S-3/A

As filed with the Securities and Exchange Commission on March 12, 2003

Registration No. 333-98287

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 2

to

FORM S-3

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

WILLIAM LYON HOMES	WILLIAM LYON HOMES, INC.
[See Table of Additional Registrants On Following Page]
(Exact Name of Registrant as Specified in Its Charter)
Delaware	California
(State or Other Jurisdiction of Incorporation or Organization)
33-0864902	33-0253855
(I.R.S. Employer Identification Number)

4490 Von Karman Avenue

Newport Beach, California 92660

(949) 833-3600

(Address, Including Zip Code, and Telephone Number, Including Area Code,

of Registrant’s Principal Executive Offices)

Wade H. Cable

President

William Lyon Homes

William Lyon Homes, Inc.

4490 Von Karman Avenue

Newport Beach, California 92660

(949) 833-3600

(Name, Address, Including Zip Code, and Telephone

Number, Including Area Code, of Agent for Service)

With copies to:

Meredith Jackson, Esq. Irell & Manella LLP 1800 Avenue of the Stars, Suite 900
Los Angeles, California 90067 (310) 277-1010 Richard M. Sherman, Jr., Esq. Irell & Manella LLP 840 Newport Center Drive, Suite 400 Newport Beach, California 92660
(949) 760-0991 Daniel J. Zubkoff, Esq. Cahill Gordon & Reindel
80 Pine Street New York, New York 10005 (212) 701-3000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. ¨

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered	Amount to be Registered	Proposed Maximum Offering Price Per Unit	Proposed Maximum Aggregate Offering Price (1)	Amount of Registration Fee (2)
% Senior Notes due 2013	$250,000,000	100%	$250,000,000	$22,445
Guarantees of     % Senior Notes due 2013	N/A	N/A	N/A	N/A

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933.

(2) Fee of $18,400 previously paid. No additional consideration is being received for the guarantees and, therefore, no additional fee is required pursuant to Rule 457(n).

The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

TABLE OF ADDITIONAL REGISTRANTS

Name of Guarantor Registrant	Jurisdiction of Organization or Incorporation	IRS Employer Identification Number
California Equity Funding, Inc.	California	33-0830016
Carmel Mountain Ranch	California	33-0013333
Duxford Financial, Inc.	California	33-0640824
HSP, Inc.	California	33-0636045
Mountain Gate Ventures, Inc.	Arizona	94-3344980
OX I Oxnard, L.P.	California	33-0960120
PH-LP Ventures	California	33-0799119
PH-Rielly Ventures	California	33-0827710
PH Ventures-San Jose	California	33-0785089
Presley CMR, Inc.	California	33-0603862
Presley Homes	California	33-0905035
St. Helena Westminster Estates, LLC	Delaware	33-0842940
Sycamore CC, Inc.	California	33-0981307
William Lyon Southwest, Inc.	Arizona	86-0978474

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION MARCH 11, 2003

$250,000,000

        % Senior Notes due 2013

COMPANY

Ø We 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 our predecessor in 1956, we, including our unconsolidated joint ventures, have sold over 56,000 homes.

NOTES

Ø William Lyon Homes, Inc., our principal operating company, is offering $250,000,000 aggregate principal amount of its         % Senior Notes due 2013.

Ø We will pay interest on the notes semi-annually in arrears on         and         of each year, commencing on         , 2003.

Ø The notes will mature on         , 2013.

Ø We will use the gross proceeds of this offering to (1) repay our existing senior notes, (2) repay certain other debt, and (3) pay related fees, commissions and other expenses.

REDEMPTION AND REPURCHASE

Ø We may redeem the notes, in whole or in part, at any time on or after         , 2008 at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest.

Ø At any time on or before         , 2006, we may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to         % of the principal amount, plus accrued and unpaid interest.

Ø If we experience a change of control, we may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest. In addition, if our consolidated tangible net worth falls below a specific level, we may be required to purchase up to 10% of the notes at a purchase price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest.

RANKING AND GUARANTEE

Ø The notes will be senior unsecured obligations.

Ø William Lyon Homes, a New York Stock Exchange listed, publicly traded company, which is the parent holding company of the issuer, and all of its existing and certain of its future restricted subsidiaries will guarantee the notes on a senior unsecured basis.

Ø The notes and the guarantees will rank equally with all of our and the guarantors’ existing and future senior unsecured debt.

Ø The notes and the guarantees will rank senior to all of our and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but will be effectively subordinated to all of our and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness.

LISTING

Ø We intend to apply for listing of the notes on the New York Stock Exchange.

Investing in the notes involves risks. See “Risk Factors” beginning on page 8.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the notes or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

	Per Note	Total
Price to Public	%	$
Underwriting Discount	%	$
Proceeds to William Lyon Homes, Inc.	%	$

We currently expect to deliver the notes to the underwriters in book-entry form only through The Depository Trust Company on or about         , 2003.

UBS Warburg Salomon Smith Barney

You should rely only on the information contained in or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. We are not making any offer of these securities in any state where the offer is not permitted. You should not assume the information provided by this prospectus is accurate as of any date other than the date on the front of this prospectus.

Table of contents

	Page
Prospectus summary	1
Risk factors	8
Use of proceeds	18
Capitalization	19
Selected historical consolidated financial data	20
Management’s discussion and analysis of financial condition and results of operations	23
Market overview	42
Business	45
Management	57
Certain relationships and related transactions	65
Principal stockholders	68
Description of certain indebtedness	70
Description of the notes	75
United States federal income tax considerations for non-U.S. holders of the notes	120
Underwriting	124
Legal matters	125
Experts	125
Where you can find more information	125
Incorporation of certain documents by reference	125
Index to financial statements	F-1

i

Forward-Looking Statements

You are cautioned that certain statements contained in this prospectus, as well as some statements by us in periodic press releases and some oral statements by company officials to securities analysts and investors during presentations about us are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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 actions by us, which may be provided by management are also forward-looking statements. 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 our 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 we operate (including, but not limited to changes directly or indirectly related to the tragic events of September 11, 2001 and thereafter), a war or other hostilities involving the United States, whether an ownership change occurs which could, under certain circumstances, result in the further limitation of our ability to utilize the tax benefits associated with our net operating loss carryforwards, 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 we are able to refinance the outstanding balances of our 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. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our past performance or past or present economic conditions in our housing markets are not indicative of future performance or conditions. You are urged not to place undue reliance on forward-looking statements. In addition, we undertake 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.

Market Data

Market data and other statistical information used throughout this prospectus are based on independent industry publications, government publications, reports by market research firms or other published independent sources. Global Insight provides economic and financial data, market analysis and forecasting, and analytical consulting services. The Meyers Group provides market research and consulting services for the United States residential development industry. The Meyers Group provides comprehensive market reports with leading economic and business indicators and housing market analysis compiled and reviewed by local Meyers Group analysts and independent consultants. The Ryness Company provides marketing, consulting and trend analysis services to the Southern and Northern California residential development industry. Some data are also based on our good faith estimates, which are derived from our review of internal surveys, as well as the independent sources listed above. Although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness.

ii

Prospectus summary

The following summary highlights information contained elsewhere in this prospectus and should be read in conjunction with, and is qualified in its entirety by, the more detailed information and financial statements (including the accompanying notes) appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in the notes discussed under the “Risk factors” section beginning on page 8. Unless otherwise noted, the terms “we,” “our” and “us” refer to William Lyon Homes and its subsidiaries. In this prospectus, “California Lyon” refers to William Lyon Homes, Inc., a California corporation, and “Delaware Lyon” refers to its parent corporation, William Lyon Homes, a Delaware corporation. Unless the context indicates otherwise, “on a pro forma basis” or “pro forma” means after giving effect to the offering of the notes and the application of proceeds therefrom as described in this prospectus and “on a combined basis’’ means the total of operations in wholly-owned projects and in unconsolidated joint venture projects.

THE COMPANY

We 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 our predecessor in 1956, on a combined basis we have sold over 56,000 homes. We believe that we are one of the largest homebuilders in California in terms of both sales and homes delivered on a combined basis in 2002. We conduct our homebuilding operations through five geographic divisions: Southern California, San Diego, Northern California, Arizona and Nevada. We believe that we are well positioned for future growth in all of our markets. According to Global Insight, California, Arizona and Nevada were the 3rd, 6th, and 14th largest states, respectively, by single family housing starts in 2001. For the year ended December 31, 2002, on a combined basis we had revenues from home sales of $956.5 million and delivered 2,522 homes. For the same period, our consolidated EBITDA, which includes cash distributions of income from unconsolidated joint ventures, was $94.1 million.

We consider ourselves an opportunistic niche builder with expertise in all aspects of the homebuilding industry. We design, construct and sell a wide range of homes designed to meet the specific needs of each of our markets. We primarily emphasize sales to entry-level and move-up home buyers and we believe that this diversified product strategy enables us to best serve a wide range of buyers and adapt quickly to a variety of market conditions. As of December 31, 2002, we marketed our homes through 36 sales locations in both our wholly-owned projects and projects being developed in unconsolidated joint ventures. For the year ended December 31, 2002, the average sales price for homes delivered on a combined basis was $379,200, with base sales prices ranging from $110,000 to $1,035,000 and with square footage ranging from 1,183 to 4,695.

Our land acquisition strategy, as a merchant homebuilder, is to undertake projects with life-cycles of 24-36 months, in order to reduce development and market risk. We believe our inventory of owned lots is adequate to supply our homebuilding operations at current levels for approximately two years. As of December 31, 2002, on a combined basis, we controlled 13,723 lots, of which 6,110 were owned.

For the year ended December 31, 2002, on a combined basis we generated 2,607 net new home orders, a 3% increase over the 2,541 net new home orders generated for the year ended December 31, 2001. The dollar amount of our backlog of homes sold but not closed as of December 31, 2002 was $259.1 million, a 47% increase over the $176.5 million as of December 31, 2001.

1

BUSINESS STRATEGY

Our business strategies focus on the following:

Focus On High Growth Core Markets

Our housing markets are located in three rapidly growing Sunbelt states, California, Arizona and Nevada, which we believe offer us attractive opportunities for long-term growth. In California, we operate in the markets of: San Diego County, Riverside County, Orange County, Los Angeles County, Ventura County, San Francisco East Bay, San Jose, Sacramento County and other central California counties. In Arizona and Nevada, we primarily operate in the Phoenix and Las Vegas markets, respectively. These areas are generally characterized by high job growth and in-migration trends, creating strong demand for new housing.

On a combined basis, we believe that we have been one of the largest homebuilders in California in both homes delivered and sales volume for the last twenty years and continue to command a significant market share. In Ventura County, California, we ranked as the largest homebuilder and in prestigious Orange County, California, we ranked as the fourth largest homebuilder in 2002, based on the number of homes sold, according to the Meyers Group. In California, we believe that our strong reputation and long-standing relationships provide us with a significant competitive advantage, particularly as it relates to dealings with land sellers, subcontractors and material suppliers. In addition to our strength in California, we believe there are significant opportunities for us to grow in Arizona and Nevada.

Maintain Conservative Financial Position and Improve Credit Profile

We operate with a conservative approach to capital and inventory risk and focus on decreasing our reliance on leverage. We successfully de-leveraged our balance sheet over the past five years while growing our stockholders’ equity (deficit) from $(5.7) million as of December 31, 1997 to $181.7 million as of December 31, 2002. We plan to continue to diminish our reliance on leverage and use our cash flow from operations for on-balance sheet inventory investment. We believe that our operating and financial performance will also benefit from our enhanced focus on wholly-owned projects and limiting our use of joint venture structures, in which our joint venture partners have historically required returns on their invested capital in excess of 20%.

Acquire Strong Land Positions Through Disciplined Acquisition Strategies

We believe that, next to our people, land is our most valuable asset and that our long-standing relationships with land sellers give us a competitive advantage in the acquisition of well positioned lots, particularly in California. We believe that our strategy as a merchant homebuilder, versus that of a master-planned community developer, allows us to limit exposure to land investment and entitlement risk, as we focus on the development of entitled parcels that can be completed within a two to three-year period. We attempt to minimize our exposure to land risk through disciplined management of completed housing inventory, as well as the use of land options and flexible land acquisition arrangements.

Maintain Low Cost Structure

Throughout our history, we have focused on minimizing construction costs and overhead, and we believe this strategy has been critical to maintaining competitive margins and profitability. We reduce costs by:

Ø Obtaining favorable pricing from subcontractors through long-term relationships and high volume;

Ø Reducing interest carry costs by acquiring entitled lots, minimizing our inventory of unsold or speculative homes and shortening the construction cycle;

Ø Minimizing overhead by centralizing certain administrative activities; and

Ø Monitoring homebuilding production, scheduling and budgeting through the effective use of management information systems.

2

Leverage Experienced Management Team with Significant Equity Ownership

Our executive officers and divisional presidents average more than 25 years of experience in the homebuilding and development industries within California and the Southwest. We combine decentralized management in those aspects of our 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, we believe, central control is required (such as approval of land acquisitions, financial, treasury, human resources and legal matters). We plan to continue to seek experienced professionals with deep market expertise while retaining our existing employees. In addition, our management owns a substantial portion of our outstanding common stock, aligning management’s incentives with those of our stockholders.

MARKET OVERVIEW

The following is a brief overview of the trends in the three growing Sunbelt states of California, Arizona, and Nevada and the metropolitan areas within those states in which we operate. Most of these markets have experienced compound annual growth rates (CAGR) in population and employment that exceed the overall rates in the nation. We believe the growth characteristics of the markets in which we operate represent a significant opportunity for us. The following table, which was derived from data compiled by Global Insight from U.S. Bureau of Labor Statistics and U.S. Census Bureau statistics, presents actual data for the years 1996 to 2001 and projected data for the years 2002 to 2006 for these trends for the areas listed below.

					Single-Family Housing Activity
	Population		Employment(1)		Starts		Permits
	1996-2001   CAGR (%)	2001-2006   CAGR (%)	1996-2001   CAGR (%)	2001-2006   CAGR (%)	1996-2001   CAGR (%)	2001-2006   CAGR (%)	1996-2001   CAGR (%)	2001-2006   CAGR (%)
U.S.(2)	1.15	0.99	2.07	1.13	1.76	0.70
California	1.61	1.49	2.90	1.02	8.15	6.55
Los Angeles	1.08	0.74	1.56	0.59			11.99	2.85
Orange County	1.75	1.01	3.67	1.29			(3.17)	10.54
Riverside	2.60	2.06	5.08	2.44			15.20	3.05
Sacramento	2.29	1.74	3.89	1.48			12.85	3.06
San Diego	1.53	1.40	3.96	1.95			9.69	5.48
San Francisco	0.45	0.49	2.47	0.25			(2.07)	15.41
San Jose	0.72	1.02	2.93	(0.01)			(16.65)	20.17
Ventura	1.63	1.23	3.33	1.17			8.52	4.63
Nevada	4.70	2.53	4.57	2.44	(1.65)	(2.50)
Las Vegas	5.41	2.73	5.64	3.00			3.14	(1.74)
Arizona	2.95	2.34	3.67	1.44	0.03	2.53
Phoenix	3.37	2.39	3.98	1.67			4.46	1.25

SOURCE: Global Insight

(1) Refers to private sector non-farm employment.

(2) 2002 U.S. employment data is actual.

Our principal executive offices are located at 4490 Von Karman Avenue, Newport Beach, California 92660 and our telephone number is (949) 833-3600.

3

The offering

The following summary is not intended to be complete. For a more detailed description of the notes, see “Description of the notes.”

Issuer	William Lyon Homes, Inc.
Securities Offered	$250,000,000 aggregate principal amount of       % Senior Notes due 2013.
Maturity Date	, 2013.
Interest Rate and Payment Dates	The notes will accrue interest from the date of their issuance at the rate of     % per year. Interest on the notes will be payable semi-annually in arrears on              and              of each year commencing on             , 2003.
Optional Redemption	We may redeem the notes, in whole or part, at any time on or after             , 2008 at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before             2006, we may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to         % of the principal amount, plus accrued and unpaid interest, if any.
Change of Control	If we experience a change of control, we may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.
Consolidated Tangible Net Worth	If our consolidated tangible net worth falls below $75 million for any two consecutive fiscal quarters, we will be required to make an offer to purchase up to 10% of the notes originally issued at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest.
Ranking and Guarantees	William Lyon Homes, a New York Stock Exchange listed, publicly traded company, which is the parent holding company of the issuer, and all of its existing and certain of its future restricted subsidiaries will guarantee the notes on a senior unsecured basis. The notes and the guarantees will rank equally with all of our and the guarantors’ existing and future senior unsecured debt. The notes and the guarantees will rank senior to all of our and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but will be

4

	effectively subordinated to all of our and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness. As of December 31, 2002, on a pro forma basis, we and the guarantors would have had approximately $5.8 million of secured indebtedness outstanding and approximately $147.1 million of additional secured indebtedness available to be borrowed under our credit facilities, as limited by our borrowing base formulas.
Restrictive Covenants	The indenture governing the notes will contain covenants that will limit our ability to, among other things: Ø      incur additional indebtedness; Ø      pay dividends or make other distributions or repurchase or redeem our stock; Ø      make investments; Ø      sell assets; Ø      incur liens; Ø      enter into agreements restricting our subsidiaries’ ability to pay dividends; Ø      enter into transactions with affiliates; and Ø      consolidate, merge or sell all or substantially all of our assets. These covenants are subject to important exceptions and qualifications, which are described under the heading “Description of the notes” in this prospectus.
Absence of a Public Market	The notes will generally be freely transferable but are a new issue of securities and there is currently no established market for them. We intend to apply for listing of the notes on the New York Stock Exchange. However, there can be no assurance as to the development or liquidity of any market for the notes.
Use of Proceeds	We will use the gross proceeds of this offering to (1) repay our existing senior notes, (2) repay certain other debt, and (3) pay related fees, commissions and other expenses. See “Use of proceeds.”
RISK FACTORS This investment involves risks. Before you invest in the notes, you should carefully consider the matters set forth under the heading “Risk factors,” and all other information contained in this prospectus.

5

Summary financial and operating data

The following summary financial and operating data should be read in conjunction with, and is qualified in its entirety by reference to, “Selected historical consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations” and our audited historical financial statements, including the notes and introductory paragraphs thereto, appearing elsewhere in this prospectus.

	Three Months Ended December 31,						As of and for the Year Ended December 31,
	2002			2001			2002			2001			2000
	(unaudited)
	(dollars in thousands)
Statement of Income Data:
Operating revenue
Home sales	$	200,376		$	173,750		$	593,762		$	452,002		$	403,850
Lots, land and other sales		1,470			—			8,648			7,054			3,016
Management fees		4,967			4,165			10,892			9,127			10,456
		206,813			177,915			613,302			468,183			417,322
Operating costs
Cost of sales—homes		(167,242	)		(150,631	)		(504,330	)		(382,608	)		(335,891	)
Cost of sales—lots, land and other		(1,848	)		(778	)		(9,404	)		(5,158	)		(3,378	)
Sales and marketing		(6,989	)		(5,193	)		(22,862	)		(18,149	)		(16,515	)
General and administrative		(13,721	)		(11,853	)		(39,366	)		(37,171	)		(35,348	)
Amortization of goodwill		—			(311	)		—			(1,242	)		(1,244	)
		(189,800	)		(168,766	)		(575,962	)		(444,328	)		(392,376	)
Equity in income of unconsolidated joint ventures		17,062			10,297			27,748			22,384			24,416
Operating income		34,075			19,446			65,088			46,239			49,362
Interest expense, net of amounts capitalized		—			—			—			(227	)		(5,557	)
Other income, net		1,096			3,385			2,693			7,513			7,324
Income before provision for income taxes and extraordinary item		35,171			22,831			67,781			53,525			51,129
Provision for income taxes		(9,555	)		(2,530	)		(18,270	)		(5,847	)		(12,357	)
Income before extraordinary item		25,616			20,301			49,511			47,678			38,772
Extraordinary item—gain from retirement of debt, net of applicable taxes		—			—			—			—			496
Net income	$	25,616		$	20,301		$	49,511		$	47,678		$	39,268
Balance Sheet Data:
Cash and cash equivalents							$	16,694		$	19,751		$	14,711
Real estate inventories								491,952			307,335			233,700
Investments in and advances to unconsolidated joint ventures								65,404			66,753			49,966
Total assets								617,581			433,709			330,280
Total debt								266,065			221,470			166,910
Minority interest								80,647			784			—
Stockholders’ equity								181,676			150,617			102,512

6

	Three Months Ended December 31,						As of and for the Year Ended December 31,
	2002			2001			2002			2001			2000
	(unaudited)
	(dollars in thousands)
Other Financial Data (unaudited):
EBITDA(1)	$	37,835		$	27,656		$	94,118		$	72,828		$	81,529
Cash flow provided by (used in) operating activities		70,353			62,438			16,191			(2,298	)		9,341
Ratio of EBITDA to interest incurred(2)		4.13	x		5.37	x		3.51	x		3.32	x		3.13	x
Ratio of debt to EBITDA								2.83	x		3.04	x		2.05	x
Ratio of earnings to fixed charges(3)								3.46	x		3.21	x		3.02	x
Operating Data (including unconsolidated joint ventures) (unaudited):
Number of net new home orders		405			483			2,607			2,541			2,603
Number of homes closed		887			970			2,522			2,566			2,666
Average sales price of homes closed	$	413		$	326		$	379		$	299		$	289
Backlog at end of period, number of homes(4)								627			542			567
Backlog at end of period, aggregate sales value(4)							$	259,123		$	176,531		$	171,650

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

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

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

(4) Backlog consists of homes sold under pending sales contracts that have not yet closed, some of which are subject to contingencies, including mortgage loan approval and the sale of existing homes by customers. There can be no assurance that homes sold under pending sales contracts will close. Of the total homes sold subject to pending sales contracts as of December 31, 2002, 512 represent homes under construction and 115 represent homes not yet under construction. Backlog as of all dates is unaudited.

7

Risk factors

An investment in the notes involves a high degree of risk. You should carefully consider the following risk factors in addition to the other information contained or incorporated by reference in this prospectus. The risks described below are not the only ones we face. Other risks, including those that we do not currently consider material or may not currently anticipate, may impair our business.

RISKS RELATED TO OUR BUSINESS

Our revenues may decrease and our results of operations and the value of the notes may be adversely affected if demand for housing declines as a result of 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 our projects are located, underwent a significant recession in the early 1990s that affected demand for our homes. Furthermore, demand for our homes decreased in the fourth quarter of 2001 partially as a result of the tragic events of September 11, 2001. Should current economic and business conditions decline, demand for our homes could be significantly affected. An important segment of our 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 our sales. Moreover, during such periods, we may need to reduce our 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 our margins by increasing our costs and expenses. In times of high inflation, demand for housing may decline and we may be unable to recover our increased costs through higher sales.

Fluctuations in real estate values may require us to write-down the book value of our real estate assets.

The homebuilding industry is subject to significant variability and fluctuations in real estate values. As a result, we may be required to write-down the book value of our real estate assets in accordance with generally accepted accounting principles, and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our financial condition and earnings.

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

In general, housing demand is adversely affected by increases in interest rates and housing costs and the unavailability of mortgage financing. Most of our buyers finance their home purchases through third-party lenders providing mortgage financing. If mortgage interest rates increase and, consequently, the ability of prospective buyers to finance home purchases is adversely affected, home sales, gross margins and cash flow may also be adversely affected and the impact may be material. Our homebuilding activities also depend upon the availability and costs of mortgage financing for buyers of homes owned by potential customers, as those customers (move-up buyers) often need to sell their existing residences before they purchase our homes. Any reduction of financing availability could adversely affect home sales.

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

8

Risk factors

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.

We face potentially substantial inventory risk.

We must continuously acquire land for replacement and expansion of land inventory within our current markets. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. Thus, we may have bought and developed land on which we 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. We cannot assure you that the measures we employ to manage inventory risks will 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, we may have to sell homes at significantly low margins or at a loss.

Our financial position, future results and prospects may be adversely affected by a variety of risks, many of which are beyond our control.

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

There are some risks of loss for which we 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 our business, results of operations and financial condition, which could adversely affect the value of the notes or our ability to service the notes.

Our geographic concentration would adversely affect us if the homebuilding industry in our current markets should decline.

We presently conduct all of our business in five geographical areas: Southern California, San Diego, Northern California, Arizona and Nevada. For 2002, approximately 75% of our home closings were derived from our California operations. Because our operations are concentrated in these geographic areas, a prolonged economic downturn in these markets could have a material adverse effect on our business, results of operations, and financial condition, which could adversely affect the value of the notes or our ability to service the notes. There can be no assurance that home sale prices in these areas will not decline in the future.

We may not be able to compete effectively against our 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. We compete both with large

9

Risk factors

homebuilding companies, some of which have greater financial, marketing and sales resources than we, and with smaller local builders. The consolidation of some homebuilding companies may create competitors that have greater financial, marketing and sales resources than we and thus are able to compete more effectively against us. In addition, there may be new entrants in the markets in which we currently conduct business. We also compete for sales with individual resales of existing homes and with available rental housing.

Our operating results are variable, which may cause the value of the notes to decline.

We have historically experienced, and in the future expect to continue to experience, variability in our operating results on a quarterly and an annual basis. Factors expected to contribute to this variability include, among other things:

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

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

Ø our product mix;

Ø our ability to continue to acquire additional land or options thereon at acceptable terms;

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

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

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

Ø costs of material and labor.

Many of the factors affecting our results are beyond our control and may be difficult to predict. Fluctuations in our results may cause the value of the notes to decline.

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 with us. 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 future results of operations and cash flows.

Our success depends on key executive officers and personnel.

Our success is dependent upon the efforts and abilities of our executive officers and other key employees, many of whom have significant experience in the homebuilding industry and in our regional markets. The loss of the services of any of these executives or key personnel, for any reason, could have a material adverse effect upon our business, operating results and financial condition.

Construction defect, soil subsidence and other building-related claims may be asserted against us, and we 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

10

Risk factors

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 our 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 we have obtained insurance for construction defect and subsidence claims, there can be no assurance that we will not be liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible claims or that claims will not arise out of uninsurable events, such as landslides or earthquakes, or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors.

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

We are 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. We 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 we operate. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which we have 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.

We are subject to environmental laws and regulations, which may increase our costs, limit the areas in which we can build homes and delay completion of our projects.

We are 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 us to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas. 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.

We may not be able to acquire desirable lots for residential buildout.

Our future growth depends upon our ability to acquire attractive properties for development. There is increasing competition for desirable lots in all of our markets, particularly in California, as the number of properties available for residential development decreases. Shortages in available properties could cause us to incur additional costs to acquire such properties or could limit our future projects and our growth. Our financial position, future results and prospects may be adversely affected if properties at desirable prices and locations are not continually available.

11

Risk factors

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

In prior years, the areas in which we operate in northern and southern California have experienced power shortages, including mandatory periods without electrical power, as well as significant increases in utility costs. We 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 we operate, which may reduce demand for our homes. Our operations may be adversely impacted if further rate increases and/or power shortages occur in California or in our other markets.

We depend on the availability and skill of subcontractors.

Substantially all of our construction work is done by subcontractors with us acting as the general contractor. Accordingly, the timing and quality of our construction depends on the availability and skill of our subcontractors. We do not have long-term contractual commitments with our subcontractors or suppliers. However, we generally have been able to obtain sufficient materials and subcontractors during times of material shortages. Although we believe that our relationships with our suppliers and subcontractors are good, there can be no assurance that skilled subcontractors will continue to be available at reasonable rates and in the areas in which we conduct our operations. The inability to contract with skilled subcontractors at reasonable costs on a timely basis could have a material adverse effect on our business and results of operations.

Terrorist attacks or acts of war may seriously harm our business.

Terrorist attacks or acts of war may cause damage or disruption to the economy, our company, our employees, our facilities and our customers, which could impact our revenues, costs and expenses, and financial condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that adversely affected our operations in the fourth quarter of 2001. The potential for future terrorist attacks or a war or other hostilities involving the United States has created many economic and political uncertainties, some of which may have additional material adverse affects on our business, results of operations, and financial condition.

An ownership change may have occurred or another event may occur with the result that our ability to use our tax net operating loss carryforwards may have been or will be severely limited.

On November 11, 1999, we implemented transfer restrictions with respect to shares of our stock. In general, these transfer restrictions prohibited, without the prior approval of our board of directors, the direct or indirect sale, transfer, disposition, purchase or acquisition of any of our stock by or to any holder who beneficially owned directly or through attribution 5% or more of our stock; or who, upon the direct or indirect sale, transfer, disposition, purchase or acquisition of any of our stock, would beneficially own directly or through attribution 5% or more of our stock. These transfer restrictions were intended to help reduce, but not eliminate, the risk of unfavorable ownership changes which could have severely limited our use of tax benefits from our tax net operating loss carryforwards for use in offsetting taxable income. At December 31, 2002, we had net operating loss carryforwards for federal tax purposes of approximately $5.2 million, which expire in 2009. In addition, unused recognized built-in losses in the amount of $23.9 million are available to offset future income and expire between 2009 and 2011. The utilization of these losses is limited to $3.2 million of taxable income per year; however, any portion of such permitted amount of the loss utilization that is not used in any year may be carried forward to increase permitted utilization in future years through 2011. It is possible that the tax authorities could take the position that the transfer restrictions did not provide the intended effect or adequate remedies for tax purposes. Thus, transactions could have occurred that would severely limit our ability to have used the tax benefits

12

Risk factors

associated with our net operating loss carryforwards. We learned that one stockholder unknowingly violated the transfer restrictions. The stockholder divested itself of the requisite number of shares in February and March, 2002 so that it was no longer out of compliance with our certificate of incorporation. In addition, further shifts in ownership, under certain circumstances, may reduce the limitation on the use of our remaining losses. Pursuant to our certificate of incorporation, the transfer restrictions terminated on November 11, 2002.

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

Our principal stockholders are General William Lyon and the William Harwell Lyon Trust, of which William H. Lyon is the sole beneficiary, and their interests may not be aligned with yours.

Over 50% of the outstanding shares of our common stock are beneficially owned by General William Lyon and the William Harwell Lyon Trust, of which his son, William H. Lyon, is the sole beneficiary. As a result of their stock ownership, General William Lyon and the trust control us and have the power to elect all of our directors and approve any action requiring the majority approval of the holders of our equity. General William Lyon and the trust’s interests may not be fully aligned with yours and this could lead to a strategy that is not in your best interests.

We face reduced coverages and increased costs of insurance.

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. Our 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 we are unable to obtain adequate insurance coverage, a material adverse effect on our business, financial condition and results of operations could result if we are exposed to claims arising from the presence of mold in the homes that we sell.

Partially as a result of the September 11 terrorist attacks, the cost of insurance has risen, deductibles and retentions have increased and the availability of insurance has diminished. Significant increases in our cost of insurance coverage or significant limitations on coverage could have a material adverse effect on our business, financial condition and results of operations.

RISKS ASSOCIATED WITH THE NOTES AND THE OFFERING

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations on the notes.

As of December 31, 2002, on a pro forma basis, we would have had $273.9 million of indebtedness. In addition, subject to restrictions in the indenture for the notes, we may incur substantial additional indebtedness. The high level of our indebtedness could have important consequences to you, including the following:

Ø our ability to obtain additional financing for working capital, land acquisition costs, building costs, other capital expenditures, or general corporate purposes may be impaired;

13

Risk factors

Ø we will need to use a substantial portion of our cash flow from operations to pay interest and principal on the notes and other indebtedness, which will reduce the funds available to us for other purposes;

Ø we will have a higher level of indebtedness than some of our competitors, which may put us at a competitive disadvantage and reduce our flexibility in planning for, or responding to, changing conditions in our industry, including increased competition; and

Ø we will be more vulnerable to economic downturns and adverse developments in our business.

We expect to obtain the money to pay our expenses and to pay the principal and interest on the notes, our other indebtedness and other debt from cash flow from our operations. Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors. We cannot be certain that our cash flow will be sufficient to allow us to pay principal and interest on our debt, including the notes, support our operations, and meet our other obligations. If we do not have enough money, we may be required to refinance all or part of our existing debt, including the notes, sell assets or borrow more money. We cannot guarantee that we will be able to do so on terms acceptable to us, if at all. In addition, the terms of existing or future debt agreements, including our credit facilities and the indenture, may restrict us from pursuing any of these alternatives.

California Lyon is the general partner in our unconsolidated partnership joint ventures and may be liable for joint venture obligations.

At December 31, 2002, eleven of our active joint ventures were organized as limited partnerships. California Lyon is the general partner in each of these and may serve as the general partner in future joint ventures. As a general partner, California Lyon 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. As of December 31, 2002, these joint ventures had $90.1 million of outstanding indebtedness. In addition, Delaware Lyon has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. Delaware Lyon has also provided completion guarantees and repayment guarantees for some of the limited partnerships under their credit facilities. The repayment guarantees only become effective upon repayment of our outstanding 12 ¹/2% Senior Notes. We anticipate that the lender who holds these repayment guarantees will terminate them prior to consummation of this offering.

We may be obligated in connection with guarantees provided by California Lyon.

In January, 2003 California Lyon and two unaffiliated parties formed a limited liability company (“Development LLC”) for the purpose of acquiring land in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into residential homesites. California Lyon has an indirect, minority interest in the Development LLC. Under specified conditions, California Lyon or an affiliate will be obligated to purchase from the Development LLC approximately 50% in value of the developed lots. In order to secure such obligations, California Lyon has posted a letter of credit equal to approximately $5 million. The letter of credit also secures the Development LLC’s repayment obligations under a $35 million revolving line of credit, under which the Development LLC had outstanding indebtedness of approximately $30.6 million at January 31, 2003. California Lyon and the other indirect and direct members of the Development LLC, including certain affiliates and parents of such other members, further (i) have guaranteed to the bank, under certain circumstances, repayment of the Development LLC’s indebtedness under the line of credit, payment of necessary loan remargining obligations, completion of certain infrastructure improvements to the property, and the Development LLC’s performance under certain environmental covenants and indemnities, and (ii) have entered into a

14

Risk factors

Reimbursement and Indemnity Agreement to allocate any liability arising from these guaranty obligations to the bank, including, the posting and pledge to the bank of the letters of credit by the parties. Delaware Lyon has entered into a joinder agreement to be jointly and severally liable for California Lyon’s obligations under the Reimbursement and Indemnity Agreement. As a result of these agreements and guarantees, Delaware Lyon and California Lyon may be liable in specified circumstances for the full amount of the obligations guaranteed to the bank. California Lyon and Delaware Lyon’s obligations are unsecured obligations, pari passu with their obligations as issuer and a guarantor of the notes. California Lyon and Delaware Lyon may enter into similar guarantees in connection with future land acquisition arrangements. If any such existing or future guarantees are called upon, payment under such guarantees or our inability to make payments under such guarantees may have a material adverse effect on our results of operations.

The notes will be unsecured, and effectively subordinated to our secured indebtedness.

The notes will not be secured. Our credit facilities and construction loans are secured by liens on the real estate under development that is financed by those facilities or loans. If we become insolvent or are liquidated, or if payment under any of our secured indebtedness was accelerated, the holders of our 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 notes. As a result, the notes will be effectively subordinated to our 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 our secured creditors. As of December 31, 2002, after giving effect to the sale of the notes and the application of the proceeds therefrom as described under “Use of proceeds,” our pro forma secured indebtedness outstanding would have been $5.8 million, and we would have had commitments available to permit us to borrow an additional $147.1 million of secured indebtedness under our credit facilities, as limited by our borrowing base formulas.

The guarantees of our subsidiaries may be avoidable as fraudulent transfers and any new guarantees may be avoidable as preferences.

The notes will be the obligations of California Lyon and will be guaranteed by Delaware Lyon and by all of its existing and certain of its future restricted subsidiaries. The guarantees by 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:

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

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

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

Ø 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

Ø 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 notes to that of the guarantor’s other debt, require holders of the notes to return amounts already paid under that guarantee, or take other action detrimental to holders of the notes and the guarantees of the 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:

Ø 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

15

Risk factors

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

We 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 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 we are required to grant additional subsidiary guarantees for the notes at a time in the future when a guarantor was insolvent, those guarantees may also be avoidable as preferences under U.S. bankruptcy law or comparable provisions of state law.

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

The indenture for the notes imposes significant operating and financial restrictions on us. These restrictions will limit the ability of us and our subsidiaries, among other things, to:

Ø incur additional indebtedness;

Ø pay dividends or make other distributions or repurchase or redeem our stock;

Ø make investments;

Ø sell assets;

Ø incur liens;

Ø enter into agreements restricting our subsidiaries’ ability to pay dividends;

Ø enter into transactions with affiliates; and

Ø consolidate, merge or sell all or substantially all of our assets.

Our other debt agreements contain additional restrictions. In addition, we may in the future enter into other agreements governing indebtedness which impose yet additional restrictions. We cannot assure you that these restrictions will not adversely affect our ability to finance our 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.

We may not be able to satisfy our obligations to holders of the notes upon a change of control.

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

16

Risk factors

If this event occurs, we may not have enough assets to satisfy all obligations under the indenture and our other indebtedness. In order to satisfy our obligations, we could seek to refinance the indebtedness under the notes and our other indebtedness or obtain a waiver from the holders of our indebtedness. We cannot assure you that we would be able to obtain a waiver or refinance our indebtedness on terms acceptable to us, if at all.

There is no established trading market for the notes; and you may not be able to sell them quickly or at the price that you paid.

The notes are a new issue of securities and there is no established trading market for the notes. We intend to apply for the notes to be listed on the New York Stock Exchange.

We cannot assure you that you will be able to sell your notes at a particular time or that the prices that you receive when you sell the notes will be favorable. We also cannot assure you as to the level of liquidity of the trading market for the notes. Future trading prices of the notes will depend on many factors, including our operating performance and financial condition and the market for similar securities.

Historically, the market for non-investment grade debt has been subject to disruptions that have caused volatility in prices. It is possible that the market for the notes will be subject to disruptions. Any disruptions may have a negative effect on noteholders, regardless of our prospects and financial performance.

17

Use of proceeds

We intend to use the gross proceeds of $250.0 million from the offering of the notes to redeem the $70.3 million of our outstanding 12½% Senior Notes, to repay certain other debt, and to pay related fees, commissions and other expenses.

The following sets forth the anticipated uses of the proceeds of this offering (dollars in thousands):

Repayment of revolving credit facilities debt(1)	$	112,267
Repayment of construction notes payable(2)		25,218
Repayment of purchase money notes payable—land acquisitions(3)		28,861
Repayment of unsecured line of credit(4)		5,500
Repayment of 12 1/2% Senior Notes due July 1, 2003(5)		70,279
Expenses of the offering of the notes		7,875
	$	250,000

(1) Represents amounts to be repaid under our existing revolving credit facilities, which are collateralized by real estate inventories. These facilities bear interest at varying rates from LIBOR plus 2.40% to the prime rate plus 0.375% (weighted-average rate of 4.331% at December 31, 2002), and mature, in each case, upon the earlier of the sale of the financed home or the termination of the facilities, with the facilities maturing on varying dates from June 13, 2003 to September 24, 2006.

(2) Represents amounts outstanding under various construction notes payable, which are collateralized by real estate inventories. These notes bear interest at varying rates from the prime rate plus 0.25% to 14% (weighted-average rate of 5.206% at December 31, 2002) and mature upon the earliest of (i) the completion of the development of the lots, (ii) the sale of the financed home or (iii) the maturity of the notes payable, with the notes maturing on varying dates from March 5, 2003 to June 11, 2004.

(3) Represents amounts outstanding under various purchase money notes payable, which are collateralized by real estate inventories. These notes bear interest at varying rates from the prime rate plus 2% to 12.50% (weighted-average rate of 8.896% at December 31, 2002) and mature at varying dates from September 1, 2003 to July 1, 2005.

(4) Represents amount outstanding under an unsecured line of credit which bears interest at the prime rate plus 1% (5.25% at December 31, 2002) and matures on June 30, 2003.

(5) Represents amount outstanding under our 12 ¹/2% Senior Notes due July 1, 2003. The amounts outstanding which will be repaid from the proceeds of this offering include the following: (i) $30.0 million owned by General William Lyon, our Chairman and Chief Executive Officer, and a trust for which his son, William H. Lyon is the sole beneficiary; (ii) $2.32 million owned by Wade H. Cable, our President and Chief Operating Officer; and (iii) $1.0 million owned by William H. McFarland, a member of our Board of Directors.

18

Capitalization

The following table sets forth (1) our capitalization as of December 31, 2002 and (2) our capitalization as of December 31, 2002 after giving effect to the sale of the notes and the application of the proceeds therefrom as described under “Use of proceeds.”

	December 31, 2002
	Actual		As Adjusted
	(dollars in thousands)
Cash and cash equivalents	$	16,694	$	16,694
Debt:
Revolving credit facilities	$	118,068	$	5,801
Construction notes payable		25,218		—
Purchase money notes payable—land acquisitions		28,861		—
Unsecured line of credit		5,500		—
12 1/2% Senior Notes due 2003		70,279		—
Senior Notes offered hereby		—		250,000
Total homebuilding debt		247,926		255,801
Collateralized mortgage obligations under revolving mortgage warehouse credit facility, secured by first trust deed mortgage notes receivable		18,139		18,139
Total debt(1)	$	266,065	$	273,940
Stockholders’ equity(2):
Common stock, par value $.01 per share; 30,000,000 shares authorized; 9,728,747 shares issued and outstanding at December 31, 2002		97		97
Additional paid-in capital		108,592		108,592
Retained earnings(3)		72,987		72,559
Total stockholders’ equity		181,676		181,248
Total capitalization(4)	$	447,741	$	455,188

(1) Total debt does not include approximately $90.1 million of notes payable by unconsolidated joint ventures as of December 31, 2002. See Note 4 of “Notes to Consolidated Financial Statements.”

(2) The table does not include 448,320 shares issuable upon the exercise of outstanding options as of December 31, 2002, or 396,666 shares authorized and reserved for issuance upon the exercise of options that may be issued in the future pursuant to stock option plans. See “Management” and Note 6 of “Notes to Consolidated Financial Statements.”

(3) Retained earnings as adjusted as of December 31, 2002 reflects the pro forma write-off of unamortized deferred loan costs, net of income taxes, of approximately $0.4 million related to the payoff of existing debt from a portion of the proceeds from the offering of the notes.

(4) Total capitalization does not include approximately $91.3 million of other owners’ capital investments in unconsolidated joint ventures as of December 31, 2002. See Note 4 of “Notes to Consolidated Financial Statements.” 

19

Selected historical consolidated financial data

The following table sets forth certain of our historical financial data. We have derived the selected historical consolidated financial data as of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000 from our audited consolidated financial statements and the related notes included elsewhere herein. The selected historical consolidated financial data as of December 31, 2000, 1999 and 1998 and for the years ended December 31, 1999 and 1998 have been derived from our audited financial statements for such years, which are not included herein. We have derived the selected historical consolidated financial data as of and for the three months ended December 31, 2002 and 2001 from our unaudited consolidated financial statements for such periods, which are not included herein. In the opinion of our management, our unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our financial position, the results of our operations and our cash flows. 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.

	Three Months Ended December 31,						As of and for the Year Ended December 31,
	2002			2001			2002			2001			2000			1999(1)			1998
	(unaudited)
	(dollars in thousands)
Statement of Income Data:
Operating revenue
Home sales	$	200,376		$	173,750		$	593,762		$	452,002		$	403,850		$	426,839		$	348,352
Lots, land and other sales		1,470			—			8,648			7,054			3,016			13,142			19,930
Management fees		4,967			4,165			10,892			9,127			10,456			4,825			2,217
		206,813			177,915			613,302			468,183			417,322			444,806			370,499
Operating costs
Cost of sales—homes		(167,242	)		(150,631	)		(504,330	)		(382,608	)		(335,891	)		(357,153	)		(297,781	)
Cost of sales—lots, land and other		(1,848	)		(778	)		(9,404	)		(5,158	)		(3,378	)		(13,223	)		(20,992	)
Sales and marketing		(6,989	)		(5,193	)		(22,862	)		(18,149	)		(16,515	)		(19,387	)		(21,463	)
General and administrative		(13,721	)		(11,853	)		(39,366	)		(37,171	)		(35,348	)		(24,193	)		(18,182	)
Amortization of goodwill(2)		—			(311	)		—			(1,242	)		(1,244	)		(307	)		—
		(189,800	)		(168,766	)		(575,962	)		(444,328	)		(392,376	)		(414,263	)		(358,418	)
Equity in income of unconsolidated joint ventures		17,062			10,297			27,748			22,384			24,416			17,859			3,499
Operating income		34,075			19,446			65,088			46,239			49,362			48,402			15,580
Interest expense, net of amounts capitalized		—			—			—			(227	)		(5,557	)		(6,153	)		(9,214	)
Financial advisory expenses		—			—			—			—			—			(2,197	)		(1,286	)
Other income, net		1,096			3,385			2,693			7,513			7,324			3,445			3,225
Income before provision for income taxes and extraordinary item		35,171			22,831			67,781			53,525			51,129			43,497			8,305
Provision for income taxes		(9,555	)		(2,530	)		(18,270	)		(5,847	)		(12,357	)		(220	)		(1,191	)
Income before extraordinary item		25,616			20,301			49,511			47,678			38,772			43,277			7,114
Extraordinary item—gain from retirement of debt, net of applicable taxes		—			—			—			—			496			4,200			2,741
Net income	$	25,616		$	20,301		$	49,511		$	47,678		$	39,268		$	47,477		$	9,855
Balance Sheet Data:
Cash and cash equivalents							$	16,694		$	19,751		$	14,711		$	2,154		$	23,955
Real estate inventories								491,952			307,335			233,700			199,430			175,668
Investments in and advances to unconsolidated joint ventures								65,404			66,753			49,966			50,282			30,462
Total assets								617,581			433,709			330,280			278,483			246,404
Total debt								266,065			221,470			166,910			176,630			195,393
Minority interest								80,647			784			—			—			—
Stockholders’ equity								181,676			150,617			102,512			53,301			5,824

20

Selected historical consolidated financial data

	Three Months Ended December 31,				As of and for the Year Ended December 31,
	2002		2001		2002		2001			2000		1999(1)		1998
	(unaudited)
	(dollars in thousands)
Other Financial Data (unaudited):
EBITDA(3)	$	37,835	$	27,656	$	94,118	$	72,828		$	81,529	$	68,909	$	46,178
Cash flow provided by (used in) operating activities (3)		70,353		62,438		16,191		(2,298	)		9,341		65,854		55,140
Ratio of EBITDA to interest incurred(4)		4.13x		5.37x		3.51x		3.32x			3.13x		2.81x		1.47x
Ratio of debt to EBITDA						2.83x		3.04x			2.05x		2.56x		4.23x
Ratio of earnings to fixed charges(5)						3.46x		3.21x			3.02x		2.58x		1.33x
Operating Data (including unconsolidated joint ventures) (unaudited):
Number of net new home orders		405		483		2,607		2,541			2,603		2,303		2,139
Number of homes closed		887		970		2,522		2,566			2,666		2,618		1,925
Average sales price of homes closed	$	413	$	326	$	379	$	299		$	289	$	241	$	202
Backlog at end of period, number of homes(6)						627		542			567		630		617
Backlog at end of period, aggregate sales value(6)					$	259,123	$	176,531		$	171,650	$	185,800	$	165,100

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

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

	Three Months Ended December 31,				Year Ended December 31,
	2002		2001		2002		2001		2000		1999		1998
	(unaudited)
	(dollars in thousands)
Net income, as reported	$	25,616	$	20,301	$	49,511	$	47,678	$	39,268	$	47,477	$	9,855
Amortization of goodwill, net of tax		—		277		—		1,106		943		305		—
Net income, as adjusted	$	25,616	$	20,578	$	49,511	$	48,784	$	40,211	$	47,782	$	9,855
Earnings per common share, as adjusted:
Basic	$	2.63	$	1.94	$	4.85	$	4.61	$	3.83	$	4.58	$	0.94
Diluted	$	2.56	$	1.91	$	4.73	$	4.54	$	3.83	$	4.58	$	0.94

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

21

Selected historical consolidated financial data

	Three Months Ended December 31,						Year Ended December 31,
	2002			2001			2002			2001			2000			1999			1998
	(unaudited)
	(dollars in thousands)
Net income	$	25,616		$	20,301		$	49,511		$	47,678		$	39,268		$	47,477		$	9,855
Provision for income taxes		9,555			2,530			18,270			5,847			12,383			245			1,650
Interest expense:
Interest incurred		9,161			5,151			26,783			21,908			26,012			24,500			31,475
Interest capitalized		(9,161	)		(5,151	)		(26,783	)		(21,681	)		(20,455	)		(18,347	)		(22,261	)
Amortization of capitalized interest included in cost of sales		9,315			8,272			28,109			20,537			21,373			23,771			27,899
Depreciation and amortization		389			612			1,355			2,519			2,499			1,518			1,059
Cash distributions of income from unconsolidated joint ventures		10,022			6,238			24,621			18,404			24,865			7,604			—
Equity in income of unconsolidated joint ventures		(17,062	)		(10,297	)		(27,748	)		(22,384	)		(24,416	)		(17,859	)		(3,499	)
EBITDA	$	37,835		$	27,656		$	94,118		$	72,828		$	81,529		$	68,909		$	46,178

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

	Three Months Ended December 31,						Year Ended December 31,
	2002			2001			2002			2001			2000			1999		1998
	(unaudited)
							(dollars in thousands)
Net cash provided by (used in) operating activities	$	70,353		$	62,438		$	16,191		$	(2,298	)	$	9,341		$65,854		$55,140
Interest expense:
Interest incurred		9,161			5,151			26,783			21,908			26,012		24,500		31,475
Interest capitalized		(9,161	)		(5,151	)		(26,783	)		(21,681	)		(20,455	)	(18,347	)	(22,261	)
Amortization of capitalized interest included in cost of sales		9,315			8,272			28,109			20,537			21,373		23,771		27,899
Cash distributions of income from unconsolidated joint ventures		10,022			6,238			24,621			18,404			24,865		7,604		—
Extraordinary gain on repurchase of 12 1/2% Senior Notes		—			—			—			—			561		4,225		3,200
Net changes in operating assets and liabilities:
Receivables		6,959			5,002			3,767			(2,480	)		113		6,531		556
Real estate inventories		(54,528	)		(46,751	)		23,126			31,185			29,378		(63,191	)	(41,272	)
Deferred loan costs		(1,046	)		(30	)		(1,490	)		2,077			(841	)	(1,280	)	655
Goodwill		—			—			—			—			—		8,689		—
Other assets		538			(5,153	)		2,681			93			392		6,410		(17	)
Accounts payable		1,207			8,455			(8,467	)		6,416			(10,109	)	6,847		(4,510	)
Accrued expenses		(4,985	)		(10,815	)		5,580			(1,333	)		899		(2,704	)	(4,687	)
EBITDA	$	37,835		$	27,656		$	94,118		$	72,828		$	81,529		$68,909		$46,178

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

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

(6) Backlog consists of homes sold under pending sales contracts that have not yet closed, some of which are subject to contingencies, including mortgage loan approval and the sale of existing homes by customers. There can be no assurance that homes sold under pending sales contracts will close. Of the total homes sold subject to pending sales contracts as of December 31, 2002, 512 represent homes under construction and 115 represent homes not yet under construction. Backlog as of all dates is unaudited.

22

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 our consolidated financial statements and notes thereto and other financial information included or incorporated by reference in this prospectus.

GENERAL OVERVIEW

We 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 our predecessor in 1956, on a combined basis we have sold over 56,000 homes. We believe that we are one of the largest homebuilders in California in terms of both sales and homes delivered on a combined basis in 2002. We conduct our homebuilding operations through five geographic divisions: Southern California, San Diego, Northern California, Arizona and Nevada. We believe that we are well positioned for future growth in all of our markets. According to Global Insight, California, Arizona and Nevada were the 3rd, 6th, and 14th largest states, respectively, by single family housing starts in 2001. For the year ended December 31, 2002, on a combined basis we had revenues from home sales of $956.5 million and delivered 2,522 homes. For the same period, our consolidated EBITDA, which includes cash distributions of income from unconsolidated joint ventures, was $94.1 million. See Note 3 of “Selected historical consolidated financial data.”

We have historically entered into homebuilding joint ventures from time to time to better enable us to reduce our capital investment and risk in the highly capital intensive California markets. As of December 31, 2002, we and certain of our subsidiaries were general partners or members in 16 active joint ventures involved in the development and sale of residential projects. These joint ventures are 50% or less owned by us and not controlled by us and, accordingly, the financial statements of such joint ventures are not consolidated with our financial statements. Our investments in unconsolidated joint ventures are accounted for using the equity method. Income allocations and cash distributions to us from the unconsolidated joint ventures are based on predetermined formulas between us and our joint venture partners as specified in the applicable partnership or operating agreements. See Note 4 of “Notes to Consolidated Financial Statements” for condensed combined financial information for these joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by our joint ventures will be funded by our joint venture partners or from the proceeds of construction financing obtained by the joint ventures. A recently adopted accounting interpretation could require the consolidation of the assets, liabilities and operations of certain of our joint venture and land banking arrangements. See “Impact of New Accounting Pronouncements.”

23

Management’s discussion and analysis of financial condition and results of operations

RESULTS OF OPERATIONS

Overview

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

	As of and for the year ended December 31, 2002
	Company Wholly-owned			Unconsolidated Joint Ventures			Combined Total
Selected Financial Information (dollars in thousands)
Homes closed		1,740			782			2,522
Home sales revenue	$	593,762		$	362,697		$	956,459
Cost of sales		(504,330	)		(298,838	)		(803,168	)
Gross margin	$	89,432		$	63,859		$	153,291
Gross margin percentage		15.1	%		17.6	%		16.0	%
Number of homes closed
California		1,116			782			1,898
Arizona		270			—			270
Nevada		354			—			354
Total		1,740			782			2,522
Average sales price
California	$	387,900		$	463,800		$	419,200
Arizona		212,800			—			212,800
Nevada		292,200			—			292,200
Total	$	341,200		$	463,800		$	379,200
Number of net new home orders
California		1,117			880			1,997
Arizona		289			—			289
Nevada		321			—			321
Total		1,727			880			2,607
Average number of sales locations during period
California		15			10			25
Arizona		6			—			6
Nevada		4			—			4
Total		25			10			35

24

Management’s discussion and analysis of financial condition and results of operations

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

25

Management’s discussion and analysis of financial condition and results of operations

	As of and for the year ended December 31, 2001
	Company Wholly-owned			Unconsolidated Joint Ventures			Combined Total
Selected Financial Information (dollars in thousands)
Homes closed		1,861			705			2,566
Home sales revenue	$	452,002		$	316,098		$	768,100
Cost of sales		(382,608	)		(258,997	)		(641,605	)
Gross margin	$	69,394		$	57,101		$	126,495
Gross margin percentage		15.4	%		18.1	%		16.5	%
Number of homes closed
California		1,087			705			1,792
Arizona		298			—			298
Nevada		476			—			476
Total		1,861			705			2,566
Average sales price
California	$	281,300		$	448,400		$	347,100
Arizona		150,200			—			150,200
Nevada		213,100			—			213,100
Total	$	242,900		$	448,400		$	299,300
Number of net new home orders
California		1,080			618			1,698
Arizona		336			—			336
Nevada		507			—			507
Total		1,923			618			2,541
Average number of sales locations during period
California		15			13			28
Arizona		6			—			6
Nevada		6			—			6
Total		27			13			40

26

Management’s discussion and analysis of financial condition and results of operations

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

27

Management’s discussion and analysis of financial condition and results of operations

	As of and for the year ended December 31, 2000
	Company Wholly-owned			Unconsolidated Joint Ventures			Combined Total
Selected Financial Information (dollars in thousands)
Homes closed		1,757			909			2,666
Home sales revenue	$	403,850		$	367,723		$	771,573
Cost of sales		(335,891	)		(307,215	)		(643,106	)
Gross margin	$	67,959		$	60,508		$	128,467
Gross margin percentage		16.8	%		16.5	%		16.7	%
Number of homes closed
California		1,183			909			2,092
Arizona		189			—			189
Nevada		349			—			349
New Mexico(2)		36			—			36
Total		1,757			909			2,666
Average sales price
California	$	259,300		$	404,500		$	322,400
Arizona		139,200			—			139,200
Nevada		189,500			—			189,500
New Mexico(2)		130,800			—			130,800
Total	$	229,900		$	404,500		$	289,400
Number of net new home orders
California		1,103			906			2,009
Arizona		252			—			252
Nevada		321			—			321
New Mexico(2)		21			—			21
Total		1,697			906			2,603
Average number of sales locations during period
California		18			13			31
Arizona		5			—			5
Nevada		6			—			6
New Mexico(2)		1			—			1
Total		30			13			43

28

Management’s discussion and analysis of financial condition and results of operations

	As of and for the year ended December 31, 2000
	Company Wholly-owned		Unconsolidated Joint Ventures		Combined Total
Backlog of homes sold but not closed at end of period
California		206		184		390
Arizona		80		—		80
Nevada		97		—		97
Total		383		184		567
Dollar amount of backlog of homes sold but not closed at end of period (dollars in thousands)
California	$	57,001	$	82,169	$	139,170
Arizona		11,842		—		11,842
Nevada		20,638		—		20,638
Total	$	89,481	$	82,169	$	171,650
Lots controlled at end of year
Owned lots
California		1,457		2,123		3,580
Arizona		543		178		721
Nevada		587		—		587
Total		2,587		2,301		4,888
Optioned lots(1)
California						2,082
Arizona						921
Nevada						399
Total						3,402
Total lots controlled
California						5,662
Arizona						1,642
Nevada						986
Total						8,290

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

(2) We ceased our operations in New Mexico in mid-2000.

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Management’s discussion and analysis of financial condition and results of operations

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

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

Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed on a combined basis as of December 31, 2002 was  $259.1 million, up 46.8% from $176.5 million as of December 31, 2001. The cancellation rate of buyers who contracted to buy a home but did not close escrow at our projects was approximately 19% during 2002 and 24% during 2001. Our inventory of completed and unsold homes was 28 homes as of December 31, 2002.

We believe that the increase in the number of net new home orders and the decrease in the cancellation rate during 2002, as described above, are indications of an improving economy in 2002 after the economic slow-down in the latter half of 2001. In addition, in most of the markets in which we operate, the demand for housing exceeds the current supply of housing. The decline in net new home orders and closings for 2001 as compared with 2000 was primarily the result of (1) a weakening economy whose short-term outlook had become more uncertain following the unprecedented and tragic events of September 11, 2001 and (2) a reduction in the average number of active sales locations from 43 in 2000 to 40 in 2001. At December 31, 2001, we had 43 sales locations as compared to 42 sales locations at December 31, 2000. At December 31, 2002, we had 36 sales locations.

Comparison of Years Ended December 31, 2002 and 2001

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

Total operating income increased to $65.1 million in 2002 from $46.2 million in 2001. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $20.0 million to $89.4 million in 2002 from $69.4 million in 2001. This increase was primarily due to an increase in the average sales prices to $341,200 in 2002 from $242,900 in 2001 (a 40.5% increase), offset by a decrease in the number of wholly-owned homes closed to 1,740 in 2002 from 1,861 in 2001 (a 6.5% decrease).

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Management’s discussion and analysis of financial condition and results of operations

Gross margin percentages decreased by 0.3% to 15.1% in 2002 from 15.4% in 2001. Sales and marketing expenses increased by $4.8 million (26.5%) to $22.9 million in 2002 from $18.1 million in 2001 primarily due to increased marketing fees paid to developers of master-planned communities and sales commissions as a result of increased revenue from sales of homes. General and administrative expenses increased by $2.2 million to $39.4 million in 2002 from $37.2 million in 2001, primarily as a result of increased salaries and related benefits and additional employee bonuses based on our improved operating results.

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

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

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

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

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

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

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Management’s discussion and analysis of financial condition and results of operations

Comparison of Years Ended December 31, 2001 and 2000.            

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

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

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

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

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

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

FINANCIAL CONDITION AND LIQUIDITY

We provide for our 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

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Management’s discussion and analysis of financial condition and results of operations

substantial portion of the capital required for certain projects. We currently have outstanding 12 ¹/2% Senior Notes and maintain the following major credit facilities: secured revolving credit facilities (“Revolving Credit Facilities”) and an unsecured revolving line of credit with a commercial bank (“Unsecured Revolving Line”). We also finance certain projects and land acquisitions with construction loans secured by real estate inventories, seller provided financing and land banking transactions. We intend to use the net proceeds from the offering of the notes to repay (1) our existing 12 ¹/2% Senior Notes, (2) a portion of the outstanding balances under the Revolving Credit Facilities, (3) our Unsecured Revolving Line, (4) our construction notes payable and (5) our seller financing.

Our ability to meet our obligations on our indebtedness will depend to a large degree on our future performance, which in turn will be subject, in part, to factors beyond our control, such as prevailing economic conditions either nationally or in the regions in which we operate, 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.

12 ¹/2% Senior Notes.

As of December 31, 2002, $70.3 million aggregate principal amount of our 12 ¹/2% Senior Notes was outstanding. We intend to use a portion of the net proceeds from the offering of the notes to repurchase the outstanding balance of our 12 ¹/2% Senior Notes. On May 1, 2001, we completed a consent solicitation with respect to the 12 ¹/2% Senior Notes and received consents from holders of $39.3 million of the then outstanding notes to extend the maturity date from July 1, 2001 to July 1, 2003 and to make certain amendments to the note covenants. Although we initially intended to accept consents from no more than 50% of holders, we elected to accept additional consents, as contemplated by the consent solicitation documents. The consenting holders received a consent fee of 4% of the principal balance. Subsequently, during May and June 2001, we also repurchased $31.4 million of the 12 ¹/2% Senior Notes from non-consenting holders.

In June 2001, General William Lyon, our Chairman and Chief Executive Officer, and a trust for which his son William H. Lyon is a beneficiary, purchased from us at par $30.0 million of the 12 ¹/2% Senior Notes. William H. Lyon is one of our directors and an employee. Effective in July 2001, William H. McFarland, another member of our board of directors, purchased from us at par $1.0 million of the 12 ¹/2% Senior Notes. In parity with holders consenting during the consent solicitation, these directors received a consent fee of 4% of the principal balance and consented to the amendments effected by our consent solicitation statement dated February 28, 2001.

In July 2001, we repaid all of the remaining 12½% Senior Notes which matured on July 1, 2001 amounting to $5.9 million.

In April, May and November 2000, we purchased $22.8 million principal amount of our outstanding 12½% Senior Notes at a cost of $22.1 million. The net gain resulting from the purchase was $0.5 million after giving effect to income taxes and amortization of related loan costs. Such gain is reflected as an extraordinary item in our results of operations for the year ended December 31, 2000.

Revolving Credit Facilities.

As of December 31, 2002, we have three revolving credit facilities which have an aggregate maximum loan commitment of $225.0 million and mature at various dates. Our $100.0 million revolving line of

33

Management’s discussion and analysis of financial condition and results of operations

credit matures in September 2006, our $75.0 million bank revolving line of credit matures in June 2003 and our $50.0 million bank revolving line of credit initially “matures” in September 2004, after which the amounts available for borrowing begin to reduce. Effective in January 2003, our $100.0 million revolving line of credit was increased to $150.0 million, which increased our aggregate maximum loan commitment to $275.0 million. Each facility is secured by first deeds of trust on real estate for the specific projects funded by each respective facility and pledges of net sale proceeds and related property. Borrowings under the facilities are limited by the availability of sufficient real estate collateral, which is determined constantly throughout the facility period. The composition of the collateral borrowing base is limited to certain parameters in the facility agreement and is based upon the lesser of the direct costs of the real estate collateral (such as land, lots under development, developed lots or homes) or a percentage of the appraised value of the collateral, which varies depending upon the stage of construction. Repayment of advances is upon the earliest of the close of escrow of individual lots and homes within the collateral pool, the maturity date of individual lots and homes within the collateral pool or the facility maturity date. Also, each credit facility includes financial covenants, which may limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2002, $118.1 million was outstanding under these credit facilities, with a weighted-average interest rate of 4.331%, and the undrawn availability was $34.8 million as limited by our borrowing base formulas. Delaware Lyon has guaranteed on an unsecured basis California Lyon’s obligations under certain of the revolving credit facilities and has provided an unsecured environmental indemnity. We are required to comply with a number of covenants under these revolving credit facilities. See “Description of certain indebtedness” and Note 5 of “Notes to Consolidated Financial Statements.”

Unsecured Revolving Line.

At December 31, 2002, we had an unsecured revolving line of credit with a commercial bank in the amount of $10.0 million. The Unsecured Revolving Line bears interest at prime plus 1% and matures in June 2003. The Unsecured Revolving Line includes financial covenants that may limit the amount which may be borrowed thereunder. As of December 31, 2002, $5.5 million was outstanding under the Unsecured Revolving Line. We will be terminating this facility upon repayment of outstanding amounts from the proceeds from the sale of the notes.

Construction Notes Payable.

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

Seller Financing.

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

Revolving Mortgage Warehouse Credit Facility.

We have a $20.0 million revolving mortgage warehouse credit facility with a bank to fund our mortgage origination operations, $15.0 million of which is committed (lender obligated to lend if stated conditions

34

Management’s discussion and analysis of financial condition and results of operations

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

Land Banking Arrangements.

We enter into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, minimizing the use of funds from our revolving credit facilities and other corporate financing sources and limiting our risk, we transfer our 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 us an option to acquire lots in staged takedowns. In consideration for this option, we make a non-refundable deposit equal to 20% or less of the total purchase price. Additionally, we may be subject to other penalties if lots are not acquired. We are under no obligation to purchase the balance of the lots, but would forfeit our remaining deposit and be subject to penalties if the lots are not purchased. We do not have legal title to these entities or their assets and have not guaranteed their liabilities. The deposits and penalties related to such land banking projects have been recorded in the accompanying balance sheet. The financial statements of these entities are not consolidated with our consolidated financial statements. A recently adopted accounting interpretation could require the consolidation of the assets, liabilities and operations of certain of our joint venture and land banking arrangements. See “Impact of New Accounting Pronouncements.” These land banking arrangements help us manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider, general housing market conditions and geographic preferences. Summary information with respect to our land banking arrangements is as follows as of December 31, 2002 (dollars in thousands):

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

Joint Venture Financing.

As of December 31, 2002, we and certain of our subsidiaries were general partners or members in 16 active joint ventures involved in the development and sale of residential projects. These joint ventures are 50% or less owned by us and not controlled by us and, accordingly, the financial statements of such joint ventures are not consolidated with our financial statements. Our investments in unconsolidated joint ventures are accounted for using the equity method. A recently adopted accounting interpretation could require the consolidation of the assets, liabilities and operations of certain of our joint venture and land

35

Management’s discussion and analysis of financial condition and results of operations

banking arrangements. See “Impact of New Accounting Pronouncements.” Income allocations and cash distributions to us from the unconsolidated joint ventures are based on predetermined formulas between us and our joint venture partners as specified in the applicable partnership or operating agreements. We generally receive, after partners’ priority returns and returns of partners’ capital, approximately 50% of the profits and cash flows from joint ventures. See Note 4 of “Notes to Consolidated Financial Statements” for condensed combined financial and other information for these joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by our venture partners or from the proceeds of construction financing obtained by the joint ventures.

As of December 31, 2002, our investment in and advances to these joint ventures was $65.4 million and our venture partners’ investment in such joint ventures was $91.3 million. Eleven of the joint ventures are in the form of limited partnerships of which we or one of our subsidiaries are the general partner. As of December 31, 2002, these joint ventures had obtained financing from construction lenders which amounted to $90.1 million of outstanding indebtedness. While historically all liabilities of these partnerships have been satisfied out of the assets of such partnerships and while we believe that this will continue in the future, we, as general partner, are potentially responsible for all liabilities and indebtedness of these partnerships. In addition, Delaware Lyon has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. Delaware Lyon has also provided completion guarantees and repayment guarantees for some of the limited partnerships under their credit facilities. The repayment guarantees only become effective upon repayment of our outstanding 12 ¹/2% Senior Notes. We anticipate that the lender who holds these repayment guarantees will terminate them prior to consummation of this offering.

Some of the credit facilities contain financial covenants applicable to us. See “Description of certain indebtedness.”

During the year ended December 31, 2002, one of our existing unconsolidated joint ventures (“Existing Venture”) was restructured such that we are required to purchase the 538 lots owned by the Existing Venture on a specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the outside partner of the Existing Venture (estimated to be $178.6 million, including an estimated preferred return of $36.9 million). During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64.5 million, which includes a $12.5 million preferred return to the outside partner of the Existing Venture. The 242 lots were purchased by a newly formed joint venture (“New Venture”) between us and an outside partner. We are required to purchase the 242 lots owned by the New Venture on a specified takedown basis through May 15, 2004 at a purchase price equal to $74.2 million plus a 13 ¹/2% preferred return on invested capital to the outside partner of the New Venture. Because we are required to purchase the lots owned by both the Existing Venture and the New Venture, and we now control both ventures, the financial statements of both ventures have been consolidated with our financial statements as of December 31, 2002, including real estate inventories of $101.8 million and minority interest in consolidated joint ventures of $80.6 million. During the year ended December 31, 2002 an additional 44 lots were purchased from the Existing Venture for $19.8 million, which includes a $4.0 million preferred return to the outside partner of the Existing Venture. The 44 lots were purchased through a land banking arrangement. The intercompany sale and related profit from the 242 lots and the 44 lots have been eliminated in consolidation.

In January 2003, California Lyon and two unaffiliated parties formed a limited liability company (“Development LLC”) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into

36

Management’s discussion and analysis of financial condition and results of operations

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

Assessment District Bonds.

In some jurisdictions in which we develop and construct 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 our 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, we are responsible for the assessments on our land. When our homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. See Note 10 of “Notes to Consolidated Financial Statements.”

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

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

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

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

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Management’s discussion and analysis of financial condition and results of operations

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

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

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

Net cash provided by (used in) financing activities changed from a use of $16.0 million in 2000 to a source of $11.4 million primarily as a result of increased net borrowings from notes payable and a decrease in the net repurchase of 12½% Senior Notes in 2001.

INFLATION

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

CRITICAL ACCOUNTING POLICIES

Our 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 our financial condition and results of operations and require among the most difficult, subjective or complex judgments:

Real Estate Inventories and Cost of Sales.

Real estate inventories are carried at cost net of impairment losses, if any. Real estate inventories consist primarily of deposits, raw land, lots under development, homes under construction and completed homes of real estate projects. All direct and indirect land costs, offsite and onsite improvements and applicable interest and other carrying charges are capitalized to real estate projects during periods when the project is under development. Land, offsite costs and all other common costs are allocated to land parcels benefited based upon relative fair values before construction. Onsite construction costs and related carrying charges (principally interest and property taxes) are allocated to the individual homes within a phase based upon the relative sales value of the homes. The estimation process involved in determining relative fair values and sales values is inherently uncertain because it involves estimates of current market values for land parcels before construction as well as future sales values of individual homes within a phase. Our estimate of future sales values is supported by our 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

38

Management’s discussion and analysis of financial condition and results of operations

individual home, we rely 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 that 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, we have set forth procedures which have been applied by us 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 us have historically not had a material impact on our consolidated results of operations. Management believes that our policies provide for reasonably dependable estimates to be used in the calculation and reporting of costs. We relieve our accumulated real estate inventories through cost of sales for the cost of homes sold, as described more fully below in the section entitled “Sales and Profit Recognition.”

Impairment of Real Estate Inventories.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”). This pronouncement superseded Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (“Statement No. 121”) and was required to be adopted on January 1, 2002. Statement No. 144 retained the fundamental provisions of Statement No. 121 as it relates to assets to be held and used and assets to be sold. Statement No. 144 requires impairment losses to be recorded on assets to be held and used by us when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. The estimation process used in determining the undiscounted cash flows of the assets is inherently uncertain because it involves estimates of future revenues and costs. As described more fully above in the section entitled “Real Estate Inventories and Cost of Sales”, estimates of revenues and costs are supported by our budgeting process. When an impairment loss is required for assets to be held and used by us, the related assets are adjusted to their estimated fair value.

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

39

Management’s discussion and analysis of financial condition and results of operations

recognition in future periods. The profit recorded by us is based on the calculation of cost of sales that is dependent on our allocation of costs, which is described in more detail above in the section entitled “Real Estate Inventories and Cost of Sales.”

Our critical accounting policies are more fully described in Note 1 of “Notes to Consolidated Financial Statements.”

RELATED PARTY TRANSACTIONS

See “Certain relationships and related transactions” and Note 9 of “Notes to Consolidated Financial Statements” for a description of our transactions with related parties.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“Interpretation No. 45”). The disclosure requirements of Interpretation No. 45 are effective as of December 31, 2002. The initial recognition and measurement requirements of Interpretation No. 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002.

40

Management’s discussion and analysis of financial condition and results of operations

We are currently evaluating the impact of the required accounting treatment under Interpretation No. 45 for guarantees issued or modified after December 31, 2002. We have not determined the anticipated impact of the application of Interpretation No. 45 to guarantees issued or modified after December 31, 2002. However, in the case of a guarantee issued as part of a transaction with multiple elements with an unrelated party, Interpretation No. 45 generally requires the recording at inception of the guarantee of a liability equal to the guarantee’s estimated fair value. In the absence of observable transactions for identical or similar guarantees, estimated fair value will likely be based on the expected present value which is the sum of the estimated probability-weighted range of contingent payments under the guarantee arrangement. The recording of a liability could have a corresponding effect on various of our financial ratios and other financial and operational indicators. See Notes 4, 5 and 10 of “Notes to Consolidated Financial Statements” for additional information related to our guarantees.

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

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates to our floating rate debt with a total outstanding balance at December 31, 2002 of $167.3 million where the interest rate is variable based upon certain bank reference or prime rates. If interest rates were to increase by 10%, the estimated impact on our 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, 2002, but would increase capitalized interest by approximately $0.8 million which would be amortized to cost of sales as home closings occur.

41

Market Overview

The following is a brief overview of the business, economic and demographic trends in the three growing Sunbelt states of California, Arizona, and Nevada and the metropolitan areas within those states in which we operate. Most of these markets have experienced compound annual growth rates (CAGR) in population and employment that exceed the overall rates in the nation. We believe the growth characteristics of the markets in which we operate represent a significant opportunity for us. The following table, which was derived from data compiled by Global Insight from U.S. Bureau of Labor Statistics and U.S. Census Bureau statistics presents actual data for the years 1996 to 2001 and projected data for the years 2002 to 2006 for these trends for the areas listed below.

As used herein and unless otherwise noted, the terms Orange County, Los Angeles, Ventura, Riverside, Sacramento, San Francisco, and San Jose refer to the Primary Metropolitan Statistical Areas (PMSAs) encompassing such cities or counties, and San Diego, Las Vegas, and Phoenix refer to the Metropolitan Statistical Areas (MSAs) encompassing those cities, in each case as defined by the Office of Management and Budget. The population rankings of the metropolitan areas set forth herein are based on data from the U.S. Census Bureau’s 2000 Census.

						Single-Family Housing Activity
	Population		Employment(1)			Starts				Permits
	1996-2001 CAGR (%)	2001-2006 CAGR (%)	1996-2001 CAGR (%)	2001-2006 CAGR (%)		1996-2001 CAGR (%)		2001-2006 CAGR (%)		1996-2001 CAGR (%)		2001-2006 CAGR (%)
U.S.(2)	1.15	0.99	2.07	1.13		1.76		0.70
California	1.61	1.49	2.90	1.02		8.15		6.55
Los Angeles	1.08	0.74	1.56	0.59						11.99		2.85
Orange County	1.75	1.01	3.67	1.29						(3.17	)	10.54
Riverside	2.60	2.06	5.08	2.44						15.20		3.05
Sacramento	2.29	1.74	3.89	1.48						12.85		3.06
San Diego	1.53	1.40	3.96	1.95						9.69		5.48
San Francisco	0.45	0.49	2.47	0.25						(2.07	)	15.41
San Jose	0.72	1.02	2.93	(0.01	)					(16.65	)	20.17
Ventura	1.63	1.23	3.33	1.17						8.52		4.63
Nevada	4.70	2.53	4.57	2.44		(1.65	)	(2.50	)
Las Vegas	5.41	2.73	5.64	3.00						3.14		(1.74	)
Arizona	2.95	2.34	3.67	1.44		0.03		2.53
Phoenix	3.37	2.39	3.98	1.67						4.46		1.25

SOURCE: Global Insight

(1) Refers to private sector non-farm employment.

(2) 2002 U.S. employment data is actual.

SOUTHERN CALIFORNIA DIVISION

The Southern California Division consists of operations in the counties of Los Angeles, Orange and Ventura and a portion of Riverside County. With over 45 years of experience in this region, we provide quality housing to a variety of niches within the diverse geographic market. On a combined basis, we closed 874 homes for the year ended December 31, 2002, with base sales prices ranging from $246,000 to $1,035,000 and an average base sales price of $417,300.

The Los Angeles–Riverside–Orange County metropolitan area is the second most populous metropolitan area in the United States as recognized by the U.S. Census Bureau.

42

Market overview

Los Angeles

Los Angeles’ diverse economy, strong demographic trends, continued price appreciation and pent-up housing demand continue to support this market, according to the Meyers Group. Single family housing permits are expected to increase by 12.71% in 2003 according to data compiled by Global Insight. Based on such data, population and employment are expected to increase by 0.66% and 0.53%, respectively in 2003. According to the Meyers Group, major employers in Los Angeles include Boeing, Kaiser Permanente, Ralph’s Grocery and Kelly Services.

Riverside

As land availability is reduced in neighboring Los Angeles and Orange County, Riverside is expected to continue to meet overflow housing demand. Furthermore, the Riverside County Integrated Plan (RCIP), aimed at improving commutes along major highways, is expected to expand access to many homebuilding markets in Riverside. Although single family housing permits are expected to decrease by 1.98% in 2003, population and employment are expected to increase by 1.96% and 1.87%, respectively, in 2003 according to data compiled by Global Insight. According to the Meyers Group, major employers in Riverside include Stater Bros. Markets, Wal-Mart Stores, United Parcel Service, and the University of California-Riverside.

Orange County

In Orange County, we were ranked as the fourth largest homebuilder in 2002, based on the number of homes sold, according to the Meyers Group. Single family housing permits are expected to increase by 20.80% in 2003 according to data compiled by Global Insight. Based on such data, population and employment are expected to increase by 0.93% and 0.73%, respectively, in 2003. According to the Meyers Group, major employers in Orange County include Walt Disney, the University of California-Irvine, Boeing, and Albertson’s.

SAN DIEGO DIVISION

The San Diego Division consists of operations in San Diego County and a portion of Riverside County. With over 30 years of experience in the area, we were ranked as the eighth largest homebuilder in 2002 in San Diego County, based on the number of homes sold, according to the Meyers Group. On a combined basis, we closed 469 homes for the year ended December 31, 2002, with base sales prices ranging from $180,000 to $645,000, and an average base sales price of $357,900.

San Diego

The San Diego metropolitan area is the 17^th most populous metropolitan area in the United States as recognized by the U.S. Census Bureau. Positive employment growth and a diversified economy enhance San Diego’s economic outlook. Single family housing permits are expected to increase by 19.59% in 2003 according to data compiled by Global Insight. Based on such data, population and employment are expected to increase by 1.32% and 1.89%, respectively, in 2003. According to the Meyers Group, major employers in San Diego include the University of California at San Diego, Sharp Healthcare, Scripps Health and the Naval Amphibean Base Coronado.

NORTHERN CALIFORNIA DIVISION

The Northern California Division consists of operations in Contra Costa, El Dorado, Sacramento, Santa Clara, San Joaquin, Solano, Placer, and Stanislaus Counties. We have over 35 years of experience in the market and in 2002 were ranked as a top five builder in Solano and El Dorado Counties and a top ten builder in San Joaquin County based on the number of homes sold, according to The Ryness Company. We provide quality housing to a variety of niches within this diverse geographic market. On a combined basis, we closed 555 homes for the year ended December 31, 2002, with base sales prices ranging from $209,000 to $1,003,000, and an average base sales price of $347,200.

43

Market overview

San Francisco Bay Area

The San Francisco-Oakland-San Jose metropolitan area (the “San Francisco Bay Area”) is the fifth most populous metropolitan area in the United States as recognized by the U.S. Census Bureau. Although the San Francisco Bay Area has experienced low housing affordability and recent job losses, housing demand remains strong due to low levels of housing supply. Single family housing permits in San Francisco are expected to increase by 41.07% in 2003 according to data compiled by Global Insight. Based on such data, population is expected to increase by 0.43% and employment is expected to decrease 0.02% in 2003. Single family housing permits in San Jose are expected to increase by 47.93% in 2003 according to data compiled by Global Insight, and population and employment are expected to increase by 0.99% and 0.34%, respectively, in 2003. According to the Meyers Group, major employers in the San Francisco Bay Area include Cisco Systems, Pacific Bell, the University of California-San Francisco and Hewlett-Packard.

Sacramento

The Sacramento-Yolo metropolitan area is the 25^th most populous metropolitan area in the United States as recognized by the U.S. Census Bureau. Housing affordability compared to neighboring markets, a diversified economy and strong infrastructure provide support for homebuilding demand in the metropolitan area. Although single family housing permits are expected to decrease in Sacramento by 4.70% in 2003, population and employment are expected to increase by 1.59% and 0.60%, respectively, in 2003 according to data compiled by Global Insight. According to the Meyers Group, major employers in the metropolitan area include Intel, Raley’s, Pacific Bell and Hewlett-Packard.

NEVADA DIVISION

The Nevada Division consists of operations in Clark County. We entered the Nevada market in 1995 and we believe that during the last three years our projects were among the top selling projects in Summerlin. Summerlin has been the best selling master planned community in the nation for nine out of the ten years through December 31, 2001. We closed 354 homes for the year ended December 31, 2002, with base sales prices ranging from $132,000 to $595,000, and an average base sales price of $243,900.

Las Vegas

The Las Vegas metropolitan area is the 32^nd most populous and the fastest growing metropolitan area in the U.S. as recognized by the U.S. Census Bureau, with an 83.3% increase in population from 1990 to 2000. Housing affordability, combined with positive job and population growth, bolster homebuilding demand, primarily in the entry level and move up housing segments. Although single family housing permits are expected to decrease by 1.11% in 2003, population and employment are expected to increase by 2.76% and 3.22%, respectively, in 2003 according to data compiled by Global Insight. According to the Meyers Group, major employers in Las Vegas include Bellagio Casino Hotel, MGM Grand Hotel, Bally’s & Paris Casino Hotels and Mirage Casino-Hotel.

ARIZONA DIVISION

The Arizona Division consists of operations in Maricopa County. With over 30 years of experience in the Arizona market, we closed 270 homes for the year ended December 31, 2002, with base sales prices ranging from $110,000 to $324,000, and an average base sales price of $194,100.

Phoenix

The Phoenix-Mesa metropolitan area is the 14^th most populous metropolitan area in the United States as recognized by the U.S. Census Bureau. Single family housing permits in Phoenix are expected to increase by 0.28% in 2003 according to data compiled by Global Insight. Based on such data, population and employment are expected to increase by 2.41% and 1.32%, respectively, in 2003. Population growth was in excess of 100,000 people per year through much of the 1990s and the trend is expected to continue in 2003, according to the Meyers Group. According to the Meyers Group, major employers in the metropolitan area include Honeywell, Wal-Mart Stores, Banner Health Systems and Raytheon Company.

44

Business

GENERAL

We 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 our predecessor in 1956, on a combined basis we have sold over 56,000 homes. We believe that we are one of the largest homebuilders in California in terms of both sales and homes delivered on a combined basis in 2002. We conduct our homebuilding operations through five geographic divisions: Southern California, San Diego, Northern California, Arizona and Nevada. We believe that we are well positioned for future growth in all of our markets. According to Global Insight, California, Arizona and Nevada were the 3rd, 6th, and 14th largest states, respectively, by single family housing starts in 2001. For the year ended December 31, 2002, on a combined basis we had revenues from home sales of $956.5 million and delivered 2,522 homes. For the same period, our consolidated EBITDA, which includes cash distributions of income from unconsolidated joint ventures, was $94.1 million. See Note 3 of “Selected historical consolidated financial data.”

We consider ourselves an opportunistic niche builder with expertise in all aspects of the homebuilding industry. We design, construct and sell a wide range of homes designed to meet the specific needs of each of our markets. We primarily emphasize sales to entry-level and move-up home buyers and we believe that this diversified product strategy enables us to best serve a wide range of buyers and adapt quickly to a variety of market conditions. As of December 31, 2002, we marketed our homes through 36 sales locations in both our wholly-owned projects and projects being developed in unconsolidated joint ventures. For the year ended December 31, 2002, the average sales price for homes delivered on a combined basis was $379,200, with base sales prices ranging from $110,000 to $1,035,000 and with square footage ranging from 1,183 to 4,695.

Our land acquisition strategy, as a merchant homebuilder, is to undertake projects with life-cycles of 24-36 months, in order to reduce development and market risk. We believe our inventory of owned lots is adequate to supply our homebuilding operations at current levels for approximately two years. As of December 31, 2002, on a combined basis, we controlled 13,723 lots, of which 6,110 were owned.

For the year ended December 31, 2002, on a combined basis we generated 2,607 net new home orders, a 3% increase over the 2,541 net new home orders generated for the year ended December 31, 2001. The dollar amount of our backlog of homes sold but not closed as of December 31, 2002 was $259.1 million, a 47% increase over the $176.5 million as of December 31, 2001.

BUSINESS STRATEGY

Our business strategies focus on the following:

Focus On High Growth Core Markets

Our housing markets are located in three rapidly growing Sunbelt states, California, Arizona and Nevada, which we believe offer us attractive opportunities for long-term growth. In California, we operate in the markets of: San Diego County, Riverside County, Orange County, Los Angeles County, Ventura County, San Francisco East Bay, San Jose, Sacramento County and other central California counties. In Arizona and Nevada, we primarily operate in the Phoenix and Las Vegas markets, respectively. These areas are generally characterized by high job growth and in-migration trends, creating strong demand for new housing.

On a combined basis, we believe that we have been one of the largest homebuilders in California in both homes delivered and sales volume for the last twenty years and continue to command a significant

45

Business

market share. In Ventura County, California, we ranked as the largest homebuilder, and, in prestigious Orange County, California, we ranked as the fourth largest homebuilder in 2002, based on number of homes sold, according to the Meyers Group. In California, we believe that our strong reputation and long-standing relationships provide us with a significant competitive advantage, particularly as it relates to dealings with land sellers, subcontractors and material suppliers. In addition to our strength in California, we believe there are significant opportunities for us to grow in Arizona and Nevada.

Maintain Conservative Financial Position and Improve Credit Profile

We operate with a conservative approach to capital and inventory risk and focus on decreasing our reliance on leverage. We successfully de-leveraged our balance sheet over the past five years while growing our stockholders’ equity (deficit) from $(5.7) million as of December 31, 1997 to $181.7 million as of December 31, 2002. We plan to continue to diminish our reliance on leverage and use our cash flow from operations for on-balance sheet inventory investment. We believe that our operating and financial performance will also benefit from our enhanced focus on wholly-owned projects and limiting our use of joint venture structures, in which our joint venture partners have historically required returns on their invested capital in excess of 20%.

Acquire Strong Land Positions Through Disciplined Acquisition Strategies

We believe that, next to our people, land is our most valuable asset and that our long-standing relationships with land sellers give us a competitive advantage in the acquisition of well positioned lots, particularly in California. We believe that our strategy as a merchant homebuilder, versus that of a master-planned community developer, allows us to limit exposure to land investment and entitlement risk, as we focus on the development of entitled parcels that can be completed within a two to three-year period. We attempt to minimize our exposure to land risk through disciplined management of completed housing inventory, as well as the use of land options and flexible land acquisition arrangements.

Maintain Low Cost Structure

Throughout our history, we have focused on minimizing construction costs and overhead, and we believe this strategy has been critical to maintaining competitive margins and profitability. We reduce costs by:

Ø Obtaining favorable pricing from subcontractors through long-term relationships and high volume;

Ø Reducing interest carry costs by acquiring entitled lots, minimizing our inventory of unsold or speculative homes and shortening the construction cycle;

Ø Minimizing overhead by centralizing certain administrative activities; and

Ø Monitoring homebuilding production, scheduling and budgeting through the effective use of management information systems.

Leverage Experienced Management Team with Significant Equity Ownership

Our executive officers and divisional presidents average more than 25 years of experience in the homebuilding and development industries within California and the Southwest. We combine decentralized management in those aspects of our 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, we believe, central control is required (such as approval of land acquisitions, financial, treasury, human resources and legal matters). We plan to continue to seek experienced professionals with deep market expertise while retaining our existing employees. In addition, our management owns a substantial portion of our outstanding common stock, aligning management’s incentives with those of our stockholders.

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Business

OUR MARKETS

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

The following table sets forth sales from real estate operations attributable to each of our homebuilding divisions during the preceding three fiscal years and the three months ended December 31, 2002 and 2001:

	Three Months Ended December 31,								Year Ended December 31,
	2002				2001				2002				2001				2000
	Dollar Amount		% of Total		Dollar Amount		% of Total		Dollar Amount		% of Total		Dollar Amount		% of Total		Dollar Amount		% of Total
	(Dollars in Thousands)
Wholly-owned
Southern California(1)	$	92,206	25	%	$	49,255	15	%	$	232,868	24	%	$	118,611	15	%	$	107,249	14	%
San Diego(2)		30,670	8	%		46,354	15	%		115,843	12	%		117,652	15	%		90,137	12	%
Northern California(3)		36,148	10	%		36,167	11	%		84,679	9	%		75,108	10	%		111,026	14	%
Arizona(4)		19,167	5	%		16,178	5	%		65,571	7	%		46,262	6	%		26,309	3	%
New Mexico(5)		—	0	%		—	0	%		—	—			—	—			6,011	1	%
Nevada(6)		23,655	7	%		25,796	8	%		103,449	11	%		101,423	13	%		66,134	8	%
		201,846	55	%		173,750	54	%		602,410	63	%		459,056	59	%		406,866	52	%
Unconsolidated joint ventures
Southern California(1)		76,536	21	%		69,005	21	%		167,518	16	%		156,336	20	%		112,233	14	%
San Diego(2)		33,752	9	%		21,713	7	%		90,843	9	%		49,748	6	%		116,048	15	%
Northern California(3)		55,868	15	%		57,443	18	%		121,415	12	%		115,385	15	%		146,571	19	%
		166,156	45	%		148,161	46	%		379,776	37	%		321,469	41	%		374,852	48	%
Combined
Southern California(1)		168,742	46	%		118,260	36	%		400,386	40	%		274,947	35	%		219,482	28	%
San Diego(2)		64,422	17	%		68,067	22	%		206,686	21	%		167,400	21	%		206,185	27	%
Northern California(3)		92,016	25	%		93,610	29	%		206,094	21	%		190,493	25	%		257,597	33	%
Arizona(4)		19,167	5	%		16,178	5	%		65,571	7	%		46,262	6	%		26,309	3	%
New Mexico(5)		—	0	%		—	0	%		—	—			—	—			6,011	1	%
Nevada(6)		23,655	7	%		25,796	8	%		103,449	11	%		101,423	13	%		66,134	8	%
	$	368,002	100	%	$	321,911	100	%	$	982,186	100	%	$	780,525	100	%	$	781,718	100	%

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

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

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

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

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

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

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Business

LAND ACQUISITION AND DEVELOPMENT

As of December 31, 2002, on a combined basis we controlled 13,723 lots. Of these lots, 6,110 were owned and entitled. As used in this prospectus, “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.

We estimate that our current inventory of land owned is adequate to supply our homebuilding operations at current operating levels for approximately two years.

We use a land acquisition team, which includes members of our senior management, to manage the risks associated with land ownership and development. It is our policy that land can be purchased or sold only with the prior approval of our senior management. Our 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. Our strategy consists of the following elements:

Ø Completing due diligence prior to committing to acquire land;

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

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

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

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

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

Ø Employing centralized control of approval over all land transactions;

Ø Expanding our homebuilding operations in the Southwest, particularly in our long established markets of California and Arizona and in Nevada, where we entered the market in 1995; and

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

Prior to committing to the acquisition of land, we conduct 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, we consider assumptions concerning the needs of the targeted customer and determine whether the underlying land price enables us to meet those needs at an affordable price. Before purchasing land we attempt to project the commencement of construction and sales over a reasonable time period. We utilize outside architects and consultants, under close supervision, to help review our acquisitions and design our products.

In January 2003, California Lyon and two unaffiliated parties formed a limited liability company (“Development LLC”) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. This unique acquisition is positioned to deliver homes in multiple product segments in what we believe is one of the highest demand and supply constrained markets in the country.

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Upon completion of the development, California Lyon has the obligation under certain specific conditions to purchase approximately one-half of the homesites. It is anticipated that homebuilding activities and first deliveries will begin in 2005. See the section entitled “Description of indebtedness—Limited Liability Company Facility” for more information relating to this transaction and related financing.

HOMEBUILDING AND MARKET STRATEGY

We currently have a wide variety of product lines that enables us to meet the specific needs of each of our markets. Although we primarily emphasize sales to the entry-level and move-up home buyers, we believe that this diversified product strategy enables us 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 our sales locations are geographically dispersed. At December 31, 2002, we had 36 sales locations.

Because the decision as to which product to develop is based on our assessment of market conditions and the restrictions imposed by government regulations, homestyles and sizes vary from project to project. Our detached housing ranges from 1,302 to 4,695 square feet, and our attached housing ranges in size from 1,183 to 1,825 square feet.

Due to our product and geographic diversification strategy, the prices of our homes also vary substantially. Base sales prices for our detached housing range from approximately $110,000 to $1,035,000 and base sales prices for our attached housing range from approximately $299,000 to $390,000. On a combined basis, the average sales price of our homes for the year ended December 31, 2002 was $379,200.

We generally standardize and limit 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 us to better control and reduce construction costs.

We contract with a number of architects and other consultants who are involved in the design process of our 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 that are familiar with local requirements.

Substantially all construction work is done by subcontractors with us acting as the general contractor. We manage subcontractor activities with on-site supervisory employees and management control systems. We do not have long- term contractual commitments with our subcontractors or suppliers. However, we generally have been able to obtain sufficient materials and subcontractors during times of material shortages. We believe that our relationships with our suppliers and subcontractors are good.

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DESCRIPTION OF PROJECTS AND COMMUNITIES UNDER DEVELOPMENT

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

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

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

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

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

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

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

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

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

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

SALES AND MARKETING

The management team responsible for a specific project develops marketing objectives, formulates pricing and sales strategies and develops advertising and public relations programs for approval of senior management. We make 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 our developments. In addition, we market all of our products through our website at www.lyonhomes.com. In general, our advertising emphasizes our strengths with respect to the quality and value of our products.

We normally build, decorate, furnish and landscape three to five model homes for each product line and maintain on-site sales offices, which typically are open seven days a week. We believe that model homes play a particularly important role in our marketing efforts. Consequently, we expend a significant amount of effort in creating an attractive atmosphere at our model homes. Interior decorations vary among our models and are carefully selected

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based upon the lifestyles of our 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.

We employ in-house commissioned sales personnel or contract with a third-party firm to sell our homes. In some cases, outside brokers are also involved in the selling of our homes. We typically engage our sales personnel on a long-term, rather than a project-by-project basis, which we believe results in a more motivated sales force with an extensive knowledge of our operating policies and products. Sales personnel are trained by us and attend weekly meetings to be updated on the availability of financing, construction schedules and marketing and advertising plans.

We strive 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 our reputation for quality and service, and ultimately lead to enhanced customer retention and referrals.

Our homes are typically sold before or during construction through sales contracts that 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 our projects was approximately 19% during 2002. Cancellation rates are subject to a variety of factors beyond our control such as adverse economic conditions and increases in mortgage interest rates. Our inventory of completed and unsold homes was 28 homes as of December 31, 2002.

WARRANTY

We provide our homebuyers with a one-year limited warranty covering workmanship and materials. We also provide our homebuyers with a limited warranty that covers “construction defects,” as defined in the limited warranty agreement, for the length of our legal liability for such defects (which may be up to ten years in some circumstances), as determined by the law of the state in which we build. The limited warranty covering construction defects is transferable to subsequent buyers not under direct contract with us 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. We began providing this limited warranty at the end of 2001.

In connection with the limited warranty covering construction defects, we obtained a three-year insurance policy in November 2001. We have been informed by our insurance carrier that this insurance policy will respond to construction defect claims on homes that close during each policy period for the duration of our 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 us and the subcontractors enrolled in our insurance program. As a result, we are no longer required to obtain proof of insurance from these subcontractors nor be named as an additional insured under their individual insurance policies. We still require that subcontractors not enrolled in our insurance program provide proof of insurance and name us as an additional insured under their insurance policy. Furthermore, we generally require that our subcontractors provide us 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 we will be able to renew our insurance coverage or renew it at reasonable rates, that we will not be liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence or building-related claims or that claims will not arise out of uninsurable events, such as landslides or earthquakes, or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors.

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SALE OF LOTS AND LAND

In the ordinary course of business, we continually evaluate land sales and have sold, and expect that we will continue to sell, land as market and business conditions warrant. We 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, we may acquire sites with commercial, industrial and multi-family parcels which will generally be sold to third-party developers.

CUSTOMER FINANCING—DUXFORD FINANCIAL, INC.

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

Duxford Financial, Inc., a wholly-owned subsidiary, began operations effective December 1, 1994 and is in operation to service our homebuilding divisions. The mortgage company operates as a mortgage broker/loan correspondent and originates conventional, FHA and VA loans.

INFORMATION SYSTEMS AND CONTROLS

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

REGULATION

We and our 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. We and our 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 we operate. Because we usually purchase land with entitlements, we believe that the moratoriums would adversely affect us 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 we receive entitlements.

We and our 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 us and our competitors to incur substantial compliance and other costs, and may prohibit or severely restrict development in certain environmentally sensitive regions or areas. Our 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 our operations.

Our subsidiary, Duxford Financial, Inc., is subject to state licensing laws as a mortgage broker as well as federal and state laws concerning real estate loans. Our subsidiary, Duxford Escrow, Inc., is licensed and

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subject to regulation under the California Escrow Law. California Lyon is licensed as a general building contractor in California, Arizona and Nevada. In addition, California Lyon holds a corporate real estate license under the California Real Estate Law.

COMPETITION

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

EMPLOYEES

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

Our executive officers and division presidents average more than 25 years of experience in the homebuilding and development industries within California and the Southwest. We combine decentralized management in those aspects of our 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 we believe central control is required (such as approval of land acquisitions, financial, treasury, human resources and legal matters).

As of December 31, 2002, we employed 539 full-time and 31 part-time employees, including corporate staff, supervisory personnel of construction projects, maintenance crews to service completed projects, as well as persons engaged in administrative, finance and accounting, mortgage, engineering, land acquisition, sales and marketing activities.

We believe that our relations with our employees have been good. Some employees of the subcontractors that we utilize are unionized, but virtually none of our employees are union members. Although there have been temporary work stoppages in the building trades in our areas of operation, to date none have had any material impact upon our overall operations.

PROPERTIES

Our corporate headquarters are located at 4490 Von Karman Avenue, Newport Beach, California, which we lease from a trust of which William H. Lyon is the sole beneficiary. We lease or own properties for our division offices and Duxford Financial, Inc., but none of these properties is material to the operation of our business. For information about properties owned by us for use in our homebuilding activities, see the section entitled “Description of Projects and Communities Under Development.”

LEGAL PROCEEDINGS

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

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DIRECTORS AND EXECUTIVE OFFICERS

The following table lists our directors and executive officers and provides their respective ages and current positions as of January 31, 2003. Biographical information for each director and executive officer is provided below.

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

(a) Member of the audit committee.

(b) Member of the compensation committee.

General William Lyon was elected director and Chairman of the Board of the former The Presley Companies in 1987 and has served us in that capacity since November 1999. General Lyon is our Chief Executive Officer. General Lyon also serves as the Chairman of the Board, President and Chief Executive Officer of Corporate Enterprises, Inc. In recognition of his distinguished career in real estate development, General Lyon was elected to the California Building Industry Foundation Hall of Fame in 1985. General Lyon is a retired USAF Major General and was Chief of the Air Force Reserve from 1975 to 1979. General Lyon is a director of Fidelity Financial Services, Inc.

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

General James E. Dalton, USAF (Ret.), was elected in 1991 to the board of directors of the former The Presley Companies and has served us in that capacity since November 1999. He serves as Chairman of

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our audit committee. General Dalton was the President of Logicon R&D Associates, a subsidiary of Logicon Corporation (a defense contractor providing advanced technology systems and services), a position he held from 1985 until his retirement in December 1998. He also served as General Manager of Logicon’s Defense Technology Group from 1995 until his retirement in December 1998. General Dalton currently acts as an independent consultant to several companies in the defense industry and is a director of Defense Group, Inc. and Finance America, Inc.

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

William H. Lyon, son of Chairman William Lyon, worked full time with the former William Lyon Homes from November 1997 through November 1999, has been employed by us since November 1999, and has been a member of our board of directors since January 25, 2000. Since joining us, Mr. Lyon has participated in a training program designed to expose him to the many facets of real estate development, and currently he is Director of Corporate Development. Mr. Lyon received a dual B.S. in Industrial Engineering and Product Design from Stanford University in 1997.

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

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

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

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

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Management

Douglas F. Bauer, Senior Vice President and Northern California Division President, joined us in 1999 when we 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 Division President since his hire in January 1989. Prior experience includes seven years at Security Pacific National Bank in Los Angeles, California in various financial positions. Mr. Bauer has more than 20 years experience in the real estate development and homebuilding industry.

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

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

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

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

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

Richard S. Robinson, Senior Vice President — Finance, joined us in 1999 when we 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 us in 1999 when we acquired substantially all of the assets of the former William Lyon Homes, where Ms. Hardgrave had served in various tax management positions since her hire in July 1989. Ms. Hardgrave has more than 15 years experience in real estate tax and audit.

W. Douglass Harris, Vice President and Corporate Controller joined The Presley Companies in June 1992 and has served us in that capacity since November 1999. Mr. Harris has served as our Corporate Secretary since October 2002. Previously, Mr. Harris spent seven years with Shapell Industries, Inc., another major California homebuilder, as its Vice President and Corporate Controller. Mr. Harris has been involved with the real estate development and homebuilding industry for more than 20 years.

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COMPENSATION OF DIRECTORS OF DELAWARE LYON

In 2002, outside directors received an annual retainer of $30,000 per year plus $1,000 for each Delaware Lyon board of directors meeting attended and $1,000 per year per committee for service on committees of Delaware Lyon’s board of directors, which they take in cash. We adopted the William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002, whereby each outside director may elect to defer payment of a portion or all of his annual compensation until his retirement date or a fixed payment date in the future at which time he would receive all deferred amounts and accumulated earnings thereon, if any, in a lump sum. Currently, General Dalton is our only director who intends to defer all of his 2002 director compensation under the plan. Directors of California Lyon are not compensated for their services as such.

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

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

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EXECUTIVE COMPENSATION

Summary Compensation Table.

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

		Annual Compensation				Long-Term Compensation
						Awards
Name and Principal Position	Year	Salary($)(1)		Bonus Paid in Specified Year But Earned in Earlier Years ($)(2)(3)(4)(5)	Bonus Earned During Specified Year But Payable in Future Years($)(3)(4)(5)(6)	Securities Underlying Options(#)	All Other Compensation ($)(7)
General William Lyon(8) Chairman of the Board and Chief Executive Officer	2002 2001 2000	$	495,000 495,000 495,000	$1,985,408 1,440,023 0	$2,488,838 2,007,200 1,920,030	0 0 0	$	0 0 0
Wade H. Cable Director, President and Chief Operating Officer	2002 2001 2000		424,330 424,330 424,330	2,294,158 1,823,773 617,500	2,488,838 2,007,200 1,920,030	0 0 50,000		5,100 5,100 5,100
Thomas J. Mitchell(8) Senior Vice President and Southern California Division President	2002 2001 2000		206,000 206,000 200,000	647,259 385,875 0	1,060,582 691,512 514,500	0 0 25,000		5,100 5,100 5,100
Douglas F. Bauer(8) Senior Vice President and Northern California Division President	2002 2001 2000		206,000 206,000 200,000	484,970 477,338 0	500,000 434,476 636,450	0 0 25,000		5,100 5,100 5,100
Mary J. Connelly Senior Vice President and Nevada Division President	2002 2001 2000		200,000 200,000 175,366	461,627 321,014 172,131	500,000 429,332 288,510	0 0 25,000		5,100 5,100 5,100

(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 our 401(k) plan and deferred compensation plan. Does not include perquisites and other personal benefits, securities or property received by the executive unless the aggregate amount of such compensation is greater than 10 percent of the total annual salary and bonus reported for the executive.

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

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

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

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Management

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

(6) Includes amounts, which the executive would have been entitled to be paid, but which at the election of the executive were deferred by payment into our executive deferred compensation plan.

(7) Represents matching contributions into the executive’s 401(k) plan account in an amount equal to 3% of the executive’s eligible earnings.

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

Our board of directors has approved a cash bonus plan for all of our full-time, salaried employees, including the CEO, COO, CFO, division presidents, executives, managers, field construction staff, and certain other employees. Under the terms of this plan, the CEO, COO and CFO are eligible to receive bonuses based upon specified percentages of our pretax, pre-bonus income. Division presidents are eligible to receive bonuses based upon specified percentages of their respective division pre-tax, pre-bonus income. All other participants are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.

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

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

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

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

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

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

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

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

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

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

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE

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

				Number of Securities Underlying Unexercised Options/SARS At Fiscal Year-End(#)(1)		Value of Unexercised In-The-Money Options/SARS At Fiscal Year-End($)(1)(2)
	Shares Acquired On Exercise(#)(1)	Value Realized($)(2)		Exercisable	Unexercisable	Exercisable		Unexercisable
General William Lyon	—		—	—	—		—		—
Wade H. Cable 1991 Plan 2000 Plan	13,912 —	$	212,854 —	0 33,335	0 16,665	$	0 438,105	$	0 219,020
Thomas J. Mitchell	—		—	16,668	8,332	$	219,059	$	109,503
Douglas F. Bauer	8,333	$	148,098	0	8,332		0	$	109,503
Mary J. Connelly	—		—	8,333	8,332	$	109,516	$	109,503

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

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

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EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS

Employees of California Lyon, including our executive officers, enter into annual employment agreements with California Lyon which provide that their employment is at-will. The employment agreements between California Lyon and each of General William Lyon, Wade Cable, Thomas Mitchell, Douglas Bauer and Mary Connelly provide for an annual salary effective January 1, 2003 of $600,000, $500,000, $225,000, $225,000 and $225,000 respectively. Each employment agreement also provides for a monthly automobile allowance of $400.

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of our compensation committee are General James E. Dalton, William H. McFarland, Michael L. Meyer, Raymond A. Watt and Randolph W. Westerfield. None of the members of the compensation committee has ever been an officer or employee of us or any of our subsidiaries. None of our 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 us. We plan to use the net proceeds of the offering of the notes to repay all of the 12 ¹/2% Senior Notes, including the $1,000,000 in principal amount held by Mr. McFarland. See the section entitled “Certain relationships and related transactions.”

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Certain relationships and related transactions

Proposed Repayment of 12½% Senior Notes Held by General William Lyon, a Trust for which William H. Lyon is the Sole Beneficiary, Wade H. Cable and William H. McFarland.

On May 1, 2001, we completed a consent solicitation with respect to the 12½% Senior Notes and received consents from holders of $39,279,000 of the then outstanding notes to extend the maturity date from July 1, 2001 to July 1, 2003 and to make certain amendments to the note covenants. Although we initially intended to accept consents from no more than 50% of holders, we elected to accept additional consents, as contemplated by the consent solicitation documents. The consenting holders received a fee of 4% of the principal balance. Subsequently, during May and June 2001, we also repurchased $31,444,000 of the 12½% Senior Notes from non-consenting holders.

In June 2001, General William Lyon, our Chairman and Chief Executive Officer, and a trust for which his son William H. Lyon, a director, is the sole beneficiary, purchased from us at par $30,000,000 of the 12½% Senior Notes. William H. McFarland, another member of our board of directors, purchased from us at par $1,000,000 of the 12½% Senior Notes. In parity with holders consenting during the consent solicitation, these directors received a consent fee of 4% of the principal balance and consented to the amendments effected by our consent solicitation statement dated February 28, 2001.

As of December 31, 2002, $70,279,000 aggregate principal amount of our 12 ¹/2% Senior Notes was outstanding. We intend to use a portion of the net proceeds of the offering of the notes to repay all of the 12 ¹/2% Senior Notes, including $30,000,000 in principal amount held by General William Lyon and the trust for his son William H. Lyon, $2,323,000 in principal amount held by Wade H. Cable and the $1,000,000 in principal amount held by William H. McFarland.

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

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

On October 26, 2000, our board of directors (with General William Lyon and William H. Lyon abstaining) approved the purchase of 579 lots for a total purchase price of $12,581,000 from an entity controlled by General William Lyon and William H. Lyon. The terms of the purchase agreement provide for an initial option payment of $1,000,000 and a rolling option takedown of the lots. Phase takedowns of approximately 20 lots each are anticipated to occur at two to three month intervals for each of several product types through September 2004. In addition, one-half of the net profits in excess of six percent from the development are to be paid to the seller. During the years ended December 31, 2002 and 2001, we purchased 183 lots and 143 lots, respectively, under this agreement for a total purchase price of $4,150,000 and $2,777,000, respectively. In addition, during the year ended December 31, 2002, payments in the amount of $1,614,000 were made for one-half of the net profits in excess of six percent from the development. This land acquisition qualifies as an affiliate transaction under our 12½% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994 (“Indenture”). Pursuant to the terms of the Indenture, we have determined that the land acquisition is on terms that are no less favorable to us than those that would have been obtained in a comparable transaction by us with an unrelated person. We have delivered to the Trustee under the Indenture a resolution of our board of directors set forth in an Officers’ Certificate certifying that the land acquisition is on terms that are no less favorable to us than

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Certain relationships and related transactions

those that would have been obtained in a comparable transaction by us with an unrelated person and the land acquisition has been approved by a majority of the disinterested members of our board of directors. Further, we have delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.

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

Purchase of Land from Unconsolidated Joint Venture.

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

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

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

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

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

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

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Certain relationships and related transactions

Charges Incurred Related to the Charter and Use of Aircraft Owned by an Affiliate of William Lyon.

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

Certain Family Relationships.

William H. Lyon is the son of General William Lyon. General William Lyon is our Chairman of our board of directors and our Chief Executive Officer. William H. Lyon is one of our directors and an employee.

Mortgage Loans.

In 2002, we offered home mortgage loans to our employees and directors through our mortgage company subsidiary, Duxford Financial, Inc. These loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. These loans did not involve more than the normal risk of collectability or present other unfavorable features and were sold to investors typically within  7 to 15 days.

Home Purchase.

We offer a 2% discount on new homes sold to our employees. In 2002, one of our executive officers, Larry Smith, and another employee purchased a new home from us for $327,048.

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Principal stockholders

The following table sets forth certain information as to the number of shares of Delaware Lyon’s common stock beneficially owned as of January 31, 2003. The following table includes information for (a) each person or group that is known to us to be the beneficial owner of more than 5% of the outstanding shares of common stock, (b) each of our directors, (c) each executive officer named in the Summary Compensation Table, and (d) all of our directors and executive officers as a group. California Lyon is a wholly-owned subsidiary of Delaware Lyon.

	As of January 31, 2003
	Shares Beneficially Owned		Shares Acquirable Within 60 Days(1)		Percentage of All Common Stock(2)
General William Lyon(3)	3,707,573	(4)	33,335	(5)	38.32	%
The William Harwell Lyon Trust(6)	1,749,259				17.98	%
William H. Lyon(3)	0	(7)			*
Wade H. Cable(3)	0		33,335		*
Wade H. Cable & Susan M. Cable, Trustees of the Cable Family Trust, Est. 7-11-88(3)	247,705	(8)			2.55	%
Richard E. Frankel(3)	0		6,667	(9)	*
General James E. Dalton(3)	0		6,667		*
William H. McFarland(3)	0		3,333		*
William H. & Rose-Marie McFarland, Trustees (U/T/A dated February 13, 1998)(3)	3,334
Michael L. Meyer(3)	0		6,667		*
Michael L. Meyer, Trustee of the Michael L. Meyer Living Trust, Est. July 4, 1989(3)	20,000				*
Raymond A. Watt(3)	0				*
R.A. Watt 1994 Family Trust(3)	6,667				*
Randolph W. Westerfield(3)	3,333				*
Thomas J. Mitchell(3)	0		16,668		*
Douglas F. Bauer(3)	0				*
Mary J. Connelly(3)	0		8,333		*
Bricoleur Capital Management LLC(10)	1,733,940				17.82	%
FMR Corp(11)	672,000				6.91	%
All of our directors and executive officers as a group (18 persons)	5,490,366	(12)	131,840		57.02	%

 * Less than 1%

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

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

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

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

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Principal stockholders

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

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

(7) Does not include 1,749,259 shares of common stock held in The William Harwell Lyon Trust of which William H. Lyon is the sole beneficiary. William H. Lyon does not have or share, directly or indirectly, the power to vote or to direct the vote of these shares, and thus, William H. Lyon disclaims beneficial ownership of these shares.

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

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

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

(11) Based solely on the Schedule 13G filed by the stockholder on February 13, 2003, stockholder is at the following mailing address: 82 Devonshire Street, Boston, MA 02109. According to Item 6 of the Schedule 13G, various persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, our common stock. The interest of one fund, Fidelity Low Price Stock Fund, amounted to 507,000 shares at December 31, 2002.

(12) Includes 1,749,259 shares held by The William Harwell Lyon Trust of which William H. Lyon is the sole beneficiary. William H. Lyon does not have or share, directly or indirectly, the power to vote or direct the vote of these shares, and thus, William H. Lyon disclaims beneficial ownership of these shares.

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

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Description of certain indebtedness

The following is a description of our indebtedness and the indebtedness of our joint ventures that will be outstanding after giving effect to the sale of the notes and application of the estimated net proceeds as described in “Use of Proceeds”. This description is qualified in its entirety by reference to the relevant credit facilities and related documents governing the debt.

REVOLVING CREDIT FACILITIES

General Overview

California Lyon is the borrower under three secured revolving credit facilities, each of which is described in more detail below. 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 California Lyon 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 California Lyon 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. California Lyon has also provided each lender with an unsecured environmental indemnity that is a contingent obligation in addition to its obligation to repay loans under the respective credit facilities.

The notes will be effectively subordinated to all of California Lyon’s indebtedness under these three credit facilities to the extent of the value of assets securing the relevant indebtedness. Any deficiency obligation of California Lyon after the application of assets securing such indebtedness to the reduction thereof, and any obligation of California Lyon under its environmental indemnities, will rank pari passu with the notes.

Some of California Lyon’s obligations under the revolving credit facilities are guaranteed on an unsecured basis and an environmental indemnity has been given by Delaware Lyon. Delaware Lyon’s obligations under its guarantees and environmental indemnity rank pari passu with its obligations under its guaranty of the notes.

Under the revolving credit facilities, we are required to comply with a number of covenants, the most restrictive of which require Delaware Lyon to maintain:

Ø A tangible net worth, as defined, of $120.0 million, adjusted upwards quarterly by 50% of Delaware Lyon’s quarterly net income after March 31, 2002,

Ø A ratio of total liabilities to tangible net worth, each as defined, of less than 3.25 to 1; and

Ø Minimum liquidity, as defined, of at least $10.0 million.

Each credit agreement contains various representations and warranties, covenants and events of default typical for credit facilities of this type. These include cross-defaults relating to certain other obligations of California Lyon for borrowed money (including both the existing 12 ¹/2% Senior Notes and other

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Description of certain indebtedness

California Lyon credit facilities); a cross-default relating to a credit agreement between one of the lenders and one of the limited partnerships described below; and defaults or 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, maintenance of profitability, stock ownership changes, changes in management, lot ownership, and average sales prices of homes.

As of December 31, 2002, after giving effect to the sale of the notes and the application of the proceeds therefrom as described under “Use of proceeds,” our pro forma secured indebtedness under these facilities would have been $5.8 million, and we would have had commitments available to permit us to borrow an additional $147.1 million of secured indebtedness, as limited by our borrowing base formulas.

Specific Revolving Credit Facilities

$75 Million Revolving Credit Facility

This facility “expires” in June 2003. After that date California Lyon may borrow amounts, subject to applicable borrowing base and concentration limitations, under this facility solely to complete the construction of residences begun prior to such date in approved projects funded by disbursements under this facility. The final maturity date is the earlier of the date upon which the last residence, the construction of which was financed with proceeds of this loan, is sold or the date upon which such last residence is excluded from the borrowing base by the passage of time under this facility.

Interest under this facility is payable monthly at rates varying from prime to prime plus 0.10%, or LIBOR plus 2.40% to 2.60%, in each instance depending on California Lyon’s ratio of total liabilities to tangible net worth. As of December 31, 2002, interest under this facility was being charged at the rate of 3.7125% (LIBOR plus 2.40%). Additionally, California Lyon pays an annual loan facility fee of $375,000.

California Lyon has also entered into a separate secured project loan with the lender under this facility. The amount available under this facility is reduced by the amount that the lender has committed to the separate project loan. The terms of the separate project loan are substantially similar to those of this facility. A default under the separate project loan would constitute a cross-default under this facility. We consider the separate project loan as outstanding under this facility and include amounts outstanding under the separate project loan within indebtedness outstanding under our revolving credit facilities.

$50 Million Revolving Credit Facility

This facility has an “initial maturity” in September 2004. After that date: a) the maximum commitment under this facility reduces at the rate of $6.25 million per quarter beginning December 2004, and b) advances may only be used to complete previously approved projects subject to the borrowing base as of the initial maturity date. Interest under this facility is payable monthly at a rate equal to the lender’s “prime rate.” At December 31, 2002, that rate was 4.25%. Also, prior to initial maturity California Lyon pays an annual commitment fee of $250,000, payable in quarterly installments. This facility includes a $5 million sub-limit for the issuance of letters of credit to support residential projects owned and developed by California Lyon.

$150 Million Revolving Credit Facility

This facility finally matures in September 2006, although after September 2004, advances under this facility may only be made to complete projects approved on or before such date. Effective in January 2003, the maximum commitment under this facility was increased from $100 million to

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Description of certain indebtedness

$150 million as reduced by the aggregate amount of loan commitments under separate project loans issued by the lender or its affiliates to California Lyon or its affiliates with respect to projects that are not cross-collateralized with the collateral under this credit facility.

Amounts outstanding under this facility bear interest, payable monthly, at prime plus 0.375%. As of December 31, 2002, interest under this facility was being charged at the rate of 4.625%. Effective in January 2003, the annual commitment fee payable by California Lyon in quarterly installments was increased from $500,000 to $750,000.

California Lyon has entered into a separate secured project loan with the lender under this facility. The amount available under this facility is reduced by the amount that the lender has committed to the separate project loan. The terms of the separate project loan are substantially similar to those of this facility. A default under the separate project loan would constitute a cross-default under this facility. We consider the separate project loan as outstanding under this facility and include amounts outstanding under the separate project loan within indebtedness outstanding under our revolving credit facilities.

DUXFORD’S WAREHOUSE FACILITY

To fund the origination of residential mortgage loans in support of California Lyon’s home building activities, Duxford Financial, Inc., a direct subsidiary of Delaware Lyon (although not a subsidiary of California Lyon) that will guarantee the notes (“Duxford”), and one of its unconsolidated joint ventures are parties to a mortgage warehouse revolving line of credit. The facility is 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. Duxford’s guarantee of the notes will be effectively subordinated to all of its indebtedness under the mortgage warehouse facility to the extent of the value of the assets securing that facility.

The mortgage warehouse facility provides for revolving loans of up to $20.0 million in the aggregate outstanding at any time, $15 million of which is committed (lender obligated to lend if stated conditions are satisfied) and $5 million of which is not committed (lender advances are optional even if stated conditions are otherwise satisfied). Advances under the facility are subject to various limitations, including conformity of the mortgage loan being funded to FHA, VA, FNMA and/or FHLMC guidelines, with certain exceptions, the existence of an ultimate committed third party purchaser for the mortgage loan, and a maximum advance per mortgage loan generally equal to the lesser of the principal balance of the loan less amounts being disbursed to the borrower thereunder and 99% of the purchase price to be paid for the loan by the required committed third party purchaser.

Each advance under the facility bears interest at the interest rate applicable to the mortgage loan being funded, with a floor of one month LIBOR and a cap of one month LIBOR plus 2.75%. Each advance under the facility is generally due and payable at the earlier of 45 days after the advance is made, the date the mortgage loan is sold to a third party purchaser, the date the mortgage loan becomes past due 60 days or more, or the date upon which the facility terminates, whether at maturity or upon borrower default. The scheduled maturity of the mortgage warehouse facility is May 31, 2003.

The facility also requires Duxford to maintain certain financial covenants, including maintaining a combined tangible net worth, as defined, of at least $1.5 million, a combined net worth, as defined, meeting or exceeding the greater of $1.5 million and 5% of combined total liabilities, as defined, and liquidity, as defined, meeting or exceeding $1.0 million.

At December 31, 2002, the outstanding balance on the mortgage warehouse line of credit was $18.1 million.

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Description of certain indebtedness

LIMITED PARTNERSHIP FACILITIES

As of December 31, 2002, California Lyon was the general partner of eleven active unconsolidated joint venture limited partnerships that had incurred land acquisition and development debt pursuant to separate credit facilities. As of December 31, 2002, the total amount outstanding under these limited partnership facilities totaled $90.1 million. The limited partnership facilities are secured by deeds of trust on the respective limited partnership’s project as well as security interests in various of the limited partnership’s ancillary rights and personal property. As a general partner, California Lyon 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. Any liability of California Lyon as a general partner would be an unsecured obligation, pari passu with its obligation with respect to the notes. In addition, Delaware Lyon has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. Delaware Lyon has also provided completion guarantees and repayment guarantees for some of the limited partnerships under their credit facilities. The repayment guarantees only become effective upon repayment of our outstanding 12 ¹/2% Senior Notes. We anticipate that the lender who holds these repayment guarantees will terminate them prior to consummation of this offering.

Generally, these limited partnership credit facilities are subject to project-specific limitations on the amount of advances similar to the borrowing base and concentration limitations described above with respect to California Lyon’s revolving credit facilities. The limited partnership facilities generally have final maturities relating to the contemplated completion of the specific project, with specific advances becoming due earlier as a function of the passage of time or when the related collateral is sold or otherwise becomes ineligible as collateral.

Interest on the limited partnership facilities generally is payable monthly at rates ranging from prime to prime plus  ¹/2% per annum. Actual interest rates applicable under these limited partnership facilities as of December 31, 2002, ranged from approximately the prime rate per annum (4.25%) to prime plus  ¹/2% per annum (4.75%).

Some of the credit facilities contain financial covenants applicable to California Lyon, as general partner, or Delaware Lyon. These financial covenants include covenants requiring the maintenance of a specified tangible net worth, specified financial ratios, liquidity, and cash reserves. In addition to typical events of default, including cross-defaults, some of the limited partnership facilities specify changes in ownership or management. Under the most restrictive financial covenants under the credit facilities, Delaware Lyon must maintain:

Ø A minimum tangible net worth, as defined, of $120.0 million, adjusted upwards quarterly by 50% of Delaware Lyon’s net income after March 31, 2002;

Ø A ratio of total indebtedness to tangible net worth, each as defined, of less than 3.25 to 1:0; and

Ø Minimum liquidity, as defined, of at least $10.0 million.

LIMITED LIABILITY COMPANY FACILITY

In January 2003 California Lyon and two unaffiliated parties formed a limited liability company (“Development LLC”) for the purpose of acquiring land in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into residential homesites. California Lyon has an indirect, minority interest in the Development LLC, which is the borrower under a secured revolving line of credit. Advances under the line of credit are to be used to pay acquisition and development costs and expenses. The maximum commitment amount is $35 million, which is limited by specified agreed debt-to-value ratios. At the election of the Development LLC and subject to specified

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Description of certain indebtedness

terms and conditions, each advance under the line of credit bears interest at either a per annum variable rate (defined as the rate per annum most recently announced by the bank as its prime rate) or a per annum fixed rate (defined as the rate per annum equal to the sum of the LIBOR rate per annum and 2.5%). The line of credit is secured by a deed of trust on the real property and improvements thereon owned by the Development LLC, as well as pledges of all net sale proceeds, related contracts and other ancillary property. The Development LLC also has provided the bank with an unsecured environmental indemnity that is a contingent obligation in addition to its obligation to repay advances under the line of credit. The line of credit matures on January 23, 2005, but may be extended to July 23, 2005, subject to specified terms and conditions. At January 31, 2003, the Development LLC had outstanding indebtedness of approximately $30.6 million under the line of credit.

Subject to specified terms and conditions, California Lyon and the other indirect and direct members of the Development LLC, including certain affiliates and parents of such other members, each (i) have guaranteed on an unsecured basis to bank the repayment of the Development LLC’s indebtedness under the line of credit, completion of certain infrastructure improvements to the land, payment of necessary loan remargining obligations, and the Development LLC’s performance under the environmental indemnity and covenants, and (ii) have agreed to take all actions and pay all amounts to assure that the Development LLC is in compliance with financial covenants. Pursuant to the guaranty, California Lyon also has made representations and warranties and covenants to the bank, including, without limitation, financial covenants that require California Lyon to maintain:

Ø A minimum tangible net worth of not less than $120 million;

Ø A ratio of total liabilities-to-tangible net worth of not greater than 3.25:1.0; and

Ø Minimum liquidity of not less than $10 million.

California Lyon also has posted a letter of credit equal to approximately $5 million to secure the Development LLC’s obligations to the bank under the line of credit.

California Lyon and the other indirect and direct members of the Development LLC, including certain affiliates and parents of such other members, have entered into a Reimbursement and Indemnity Agreement to allocate any liability arising from their guaranty obligations to the bank, including, the posting and pledge to the bank of the letters of credit by the parties. Delaware Lyon has entered into a joinder agreement to be jointly and severally liable for California Lyon’s obligations under the Reimbursement and Indemnity Agreement. As a result of these agreements and guarantees, Delaware Lyon and California Lyon may be liable in specified circumstances for the full amount of the obligations guaranteed to the bank. The liabilities of California Lyon and Delaware Lyon are unsecured obligations, pari passu with their obligations as issuer and a guarantor of the notes.

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Description of the notes

As used below in this “Description of the notes” section, the “Issuer” means William Lyon Homes, Inc., a California corporation, and its successors, but not any of its subsidiaries. The Issuer will issue the notes described in this prospectus (the “Notes”) under an Indenture, dated as of                     , 2003 (the “Indenture”), among the Issuer, the Guarantors and U.S. Bank National Association, as trustee (the “Trustee”). The terms of the Notes include those set forth in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. You may obtain a copy of the Indenture from the Issuer at its address set forth elsewhere in this prospectus.

The following is a summary of the material terms and provisions of the Notes. The following summary does not purport to be a complete description of the Notes and is subject to the detailed provisions of, and qualified in its entirety by reference to, the Indenture. You can find definitions of certain terms used in this description under the heading “—Certain Definitions.”

Principal, Maturity and Interest

The Notes will mature on                     , 2013. The Notes will bear interest at the rate shown on the cover page of this prospectus, payable on                      and                      of each year, commencing on                     , 2003, to Holders of record at the close of business on                      or                     , as the case may be, immediately preceding the relevant interest payment date. Interest on the Notes will be computed on the basis of a 360-day year of twelve 30-day months.

The Notes will be issued in registered form, without coupons, and in denominations of $1,000 and integral multiples of $1,000.

An aggregate principal amount of Notes equal to $250.0 million is being issued in this offering. The Issuer may issue additional Notes of up to $150.0 million aggregate principal amount having identical terms and conditions to the Notes being issued in this offering (the “Additional Notes”), subject to compliance with the “Limitations on Additional Indebtedness” covenant described below. Any Additional Notes will be part of the same issue as the Notes being issued in this offering and will vote on all matters as one class with the Notes being issued in this offering, including, without limitation, waivers, amendments, redemptions and offers to purchase. For purposes of this “Description of the Notes,” except for the covenant described under “—Certain Covenants—Limitations on Additional Indebtedness,” references to the Notes include Additional Notes, if any.

Methods of Receiving Payments on the Notes

If a Holder has given wire transfer instructions to the Issuer at least ten Business Days prior to the applicable payment date, the Issuer will make all payments on such Holder’s Notes in accordance with those instructions. Otherwise, payments on the Notes will be made at the office or agency of the paying agent (the “Paying Agent”) and registrar (the “Registrar”) for the Notes within the City and State of New York unless the Issuer elects to make interest payments by check mailed to the Holders at their addresses set forth in the register of Holders.

Ranking

The Notes will be general unsecured obligations of the Issuer. The Notes will rank senior in right of payment to all future obligations of the Issuer that are, by their terms, expressly subordinated in right of

75

Description of the notes

payment to the Notes and pari passu in right of payment with all existing and future unsecured obligations of the Issuer that are not so subordinated. Each Note Guarantee (as defined below) will be a general unsecured obligation of the Guarantor thereof and will rank senior in right of payment to all future obligations of such Guarantor that are, by their terms, expressly subordinated in right of payment to such Note Guarantee and pari passu in right of payment with all existing and future unsecured obligations of such Guarantor that are not so subordinated.

The Notes and each Note Guarantee will be effectively subordinated to secured Indebtedness of the Issuer and the applicable Guarantor (including Indebtedness under the Credit Facilities) to the extent of the value of the assets securing such Indebtedness.

The Notes will also be structurally subordinated to all existing and future obligations, including Indebtedness, of Joint Ventures and any Unrestricted Subsidiaries. Claims of creditors of Joint Ventures and Unrestricted Subsidiaries, including trade creditors and holders of Indebtedness, will generally have priority as to the assets of those Joint Ventures and Unrestricted Subsidiaries over the claims of the Issuer and the holders of the Issuer’s Indebtedness, including the Notes.

As of December 31, 2002 on a pro forma basis, the Issuer would have had approximately $5.8 million of secured Indebtedness outstanding and approximately $147.1 million of additional secured indebtedness available to be borrowed under our Credit Facilities, as limited by our borrowing base formulas. Although the Indenture contains limitations on the amount of additional secured Indebtedness that the Parent and the Restricted Subsidiaries may incur, under certain circumstances, the amount of this Indebtedness could be substantial. See “—Certain Covenants—Limitations on Additional Indebtedness” and “—Limitations on Liens.”

Note Guarantees

The Issuer’s obligations under the Notes and the Indenture will be jointly and severally guaranteed (the “Note Guarantees”) by the Guarantors.

Not all of our Subsidiaries will guarantee the Notes. Unrestricted Subsidiaries will not be Guarantors. In addition, under certain circumstances, our Joint Ventures could become non-Guarantor Restricted Subsidiaries. In the event of a bankruptcy, liquidation or reorganization of any of these non-guarantor Subsidiaries, these non-guarantor Subsidiaries will pay the holders of their debts and their trade creditors before they will be able to distribute any of their assets to us.

As of the date of the Indenture, all of the Parent’s Subsidiaries (other than Duxford Title Reinsurance Company, Cerro Plata Associates, LLC, 242 Cerro Plata, LLC and Fairway Farms, LLC), including the Issuer, will be “Restricted Subsidiaries,” and the Parent and all of the Restricted Subsidiaries (other than the Issuer) will be Guarantors. Under the circumstances described below under the subheading  “—Certain Covenants—Designation of Unrestricted Subsidiaries,” the Parent will be permitted to designate some of its other Subsidiaries (other than the Issuer) as “Unrestricted Subsidiaries.” The effect of designating a Subsidiary as an “Unrestricted Subsidiary” will be:

Ø an Unrestricted Subsidiary will generally not be subject to the restrictive covenants in the Indenture;

Ø a Subsidiary that has previously been a Guarantor and that is Designated an Unrestricted Subsidiary will be released from its Note Guarantee; and

Ø the assets, income, cash flow and other financial results of an Unrestricted Subsidiary will not be consolidated with those of the Parent for purposes of calculating compliance with the restrictive covenants contained in the Indenture.

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Description of the notes

The obligations of each Subsidiary Guarantor under its Note Guarantee will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor (including, without limitation, any guarantees under the Credit Facilities permitted under clause (1) of “—Certain Covenants —Limitations on Additional Indebtedness”) and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Note Guarantee or pursuant to its contribution obligations under the Indenture, result in the obligations of such Subsidiary Guarantor under its Note Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. See “Risk Factors—Risks Associated with the Notes and the Offering—The guarantees of our subsidiaries may be avoidable as fraudulent transfers and any new guarantees may be avoidable as preferences.” Each Subsidiary Guarantor that makes a payment for distribution under its Note Guarantee is entitled to a contribution from each other Subsidiary Guarantor in a pro rata amount based on adjusted net assets of each Subsidiary Guarantor.

In the event of a sale or other disposition of all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the Equity Interests of any Subsidiary Guarantor then held by the Parent and the Restricted Subsidiaries, then that Subsidiary Guarantor will be released and relieved of any obligations under its Note Guarantee; provided that the Net Available Proceeds of such sale or other disposition shall be applied in accordance with the applicable provisions of the Indenture, to the extent required thereby. See “—Certain Covenants—Limitations on Asset Sales.” In addition, the Indenture will provide that any Subsidiary Guarantor that is Designated as an Unrestricted Subsidiary or that otherwise ceases to be a Subsidiary Guarantor, in each case in accordance with the provisions of the Indenture, will be released from its Note Guarantee upon effectiveness of such Designation or when it first ceases to be a Restricted Subsidiary, as the case may be.

Optional Redemption

Except as set forth below, the Notes may not be redeemed prior to                     , 2008. At any time on or after                     , 2008, the Issuer, at its option, may redeem the Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest thereon, if any, to the redemption date, if redeemed during the 12-month period beginning                      of the years indicated:

Year	Optional Redemption Price
2008	%
2009	%
2010	%
2011 and thereafter	100.000	%

At any time prior to                     , 2006, the Issuer may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of one or more Qualified Equity Offerings at a redemption price equal to         % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest thereon, if any, to the date of redemption; provided that (1) at least 65% of the aggregate principal amount of Notes issued under the Indenture remains outstanding immediately after the occurrence of such redemption and (2) the redemption occurs within 90 days of the date of the closing of any such Qualified Equity Offering.

The Issuer may acquire Notes by means other than a redemption, whether pursuant to an issuer tender offer, open market purchase or otherwise, so long as the acquisition does not otherwise violate the terms of the Indenture.

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Description of the notes

Selection and Notice of Redemption

In the event that less than all of the Notes are to be redeemed at any time pursuant to an optional redemption, selection of the Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not then listed on a national security exchange, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided, however, that no Notes of a principal amount of $1,000 or less shall be redeemed in part. In addition, if a partial redemption is made pursuant to the provisions described in the second paragraph under “—Optional Redemption,” selection of the Notes or portions thereof for redemption shall be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as is practicable (subject to the procedures of The Depository Trust Company), unless that method is otherwise prohibited.

Notice of redemption will be mailed by first-class mail at least 30 but not more than 60 days before the date of redemption to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to that Note will state the portion of the principal amount of the Note to be redeemed. A new Note in a principal amount equal to the unredeemed portion of the Note will be issued in the name of the Holder of the Note upon cancellation of the original Note. On and after the date of redemption, interest will cease to accrue on Notes or portions thereof called for redemption so long as the Issuer has deposited with the paying agent for the Notes funds in satisfaction of the redemption price (including accrued and unpaid interest on the Notes to be redeemed) pursuant to the Indenture.

Change of Control

Upon the occurrence of any Change of Control, each Holder will have the right to require that the Issuer purchase that Holder’s Notes for a cash price (the “Change of Control Purchase Price”) equal to 101% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the date of purchase.

Within 30 days following any Change of Control, the Issuer will mail, or caused to be mailed, to the Holders a notice:

(1)  describing the transaction or transactions that constitute the Change of Control;

(2)  offering to purchase, pursuant to the procedures required by the Indenture and described in the notice (a “Change of Control Offer”), on a date specified in the notice (which shall be a Business Day not earlier than 30 days nor later than 60 days from the date the notice is mailed) and for the Change of Control Purchase Price, all Notes properly tendered by such Holder pursuant to such Change of Control Offer; and

(3)  describing the procedures that Holders must follow to accept the Change of Control Offer. The Change of Control Offer is required to remain open for at least 20 Business Days or for such longer period as is required by law.

The Issuer or the Parent will publicly announce the results of the Change of Control Offer on or as soon as practicable after the date of purchase.

If a Change of Control Offer is made, there can be no assurance that the Issuer will have available funds sufficient to pay for all or any of the Notes that might be delivered by Holders seeking to accept the Change of Control Offer. In addition, we cannot assure you that in the event of a Change of Control the

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Description of the notes

Issuer will be able to obtain the consents necessary to consummate a Change of Control Offer from the lenders under agreements governing outstanding Indebtedness which may prohibit the offer.

The provisions described above that require us to make a Change of Control Offer following a Change of Control will be applicable regardless of whether any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders of the Notes to require that the Issuer purchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction.

The Issuer’s obligation to make a Change of Control Offer will be satisfied if a third party makes the Change of Control Offer in the manner and at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer made by the Issuer and purchases all Notes properly tendered and not withdrawn under the Change of Control Offer.

With respect to any disposition of assets, the phrase “all or substantially all” as used in the Indenture (including as set forth under “—Certain Covenants—Limitations on Mergers, Consolidations, Etc.” below) varies according to the facts and circumstances of the subject transaction, has no clearly established meaning under New York law (which governs the Indenture) and is subject to judicial interpretation. Accordingly, in certain circumstances there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of “all or substantially all” of the assets of the Parent, and therefore it may be unclear as to whether a Change of Control has occurred and whether the Holders have the right to require the Issuer to purchase Notes.

The Issuer will comply with applicable tender offer rules, including the requirements of Rule 14e-l under the Exchange Act and any other applicable laws and regulations in connection with the purchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the “Change of Control” provisions of the Indenture, the Issuer shall comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the “Change of Control” provisions of the Indenture by virtue of this compliance.

Certain Covenants

The Indenture will contain, among others, the following covenants:

Limitations on Additional Indebtedness

The Parent will not, and will not permit any Restricted Subsidiary to, directly or indirectly, incur any Indebtedness; provided that the Issuer or any Guarantor may incur additional Indebtedness (including Acquired Indebtedness) if no Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of the Indebtedness and if, after giving effect thereto, either (a) the Consolidated Fixed Charge Coverage Ratio would be at least 2.00 to 1.00 or (b) the ratio of Consolidated Indebtedness to Consolidated Tangible Net Worth would be less than 3.00 to 1.00 (either (a) or (b), the “Ratio Exception”).

Notwithstanding the above, so long as no Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of the following Indebtedness, each of the following shall be permitted (the “Permitted Indebtedness”):

(1)  Indebtedness of the Parent and any Restricted Subsidiary under the Credit Facilities and Indebtedness of Restricted Joint Ventures in an aggregate amount at any time outstanding (whether incurred under the Ratio Exception or as Permitted Indebtedness) not to exceed the greater of (x) $215.0 million and (y) the amount of the Borrowing Base as of the date of such incurrence;

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Description of the notes

(2)  the Notes and the Note Guarantees issued on the Issue Date;

(3)  Indebtedness of the Parent and the Restricted Subsidiaries to the extent outstanding on the Issue Date (other than Indebtedness referred to in clauses (1) and (2) above, and after giving effect to the intended use of proceeds of the Notes);

(4)  Indebtedness of the Parent and the Restricted Subsidiaries under Hedging Obligations; provided that (a) such Hedging Obligations relate to payment obligations on Indebtedness otherwise permitted to be incurred by this covenant, and (b) the notional principal amount of such Hedging Obligations at the time incurred does not exceed the principal amount of the Indebtedness to which such Hedging Obligations relate;

(5)  Indebtedness of the Parent owed to a Restricted Subsidiary and Indebtedness of any Restricted Subsidiary owed to the Parent or any other Restricted Subsidiary; provided, however, that (a) any Indebtedness of the Parent or the Issuer owed to a Restricted Subsidiary is unsecured and subordinated, pursuant to a written agreement, to the Parent or the Issuer’s obligations under the Indenture and the Notes and (b) upon any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or such Indebtedness being owed to any Person other than the Parent or a Restricted Subsidiary, such Restricted Subsidiary shall be deemed to have incurred Indebtedness not permitted by this clause (5);

(6)  Indebtedness in respect of bid, performance or surety bonds issued for the account of the Parent or any Restricted Subsidiary in the ordinary course of business, including guarantees or obligations of the Parent or any Restricted Subsidiary with respect to letters of credit supporting such bid, performance or surety obligations (in each case other than for an obligation for money borrowed);

(7)  Purchase Money Indebtedness incurred by the Parent or any Restricted Subsidiary, in an aggregate amount not to exceed at any time outstanding $15.0 million;

(8)  Non-Recourse Indebtedness of the Parent or any Restricted Subsidiary incurred for the acquisition, development and/or improvement of real property and secured by Liens only on such real property and Directly Related Assets;

(9)  Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within five Business Days of incurrence;

(10)  Indebtedness arising in connection with endorsement of instruments for deposit in the ordinary course of business;

(11)  Refinancing Indebtedness with respect to Indebtedness incurred pursuant to the Ratio Exception, clause (2) or (3) above or this clause (11);

(12)  the guarantee by the Parent or any Restricted Subsidiary of Indebtedness (other than Permitted Restricted Joint Venture Indebtedness and Indebtedness incurred pursuant to clause (8), (13), or (15) hereof or, in the case of the guarantee by a Restricted Subsidiary that is not a Guarantor, pursuant to the Ratio Exception) of a Restricted Subsidiary, in the case of the Parent, or of the Parent or another Restricted Subsidiary, in the case of a Restricted Subsidiary, in either case, that was permitted to be incurred by another provision of this covenant;

(13)  Indebtedness of any Restricted Subsidiary engaged primarily in the mortgage origination and lending business (a “Mortgage Subsidiary”) under warehouse lines of credit and repurchase agreements, and Indebtedness secured by mortgage loans and related assets of such Restricted Subsidiary, in each case incurred in the ordinary course of such business; provided that the only legal recourse for collection of obligations owing on such Indebtedness is against such Restricted Subsidiary, any other Mortgage Subsidiary and their respective assets;

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Description of the notes

(14) Indebtedness of the Parent or any Restricted Subsidiary in an aggregate amount not to exceed $10.0 million at any time outstanding; and

(15) Indebtedness of Consolidated Joint Ventures in an aggregate amount at any time outstanding not to exceed $115.0 million less the aggregate amount of liabilities that would constitute Indebtedness of the Parent and the Restricted Subsidiaries but for clause (c) of the last paragraph of the definition of “Indebtedness” on the date of determination.

For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness described in clauses (1) through (15) above or is entitled to be incurred pursuant to the Ratio Exception, the Parent shall, in its sole discretion, classify such item of Indebtedness and may divide and classify such Indebtedness in more than one of the types of Indebtedness described, except that Indebtedness outstanding under the Credit Facilities on the Issue Date shall be deemed to have been incurred under clause (1) above and (b) Indebtedness of Joint Ventures on the date they become Consolidated Joint Ventures shall be deemed to have been incurred under clause (15) above.

Limitations on Restricted Payments

The Parent will not, and will not permit any Restricted Subsidiary to, directly or indirectly, make any Restricted Payment if at the time of such Restricted Payment:

(1)  a Default shall have occurred and be continuing or shall occur as a consequence thereof;

(2)  the Parent cannot incur $1.00 of additional Indebtedness pursuant to the Ratio Exception; or

(3)  the amount of such Restricted Payment, when added to the aggregate amount of all other Restricted Payments made after the Issue Date (other than Restricted Payments made pursuant to clause (2), (3) or (5) of the next paragraph), exceeds the sum (the “Restricted Payments Basket”) of (without duplication):

(a)  50% of Consolidated Net Income for the period (taken as one accounting period) commencing on the first day of the first full fiscal quarter commencing after the Issue Date to and including the last day of the fiscal quarter ended immediately prior to the date of such calculation for which consolidated financial statements are available (or, if such Consolidated Net Income shall be a deficit, minus 100% of such aggregate deficit), plus

(b)  100% of the aggregate net cash proceeds received by the Parent either (x) as contributions to the common equity of the Parent after the Issue Date or (y) from the issuance and sale of Qualified Equity Interests after the Issue Date, other than to the extent any such proceeds are used to redeem Notes in accordance with the second paragraph under “—Optional Redemption,” plus

(c)  the aggregate amount by which Indebtedness of the Parent or any Restricted Subsidiary is reduced on the Parent’s balance sheet upon the conversion or exchange (other than by a Subsidiary of the Parent) of Indebtedness issued subsequent to the Issue Date into Qualified Equity Interests (less the amount of any cash, or the fair value of assets, distributed by the Parent or any Restricted Subsidiary upon such conversion or exchange), plus

(d)  in the case of the disposition or repayment of or return on any Investment that was treated as a Restricted Payment made after the Issue Date, an amount (to the extent not included in the computation of Consolidated Net Income) equal to the lesser of (i) the return of capital with respect to such Investment and (ii) the amount of such Investment that was treated as a Restricted Payment, in either case, less the cost of the disposition of such Investment and net of taxes, plus

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Description of the notes

(e)  upon a Redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the lesser of (i) the Fair Market Value of the Parent’s proportionate interest in such Subsidiary immediately following such Redesignation, and (ii) the aggregate amount of the Parent’s Investments in such Subsidiary to the extent such Investments reduced the amount available for subsequent Restricted Payments under this clause (3) and were not previously repaid or otherwise reduced, plus

(f)  $5.0 million.

The foregoing provisions will not prohibit:

(1)  the payment by the Parent or any Restricted Subsidiary of any dividend within 60 days after the date of declaration thereof, if on the date of declaration the payment would have complied with the provisions of the Indenture;

(2)  so long as no Default shall have occurred and be continuing at the time of or as a consequence of such redemption, the redemption of any Equity Interests of the Parent or any Restricted Subsidiary in exchange for, or out of the proceeds of the substantially concurrent issuance and sale of, Qualified Equity Interests;

(3)  so long as no Default shall have occurred and be continuing at the time of or as a consequence of such redemption, the redemption of Subordinated Indebtedness of the Parent or any Restricted Subsidiary (a) in exchange for, or out of the proceeds of the substantially concurrent issuance and sale of, Qualified Equity Interests or (b) in exchange for, or out of the proceeds of the substantially concurrent incurrence of, Refinancing Indebtedness permitted to be incurred under the “Limitations on Additional Indebtedness” covenant and the other terms of the Indenture;

(4)  so long as no Default shall have occurred and be continuing at the time of or as a consequence of such redemption, the redemption of Equity Interests of the Parent held by officers, directors or employees or former officers, directors or employees (or their transferees, estates or beneficiaries under their estates), upon their death, disability, retirement, severance or termination of employment or service; provided that the aggregate cash consideration paid for all such redemptions shall not exceed $2.0 million during any calendar year; or

(5)  repurchases of Equity Interests deemed to occur upon the exercise of stock options if the Equity Interests represents a portion of the exercise price thereof;

provided that no issuance and sale of Qualified Equity Interests pursuant to clause (2) or (3) above shall increase the Restricted Payments Basket, except to the extent the proceeds thereof exceed the amounts used to effect the transactions described therein.

Maintenance of Consolidated Tangible Net Worth

If the Parent’s Consolidated Tangible Net Worth declines below $75.0 million (the “Minimum Tangible Net Worth”) at the end of any fiscal quarter, the Parent must deliver an Officers’ Certificate to the Trustee within 55 days after the end of that fiscal quarter (100 days after the end of any fiscal year) to notify the Trustee. If, on the last day of each of any two consecutive fiscal quarters (the last day of the second fiscal quarter being referred to as a “Deficiency Date”), the Parent’s Consolidated Tangible Net Worth is less than the Minimum Tangible Net Worth of the Parent, then the Issuer must make an offer (a “Net Worth Offer”) to all Holders of Notes to purchase 10% of the aggregate principal amount of the Notes originally issued (the “Net Worth Offer Amount”) at a purchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest thereon, if any, to the date of purchase; provided, however, that no such Net Worth Offer shall be required if, after the Deficiency Date but prior to the date the Issuer is required to make the Net Worth Offer, capital in cash or Cash Equivalents is

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Description of the notes

contributed for Qualified Equity Interests sufficient to increase the Parent’s Consolidated Tangible Net Worth after giving effect to such contribution to an amount equal to or above the Minimum Tangible Net Worth.

The Issuer must make the Net Worth Offer no later than 65 days after each Deficiency Date (110 days if such Deficiency Date is the last day of the Parent’s fiscal year). The Net Worth Offer is required to remain open for a period of 20 Business Days following its commencement or for such longer period as required by law. The Issuer is required to purchase the Net Worth Offer Amount of the Notes on a designated date no later than five Business Days after the termination of the Net Worth Offer, or if less than the Net Worth Offer Amount of Notes shall have been tendered, all Notes then tendered.

If the aggregate principal amount of Notes tendered exceeds the Net Worth Offer Amount, the Issuer is required to purchase the Notes tendered to it pro rata among the Notes tendered (with such adjustments as may be appropriate so that only Notes in denominations of $1,000 and integral multiples thereof shall be purchased).

In no event will the failure of the Parent’s Consolidated Tangible Net Worth to equal or exceed the Minimum Tangible Net Worth at the end of any fiscal quarter be counted toward the requirement to make more than one Net Worth Offer. The Issuer may reduce the principal amount of Notes to be purchased pursuant to the Net Worth Offer by subtracting 100% of the principal amount (excluding premium) of the Notes redeemed by the Issuer prior to the purchase (otherwise than under this provision). The Issuer, however, may not credit Notes that have been previously used as a credit against any obligation to repurchase Notes pursuant to this provision.

The Issuer will comply with applicable tender offer rules, including the requirements of Rule 14e-1 under the Exchange Act and any other applicable laws and regulations in connection with the purchase of Notes pursuant to a Net Worth Offer. To the extent that the provisions of any securities laws or regulations conflict with the “Net Worth Offer” provisions of the Indenture, the Issuer shall comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the “Net Worth Offer” provisions of the Indenture by virtue of this compliance.

If a Net Worth Offer is made, there can be no assurance that the Issuer will have available funds sufficient to pay for all or any of the Notes that might be delivered by Holders seeking to accept the Net Worth Offer. In addition, we cannot assure you that the Issuer will be able to obtain the consents necessary to consummate a Net Worth Offer from the lenders under agreements governing outstanding Indebtedness which may prohibit the offer.

The Parent’s Consolidated Tangible Net Worth, on a pro forma basis, was approximately $174.4 million as of December 31, 2002.

Limitations on Dividend and Other Restrictions Affecting Restricted Subsidiaries

The Parent will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or permit to exist or become effective any consensual encumbrance or consensual restriction on the ability of any Restricted Subsidiary (other than the Issuer) to:

(a)  pay dividends or make any other distributions on or in respect of its Equity Interests;

(b)  make loans or advances or pay any Indebtedness or other obligation owed to the Parent or any other Restricted Subsidiary; or

(c)  transfer any of its assets to the Parent or any other Restricted Subsidiary;

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Description of the notes

except for:

(1)  encumbrances or restrictions existing under or by reason of applicable law;

(2)  encumbrances or restrictions existing under the Indenture, the Notes and the Note Guarantees;

(3)  non-assignment provisions of any contract or any lease entered into in the ordinary course of business;

(4)  encumbrances or restrictions existing under agreements existing on the date of the Indenture (including, without limitation, the Credit Facilities) as in effect on that date;

(5)  restrictions on the transfer of assets subject to any Lien permitted under the Indenture imposed by the holder of such Lien;

(6)  restrictions on the transfer of assets imposed under any agreement to sell such assets permitted under the Indenture to any Person pending the closing of such sale;

(7)  any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the assets of any Person, other than the Person or the assets so acquired;

(8)  encumbrances or restrictions arising in connection with Refinancing Indebtedness; provided, however, that any such encumbrances and restrictions are not materially more restrictive than those contained in the agreements creating or evidencing the Indebtedness being refinanced;

(9)  customary provisions in leases, licenses, partnership agreements, limited liability company organizational governance documents, joint venture agreements and other similar agreements entered into in the ordinary course of business that restrict the transfer of leasehold interests or ownership interests in such partnership, limited liability company, joint venture or similar Person;

(10)  Purchase Money Indebtedness incurred in compliance with the covenant described under “—Limitations on Additional Indebtedness” that impose restrictions of the nature described in clause (c) above on the assets acquired;

(11)  Non-Recourse Indebtedness incurred in compliance with the covenant described under “—Limitations on Additional Indebtedness” that impose restrictions of the nature described in clause (c) above on the assets secured by such Non-Recourse Indebtedness or on the Equity Interests in the Person holding such assets;

(12)  customary restrictions in other Indebtedness incurred in compliance with the covenant described under “—Limitations on Additional Indebtedness;” provided that such restrictions, taken as a whole, are, in the good faith judgment of the Parent’s Board of Directors, no more materially restrictive with respect to such encumbrances and restrictions than those contained in the existing agreements referenced in clause (4) above; and

(13) any encumbrances or restrictions imposed by any amendments or refinancings of the contracts, instruments or obligations referred to in clauses (1) through (12) above; provided that such amendments or refinancings are, in the good faith judgment of the Parent’s Board of Directors, no more materially restrictive with respect to such encumbrances and restrictions than those prior to such amendment or refinancing.

Limitations on Transactions with Affiliates

The Parent will not, and will not permit any Restricted Subsidiary to, directly or indirectly, in one transaction or a series of related transactions, sell, lease, transfer or otherwise dispose of any of its assets

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Description of the notes

to, or purchase any assets from, or enter into any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (an “Affiliate Transaction”), unless:

(1)  such Affiliate Transaction is on terms that are no less favorable to the Parent or the relevant Restricted Subsidiary than those that may have been obtained in a comparable transaction at such time on an arm’s-length basis by the Parent or that Restricted Subsidiary from a Person that is not an Affiliate of the Parent or that Restricted Subsidiary; and

(2)  the Parent delivers to the Trustee:

(a)  with respect to any Affiliate Transaction involving aggregate value expended or received by the Parent or any Restricted Subsidiary in excess of $2.0 million, an Officers’ Certificate of the Parent certifying that such Affiliate Transaction complies with clause (1) above and a Secretary’s Certificate which sets forth and authenticates a resolution that has been adopted by the Independent Directors approving such Affiliate Transaction; and

(b)  with respect to any Affiliate Transaction involving aggregate value expended or received by the Parent or any Restricted Subsidiary of $10.0 million or more, the certificates described in the preceding clause (b) and (x) a written opinion as to the fairness of such Affiliate Transaction to the Parent or such Restricted Subsidiary from a financial point of view or (y) a written appraisal supporting the value of such Affiliate Transaction, in either case, issued by an Independent Financial Advisor.

The foregoing restrictions shall not apply to:

(1)  transactions exclusively between or among (a) the Parent and one or more Restricted Subsidiaries or (b) Restricted Subsidiaries; provided, in each case, that no Affiliate of the Parent (other than another Restricted Subsidiary) owns Equity Interests of any such Restricted Subsidiary;

(2)  reasonable director, officer, employee and consultant compensation (including bonuses) and other benefits (including retirement, health, stock and other benefit plans) and indemnification and insurance arrangements;

(3)  the allocation of employee services among the Parent, its Subsidiaries and the Joint Ventures on a fair and equitable basis in the ordinary course of business; provided that, in the case of any such Subsidiary or Joint Venture, no officer, director or stockholder of the Parent beneficially owns any Equity Interests in such Subsidiary or Joint Venture (other than indirectly through ownership of Equity Interests in the Parent);

(4)  loans and advances permitted by clause (3) of the definition of “Permitted Investments”;

(5)  any agreement as in effect as of the Issue Date or any extension, amendment or modification thereto (so long as any such extension, amendment or modification satisfies the requirements set forth in clause (1) of the first paragraph of this covenant) or any transaction contemplated thereby;

(6)  Restricted Payments which are made in accordance with the covenant described under “—Limitations on Restricted Payments” and Permitted Investments (other than any Permitted Investment made in accordance with clause (13) of the definition of “Permitted Investments” to the extent that such Permitted Investment is in a Joint Venture or Unrestricted Subsidiary of which any officer, director or stockholder of the Parent beneficially owns any Equity Interests (other than indirectly through ownership of Equity Interests in the Parent));

(7)  licensing of trademarks to, and allocation of overhead, sales and marketing, travel and like expenses among, the Parent, its Subsidiaries and the Joint Ventures on a fair and equitable basis in the ordinary course of business; provided that, in the case of any such Subsidiary or Joint Venture, no

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Description of the notes

officer, director or stockholder of the Parent beneficially owns any Equity Interests in such Subsidiary or Joint Venture (other than indirectly through ownership of Equity Interests in the Parent); or

(8)  sales or other dispositions of Qualified Equity Interests for cash by the Parent to an Affiliate.

Limitations on Liens

The Parent shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or permit or suffer to exist any Lien of any nature whatsoever (other than Permitted Liens) against any assets of the Parent or any Restricted Subsidiary (including Equity Interests of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom, unless contemporaneously therewith:

(1)  in the case of any Lien securing an obligation that ranks pari passu with the Notes or a Note Guarantee, effective provision is made to secure the Notes or such Note Guarantee, as the case may be, at least equally and ratably with or prior to such obligation with a Lien on the same collateral; and

(2)  in the case of any Lien securing an obligation that is subordinated in right of payment to the Notes or a Note Guarantee, effective provision is made to secure the Notes or such Note Guarantee, as the case may be, with a Lien on the same collateral that is prior to the Lien securing such subordinated obligation,

in each case, for so long as such obligation is secured by such Lien.

Limitations on Asset Sales

The Parent will not, and will not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless:

(1)  the Parent or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets included in such Asset Sale; and

(2)  at least 75% of the total consideration received in such Asset Sale or series of related Asset Sales consists of cash or Cash Equivalents.

For purposes of clause (2), the following shall be deemed to be cash:

(a)  the amount (without duplication) of any Indebtedness (other than Subordinated Indebtedness) of the Parent or such Restricted Subsidiary that is expressly assumed by the transferee in such Asset Sale and with respect to which the Parent or such Restricted Subsidiary, as the case may be, is unconditionally released by the holder of such Indebtedness,

(b)  the amount of any obligations received from such transferee that are within 60 days converted by the Parent or such Restricted Subsidiary to cash (to the extent of the cash actually so received), and

(c)  the Fair Market Value of any assets (other than securities, unless such securities represent Equity Interests in an entity engaged solely in a Permitted Business, such entity becomes a Restricted Subsidiary and the Parent or a Restricted Subsidiary acquires voting and management control of such entity) received by the Parent or any Restricted Subsidiary to be used by it in the Permitted Business.

If at any time any non-cash consideration received by the Parent or any Restricted Subsidiary, as the case may be, in connection with any Asset Sale is repaid or converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then the date of such repayment, conversion or disposition shall be deemed to constitute the date of an Asset Sale hereunder and the Net Available Proceeds thereof shall be applied in accordance with this covenant.

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Description of the notes

If the Parent or any Restricted Subsidiary engages in an Asset Sale, the Parent or such Restricted Subsidiary shall, no later than 360 days following the consummation thereof, apply all or any of the Net Available Proceeds therefrom to:

(1)  repay any Indebtedness under the Credit Facilities and, in the case of any such Indebtedness under any revolving credit facility, effect a permanent reduction in the availability of such revolving credit facility;

(2)  repay any Indebtedness which was secured by the assets sold in such Asset Sale; and/or

(3)  invest all or any part of the Net Available Proceeds thereof in the purchase of assets (other than securities, unless such securities represent Equity Interests in an entity engaged solely in a Permitted Business, such entity becomes a Restricted Subsidiary and the Parent or a Restricted Subsidiary acquires voting and management control of such entity) to be used by the Parent or any Restricted Subsidiary in the Permitted Business.

The amount of Net Available Proceeds not applied or invested as provided in this paragraph will constitute “Excess Proceeds.”

When the aggregate amount of Excess Proceeds equals or exceeds $10.0 million, the Issuer will be required to make an offer to purchase from all Holders and, if applicable, redeem (or make an offer to do so) any Pari Passu Indebtedness of the Issuer the provisions of which require the Issuer to redeem such Indebtedness with the proceeds from any Asset Sales (or offer to do so), in an aggregate principal amount of Notes and such Pari Passu Indebtedness equal to the amount of such Excess Proceeds as follows:

(1)  the Issuer will (a) make an offer to purchase (a “Net Proceeds Offer”) to all Holders in accordance with the procedures set forth in the Indenture, and (b) redeem (or make an offer to do so) any such other Pari Passu Indebtedness, pro rata in proportion to the respective principal amounts of the Notes and such other Indebtedness required to be redeemed, the maximum principal amount of Notes and Pari Passu Indebtedness that may be redeemed out of the amount (the “Payment Amount”) of such Excess Proceeds;

(2)  the offer price for the Notes will be payable in cash in an amount equal to 100% of the principal amount of the Notes tendered pursuant to a Net Proceeds Offer, plus accrued and unpaid interest thereon, if any, to the date such Net Proceeds Offer is consummated (the “Offered Price”), in accordance with the procedures set forth in the Indenture and the redemption price for such Pari Passu Indebtedness (the “Pari Passu Indebtedness Price”) shall be as set forth in the related documentation governing such Indebtedness;

(3)  if the aggregate Offered Price of Notes validly tendered and not withdrawn by Holders thereof exceeds the pro rata portion of the Payment Amount allocable to the Notes, Notes to be purchased will be selected on a pro rata basis; and

(4)  upon completion of such Net Proceeds Offer in accordance with the foregoing provisions, the amount of Excess Proceeds with respect to which such Net Proceeds Offer was made shall be deemed to be zero.

To the extent that the sum of the aggregate Offered Price of Notes tendered pursuant to a Net Proceeds Offer and the aggregate Pari Passu Indebtedness Price paid to the holders of such Pari Passu Indebtedness is less than the Payment Amount relating thereto (such shortfall constituting a “Net Proceeds Deficiency”), the Issuer may use the Net Proceeds Deficiency, or a portion thereof, for general corporate purposes, subject to the provisions of the Indenture.

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Description of the notes

The Issuer will comply with applicable tender offer rules, including the requirements of Rule 14e-1 under the Exchange Act and any other applicable laws and regulations in connection with the purchase of Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the “Limitations on Asset Sales” provisions of the Indenture, the Issuer shall comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the “Limitations on Asset Sales” provisions of the Indenture by virtue of this compliance.

Limitations on Designation of Unrestricted Subsidiaries

The Parent may designate any Subsidiary of the Parent (other than the Issuer) as an “Unrestricted Subsidiary” under the Indenture (a “Designation”) only if:

(1)  no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; and

(2)  the Parent would be permitted to make, at the time of such Designation, (a) a Permitted Investment or (b) an Investment pursuant to the first paragraph of “—Limitations on Restricted Payments” above, in either case, in an amount (the “Designation Amount”) equal to the Fair Market Value of the Parent’s proportionate interest in such Subsidiary on such date.

No Subsidiary shall be Designated as an “Unrestricted Subsidiary” unless such Subsidiary:

(1)  has no Indebtedness other than Permitted Unrestricted Subsidiary Debt;

(2)  is not party to any agreement, contract, arrangement or understanding with the Parent or any Restricted Subsidiary unless the terms of the agreement, contract, arrangement or understanding (i) are no less favorable to the Parent or the Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Parent or such Restricted Subsidiary or (ii) would be permitted as (a) an Affiliate Transaction under and in compliance with “—Limitations on Transactions with Affiliates”, (b) an Asset Sale under and in compliance with “—Limitations on Asset Sales”, (c) a Permitted Investment or (d) an Investment under and in compliance with “—Limitations on Restricted Payments”;

(3)  is a Person with respect to which neither the Parent nor any Restricted Subsidiary has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve the Person’s financial condition or to cause the Person to achieve any specified levels of operating results; and

(4)  has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Parent or any Restricted Subsidiary.

If, at any time after the Designation, any Unrestricted Subsidiary fails to meet the requirements set forth in the preceding paragraph, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of the Subsidiary and any Liens on assets of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary as of the date and, if the Indebtedness is not permitted to be incurred under the covenant described under “—Limitations on Additional Indebtedness” or the Lien is not permitted under the covenant described under “—Limitations on Liens,” the Parent shall be in default of the applicable covenant.

Notwithstanding the foregoing, the Parent may Designate a Subsidiary as an Unrestricted Subsidiary without complying with the first two paragraphs of this covenant if (a) such Subsidiary is a Consolidated Joint Venture and (b) such Designation is made within 30 days of such Joint Venture becoming a

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Description of the notes

Subsidiary. Any such Unrestricted Subsidiary shall, however, be required subsequent to such Designation to comply with the immediately preceding paragraph; provided that such Unrestricted Subsidiary shall not be deemed to be in violation of the requirements set forth in the second paragraph of this covenant to the extent that the Indebtedness, obligation, agreement or other arrangement that would otherwise violate such paragraph was in existence at the time such Joint Venture became a Subsidiary as in effect at such time.

The Parent may not Designate the Issuer as an Unrestricted Subsidiary. As of the Issue Date, the Parent shall be deemed to have Designated Duxford Title Reinsurance Company, Cerro Plata Associates, LLC, 242 Cerro Plata, LLC and Fairway Farms, LLC as Unrestricted Subsidiaries.

The Parent may redesignate an Unrestricted Subsidiary as a Restricted Subsidiary (a “Redesignation”) only if:

(1)  no Default shall have occurred and be continuing at the time of and after giving effect to such Redesignation; and

(2)  all Liens, Indebtedness and Investments of such Unrestricted Subsidiary outstanding immediately following such Redesignation would, if incurred or made at such time, have been permitted to be incurred or made for all purposes of the Indenture.

All Designations and Redesignations must be evidenced by resolutions of the Board of Directors of the Parent delivered to the Trustee and certifying compliance with the foregoing provisions.

Limitations on Mergers, Consolidations, Etc.

Neither the Parent nor the Issuer will, directly or indirectly, in a single transaction or a series of related transactions, (a) consolidate or merge with or into any Person (other than a merger that satisfies the requirements of clause (1) below with a Wholly-Owned Restricted Subsidiary solely for the purpose of changing the Parent’s or the Issuer’s jurisdiction of incorporation, as the case may be, to another State of the United States), or sell, lease, transfer, convey or otherwise dispose of or assign all or substantially all of the assets of the Parent or the Parent and the Restricted Subsidiaries (taken as a whole) or the Issuer or the Issuer and the Restricted Subsidiaries that are Subsidiaries of the Issuer (taken as a whole), as the case may be, to any Person or (b) adopt a Plan of Liquidation unless, in either case:

(1)  either:

(a)  the Parent or the Issuer, as the case may be, will be the surviving or continuing Person; or

(b)  the Person formed by or surviving such consolidation or merger or to which such sale, lease, conveyance or other disposition shall be made (or, in the case of a Plan of Liquidation, any Person to which assets are transferred) (collectively, the “Successor”) is a corporation or limited liability company organized and existing under the laws of any State of the United States of America or the District of Columbia, and the Successor expressly assumes, by supplemental indenture in form and substance satisfactory to the Trustee, all of the obligations of the Issuer or the Parent, as the case may be, under the Notes or the Parent’s Note Guarantee, as applicable, and the Indenture; provided that, in the case of the Issuer, at any time the Successor is a limited liability company, there shall be a co-issuer of the Notes that is a corporation;

(2)  immediately prior to and immediately after giving effect to such transaction and the assumption of the obligations as set forth in clause (1)(b) above and the incurrence of any Indebtedness to be incurred in connection therewith, no Default shall have occurred and be continuing; and

(3)  immediately after and giving effect to such transaction and the assumption of the obligations set forth in clause (1)(b) above and the incurrence of any Indebtedness to be incurred in connection

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Description of the notes

therewith, and the use of any net proceeds therefrom on a pro forma basis, (a) the Consolidated Net Worth of the Parent or the Successor, as the case may be, would be at least equal to the Consolidated Net Worth of the Parent immediately prior to such transaction (disregarding the effect of fees, commissions, discounts, taxes and other amounts payable in respect of such transaction) and (b) the Parent or the Successor, as the case may be, could incur $1.00 of additional Indebtedness pursuant to the Ratio Exception.

For purposes of this covenant, any Indebtedness of the Successor which was not Indebtedness of the Parent or the Issuer, as the case may be, immediately prior to the transaction shall be deemed to have been incurred in connection with such transaction.

Except as provided under the caption “—Note Guarantees,” no Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person) another Person, whether or not affiliated with such Subsidiary Guarantor, unless:

(1)  either:

(a)  such Subsidiary Guarantor will be the surviving or continuing Person; or

(b)  the Person formed by or surviving any such consolidation or merger assumes, by supplemental indenture in form and substance satisfactory to the Trustee, all of the obligations of such Subsidiary Guarantor under the Note Guarantee of such Subsidiary Guarantor and the Indenture; and

(2)  immediately after giving effect to such transaction, no Default shall have occurred and be continuing.

For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the assets of one or more Restricted Subsidiaries, the Equity Interests of which constitute all or substantially all of the assets of the Parent or the Issuer, will be deemed to be the transfer of all or substantially all of the assets of the Parent or the Issuer, as the case may be.

Upon any consolidation, combination or merger of the Issuer or a Guarantor, or any transfer of all or substantially all of the assets of the Parent or the Issuer in accordance with the foregoing, in which the Issuer or such Guarantor is not the continuing obligor under the Notes or its Note Guarantee, the surviving entity formed by such consolidation or into which the Issuer or such Guarantor is merged or to which the conveyance, lease or transfer is made will succeed to, and be substituted for, and may exercise every right and power of, the Issuer or such Guarantor under the Indenture, the Notes and the Note Guarantees with the same effect as if such surviving entity had been named therein as the Issuer or such Guarantor and, except in the case of a conveyance, transfer or lease, the Issuer or such Guarantor, as the case may be, will be released from the obligation to pay the principal of and interest on the Notes or in respect of its Note Guarantee, as the case may be, and all of the Issuer’s or such Guarantor’s other obligations and covenants under the Notes, the Indenture and its Note Guarantee, if applicable.

Notwithstanding the foregoing, any Restricted Subsidiary (other than the Issuer) may merge into the Parent or another Restricted Subsidiary.

Additional Note Guarantees

If, after the Issue Date, (a) the Parent or any Restricted Subsidiary shall acquire or create another Subsidiary (other than (i) a Subsidiary that has been designated an Unrestricted Subsidiary and (ii) a Joint

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Description of the notes

Venture that has become a Restricted Subsidiary because of a change in GAAP relating to consolidation) or (b) any Unrestricted Subsidiary is redesignated a Restricted Subsidiary, then, in each such case, the Parent shall cause such Restricted Subsidiary to:

(1)  execute and deliver to the Trustee (a) a supplemental indenture in form and substance satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Issuer’s obligations under the Notes and the Indenture and (b) a notation of guarantee in respect of its Note Guarantee; and

(2)  deliver to the Trustee one or more opinions of counsel that such supplemental indenture (a) has been duly authorized, executed and delivered by such Restricted Subsidiary and (b) constitutes a valid and legally binding obligation of such Restricted Subsidiary in accordance with its terms.

Conduct of Business

The Parent will not, and will not permit any Restricted Subsidiary to, engage in any business other than the Permitted Business.

Reports

Whether or not required by the SEC, so long as any Notes are outstanding, the Parent will furnish to the Holders of Notes, within the time periods specified in the SEC’s rules and regulations (including any grace periods or extensions permitted by the SEC):

(1)  all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Parent were required to file these Forms, including a “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual information only, a report on the annual financial statements by the Parent’s certified independent accountants; and

(2)  all current reports that would be required to be filed with the SEC on Form 8-K if the Parent were required to file these reports.

In addition, whether or not required by the SEC, the Parent will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the SEC for public availability within the time periods specified in the SEC’s rules and regulations (unless the SEC will not accept the filing) and make the information available to securities analysts and prospective investors upon request.

Events of Default

Each of the following is an “Event of Default”:

(1)  failure by the Issuer to pay interest on any of the Notes when it becomes due and payable and the continuance of any such failure for 30 days;

(2)  failure by the Issuer to pay the principal on any of the Notes when it becomes due and payable, whether at stated maturity, upon redemption, upon purchase, upon acceleration or otherwise;

(3)  failure by the Parent or the Issuer to comply with any of its agreements or covenants described above under “—Certain Covenants—Limitations on Mergers, Consolidations, Etc.” or in respect of its obligations to make a Change of Control Offer as described above under “—Change of Control”;

(4)  failure by the Parent or the Issuer to comply with any other agreement or covenant in the Indenture and continuance of this failure for 30 days after written notice of the failure has been given to the Issuer by the Trustee or by the Holders of at least 25% of the aggregate principal amount of the Notes then outstanding;

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Description of the notes

(5)  default under any mortgage, indenture or other instrument or agreement under which there may be issued or by which there may be secured or evidenced Indebtedness (other than Non-Recourse Indebtedness) of the Parent or any Restricted Subsidiary, whether such Indebtedness now exists or is incurred after the Issue Date, which default:

(a)  is caused by a failure to pay when due principal on such Indebtedness within the applicable express grace period,

(b)  results in the acceleration of such Indebtedness prior to its express final maturity, or

(c)  results in the commencement of judicial proceedings to foreclose upon, or to exercise remedies under applicable law or applicable security documents to take ownership of, the assets securing such Indebtedness, and

in each case, the principal amount of such Indebtedness, together with any other Indebtedness with respect to which an event described in clause (a), (b) or (c) has occurred and is continuing, aggregates $10.0 million or more;

(6)  one or more judgments or orders that exceed $10.0 million in the aggregate (net of amounts covered by insurance or bonded) for the payment of money have been entered by a court or courts of competent jurisdiction against the Parent or any Restricted Subsidiary and such judgment or judgments have not been satisfied, stayed, annulled or rescinded within 60 days of being entered;

(7)  the Parent, the Issuer or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law:

(a)  commences a voluntary case,

(b)  consents to the entry of an order for relief against it in an involuntary case,

(c)  consents to the appointment of a Custodian of it or for all or substantially all of its assets, or

(d)  makes a general assignment for the benefit of its creditors;

(8)  a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:

(a)  is for relief against the Parent, the Issuer or any Significant Subsidiary as debtor in an involuntary case,

(b)  appoints a Custodian of the Parent, the Issuer or any Significant Subsidiary or a Custodian for all or substantially all of the assets of the Parent, the Issuer or any Significant Subsidiary, or

(c)  orders the liquidation of the Parent, the Issuer or any Significant Subsidiary,

and the order or decree remains unstayed and in effect for 60 days; or

(9)  the Note Guarantee of the Parent or any Note Guarantee of any Significant Subsidiary ceases to be in full force and effect (other than in accordance with the terms of such Note Guarantee and the Indenture) or is declared null and void and unenforceable or found to be invalid or any Guarantor denies its liability under its Note Guarantee (other than by reason of release of a Guarantor from its Note Guarantee in accordance with the terms of the Indenture and the Note Guarantee).

If an Event of Default (other than an Event of Default specified in clause (7) or (8) above with respect to the Issuer), shall have occurred and be continuing under the Indenture, the Trustee, by written notice to the Issuer, or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding by written notice to the Issuer and the Trustee, may declare all amounts owing under the Notes to be due and payable immediately. Upon such declaration of acceleration, the aggregate principal of and accrued and unpaid interest on the outstanding Notes shall immediately become due and payable; provided,

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Description of the notes

however, that after such acceleration, but before a judgment or decree based on acceleration, the Holders of a majority in aggregate principal amount of such outstanding Notes may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the nonpayment of accelerated principal and interest, have been cured or waived as provided in the Indenture. If an Event of Default specified in clause (7) or (8) with respect to the Issuer occurs, all outstanding Notes shall become due and payable without any further action or notice.

The Trustee shall, within 90 days after becoming aware of the occurrence of any Default with respect to the Notes, give the Holders notice of all uncured Defaults thereunder known to it; provided, however, that, except in the case of an Event of Default in payment with respect to the Notes or a Default in complying with “—Certain Covenants—Limitations on Mergers, Consolidations, Etc.,” the Trustee shall be protected in withholding such notice if and so long as a committee of its trust officers in good faith determines that the withholding of such notice is in the interest of the Holders.

No Holder will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless the Trustee:

(1)  has failed to act for a period of 60 days after receiving written notice of a continuing Event of Default by such Holder and a request to act by Holders of at least 25% in aggregate principal amount of Notes outstanding;

(2)  has been offered indemnity satisfactory to it in its reasonable judgment; and

(3)  has not received from the Holders of a majority in aggregate principal amount of the outstanding Notes a direction inconsistent with such request.

However, such limitations do not apply to a suit instituted by a Holder of any Note for enforcement of payment of the principal of or interest on such Note on or after the due date therefor (after giving effect to the grace period specified in clause (1) of the first paragraph of this “—Events of Default” section).

The Issuer is required to deliver to the Trustee annually a statement regarding compliance with the Indenture and, upon any Officer of the Issuer becoming aware of any Default, a statement specifying such Default and what action the Issuer is taking or proposes to take with respect thereto.

Legal Defeasance and Covenant Defeasance

The Issuer may, at its option and at any time, elect to have its obligations and the obligations of the Guarantors discharged with respect to the outstanding Notes (“Legal Defeasance”). Legal Defeasance means that the Issuer and the Guarantors shall be deemed to have paid and discharged the entire indebtedness represented by the Notes and the Note Guarantees, and the Indenture shall cease to be of further effect as to all outstanding Notes and Note Guarantees, except as to

(1)  rights of Holders to receive payments in respect of the principal of and interest on the Notes when such payments are due from the trust funds referred to below,

(2)  the Issuer’s obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and the maintenance of an office or agency for payment and money for security payments held in trust,

(3)  the rights, powers, trust, duties, and immunities of the Trustee, and the Issuer’s obligation in connection therewith, and

(4)  the Legal Defeasance provisions of the Indenture.

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Description of the notes

In addition, the Issuer may, at its option and at any time, elect to have its obligations and the obligations of the Guarantors released with respect to most of the covenants under the Indenture, except as described otherwise in the Indenture (“Covenant Defeasance”), and thereafter any omission to comply with such obligations shall not constitute a Default. In the event Covenant Defeasance occurs, certain Events of Default (not including non-payment and, solely for a period of 91 days following the deposit referred to in clause (1) of the next paragraph, bankruptcy, receivership, rehabilitation and insolvency events) will no longer apply. Covenant Defeasance will not be effective until such bankruptcy, receivership, rehabilitation and insolvency events no longer apply. The Issuer may exercise its Legal Defeasance option regardless of whether it previously exercised Covenant Defeasance.

In order to exercise either Legal Defeasance or Covenant Defeasance:

(1)  the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, U.S. legal tender, U.S. Government Obligations or a combination thereof, in such amounts as will be sufficient (without reinvestment) in the opinion of a nationally recognized firm of independent public accountants selected by the Issuer, to pay the principal of and interest on the Notes on the stated date for payment or on the redemption date of the principal or installment of principal of or interest on the Notes, and the Trustee must have a valid, perfected, exclusive security interest in such trust,

(2)  in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that:

(a)  the Issuer has received from, or there has been published by the Internal Revenue Service, a ruling, or

(b)  since the date of the Indenture, there has been a change in the applicable U.S. federal income tax law,

in either case to the effect that, and based thereon this opinion of counsel shall confirm that, the Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the Legal Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred,

(3)  in the case of Covenant Defeasance, the Issuer shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Covenant Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if the Covenant Defeasance had not occurred,

(4)  no Default shall have occurred and be continuing on the date of such deposit (other than a Default resulting from the borrowing of funds to be applied to such deposit and the grant of any Lien securing such borrowing),

(5)  the Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, the Indenture or any other material agreement or instrument to which the Parent or any of its Subsidiaries is a party or by which the Parent or any of its Subsidiaries is bound,

(6)  the Issuer shall have delivered to the Trustee an Officers’ Certificate stating that the deposit was not made by it with the intent of preferring the Holders over any other of its creditors or with the intent of defeating, hindering, delaying or defrauding any other of its creditors or others, and

(7)  the Issuer shall have delivered to the Trustee an Officers’ Certificate and an opinion of counsel, each stating that the conditions provided for in, in the case of the Officers’ Certificate, clauses (1) through (6) and, in the case of the opinion of counsel, clauses (1) (with respect to the validity and perfection of the security interest), (2) and/or (3) and (5) of this paragraph have been complied with.

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Description of the notes

If the funds deposited with the Trustee to effect Covenant Defeasance are insufficient to pay the principal of and interest on the Notes when due, then the obligations of the Issuer and the Guarantors under the Indenture will be revived and no such defeasance will be deemed to have occurred.

Satisfaction and Discharge

The Indenture will be discharged and will cease to be of further effect (except as to rights of registration of transfer or exchange of Notes which shall survive until all Notes have been canceled) as to all outstanding Notes when either

(1)  all the Notes that have been authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from this trust) have been delivered to the Trustee for cancellation, or

(2)  (a) all Notes not delivered to the Trustee for cancellation otherwise have become due and payable or have been called for redemption pursuant to the provisions described under “—Optional Redemption,” and the Issuer has irrevocably deposited or caused to be deposited with the Trustee trust funds in trust in an amount of money sufficient to pay and discharge the entire Indebtedness (including all principal and accrued interest) on the Notes not theretofore delivered to the Trustee for cancellation,

(b)  the Issuer has paid all sums payable by it under the Indenture,

(c)  the Issuer has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at maturity or on the date of redemption, as the case may be, and

(d)  the Trustee, for the benefit of the Holders, has a valid, perfected, exclusive security interest in this trust.

In addition, the Issuer must deliver an Officers’ Certificate and an opinion of counsel (as to legal matters) stating that all conditions precedent to satisfaction and discharge have been complied with.

Transfer and Exchange

A Holder will be able to register the transfer of or exchange Notes only in accordance with the provisions of the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. Without the prior consent of the Issuer, the Registrar is not required (1) to register the transfer of or exchange any Note selected for redemption, (2) to register the transfer of or exchange any Note for a period of 15 days before a selection of Notes to be redeemed or (3) to register the transfer or exchange of a Note between a record date and the next succeeding interest payment date.

The Notes will be issued in registered form and the registered Holder will be treated as the owner of such Note for all purposes.

Amendment, Supplement and Waiver

Subject to certain exceptions, the Indenture or the Notes may be amended with the consent (which may include consents obtained in connection with a tender offer or exchange offer for Notes) of the Holders of at least a majority in principal amount of the Notes then outstanding, and any existing Default under, or compliance with any provision of, the Indenture may be waived (other than any continuing Default in

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Description of the notes

the payment of the principal or interest on the Notes) with the consent (which may include consents obtained in connection with a tender offer or exchange offer for Notes) of the Holders of a majority in principal amount of the Notes then outstanding; provided that:

(a)  no such amendment may, without the consent of the Holders of two-thirds in aggregate principal amount of Notes then outstanding, amend the obligation of the Parent or the Issuer under the heading “—Change of Control” or the related definitions that could adversely affect the rights of any Holder; and

(b)  without the consent of each Holder affected, the Issuer, the Guarantors and the Trustee may not:

(1)  change the maturity of any Note;

(2)  reduce the amount, extend the due date or otherwise affect the terms of any scheduled payment of interest on or principal of the Notes;

(3)  reduce any premium payable upon optional redemption of the Notes, change the date on which any Notes are subject to redemption or otherwise alter the provisions with respect to the redemption of the Notes;

(4)  make any Note payable in money or currency other than that stated in the Notes;

(5)  modify or change any provision of the Indenture or the related definitions to subordinate the Notes or any Note Guarantee to other Indebtedness in a manner that adversely affects the Holders;

(6)  reduce the percentage of Holders necessary to consent to an amendment or waiver to the Indenture or the Notes;

(7)  impair the rights of Holders to receive payments of principal of or interest on the Notes;

(8)  release the Parent from any of its obligations under its Note Guarantee or the Indenture, except as permitted by the Indenture; or

(9)  make any change in these amendment and waiver provisions.

Notwithstanding the foregoing, the Issuer, the Guarantors and the Trustee may amend the Indenture, the Note Guarantees or the Notes without the consent of any Holder, to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Issuer’s or any Guarantor’s obligations to the Holders in the case of a merger or acquisition, to release any Guarantor from any of its obligations under its Note Guarantee or the Indenture (to the extent permitted by the Indenture), to make any change that does not materially adversely affect the rights of any Holder, to comply with SEC rules and regulations or changes to applicable law or, in the case of the Indenture, to maintain the qualification of the Indenture under the Trust Indenture Act.

No Personal Liability of Directors, Officers, Employees and Stockholders

No director, officer, employee, incorporator or stockholder of the Issuer or any Guarantor will have any liability for any obligations of the Issuer under the Notes or the Indenture or of any Guarantor under its Note Guarantee or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes and the Note Guarantees.

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Description of the notes

Concerning the Trustee

U.S. Bank National Association is the Trustee under the Indenture and has been appointed by the Issuer as Registrar and Paying Agent with regard to the Notes. The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Issuer, to obtain payment of claims in certain cases, or to realize on certain assets received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest (as defined in the Indenture), it must eliminate such conflict or resign.

The Holders of a majority in principal amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that, in case an Event of Default occurs and is not cured, the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent person in similar circumstances in the conduct of his or her own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to the Trustee.

Governing Law

The Indenture, the Notes and the Note Guarantees will be governed by, and construed in accordance with, the laws of the State of New York.

Certain Definitions

Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms.

“Acquired Indebtedness” means (1) with respect to any Person that becomes a Restricted Subsidiary after the Issue Date (other than a Consolidated Joint Venture or a Restricted Joint Venture), Indebtedness of such Person and its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary that was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary and (2) with respect to the Parent or any Restricted Subsidiary, any Indebtedness of a Person (other than the Parent or a Restricted Subsidiary) existing at the time such Person is merged with or into the Parent or a Restricted Subsidiary, or Indebtedness expressly assumed by the Parent or any Restricted Subsidiary in connection with the acquisition of an asset or assets from another Person, which Indebtedness was not, in any case, incurred by such other Person in connection with, or in contemplation of, such merger or acquisition.

“Affiliate” of any Person means any other Person which directly or indirectly controls or is controlled by, or is under direct or indirect common control with, the referent Person. For purposes of the covenant described under “—Certain Covenants—Limitations on Transactions with Affiliates,” Affiliates shall be deemed to include, with respect to any Person, any other Person (1) which beneficially owns or holds, directly or indirectly, 10% or more of any class of the Voting Stock of the referent Person, (2) of which 10% or more of the Voting Stock is beneficially owned or held, directly or indirectly, by the referent Person or (3) with respect to an individual, any immediate family member of such Person. For purposes of this definition, “control” of a Person shall mean the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.

“amend” means to amend, supplement, restate, amend and restate or otherwise modify; and “amendment” shall have a correlative meaning.

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Description of the notes

“asset” means any asset or property.

“Asset Acquisition” means

(1)  an Investment by the Parent or any Restricted Subsidiary in any other Person if, as a result of such Investment, such Person shall become a Restricted Subsidiary or shall be merged with or into the Parent or any Restricted Subsidiary, or

(2)  the acquisition by the Parent or any Restricted Subsidiary of all or substantially all of the assets of any other Person or any division or line of business of any other Person.

“Asset Sale” means any sale, issuance, conveyance, transfer, lease, assignment or other disposition by the Parent or any Restricted Subsidiary to any Person other than the Parent or any Restricted Subsidiary (including by means of a Sale and Leaseback Transaction or a merger or consolidation) (collectively, for purposes of this definition, a “transfer”), in one transaction or a series of related transactions, of any assets (including Equity Interests) of the Parent or any of its Restricted Subsidiaries other than in the ordinary course of business. For purposes of this definition, the term “Asset Sale” shall not include:

(1)  transfers of cash or Cash Equivalents;

(2)  transfers of assets (including Equity Interests) that are governed by, and made in accordance with, the provisions described under “—Certain Covenants—Limitations on Mergers, Consolidations, Etc.”;

(3)  Permitted Investments and Restricted Payments permitted under the covenant described under “—Certain Covenants—Limitations on Restricted Payments”;

(4)  the creation or realization of any Permitted Lien;

(5)  transactions in the ordinary course of business, including, without limitation, dedications and other donations to governmental authorities, sales (directly or indirectly), leases, sales and leasebacks and other dispositions of (A) homes, improved land and unimproved land, whether in single or multiple lots, (B) real estate (including related amenities and improvements), whether in single or multiple lots and (C) Equity Interests of a Subsidiary, the assets of which consist entirely of amenities and improvements related to real estate, such as golf courses, and real estate underlying such amenities and improvements;

(6)  dispositions of mortgage loans and related assets and mortgage-backed securities in the ordinary course of a mortgage lending business; and

(7)  any transfer or series of related transfers that, but for this clause, would be Asset Sales, if after giving effect to such transfers, the aggregate Fair Market Value of the assets transferred in such transaction or any such series of related transactions does not exceed $2.0 million.

“Attributable Indebtedness”, when used with respect to any Sale and Leaseback Transaction, means, as at the time of determination, the present value (discounted at a rate equivalent to the Issuer’s then-current weighted average cost of funds for borrowed money as at the time of determination, compounded on a semi-annual basis) of the total obligations of the lessee for rental payments during the remaining term of any Capitalized Lease included in any such Sale and Leaseback Transaction.

“Bankruptcy Law” means Title 11 of the United States Code, as amended, or any similar federal or state law for the relief of debtors.

“Board of Directors” means, with respect to any Person, the board of directors or comparable governing body of such Person.

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“Borrowing Base” means, at any time of determination, the sum of the following without duplication:

(1)  100% of all cash and Cash Equivalents held by the Parent, any Restricted Subsidiary (other than a Consolidated Joint Venture) or any Restricted Joint Venture;

(2)  80% of the book value of Developed Land for which no construction has occurred;

(3)  90% of the cost of the land and construction costs including capitalized interest (as reasonably allocated by the Parent) for all Units for which there is an executed purchase contract with a buyer not Affiliated with the Parent, less any deposits, down payments or earnest money;

(4)  85% of the cost of the land and construction costs including capitalized interest (as reasonably allocated by the Parent) for all Units for which construction has begun and for which there is not an executed purchase agreement with a buyer not Affiliated with the Parent; and

(5)  50% of the costs of Entitled Land (other than Developed Land) on which improvements have not commenced, less mortgage Indebtedness (other than under a Credit Facility) applicable to such land;

provided that the aggregate amount of assets of a Restricted Joint Venture (whether or not it is a Restricted Subsidiary) comprising a portion of the Borrowing Base shall not exceed, at such time of determination, 125% of the amount of Permitted Restricted Joint Venture Indebtedness then outstanding of such Restricted Joint Venture.

“Business Day” means a day other than a Saturday, Sunday or other day on which banking institutions in New York are authorized or required by law to close.

“Capitalized Lease” means a lease required to be capitalized for financial reporting purposes in accordance with GAAP.

“Capitalized Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under a Capitalized Lease, and the amount of such obligation shall be the capitalized amount thereof determined in accordance with GAAP.

“Cash Equivalents” means:

(1)  marketable obligations with a maturity of 360 days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof;

(2)  demand and time deposits and certificates of deposit or acceptances with a maturity of 180 days or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $500 million and is assigned at least a “B” rating by Thomson Financial BankWatch;

(3)  commercial paper maturing no more than 180 days from the date of creation thereof issued by a corporation that is not the Parent or an Affiliate of the Parent, and is organized under the laws of any State of the United States of America or the District of Columbia and rated at least A-1 by S&P or at least P-1 by Moody’s;

(4)  repurchase obligations with a term of not more than ten days for underlying securities of the types described in clause (1) above entered into with any commercial bank meeting the specifications of clause (2) above; and

(5)  investments in money market or other mutual funds substantially all of whose assets comprise securities of the types described in clauses (1) through (4) above.

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Description of the notes

“Change of Control” means the occurrence of any of the following events:

(1)  the Parent shall cease to own beneficially and of record all of the Equity Interests of the Issuer;

(2)  any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause that person or group shall be deemed to have “beneficial ownership” of all securities that any such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of Voting Stock representing more than 50% of the voting power of the total outstanding Voting Stock of the Parent;

(3)  during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Parent (together with any new directors whose election to such Board of Directors or whose nomination for election by the stockholders of the Parent was approved by a vote of the majority of the directors of the Parent then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Parent;

(4)  (a) all or substantially all of the assets of the Parent and the Restricted Subsidiaries are sold or otherwise transferred to any Person other than a Wholly-Owned Restricted Subsidiary or one or more Permitted Holders or (b) the Parent consolidates or merges with or into another Person other than a Permitted Holder or any Person other than a Permitted Holder consolidates or merges with or into the Parent, in either case under this clause (4), in one transaction or a series of related transactions in which immediately after the consummation thereof Persons owning Voting Stock representing in the aggregate 100% of the total voting power of the Voting Stock of the Parent immediately prior to such consummation do not own Voting Stock representing a majority of the total voting power of the Voting Stock of the Parent or the surviving or transferee Person; or

(5)  the Parent or the Issuer shall adopt a plan of liquidation or dissolution or any such plan shall be approved by the stockholders of the Parent or the Issuer.

“Consolidated Amortization Expense” for any period means the amortization expense of the Parent and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP.

“Consolidated Cash Flow Available for Fixed Charges” for any period means, without duplication, the sum of the amounts for such period of

(1)  Consolidated Net Income, plus

(2)  in each case only to the extent (and in the same proportion) deducted in determining Consolidated Net Income and with respect to the portion of Consolidated Net Income attributable to any Restricted Subsidiary (other than the Issuer) only if a corresponding amount would be permitted at the date of determination to be distributed to the Issuer or the Parent by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders,

(a)  Consolidated Income Tax Expense,

(b)  Consolidated Amortization Expense (but only to the extent not included in Consolidated Interest Expense),

(c)  Consolidated Depreciation Expense,

(d)  Consolidated Interest Expense and interest and other charges amortized to “cost of sales—homes” or “cost of sales—lots, land and other”, and

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Description of the notes

(e)  all other non-cash items reducing the Consolidated Net Income (excluding any non-cash charge that results in an accrual of a reserve for cash charges in any future period) for such period,

in each case determined on a consolidated basis in accordance with GAAP, minus

(3)  the aggregate amount of all non-cash items, determined on a consolidated basis, to the extent such items increased Consolidated Net Income for such period.

“Consolidated Depreciation Expense” for any period means the depreciation expense of the Parent and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP.

“Consolidated Fixed Charge Coverage Ratio” means the ratio of Consolidated Cash Flow Available for Fixed Charges during the most recent four consecutive full fiscal quarters for which internal financial statements are available (the “Four-Quarter Period”) ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the “Transaction Date”) to Consolidated Interest Incurred for the Four-Quarter Period. For purposes of this definition, Consolidated Cash Flow Available for Fixed Charges and Consolidated Interest Incurred shall be calculated after giving effect on a pro forma basis for the period of such calculation to:

(1)  the incurrence of any Indebtedness, the inclusion of any Indebtedness on the balance sheet or the issuance of any Preferred Stock, in each case of the Parent or any Restricted Subsidiary (and the application of the proceeds thereof) and any repayment of other Indebtedness or redemption of other Preferred Stock (and the application of the proceeds therefrom) (other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to any revolving credit arrangement) occurring during the Four-Quarter Period or at any time subsequent to the last day of the Four-Quarter Period and on or prior to the Transaction Date, as if such incurrence, repayment, issuance or redemption, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four-Quarter Period; and

(2)  any Asset Sale or Asset Acquisition (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of the Parent or any Restricted Subsidiary (including any Person who becomes a Restricted Subsidiary as a result of such Asset Acquisition) incurring Acquired Indebtedness and also including any Consolidated Cash Flow Available for Fixed Charges (including any pro forma expense and cost reductions calculated on a basis consistent with Regulation S-X under the Exchange Act) associated with any such Asset Acquisition) occurring during the Four-Quarter Period or at any time subsequent to the last day of the Four-Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition or other disposition (including the incurrence of, or assumption or liability for, any such Indebtedness or Acquired Indebtedness) occurred on the first day of the Four-Quarter Period.

If the Parent or any Restricted Subsidiary directly or indirectly guarantees Indebtedness of a third Person (other than a Restricted Subsidiary, in the case of the Parent, or the Parent or another Restricted Subsidiary, in the case of a Restricted Subsidiary), the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if the Parent or such Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed Indebtedness.

In calculating Consolidated Interest Incurred for purposes of determining the denominator (but not the numerator) of this Consolidated Fixed Charge Coverage Ratio:

(1)  interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on this Indebtedness in effect on the Transaction Date;

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Description of the notes

(2)  if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four-Quarter Period; and

(3)  notwithstanding clause (1) or (2) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements with a term of at least one year after the Transaction Date relating to Hedging Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of these agreements.

“Consolidated Income Tax Expense” for any period means the provision for taxes of the Parent and the Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP.

“Consolidated Indebtedness” means, as of any date, the total Indebtedness of the Parent and the Restricted Subsidiaries as of such date, determined on a consolidated basis.

“Consolidated Interest Expense” for any period means the sum, without duplication, of the total interest expense (other than interest and other charges amortized to “cost of sales—homes” or “cost of sales—lots, land and other”) of the Parent and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP and including, without duplication,

(1)  imputed interest on Capitalized Lease Obligations and Attributable Indebtedness,

(2)  commissions, discounts and other fees and charges owed with respect to letters of credit securing financial obligations, bankers’ acceptance financing and receivables financings,

(3)  the net costs associated with Hedging Obligations,

(4)  amortization of debt issuance costs, debt discount or premium and other financing fees and expenses,

(5)  the interest portion of any deferred payment obligations,

(6)  all other non-cash interest expense,

(7)  the product of (a) all dividend payments on any series of Disqualified Equity Interests of the Parent or any Preferred Stock of any Restricted Subsidiary (other than any such Disqualified Equity Interests or any Preferred Stock held by the Parent or a Wholly-Owned Restricted Subsidiary), multiplied by (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of the Parent and the Restricted Subsidiaries, expressed as a decimal,

(8)  all interest payable with respect to discontinued operations, and

(9)  all interest on any Indebtedness of any other Person (other than a Restricted Subsidiary, in the case of the Parent, or the Parent or another Restricted Subsidiary, in the case of a Restricted Subsidiary) guaranteed by the Parent or any Restricted Subsidiary.

“Consolidated Interest Incurred” for any period means the sum, without duplication, of (1) Consolidated Interest Expense and (2) interest capitalized for such period (including interest capitalized with respect to discontinued operations but not including interest or other charges amortized to “cost of sales—homes” or “cost of sales—lots, land and other”).

“Consolidated Joint Venture” means a Joint Venture in existence on the Issue Date which becomes a Subsidiary because of a change in GAAP relating to consolidation.

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Description of the notes

“Consolidated Joint Venture Indebtedness” means Indebtedness of Consolidated Joint Ventures included on the consolidated balance sheet of the Parent and its Restricted Subsidiaries.

“Consolidated Net Income” for any period means the net income (or loss) of the Parent and the Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded from such net income (to the extent otherwise included therein), without duplication:

(1)  the net income (or loss) of any Person (other than a Restricted Subsidiary) in which any Person other than the Parent or any of its Restricted Subsidiaries has an ownership interest, except to the extent that cash in an amount equal to any such income has actually been received by the Parent or any of its Restricted Subsidiaries during such period;

(2)  except to the extent includible in the consolidated net income of the Parent pursuant to the foregoing clause (1), the net income (or loss) of any Person that accrued prior to the date that (a) such Person becomes a Restricted Subsidiary or is merged into or consolidated with the Parent or any Restricted Subsidiary or (b) the assets of such Person are acquired by the Parent or any Restricted Subsidiary;

(3)  the net income of any Restricted Subsidiary (other than the Issuer) during such period to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of that income is not permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary during such period;

(4)  that portion of the net income of any Restricted Subsidiary (other than the Issuer) that is not a Guarantor and is not a Wholly-Owned Restricted Subsidiary attributable to the portion of the Equity Interests of such Restricted Subsidiary that is not owned by the Parent or the Restricted Subsidiaries;

(5)  for the purposes of calculating the Restricted Payments Basket only, in the case of a successor to the Parent or the Issuer by consolidation, merger or transfer of its assets, any income (or loss) of the successor prior to such merger, consolidation or transfer of assets;

(6)  other than for purposes of calculating the Restricted Payments Basket, any gain (or loss), together with any related provisions for taxes on any such gain (or the tax effect of any such loss), realized during such period by the Parent or any Restricted Subsidiary upon (a) the acquisition of any securities, or the extinguishment of any Indebtedness, of the Parent or any Restricted Subsidiary or (b) any Asset Sale by the Parent or any Restricted Subsidiary; and

(7)  other than for purposes of calculating the Restricted Payments Basket, any extraordinary gain (or extraordinary loss), together with any related provision for taxes on any such extraordinary gain (or the tax effect of any such extraordinary loss), realized by the Parent or any Restricted Subsidiary during such period.

In addition, any return of capital with respect to an Investment that increased the Restricted Payments Basket pursuant to clause (3)(d) of the first paragraph under “—Certain Covenants—Limitations on Restricted Payments” or decreased the amount of Investments outstanding pursuant to clause (14) of the definition of “Permitted Investments” shall be excluded from Consolidated Net Income for purposes of calculating the Restricted Payments Basket.

“Consolidated Net Worth” means, with respect to any Person as of any date, the consolidated stockholders’ equity of such Person, determined on a consolidated basis in accordance with GAAP, less (without duplication) (1) any amounts thereof attributable to Disqualified Equity Interests of such Person

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Description of the notes

or its Subsidiaries or any amount attributable to Unrestricted Subsidiaries (other than Cerro Plata Associates, LLC and 242 Cerro Plata, LLC) and (2) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within twelve months after the acquisition of such business) subsequent to the Issue Date in the book value of any asset owned by such Person or a Subsidiary of such Person.

“Consolidated Tangible Assets” means, as of any date, the total amount of assets of the Parent and the Restricted Subsidiaries on a consolidated basis at the end of the fiscal quarter immediately preceding such date, as determined in accordance with GAAP, less (1) Intangible Assets and (2) any assets securing Non-Recourse Indebtedness.

“Consolidated Tangible Net Worth” means, with respect to any Person as of any date, the Consolidated Net Worth of such Person as of such date less (without duplication) all Intangible Assets of such Person as of such date.

“Credit Facilities” means (i) the Loan Agreement dated as of September 25, 2000 between the Issuer and Residential Funding Corporation, as amended, (ii) the Master Loan Agreement dated as of August 31, 2000 between the Issuer and Guaranty Federal Bank, F.S.B, as amended, and (iii) the Revolving Line of Credit Loan Agreement dated as of September 21, 2000 between the Issuer and California Bank & Trust, as amended, in each case (i), (ii) and (iii), including any notes, guarantees, collateral and security documents, instruments and agreements executed in connection therewith (including Hedging Obligations related to the Indebtedness incurred thereunder), and in each case as amended or refinanced from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of borrowings or other Indebtedness outstanding or available to be borrowed thereunder) all or any portion of the Indebtedness under such agreements, and any successor or replacement agreement or agreements with the same or any other agents, creditor, lender or group of creditors or lenders. Notwithstanding the foregoing, “Credit Facilities” shall not include any agreements relating to Consolidated Joint Venture Indebtedness or Permitted Restricted Joint Venture Indebtedness.

“Custodian” means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.

“Default” means (1) any Event of Default or (2) any event, act or condition that, after notice or the passage of time or both, would be an Event of Default.

“Designation” has the meaning given to this term in the covenant described under “—Certain Covenants—Limitations on Designation of Unrestricted Subsidiaries;” and “Designate” and “Designated” shall have correlative meanings.

“Designation Amount” has the meaning given to this term in the covenant described under “—Certain Covenants—Limitations on Designation of Unrestricted Subsidiaries.”

“Developed Land” means all Entitled Land of the Parent, its Restricted Subsidiaries (other than Consolidated Joint Ventures) and the Restricted Joint Ventures which is undergoing active development or is ready for vertical construction.

“Directly Related Assets” means, with respect to any particular property, assets directly related thereto or derived therefrom, such as proceeds (including insurance proceeds), products, rents, and profits thereof and improvements and accessions thereto.

“Disqualified Equity Interests” of any Person means any class of Equity Interests of such Person that, by their terms, or by the terms of any related agreement or of any security into which they are convertible,

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Description of the notes

puttable or exchangeable, are, or upon the happening of any event or the passage of time would be, required to be redeemed by such Person, whether or not at the option of the holder thereof, or mature or are mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, in whole or in part, on or prior to the date which is 91 days after the final maturity date of the Notes; provided, however, that any class of Equity Interests of such Person that, by its terms, authorizes such Person to satisfy in full its obligations with respect to the payment of dividends or upon maturity, redemption (pursuant to a sinking fund or otherwise) or repurchase thereof or otherwise by the delivery of Equity Interests that are not Disqualified Equity Interests, and that are not convertible, puttable or exchangeable for Disqualified Equity Interests or Indebtedness, will not be deemed to be Disqualified Equity Interests so long as such Person satisfies its obligations with respect thereto solely by the delivery of Equity Interests that are not Disqualified Equity Interests; provided, further, however, that any Equity Interests that would not constitute Disqualified Equity Interests but for provisions thereof giving holders thereof (or the holders of any security into or for which such Equity Interests are convertible, exchangeable or exercisable) the right to require the Issuer to redeem such Equity Interests upon the occurrence of a change in control occurring prior to the final maturity date of the Notes shall not constitute Disqualified Equity Interests if the change in control provisions applicable to such Equity Interests are no more favorable to such holders than the provisions described under the caption “—Change of Control” and such Equity Interests specifically provide that such Person will not redeem any such Equity Interests pursuant to such provisions prior to the Issuer’s purchase of the Notes as required pursuant to the provisions described under the caption “—Change of Control.”

“Entitled Land” means all land of the Parent, its Restricted Subsidiaries (other than Consolidated Joint Ventures) and the Restricted Joint Ventures (a) on which Units may be constructed or which may be utilized for commercial, retail or industrial uses, in each case, under applicable laws and regulations and (b) the intended use by the Parent for which is permissible under the applicable regional plan, development agreement or applicable zoning ordinance.

“Equity Interests” of any Person means (1) any and all shares or other equity interests (including common stock, preferred stock, limited liability company interests and partnership interests) in such Person and (2) all rights to purchase, warrants or options (whether or not currently exercisable), participations or other equivalents of or interests in (however designated) such shares or other interests in such Person.

“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

“Fair Market Value” means, with respect to any asset, the price (after taking into account any liabilities relating to such assets) that would be negotiated in an arm’s-length transaction for cash between a willing seller and a willing and able buyer, neither of which is under any compulsion to complete the transaction, as such price is determined in good faith by the Board of Directors of the Parent or a duly authorized committee thereof, as evidenced by a resolution of such Board or committee.

“GAAP” means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, as in effect from time to time.

“guarantee” means a direct or indirect guarantee by any Person of any Indebtedness of any other Person and includes any obligation, direct or indirect, contingent or otherwise, of such Person: (1) to purchase

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or pay (or advance or supply funds for the purchase or payment of) Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm’s-length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise); or (2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part). Notwithstanding the foregoing, the liability of a general partner for the Indebtedness of a partnership that is secured by assets of such partnership whose Fair Market Value on the Issue Date exceeds the amount of such Indebtedness shall not be deemed to be a guarantee for purposes of this definition; provided that (i) the general partner has not otherwise guaranteed or assumed such Indebtedness, (ii) such Indebtedness is not included on the balance sheet of the general partner and is not required to be so included in accordance with GAAP as in effect on the date of such determination (except, in each case in this clause (ii), if the partnership was a Joint Venture which became a Subsidiary and which was Designated as an Unrestricted Subsidiary in accordance with the fourth paragraph of the covenant described under “Certain Covenants—Limitations on Designation of Unrestricted Subsidiaries”), (iii) to the extent the aggregate amount of liabilities of the Parent and the Restricted Subsidiaries that would constitute guarantees but for this sentence on the date of determination exceeds $115.0 million less the aggregate amount of Indebtedness outstanding under clause (15) of the definition of “Permitted Indebtedness” on the date of determination, then such excess shall be deemed to be guarantees by the Parent and the Restricted Subsidiaries and (iv) such partnership was in existence on the Issue Date. “guarantee,” when used as a verb, and “guaranteed” have correlative meanings.

“Guarantors” means the Parent and each Restricted Subsidiary of the Parent on the Issue Date (other than the Issuer), and each other Person that is required to become a Guarantor by the terms of the Indenture after the Issue Date, in each case, until such Person is released from its Note Guarantee. On the Issue Date, the Guarantors will be the Parent, California Equity Funding, Inc., a California corporation, PH-LP Ventures, a California corporation, Duxford Financial, Inc., a California corporation, Sycamore CC, Inc., a California corporation, Presley CMR, Inc., a California corporation, William Lyon Southwest, Inc., an Arizona corporation, PH-Reilly Ventures, a California corporation, Mountain Gate Ventures, Inc., an Arizona corporation, OX I Oxnard, L.P., a California limited partnership, Carmel Mountain Ranch, a California general partnership, HSP, Inc., a California corporation, PH Ventures-San Jose, a California corporation, Presley Homes, a California corporation and St. Helena Westminster Estates, LLC, a Delaware limited liability company.

“Hedging Obligations” of any Person means the obligations of such Person pursuant to (1) any interest rate swap agreement, interest rate collar agreement or other similar agreement or arrangement designed to protect such Person against fluctuations in interest rates, (2) agreements or arrangements designed to protect such Person against fluctuations in foreign currency exchange rates in the conduct of its operations, or (3) any forward contract, commodity swap agreement, commodity option agreement or other similar agreement or arrangement designed to protect such Person against fluctuations in commodity prices, in each case entered into in the ordinary course of business for bona fide hedging purposes and not for the purpose of speculation.

“Holder” means any registered holder, from time to time, of the Notes.

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Description of the notes

“incur” means, with respect to any Indebtedness or obligation, incur, create, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to such Indebtedness or obligation; provided that (1) the Indebtedness of a Person existing at the time such Person became a Restricted Subsidiary or at the time such Person merged with or into the Parent or a Restricted Subsidiary shall be deemed to have been incurred at such time and (2) neither the accrual of interest nor the accretion of original issue discount shall be deemed to be an incurrence of Indebtedness.

“Indebtedness” of any Person at any date means, without duplication:

(1)  all liabilities, contingent or otherwise, of such Person for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof);

(2)  all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;

(3)  all obligations of such Person in respect of letters of credit or other similar instruments (or reimbursement obligations with respect thereto);

(4)  all obligations of such Person to pay the deferred and unpaid purchase price of property or services, except trade payables and accrued expenses incurred by such Person in the ordinary course of business in connection with obtaining goods, materials or services;

(5)  the maximum fixed redemption or repurchase price of all Disqualified Equity Interests of such Person;

(6)  all Capitalized Lease Obligations of such Person;

(7)  all Indebtedness of others secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person;

(8)  all Indebtedness of others guaranteed by such Person to the extent of such guarantee; provided that (i) Indebtedness of the Parent or its Subsidiaries that is guaranteed by the Parent or the Parent’s Subsidiaries shall be counted only once in the calculation of the amount of Indebtedness of the Parent and its Subsidiaries on a consolidated basis and (ii) only the liabilities relating to any such guarantee that are recorded as liabilities, or required (in accordance with GAAP) to be recorded as liabilities, on the balance sheet of such Person shall be considered Indebtedness of such Person (it being understood that any increase in liabilities recorded or required to be recorded on such Person’s balance sheet shall be deemed to be an “incurrence” of Indebtedness by such Person at the time of such increase);

(9)  all Attributable Indebtedness;

(10)  to the extent not otherwise included in this definition, Hedging Obligations of such Person;

(11)  all obligations of such Person under conditional sale or other title retention agreements relating to assets purchased by such Person; and

(12)  the liquidation value of Preferred Stock of a Subsidiary of such Person issued and outstanding and held by any Person other than such Person (or one of its Wholly-Owned Restricted Subsidiaries).

Notwithstanding the foregoing, the following shall not be considered Indebtedness: (a) earn-outs or similar profit sharing or participation arrangements provided for in acquisition agreements which are determined on the basis of future operating earnings or other similar performance criteria (which are not determinable at the time of acquisition) of the acquired assets or entities, (b) accrued expenses, trade payables, customer deposits or deferred income taxes arising in the ordinary course of business, (c) the liability of a general partner for the Indebtedness of a partnership that is secured by assets of such partnership whose Fair Market Value on the Issue Date exceeds the amount of such Indebtedness; provided that, in the case of this clause (c), (i) the general partner has not otherwise guaranteed or

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assumed such Indebtedness, (ii) such Indebtedness is not included on the balance sheet of the general partner and is not required to be so included in accordance with GAAP as in effect on the date of such determination (except, in each case in this clause (ii), if the partnership is a Consolidated Joint Venture which was Designated as an Unrestricted Subsidiary in accordance with the fourth paragraph of the covenant described under “Certain Covenants—Limitations on Designation of Unrestricted Subsidiaries”), (iii) to the extent the aggregate amount of liabilities of the Parent and the Restricted Subsidiaries that would constitute Indebtedness but for this clause (c) on the date of determination exceeds $115.0 million less the aggregate amount of Indebtedness outstanding under clause (15) of the definition of “Permitted Indebtedness” on the date of determination, then such excess shall be considered Indebtedness of the Parent and the Restricted Subsidiaries and (iv) such partnership was in existence on the Issue Date, (d) completion guarantees entered into in the ordinary course of business and (e) obligations in respect of district improvement bonds pertaining to roads, sewers and other infrastructure. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above, the maximum liability of such Person for any such contingent obligations at such date and, in the case of clause (7), the lesser of (a) the Fair Market Value of any asset subject to a Lien securing the Indebtedness of others on the date that the Lien attaches and (b) the amount of the Indebtedness secured; provided, however, that the amount outstanding at any time of any Indebtedness issued with original issue discount shall be deemed to be the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time, as determined in accordance with GAAP. For purposes of clause (5), the “maximum fixed redemption or repurchase price” of any Disqualified Equity Interests that do not have a fixed redemption or repurchase price shall be calculated in accordance with the terms of such Disqualified Equity Interests as if such Disqualified Equity Interests were redeemed on any date on which an amount of Indebtedness outstanding shall be required to be determined pursuant to the Indenture.

“Independent Director” means a director of the Parent who

(1)  is independent with respect to the transaction at issue;

(2)  does not have any material financial interest in the Parent or any of its Affiliates (other than as a result of holding securities of the Parent); and

(3)  has not and whose Affiliates or affiliated firm has not, at any time during the twelve months prior to the taking of any action hereunder, directly or indirectly, received, or entered into any understanding or agreement to receive, compensation, payment or other benefit, of any type or form, from the Parent or any of its Affiliates, other than customary directors’ fees and indemnity and insurance arrangements for serving on the Board of Directors of the Parent or any Affiliate and reimbursement of out-of-pocket expenses for attendance at the Parent’s or Affiliate’s board and board committee meetings.

“Independent Financial Advisor” means an accounting, appraisal or investment banking firm of nationally recognized standing that is, in the reasonable judgment of the Parent’s Board of Directors, qualified to perform the task for which it has been engaged and disinterested and independent with respect to the Parent and its Affiliates; provided, however, that the prior rendering of service to the Parent or an Affiliate of the Parent shall not, by itself, disqualify the advisor.

“Intangible Assets” means, with respect to any Person, all unamortized debt discount and expense, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, write-ups of assets over their carrying value (other than write-ups which occurred prior to the Issue Date and other than, in connection with the acquisition of an asset, the write-up of the value of such asset to its Fair Market Value in accordance with GAAP on the date of acquisition) and all other items which

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would be treated as intangibles on the consolidated balance sheet of such Person prepared in accordance with GAAP.

“Investments” of any Person means, without duplication:

(1)  all direct or indirect investments by such Person in any other Person in the form of loans, advances or capital contributions or other credit extensions constituting Indebtedness of such other Person, and any guarantee of Indebtedness of any other Person;

(2)  all purchases (or other acquisitions for consideration) by such Person of Indebtedness, Equity Interests or other securities of any other Person;

(3)  all other items that would be classified as investments on a balance sheet of such Person prepared in accordance with GAAP; and

(4)  the Designation of any Subsidiary as an Unrestricted Subsidiary.

Except as otherwise expressly specified in this definition, the amount of any Investment (other than an Investment made in cash) shall be the Fair Market Value thereof on the date such Investment is made. The amount of any Investment pursuant to clause (4) shall be the Designation Amount determined in accordance with the covenant described under “—Certain Covenants—Limitations on Designation of Unrestricted Subsidiaries.” If the Parent or any Restricted Subsidiary sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary, the Parent shall be deemed to have made an Investment on the date of any such sale or other disposition equal to the Fair Market Value of the Equity Interests of and all other Investments in such Restricted Subsidiary not sold or disposed of, which amount shall be determined by the Board of Directors of the Parent. Notwithstanding the foregoing, redemptions of Equity Interests of the Parent shall be deemed not to be Investments.

“Issue Date” means                     , 2003, the date on which the Notes are originally issued.

“Joint Venture” means a corporation, limited liability company, partnership or other entity engaged in a Permitted Business (other than an entity constituting a Subsidiary of the Parent) in which the Parent or any of its Restricted Subsidiaries owns, directly or indirectly, at least 10% of the Equity Interests.

“Lien” means, with respect to any asset, any mortgage, deed of trust, lien (statutory or other), pledge, lease, easement, restriction, covenant, charge, security interest or other encumbrance of any kind or nature in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, and any lease in the nature thereof, any option or other agreement to sell, and any filing of, or agreement to give, any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction (other than cautionary filings in respect of operating leases).

“Moody’s” means Moody’s Investors Service, Inc., and its successors; provided, that any reference to a particular rating by Moody’s shall be construed to apply to the corresponding rating of any successor.

“Net Available Proceeds” means, with respect to any Asset Sale, the proceeds thereof in the form of cash or Cash Equivalents, net of

(1)  brokerage commissions and other fees and expenses (including fees and expenses of legal counsel, accountants and investment banks) of such Asset Sale;

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Description of the notes

(2)  provisions for taxes payable as a result of such Asset Sale (after taking into account any available tax credits or deductions and any tax sharing arrangements);

(3)  amounts required to be paid to any Person (other than the Parent or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale or having a Lien thereon;

(4)  payments of unassumed liabilities (not constituting Indebtedness) relating to the assets sold at the time of, or within 30 days after the date of, such Asset Sale; and

(5) appropriate amounts to be provided by the Parent or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the Parent or any Restricted Subsidiary, as the case may be, after such Asset Sale, including pensions and other postemployment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers’ Certificate of the Parent delivered to the Trustee; provided, however, that any amounts remaining after adjustments, revaluations or liquidations of such reserves shall constitute Net Available Proceeds.

“Non-Recourse Indebtedness” with respect to any Person means Indebtedness of such Person for which (1) the sole legal recourse for collection of principal and interest on such Indebtedness is against the specific property identified in the instruments evidencing or securing such Indebtedness and such property was acquired with the proceeds of such Indebtedness or such Indebtedness was incurred within 90 days after the acquisition of such property and (2) no other assets of such Person may be realized upon in collection of principal or interest on such Indebtedness.

“Officer” of any Person means any of the following of such Person: the Chairman of the Board of Directors, the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President, the Treasurer or the Secretary.

“Officers’ Certificate” of any Person means a certificate signed by two Officers of such Person.

“Parent” means William Lyon Homes, a Delaware corporation.

“Pari Passu Indebtedness” means any Indebtedness of the Issuer or any Guarantor that ranks pari passu as to payment with the Notes or the Note Guarantee of such Guarantor, as applicable.

“Permitted Business” means the businesses engaged in by the Parent and its Subsidiaries on the Issue Date as described in this prospectus and businesses that are reasonably related thereto or reasonable extensions thereof.

“Permitted Holders” means General William Lyon, his wife, his lineal descendants and his other close family members, any corporation, limited liability company or partnership in which he has voting control and is the direct and beneficial owner of a majority of the Equity Interests and any trust for the benefit of him, his wife, his lineal descendants or his other close family members.

“Permitted Investment” means:

(1)  Investments by the Parent or any Restricted Subsidiary in (a) the Issuer or any Guarantor or (b) in any Person that is or will become immediately after such Investment a Guarantor or that will merge or consolidate into the Issuer or a Guarantor;

(2)  Investments in the Parent by any Restricted Subsidiary;

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Description of the notes

(3)  loans and advances to directors, employees and officers of the Parent and the Restricted Subsidiaries for bona fide business purposes and to purchase Equity Interests of the Parent not in excess of $2.0 million at any one time outstanding;

(4)  Hedging Obligations incurred pursuant to clause (4) of the second paragraph under the covenant described under “—Certain Covenants—Limitations on Additional Indebtedness”;

(5)  Cash Equivalents;

(6)  receivables owing to the Parent or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Parent or any such Restricted Subsidiary deems reasonable under the circumstances;

(7)  Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers;

(8)  Investments made by the Parent or any Restricted Subsidiary as a result of consideration received in connection with an Asset Sale made in compliance with the covenant described under “—Certain Covenants—Limitations on Asset Sales”;

(9)  lease, utility and other similar deposits in the ordinary course of business;

(10)  Investments made by the Parent or a Restricted Subsidiary for consideration consisting only of Qualified Equity Interests;

(11)  stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Parent or any Restricted Subsidiary or in satisfaction of judgments;

(12)  Investments in existence on the Issue Date;

(13)  Investments (with each Investment being valued as of the date made and without regard to subsequent changes in value) made by the Parent or any Restricted Subsidiary in Joint Ventures, Consolidated Joint Ventures, Restricted Joint Ventures or in Unrestricted Subsidiaries in an aggregate amount at any one time outstanding not to exceed the sum of (x) 15% of the Parent’s Consolidated Tangible Net Worth at December 31, 2002 plus (y) in the case of the disposition or repayment of or return on any Investment in a Joint Venture, Consolidated Joint Venture or Unrestricted Subsidiary, which Investment was in existence on December 31, 2002, an amount equal to the return of capital after December 31, 2002 with respect to such Investment (to the extent not included in the computation of Consolidated Net Income), less the cost of the disposition of such Investment and net of taxes;

(14)  completion guarantees entered into in the ordinary course of business;

(15)  the Designation of a Subsidiary as an Unrestricted Subsidiary in accordance with the fourth paragraph of the covenant described under “Certain Covenants—Limitations on Designation of Unrestricted Subsidiaries”; and

(16)  other Investments in an aggregate amount not to exceed $5.0 million at any one time outstanding (with each Investment being valued as of the date made and without regard to subsequent changes in value).

The amount of Investments outstanding at any time pursuant to clause (16) above shall be deemed to be reduced:

(a)  upon the disposition or repayment of or return on any Investment made pursuant to clause (16) above, by an amount equal to the return of capital with respect to such Investment to the Parent or

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Description of the notes

any Restricted Subsidiary (to the extent not included in the computation of Consolidated Net Income), less the cost of the disposition of such Investment and net of taxes; and

(b)  upon a Redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, by an amount equal to the lesser of (x) the Fair Market Value of the Parent’s proportionate interest in such Subsidiary immediately following such Redesignation, and (y) the aggregate amount of Investments in such Subsidiary that increased (and did not previously decrease) the amount of Investments outstanding pursuant to clause (16) above.

“Permitted Liens” means the following types of Liens:

(1)  (a) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business and (b) Liens for taxes, assessments or governmental charges or claims, in either case, for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof;

(2)  Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);

(3)  Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person’s obligations in respect of bankers’ acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods;

(4)  Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents, goods covered thereby and other assets relating to such letters of credit and products and proceeds thereof;

(5)  Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Parent or any Restricted Subsidiary, including rights of offset and setoff;

(6)  bankers’ Liens, rights of setoff and other similar Liens existing solely with respect to cash and Cash Equivalents on deposit in one or more accounts maintained by the Parent or any Restricted Subsidiary, in each case granted in the ordinary course of business in favor of the bank or banks with which such accounts are maintained, securing amounts owing to such bank with respect to cash management and operating account arrangements, including those involving pooled accounts and netting arrangements; provided that in no case shall any such Liens secure (either directly or indirectly) the repayment of any Indebtedness;

(7)  leases or subleases, licenses or sublicenses, (or any Liens related thereto) granted to others that do not materially interfere with the ordinary course of business of the Parent or any Restricted Subsidiary;

(8)  Liens arising from filing Uniform Commercial Code financing statements regarding leases;

(9)  Liens securing all of the Notes and Liens securing any Note Guarantee;

(10)  Liens in favor of the Trustee under and as permitted by the Indenture;

(11)  Liens existing on the Issue Date securing Indebtedness outstanding on the Issue Date;

(12)  Liens in favor of the Issuer or a Guarantor;

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Description of the notes

(13)  Liens securing Indebtedness under the Credit Facilities incurred pursuant to clause (1) of “—Limitations on Additional Indebtedness”;

(14)  without limiting any other clause in this definition of “Permitted Liens,” Liens securing Indebtedness of the Parent or any Restricted Subsidiary permitted to be incurred under the Indenture; provided, that the aggregate amount of all Consolidated Indebtedness of the Parent and the Restricted Subsidiaries secured by Liens (including all Indebtedness permitted to be secured by the other provisions of this definition, but excluding Non-Recourse Indebtedness) shall not exceed 30% of Consolidated Tangible Assets at any one time outstanding (after giving effect to the incurrence of such Indebtedness and the use of the proceeds thereof);

(15)  Liens securing Non-Recourse Indebtedness of the Parent or any Restricted Subsidiary permitted to be incurred under the Indenture; provided, that such Liens apply only to (a) the property financed out of the net proceeds of such Non-Recourse Indebtedness within 90 days after the incurrence of such Non-Recourse Indebtedness and (b) Directly Related Assets;

(16)  Liens securing Purchase Money Indebtedness permitted to be incurred under the Indenture; provided that such Liens apply only to (a) the property acquired, constructed or improved with the proceeds of such Purchase Money Indebtedness within 90 days after the incurrence of such Purchase Money Indebtedness and (b) Directly Related Assets;

(17)  Liens securing Acquired Indebtedness permitted to be incurred under the Indenture; provided that the Liens do not extend to assets not subject to such Lien at the time of acquisition (other than Directed Related Assets) and are no more favorable to the lienholders than those securing such Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by the Parent or a Restricted Subsidiary;

(18)  Liens on assets of a Person existing at the time such Person is acquired or merged with or into or consolidated with the Parent or any such Restricted Subsidiary (and not created in anticipation or contemplation thereof);

(19)  Liens to secure Attributable Indebtedness permitted to be incurred under the Indenture; provided that any such Lien shall not extend to or cover any assets of the Parent or any Restricted Subsidiary other than (a) the assets which are the subject of the Sale and Leaseback Transaction in which the Attributable Indebtedness is incurred and (b) Directly Related Assets;

(20)  Liens securing Consolidated Joint Venture Indebtedness permitted to be incurred under the Indenture; provided that, with respect to Indebtedness of any particular Consolidated Joint Venture, such Liens do not extend to assets other than those of the Consolidated Joint Venture;

(21) Liens securing Permitted Restricted Joint Venture Indebtedness permitted to be incurred under the Indenture; provided that, with respect to Indebtedness of any particular Restricted Joint Venture, such Liens do not extend to assets other than those of the Restricted Joint Venture;

(22)  Liens to secure Refinancing Indebtedness which is incurred to refinance any Indebtedness which has been secured by a Lien permitted under the Indenture and which has been incurred in accordance with the provisions of the Indenture; provided that in each case such Liens do not extend to any additional assets (other than Directly Related Assets);

(23)  attachment or judgment Liens not giving rise to a Default and which are being contested in good faith by appropriate proceedings;

(24)  easements, rights-of-way, restrictions and other similar charges or encumbrances not materially interfering with the ordinary course of business of the Parent and its Subsidiaries;

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Description of the notes

(25)  zoning restrictions, licenses, restrictions on the use of real property or minor irregularities in title thereto, which do not materially impair the use of such real property in the ordinary course of business of the Parent and its Subsidiaries or the value of such real property for the purpose of such business;

(26)  Liens on Equity Interests in an Unrestricted Subsidiary to the extent that such Liens secure Indebtedness of such Unrestricted Subsidiary owing to lenders who have also been granted Liens on assets of such Unrestricted Subsidiary to secure such Indebtedness; and

(27)  any option, contract or other agreement to sell an asset; provided such sale is not otherwise prohibited under the Indenture.

“Permitted Restricted Joint Venture Indebtedness” means Indebtedness of a Restricted Joint Venture incurred pursuant to clause (1) of “—Limitations on Additional Indebtedness”.

“Permitted Unrestricted Subsidiary Debt” means Indebtedness of an Unrestricted Subsidiary:

(1)  as to which neither the Parent nor any Restricted Subsidiary (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable as a guarantor or otherwise, or (c) constitutes the lender, other than, in the case of clause (a) or (b), obligations of the Parent or any Restricted Subsidiary arising as a result of being the general partner of such Unrestricted Subsidiary to the extent such obligations do not constitute Indebtedness of the Parent or such Restricted Subsidiary in accordance with the definition of “Indebtedness”; and

(2)  as to which the lenders have been notified in writing that they will not have any recourse to the Equity Interests or assets of the Parent or any Restricted Subsidiary.

“Person” means any individual, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other entity of any kind.

“Plan of Liquidation” with respect to any Person, means a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise): (1) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such Person otherwise than as an entirety or substantially as an entirety; and (2) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition of all or substantially all of the remaining assets of such Person to creditors and holders of Equity Interests of such Person.

“Preferred Stock” means, with respect to any Person, any and all preferred or preference stock or other equity interests (however designated) of such Person whether now outstanding or issued after the Issue Date.

“principal” means, with respect to the Notes, the principal of, and premium, if any, on the Notes.

“Purchase Money Indebtedness” means Indebtedness, including Capitalized Lease Obligations, of the Parent or any Restricted Subsidiary incurred for the purpose of financing all or any part of the purchase price of property, plant or equipment used in the business of the Parent or any Restricted Subsidiary or the cost of installation, construction or improvement thereof; provided, however, that (1) the amount of such Indebtedness shall not exceed such purchase price or cost (including financing costs), (2) such Indebtedness shall not be secured by any asset other than the specified asset being financed or, in the case

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Description of the notes

of real property or fixtures, including additions and improvements, the real property to which such asset is attached and Directly Related Assets and (3) such Indebtedness shall be incurred within 90 days after such acquisition of such asset by the Parent or such Restricted Subsidiary or such installation, construction or improvement.

“Qualified Equity Interests” means Equity Interests of the Parent other than Disqualified Equity Interests; provided that such Equity Interests shall not be deemed Qualified Equity Interests to the extent sold or owed to a Subsidiary of the Parent or financed, directly or indirectly, using funds (1) borrowed from the Parent or any Subsidiary of the Parent until and to the extent such borrowing is repaid or (2) contributed, extended, guaranteed or advanced by the Parent or any Subsidiary of the Parent (including, without limitation, in respect of any employee stock ownership or benefit plan).

“Qualified Equity Offering” means the issuance and sale of Qualified Equity Interests; provided, however, that cash proceeds therefrom equal to not less than 100% of the aggregate principal amount of any Notes to be redeemed are received by the Issuer as a capital contribution immediately prior to such redemption.

“Ratio Exception” has the meaning set forth in the proviso in the first paragraph of the covenant described under “—Certain Covenants—Limitations on Additional Indebtedness.”

“redeem” means to redeem, repurchase, purchase, defease, retire, discharge or otherwise acquire or retire for value; and “redemption” shall have a correlative meaning.

“Redesignation” has the meaning given to such term in the covenant described under “—Certain Covenants—Limitations on Designation of Unrestricted Subsidiaries.”

“refinance” means to refinance, repay, prepay, replace, renew or refund.

“Refinancing Indebtedness” means Indebtedness of the Parent or a Restricted Subsidiary issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used substantially concurrently to redeem or refinance in whole or in part, or constituting an amendment of, any Indebtedness of the Parent or any Restricted Subsidiary (the “Refinanced Indebtedness”) in a principal amount not in excess of the principal amount of the Refinanced Indebtedness so repaid or amended (plus the amount of any premium paid and the amount of reasonable expenses incurred by the Parent or any Restricted Subsidiary in connection with such repayment or amendment) (or, if such Refinancing Indebtedness refinances Indebtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commitment under such revolving credit facility or other agreement); provided that:

(1)  if the Refinanced Indebtedness was subordinated to or pari passu with the Notes or the Note Guarantees, as the case may be, then such Refinancing Indebtedness, by its terms, is expressly pari passu with (in the case of Refinanced Indebtedness that was pari passu with) or subordinate in right of payment to (in the case of Refinanced Indebtedness that was subordinated to) the Notes or the Note Guarantees, as the case may be, at least to the same extent as the Refinanced Indebtedness;

(2)  the Refinancing Indebtedness is scheduled to mature either (a) no earlier than the Refinanced Indebtedness being repaid or amended or (b) after the maturity date of the Notes;

(3)  the portion, if any, of the Refinancing Indebtedness that is scheduled to mature on or prior to the maturity date of the Notes has a Weighted Average Life to Maturity at the time such Refinancing Indebtedness is incurred that is equal to or greater than the Weighted Average Life to Maturity of the

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Description of the notes

portion of the Refinanced Indebtedness being repaid that is scheduled to mature on or prior to the maturity date of the Notes; and

(4)  the Refinancing Indebtedness is secured only to the extent, if at all, and by the assets, that the Refinanced Indebtedness being repaid, extended or amended is secured.

“Restricted Joint Venture” means a partnership formed after the Issue Date which, at the time of its formation, constituted a Joint Venture (whether or not it subsequently becomes a Restricted Subsidiary) and of which the Issuer or any Guarantor is a general partner, to the extent that (i) the Indebtedness of such partnership is secured by assets whose Fair Market Value on the date of determination exceed the amount of such Indebtedness and (ii) the general partner has not otherwise guaranteed or assumed such Indebtedness.

“Restricted Payment” means any of the following:

(1)  the declaration or payment of any dividend or any other distribution on Equity Interests of the Parent or any Restricted Subsidiary or any payment made to the direct or indirect holders (in their capacities as such) of Equity Interests of the Parent or any Restricted Subsidiary, including, without limitation, any payment in connection with any merger or consolidation involving the Parent or the Issuer, but excluding (a) dividends or distributions payable solely in Qualified Equity Interests and (b) in the case of Restricted Subsidiaries, dividends or distributions payable to the Parent or to a Restricted Subsidiary and pro rata dividends or distributions payable to minority stockholders of any Restricted Subsidiary;

(2)  the redemption of any Equity Interests of the Parent or any Restricted Subsidiary, including, without limitation, any payment in connection with any merger or consolidation involving the Parent or the Issuer, but excluding any such Equity Interests held by the Parent or any Restricted Subsidiary;

(3)  any Investment other than a Permitted Investment; or

(4)  any redemption prior to the scheduled maturity or prior to any scheduled repayment of principal or sinking fund payment, as the case may be, in respect of Subordinated Indebtedness.

“Restricted Payments Basket” has the meaning given to such term in the first paragraph of the covenant described under “—Certain Covenants—Limitations on Restricted Payments.”

“Restricted Subsidiary” means any Subsidiary of the Parent other than an Unrestricted Subsidiary.

“S&P” means Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc., and its successors; provided, that any reference to a particular rating by S&P shall be construed to apply to the corresponding rating of any successor.

“Sale and Leaseback Transaction” means, with respect to any Person, an arrangement with any bank, insurance company or other lender or investor or to which such lender or investor is a party, providing for the leasing by such Person of any asset of such Person which has been or is being sold or transferred by such Person to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such asset.

“SEC” means the U.S. Securities and Exchange Commission.

“Secretary’s Certificate” means a certificate signed by the Secretary of the Parent.

“Securities Act” means the U.S. Securities Act of 1933, as amended.

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Description of the notes

“Significant Subsidiary” means (1) any Restricted Subsidiary (other than the Issuer) that would be a “significant subsidiary” as defined in Regulation S-X promulgated pursuant to the Securities Act as such Regulation is in effect on the Issue Date and (2) any Restricted Subsidiary (other than the Issuer) that, when aggregated with all other Restricted Subsidiaries (other than the Issuer) that are not otherwise Significant Subsidiaries and as to which any event described in clause (7) or (8) under “—Events of Default” has occurred and is continuing, would constitute a Significant Subsidiary under clause (1) of this definition.

“Subordinated Indebtedness” means Indebtedness of the Issuer or any Guarantor that is subordinated in right of payment to the Notes or the Note Guarantees, respectively.

“Subsidiary” means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity that is or is required to be consolidated in the consolidated financial statements of such Person in accordance with GAAP. Unless otherwise specified, “Subsidiary” refers to a Subsidiary of the Parent.

“Subsidiary Guarantor” means any Guarantor other than the Parent.

“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended.

“Unit” means a residence, whether single or part of a multifamily building, whether completed or under construction, held by the Parent, any Restricted Subsidiary (other than Consolidated Joint Ventures) or any Restricted Joint Venture for sale in the ordinary course of business.

“Unrestricted Subsidiary” means (1) any Subsidiary that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors of the Parent in accordance with the covenant described under “—Certain Covenants—Limitations on Designation of Unrestricted Subsidiaries” and (2) any Subsidiary of an Unrestricted Subsidiary.

“U.S. Government Obligations” means direct non-callable obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged.

“Voting Stock” with respect to any Person, means securities of any class of Equity Interests of such Person entitling the holders thereof (whether at all times or only so long as no senior class of stock or other relevant equity interest has voting power by reason of any contingency) to vote in the election of members of the Board of Directors of such Person.

“Weighted Average Life to Maturity” when applied to any Indebtedness at any date, means the number of years obtained by dividing (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment by (2) the then outstanding principal amount of such Indebtedness.

“Wholly-Owned Restricted Subsidiary” means a Restricted Subsidiary of which 100% of the Equity Interests (except for directors’ qualifying shares or certain minority interests owned by other Persons solely due to local law requirements that there be more than one stockholder, but which interest is not in excess of what is required for such purpose) are owned directly by the Parent or through one or more Wholly-Owned Restricted Subsidiaries.

117

Description of the notes

BOOK-ENTRY, DELIVERY AND FORM OF NOTES

The Notes will be represented by one or more global Notes (the “Global Notes”) in definitive form. The Global Notes will be deposited on the Issue Date with, or on behalf of, the Depository Trust Company (“DTC”) and registered in the name of Cede & Co., as nominee of DTC (such nominee being referred to herein as the “Global Note Holder”). DTC will maintain the Notes in denominations of $1,000 and integral multiples thereof through its book-entry facilities.

DTC has advised us as follows:

DTC is a limited-purpose trust company that was created to hold securities for its participating organizations, including the Euroclear System and Clearstream Banking, Société Anònyme, Luxembourg (collectively, the “Participants” or the “Depositary’s Participants”), and to facilitate the clearance and settlement of transactions in these securities between Participants through electronic book-entry changes in accounts of its Participants. The Depositary’s Participants include securities brokers and dealers (including the underwriters), banks and trust companies, clearing corporations and certain other organizations. Access to DTC’s system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the “Indirect Participants” or the “Depositary’s Indirect Participants”) that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Depositary’s Participants or the Depositary’s Indirect Participants. Pursuant to procedures established by DTC, ownership of the Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the interests of the Depositary’s Participants) and the records of the Depositary’s Participants (with respect to the interests of the Depositary’s Indirect Participants).

The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer the Notes will be limited to such extent.

So long as the Global Note Holder is the registered owner of any Notes, the Global Note Holder will be considered the sole holder of outstanding Notes represented by such Global Notes under the Indenture. Except as provided below, owners of the Notes will not be entitled to have the Notes registered in their names and will not be considered the owners or holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instructions, or approvals to the Trustee thereunder. None of the Issuer, the Guarantors or the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of the Notes by DTC, or for maintaining, supervising or reviewing any records of DTC relating to such Notes.

Payments in respect of the principal of, premium, if any, and interest on any Notes registered in the name of a Global Note Holder on the applicable record date will be payable by the Trustee to or at the direction of such Global Note Holder in its capacity as the registered holder under the Indenture. Under the terms of the Indenture, we and the Trustee may treat the persons in whose names any Notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither we nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of the Notes (including principal, premium, if any, and interest). We believe, however, that it is currently the policy of DTC to immediately credit the accounts of the relevant Participants with such payments, in amounts proportionate to their respective beneficial interests in the relevant security as shown on the records of DTC. Payments by the Depositary’s Participants and the Depositary’s Indirect Participants to the beneficial owners of the Notes will be governed by standing instructions and customary practice and will be the responsibility of the Depositary’s Participants or the Depositary’s Indirect Participants.

118

Description of the notes

Subject to certain conditions, any person having a beneficial interest in the Global Notes may, upon request to the Trustee and confirmation of such beneficial interest by the Depositary or its Participants or Indirect Participants, exchange such beneficial interest for Notes in definitive form. Upon any such issuance, the Trustee is required to register such notes in the name of and cause the same to be delivered to, such person or persons (or the nominee of any thereof). Such notes would be issued in fully registered form. In addition, if (1) we notify the trustee in writing that DTC is no longer willing or able to act as a depositary and we are unable to locate a qualified successor within 90 days or (2) we, at our option, notify the trustee in writing that we elect to cause the issuance of notes in definitive form under the Indenture, then, upon surrender by the relevant Global Note Holder of its Global Note, Notes in such form will be issued to each person that such Global Note Holder and DTC identifies as being the beneficial owner of the related Notes.

Neither we nor the trustee will be liable for any delay by the Global Note Holder or DTC in identifying the beneficial owners of Notes and we and the Trustee may conclusively rely on, and will be protected in relying on, instructions from the Global Note Holder or DTC for all purposes.

The information in this section concerning DTC, Euroclear and Clearstream and their book-entry systems has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof.

119

United States federal income tax considerations for non-U.S. holders of the notes

GENERAL

The following is a general discussion of the material United States federal income and estate tax consequences of the purchase, ownership and disposition of the notes by an investor who is a “Non-U.S. Holder,” as such term is defined below, and who acquires the notes pursuant to this offering.

A “Non-U.S. Holder” is a beneficial owner of a note that is for United States federal income tax purposes, either a nonresident alien or a corporation, estate or trust that is not a U.S. Holder. A “U.S. Holder” is a beneficial owner of a note who is for United States federal income tax purposes

Ø an individual who is a citizen or resident of the United States,

Ø a corporation created in, or organized under the laws of, the United States or any state or political subdivision thereof,

Ø an estate the income of which is subject to United States federal income taxation regardless of its source, or

Ø a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust, or (B) that was in existence on August 20, 1996, was treated as a United States person under the Internal Revenue Code of 1986, as amended (the “Code”) in effect immediately prior to such date and has made a valid election to be treated as a United States person under the Code.

If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of the notes, the treatment of a partner in the partnership will generally depend upon the status of the partner and upon the activities of the partnership. A HOLDER OF THE NOTES THAT IS A PARTNERSHIP AND PARTNERS IN SUCH PARTNERSHIP SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND DISPOSITION OF THE NOTES.

This summary assumes that investors will hold their notes as “capital assets” under the Code, (generally, property held for investment) and does not discuss special situations, such as those of broker-dealers, tax-exempt organizations, individual retirement accounts and other tax deferred accounts, financial institutions, partnerships or other passthrough entities, insurance companies, certain former citizens or former long term residents of the United States, or persons holding notes as part of a hedging or conversion transaction, a straddle, a constructive sale or synthetic securities transactions or that have a functional currency other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. Furthermore, the discussion below is based upon the provisions of the Code, Internal Revenue Services (“IRS”) rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked, or modified, possibly with retroactive effect, so as to result in United States federal income tax consequences different from those discussed below. We have not sought and do not intend to seek, any ruling from the IRS with respect to the tax consequences, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed below. In addition, except as otherwise indicated, the following does not consider the effect of any applicable foreign, state, local or other tax laws or estate or gift tax considerations.

120

United States federal income tax considerations for non-U.S. holders of the notes

PROSPECTIVE NON-U.S. HOLDERS OF SENIOR NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR SITUATIONS, AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OR SUBSEQUENT REVISIONS THEREOF.

PAYMENT OF INTEREST

This discussion assumes, based upon the description of the DTC’s book-entry procedures discussed in the section entitled “Description of the Notes—Book-Entry, Delivery and Form of Notes” that upon issuance and throughout the term, all the notes will be in registered form within the meaning of the Code and applicable Treasury regulations. Assuming that a Non-U.S. Holder’s income and gain on a note are not effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States, the payment to a Non-U.S. Holder of interest on the note will not be subject to U.S. federal withholding tax pursuant to the “portfolio interest exception,” provided that

Ø the Non-U.S. Holder (A) does not actually or constructively own 10 percent or more of the total combined voting power of all classes of stock entitled to vote, (B) is not, for United States federal income tax purposes, a controlled foreign corporation related, directly or indirectly, to us through stock ownership, and (C) is not a bank that received the notes on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business; and

Ø either (A) the beneficial owner of the notes certifies to us or our paying agent, under penalties of perjury, that it is not a U.S. Holder and provides its name and address on IRS Form W-8BEN (or a suitable substitute form) or (B) a securities clearing organization, bank or other financial institution that holds the notes on behalf of such Non-U.S. Holder in the ordinary course of its trade or business (a “financial institution”) certifies under penalties of perjury that such a IRS Form W-8BEN (or suitable substitute form) has been received from the beneficial owner by it or by a financial institution between it and the beneficial owner and furnishes the payor with a copy thereof; provided that a foreign financial institution will fulfill the certification requirement by filing IRS Form W-8IMY (or suitable substitute form) if it has entered into an agreement with the IRS to be treated as a qualified intermediary.

If a Non-U.S. Holder cannot satisfy the requirements of the portfolio interest exception described above, payments of interest made to such Non-U.S. Holder will be subject to a 30 percent United States federal withholding tax, unless the beneficial owner of the note provides us or our paying agent, as the case may be, with a properly executed (i) IRS Form W-8BEN (or a suitable substitute form) claiming an exemption from or reduction in the rate of withholding under the benefit of a tax treaty or (ii) IRS Form W-8ECI (or a suitable substitute form) providing a United States identification number and stating that interest paid on the note is effectively connected with the beneficial owner’s conduct of a trade or business in the United States.

If a Non-U.S. Holder of a note is engaged in a trade or business in the United States and interest on the note is effectively connected with the conduct of such trade or business, and, where an income tax treaty applies, such interest is attributable to a United States permanent establishment, such Non-U.S. Holder, will be subject to U.S. federal income tax on such interest on a net basis at applicable graduated individual or corporate rates. In addition, if such Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits tax equal to 30 percent of its effectively connected earnings and profits, subject to adjustment, for that taxable year unless it qualifies for a lower rate under an applicable income tax treaty.

121

United States federal income tax considerations for non-U.S. holders of the notes

SALE, REDEMPTION, RETIREMENT OR OTHER TAXABLE DISPOSITION OF THE NOTES

A Non-U.S. Holder generally will not be subject to United States federal income tax on gain realized on a sale, exchange, redemption, retirement or other taxable disposition of a note unless (i) the gain is effectively connected with the conduct of a trade or business in the United States by the Non-U.S. Holder, and, where an income tax treaty applies, attributable to a United States permanent establishment or, (ii) in the case of a Non-U.S. Holder who is an individual, such holder is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met.

If a Non-U.S. Holder of a note is engaged in the conduct of a trade or business in the United States, gain on the disposition of the note that is effectively connected with the conduct of such trade or business and, where an income tax treaty applies, is attributable to a United States permanent establishment, will be taxed on a net basis at applicable graduated individual or corporate rates. Effectively connected gain of a foreign corporation may, under certain circumstances, be subject as well to a branch profits tax at a rate of 30 percent or a lower applicable treaty rate.

INFORMATION REPORTING AND BACKUP WITHHOLDING

We must report annually to the IRS and to each Non-U.S. Holder on IRS Form 1042-S the amount of interest paid on a note, regardless of whether withholding was required, and any tax withheld with respect to the interest. Under the provisions of an income tax treaty and other applicable agreements, copies of these information returns may be made available to the tax authorities of the country in which the Non-U.S. Holder resides.

Certain Non-U.S. Holders may, under applicable rules, be presumed to be U.S. persons. Unless such persons certify their non-United States status and furnish the payor necessary identifying information, interest paid to such holders of notes generally will be subject to backup withholding. Pursuant to recent tax legislation the rate of backup withholding tax is 30 percent until January 1, 2004 and will be reduced to 29 percent on January 1, 2004 and 28 percent on January 1, 2006.

The payment of proceeds from the disposition of a note, effected by or through a United States office of a broker is also subject to both backup withholding and information reporting unless a Non-U.S. Holder provides the payor with such Non-U.S. Holder’s name and address and either certifies non-United States status or otherwise establishes an exemption. In general, backup withholding and information reporting will not apply to the payment of the proceeds of a sale of a note by or through a foreign office of a broker. If, however, such broker is, for United States federal income tax purposes, a United States person, a controlled foreign corporation, a foreign person 50 percent or more of whose gross income is from a United States trade or business for a specified three-year period, or, a foreign partnership that at any time during its tax year either is engaged in the conduct of a trade or business in the United States or has as partners one or more United States persons that, in the aggregate, hold more than 50 percent of the income or capital interest in the partnership, such payments will be subject to information reporting, but not backup withholding, unless such broker has documentary evidence in its records that the holder is a Non-U.S. Holder and certain other conditions are met, or the exemption is otherwise established.

Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against the Non-U.S. Holder’s United States federal income tax liability provided that the required information is timely furnished to the IRS.

FEDERAL ESTATE TAX

Subject to applicable estate tax treaty provisions, notes held by an individual Non-U.S. Holder will not be included in such holder’s gross estate for U.S. federal estate tax purposes if the interest on the notes

122

United States federal income tax considerations for non-U.S. holders of the notes

qualifies for the “portfolio interest exemption” from U.S. federal income tax under the rules described above. The United States federal estate tax generally has been repealed for decedents dying in 2010. Unless extended by new legislation, however, the repeal expires and the United States federal estate tax is reinstated beginning January 1, 2011.

NON-U.S. HOLDERS OF THE NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS IN DETERMINING THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP, AND DISPOSITION OF THE NOTES, INCLUDING THE APPLICATION TO THEIR PARTICULAR SITUATIONS OF THE UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS DISCUSSED IN THIS PROSPECTUS AND THE APPLICATION OF STATE, LOCAL, FOREIGN, OR OTHER TAX LAWS.

123

Underwriting

Under the terms and subject to the conditions contained in an underwriting agreement dated the date hereof, the underwriters named below, have severally agreed to purchase, and we have agreed to sell to them, severally, the principal amount of notes listed opposite their respective names:

Underwriters	Principal Amount of Notes
UBS Warburg LLC	$
Salomon Smith Barney Inc.
	$	250,000,000

Under the terms and conditions of the underwriting agreement, the underwriters must buy all of the notes if they buy any of them. The underwriting agreement provides that the obligations of the underwriters pursuant thereto are subject to certain conditions. The underwriters will sell the notes to the public when and if the underwriters buy the notes from us.

The underwriters propose to offer the notes directly to the public initially at the offering price set forth on the cover page of this prospectus. The underwriters may offer the notes to securities dealers at that price less a concession not in excess of $       per $1,000 note. Securities dealers may reallow a concession not in excess of $       per $1,000 note on sales to certain other brokers or dealers. The underwriters reserve the right to reject any order for the purchase of the notes. If all of the notes are not sold at the public offering price, the underwriters may change the offering price and other selling terms.

The following table shows the underwriters’ discounts and commissions we have agreed to pay to the underwriters in connection with this offering:

Per $1,000 note	$
Total	$

We have been advised by the underwriters that they intend to make a market in the notes but they are not obligated to do so and may stop their market making at any time. Liquidity of the trading markets for the notes cannot be assured.

In order to facilitate the offering of the notes, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the notes. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the notes for their own accounts. In addition, to cover over-allotments or to stabilize the price of the notes, the underwriters may bid for, and purchase, the notes in the open market. Finally, the underwriters may reclaim selling concessions allowed to a particular dealer for distributing the notes in the offering if the dealer repurchases previously distributed notes in transactions to cover short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the notes above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. These transactions may be effected in the over-the-counter market or elsewhere.

We estimate that the expenses we will incur in connection with the sale of the notes, other than underwriting discounts, will be $1.8 million (this amount includes $0.8 million expensed in the year ended 2002). This estimate includes expenses relating to the filing fee for the registration statement, printing, rating agency fees, trustees’ fees and accounting and legal fees, among other expenses.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933.

In the ordinary course of their respective businesses, the underwriters and certain of their affiliates have in the past and may in the future engage in investment and commercial banking or other transactions of a financial nature with us or our affiliates, including the provision of certain advisory services and the making of loans to us and our affiliates.

124

Legal matters

The validity of the notes offered hereby will be passed upon for us by Irell & Manella LLP, Newport Beach, California. Richard Sherman, Esq., a partner in Irell & Manella LLP, is the trustee of The William Lyon Harwell Trust which beneficially owns 1,749,259 shares of common stock of the Registrant. William Harwell Lyon, a director of the Registrant and an employee of a wholly-owned subsidiary of the Registrant, is the sole beneficiary of The William Lyon Harwell Trust. Certain legal matters will be passed upon for the underwriters by Cahill Gordon & Reindel, New York, New York.

Experts

Our financial statements appearing and incorporated by reference in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, to the extent indicated in their reports thereon also appearing elsewhere herein and incorporated by reference. Such financial statements have been included herein and incorporated herein by reference in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.

Where you can find more information

We are subject to the information reporting requirements of the Exchange Act. You may read our reports and other filings at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain further information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You also may request copies of those documents at prescribed rates by writing to the SEC. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The site’s address is http://www.sec.gov. You also may request copies of our documents, which will be provided to you at no cost, by writing or telephoning us as follows: Corporate Secretary, William Lyon Homes, 4490 Von Karman Avenue, Newport Beach, California 92660, telephone (949) 833-3600. Our internet address is www.lyonhomes.com. Information provided by our website shall not be deemed to be incorporated by reference into, and shall not be considered a part of, this prospectus.

Incorporation of certain documents by reference

The SEC allows us to ‘‘incorporate by reference’’ the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus and any information that we file later with the SEC will automatically update and supercede this information. We are incorporating by reference Delaware Lyon’s Annual Report on Form 10-K for the year ended December 31, 2002.

All documents that Delaware Lyon files with the SEC, pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this prospectus and prior to the termination of the offering of the notes offered by this prospectus, shall be deemed to be incorporated by reference into, and to be a part of, this prospectus from the date such documents are filed with the SEC.

Any statements contained in this prospectus or in a document incorporated or deemed to be incorporated by reference into this prospectus will be deemed to be modified or superceded for purposes of this prospectus to the extent that a statement contained in this prospectus or any other subsequently filed document that is deemed to be incorporated by reference into this prospectus modifies or supercedes the statement. Any statement so modified or superceded will not be deemed, except as so modified or superceded, to constitute a part of this prospectus.

You may request, and we will provide, a copy of these filings, at no cost to you, by writing or telephoning us at the following address: William Lyon Homes, 4490 Von Karman Avenue, Newport Beach, CA 92660, (949) 833-3600.

125

INDEX TO FINANCIAL STATEMENTS

	Page
William Lyon Homes
Report of Independent Auditors	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Income	F-4
Consolidated Statements of Stockholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7

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.

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

William Lyon Homes

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

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

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

/S/    ERNST & YOUNG LLP

Irvine, California

February 10, 2003

F-2

William Lyon Homes

CONSOLIDATED BALANCE SHEETS

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

	December 31,
	2002		2001
ASSETS
Cash and cash equivalents	$	16,694	$	19,751
Receivables — Note 2		28,734		26,224
Real estate inventories — Note 3		491,952		307,335
Investments in and advances to unconsolidated joint ventures — Note 4		65,404		66,753
Property and equipment, less accumulated depreciation of $5,435 and $4,309 at December 31, 2002 and 2001, respectively		2,131		2,171
Deferred loan costs		1,341		2,831
Goodwill — Note 1		5,896		5,896
Other assets		5,429		2,748
	$	617,581	$	433,709
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	34,881	$	19,346
Accrued expenses		54,312		41,492
Notes payable — Note 5		195,786		151,191
12 1/2% Senior Notes due July 1, 2003 — Note 5		70,279		70,279
		355,258		282,308
Minority interest in consolidated joint ventures — Note 4		80,647		784
Commitments and contingencies — Note 10
Stockholders’ equity — Note 7
Common stock, par value $.01 per share; 30,000,000 shares authorized; 9,728,747 and 10,619,399 shares issued and outstanding at December 31, 2002 and 2001, respectively		97		106
Additional paid-in capital		108,592		127,035
Retained earnings		72,987		23,476
		181,676		150,617
	$	617,581	$	433,709

See accompanying notes.

F-3

William Lyon Homes

CONSOLIDATED STATEMENTS OF INCOME

(in thousands except per common share amounts)

	Year Ended December 31,
	2002			2001			2000
Operating revenue
Home sales	$	593,762		$	452,002		$	403,850
Lots, land and other sales		8,648			7,054			3,016
Management fees — Note 1		10,892			9,127			10,456
		613,302			468,183			417,322
Operating costs
Cost of sales — homes		(504,330	)		(382,608	)		(335,891	)
Cost of sales — lots, land and other		(9,404	)		(5,158	)		(3,378	)
Sales and marketing		(22,862	)		(18,149	)		(16,515	)
General and administrative		(39,366	)		(37,171	)		(35,348	)
Amortization of goodwill — Note 1		—			(1,242	)		(1,244	)
		(575,962	)		(444,328	)		(392,376	)
Equity in income of unconsolidated joint ventures — Note 4		27,748			22,384			24,416
Operating income		65,088			46,239			49,362
Interest expense, net of amounts capitalized — Note 5		—			(227	)		(5,557	)
Other income (expense), net — Note 8		2,693			7,513			7,324
Income before income taxes and extraordinary item		67,781			53,525			51,129
Provision for income taxes — Notes 4 and 10
Income taxes — benefit credited to paid-in capital		—			—			(9,287	)
Income taxes — net of benefit		(18,270	)		(5,847	)		(3,070	)
Income before extraordinary item		49,511			47,678			38,772
Extraordinary item — gain from retirement of debt, net of applicable income taxes — Notes 1, 7 and 8		—			—			496
Net income	$	49,511		$	47,678		$	39,268
Basic earnings per common share: — Note 1
Before extraordinary item	$	4.85		$	4.50		$	3.69
Extraordinary item		—			—			0.05
After extraordinary item	$	4.85		$	4.50		$	3.74
Diluted earnings per common share: — Note 1
Before extraordinary item	$	4.73		$	4.44		$	3.69
Extraordinary item		—			—			0.05
After extraordinary item	$	4.73		$	4.44		$	3.74

See accompanying notes.

F-4

William Lyon Homes

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock					Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)
	Shares		Amount									Total
Balance—December 31, 1999	10,439		$	104		$	116,667		$	(63,470	)	$	53,301
Issuance of common stock upon exercise of stock options—Note 6	131			2			654			—			656
Net income for the year	—			—			—			39,268			39,268
Income tax benefits related to temporary differences existing prior to the quasi-reorganization—Notes 1 and 7	—			—			9,287			—			9,287
Balance—December 31, 2000	10,570			106			126,608			(24,202	)		102,512
Issuance of common stock upon exercise of stock options—Note 6	49			—			427			—			427
Net income for the year	—			—			—			47,678			47,678
Balance—December 31, 2001	10,619			106			127,035			23,476			150,617
Issuance of common stock upon exercise of stock options—Note 6	128			1			1,117			—			1,118
Purchase and retirement of common stock—Note 6	(1,018	)		(10	)		(19,560	)		—			(19,570	)
Net income for the year	—			—			—			49,511			49,511
Balance—December 31, 2002	9,729		$	97		$	108,592		$	72,987		$	181,676

See accompanying notes.

F-5

William Lyon Homes

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2002			2001			2000
Operating activities
Net income	$	49,511		$	47,678		$	39,268
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		1,355			2,519			2,499
Equity in income of unconsolidated joint ventures		(27,748	)		(22,384	)		(24,416	)
Extraordinary gain on repurchase of 12 1/2% Senior Notes		—			—			(561	)
Provision for income taxes		18,270			5,847			12,383
Net changes in operating assets and liabilities:
Receivables		(3,767	)		2,480			(113	)
Real estate inventories		(23,126	)		(31,185	)		(29,378	)
Deferred loan costs		1,490			(2,077	)		841
Other assets		(2,681	)		(93	)		(392	)
Accounts payable		8,467			(6,416	)		10,109
Accrued expenses		(5,580	)		1,333			(899	)
Net cash provided by (used in) operating activities		16,191			(2,298	)		9,341
Investing activities
Investment in and advances to unconsolidated joint ventures		(26,475	)		(30,547	)		(20,600	)
Distributions from unconsolidated joint ventures		43,074			32,947			45,018
Mortgage notes receivable originations/issuances		(333,029	)		(220,505	)		(116,773	)
Mortgage notes receivable sales/repayments		328,821			214,636			113,474
Purchases of property and equipment		(1,315	)		(630	)		(1,890	)
Net cash provided by (used in) investing activities		11,076			(4,099	)		19,229
Financing activities
Proceeds from borrowings on notes payable		913,599			687,641			467,446
Principal payments on notes payable		(920,029	)		(669,709	)		(462,008	)
Repurchase of 12 1/2% Senior Notes		—			(51,637	)		(22,107	)
Reissuance of 12 1/2% Senior Notes		—			44,715			—
Common stock issued for exercised options		1,118			427			656
Common stock purchased		(19,570	)		—			—
Minority interest distributions, net		(5,442	)		—			—
Net cash (used in) provided by financing activities		(30,324	)		11,437			(16,013	)
Net (decrease) increase in cash and cash equivalents		(3,057	)		5,040			12,557
Cash and cash equivalents—beginning of year		19,751			14,711			2,154
Cash and cash equivalents—end of year	$	16,694		$	19,751		$	14,711
Supplemental disclosures of cash flow and non-cash activities
Cash paid during the period for interest, net of amounts capitalized	$	—		$	—		$	5,304
Issuance of notes payable for land acquisitions	$	51,025		$	43,550		$	10,042
Investment in joint venture in connection with contribution of land to joint venture	$	2,000		$	1,100		$	2,749
Debt assumed by joint venture in connection with contribution of land to joint venture	$	—		$	—		$	2,401

See accompanying notes.

F-6

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

Operations

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

Basis of Presentation

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

Segment Information

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

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

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

Real Estate Inventories and Related Indebtedness

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

F-7

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

	December 31,
	2002			2001			2000
Warranty liability, beginning of year	$	2,598		$	2,885		$	3,125
Warranty provision during year		5,167			4,156			4,132
Warranty settlements during year		(3,478	)		(4,443	)		(4,372	)
Warranty liability, end of year	$	4,287		$	2,598		$	2,885

Interest incurred under the Revolving Credit Facilities, the 12 ¹/2% Senior Notes and other notes payable, as more fully discussed in Note 5, is capitalized to qualifying real estate projects under development. Any additional interest charges related to real estate projects not under development are expensed in the period incurred.

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

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

Property and Equipment

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

F-8

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Deferred Loan Costs

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

Goodwill

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

	Year Ended December 31,
	2001	2000
Net income, as reported	$47,678	$39,268
Amortization of goodwill, net of tax	1,106	943
Net income, as adjusted	$48,784	$40,211
Earnings per common share, as adjusted:
Basic	$4.61	$3.83
Diluted	$4.54	$3.83

Sales and Profit Recognition

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

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

F-9

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

the related lease and earns income on the partial recourse note receivable at LIBOR plus 4.750% (6.13% at December 31, 2002).

Income Taxes

Income taxes are accounted for under the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Effective as of January 1, 1994, the Company completed a capital restructuring and quasi-reorganization. The quasi-reorganization resulted in the adjustment of assets and liabilities to estimated fair values and the elimination of an accumulated deficit effective January 1, 1994. Income tax benefits resulting from the utilization of net operating loss and other carryforwards existing at January 1, 1994 and temporary differences existing prior to or resulting from the quasi-reorganization, are excluded from the results of operations and credited to paid-in capital. During the year ended December 31, 2000, income tax benefits of $9,287,000 were excluded from results of operations and not reflected as a reduction to the Company’s provision for income taxes but credited directly to paid-in capital.

Financial Instruments

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

For those instruments, as defined under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, for which it is practical to estimate fair value, management has determined that the carrying amounts of the Company’s financial instruments approximate their fair value at December 31, 2002.

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

Cash and Cash Equivalents

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

Management Fees

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

Basic and Diluted Earnings Per Common Share

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

F-10

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

year ended December 31, 2001 are based on 10,583,564 and 10,739,540 shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the year ended December 31, 2000 are based on 10,499,917 and 10,503,572 shares of common stock outstanding, respectively.

Stock-Based Compensation

At December 31, 2002, the Company had stock plans, which are described more fully in Note 6. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per common share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement No. 123”) to stock-based employee plans (in thousands, except per common share amounts):

	Year Ended December 31
	2002			2001			2000
Net income, as reported	$	49,511		$	47,678		$	39,268
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(937	)		(916	)		(576	)
Net income, as adjusted	$	48,574		$	46,762		$	38,692
Earnings per common share:
Basic—as reported		$4.85			$4.50			$3.74
Basic—as adjusted		$4.76			$4.42			$3.68
Diluted—as reported		$4.73			$4.44			$3.74
Diluted—as adjusted		$4.64			$4.35			$3.68

Use of Estimates

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

Impact of New Accounting Pronouncements

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

F-11

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

Reclassifications

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

F-12

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 2—Receivables

Receivables consist of the following (in thousands):

	December 31,
	2002		2001
Notes receivable:
First trust deed mortgage notes receivable, pledged as collateral for revolving mortgage warehouse credit facility	$	18,139	$	10,985
Notes receivable from sale and related leaseback of 56 model homes which is accounted for on the cost recovery method (Note 1)		1,379		2,278
Other notes receivable		—		2,046
		19,518		15,309
Receivables from affiliates for management fees, cost reimbursements and other		3,226		6,573
Other receivables—primarily escrow proceeds		5,990		4,342
	$	28,734	$	26,224

Note 3—Real estate inventories

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

	December 31, 2002
Division	Deposits, Land and Construction in Progress		Completed Inventory, Including Models and Completed Lots Held for Sale		Total
Southern California	$	108,176	$	8,999	$	117,175
San Diego		83,699		2,847		86,546
Northern California		172,780		9,801		182,581
Arizona		39,664		2,001		41,665
Nevada		62,636		1,249		63,885
Other		100		—		100
	$	467,055	$	24,897	$	491,952
	December 31, 2001
Division	Deposits, Land and Construction In Progress		Completed Inventory, Including Models and Completed Lots Held for Sale		Total
Southern California	$	82,504	$	10,231	$	92,735
San Diego		55,678		10,459		66,137
Northern California		62,541		3,978		66,519
Arizona		42,685		2,648		45,333
Nevada		33,491		2,262		35,753
Other		858		—		858
	$	277,757	$	29,578	$	307,335

F-13

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 4— Investments in and Advances to Unconsolidated Joint Ventures

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

Condensed Combined Balance Sheets

(in thousands)

	December 31,
	2002		2001
ASSETS
Cash and cash equivalents	$	18,023	$	9,404
Receivables		13,017		5,711
Real estate inventories		234,896		294,698
	$	265,936	$	309,813
LIABILITIES AND OWNERS’ CAPITAL
Accounts payable	$	14,640	$	21,931
Accrued expenses		4,535		4,288
Notes payable		90,086		72,344
Advances from William Lyon Homes		7,498		11,768
		116,759		110,331
Owners’ Capital
William Lyon Homes		57,906		54,985
Others		91,271		144,497
		149,177		199,482
	$	265,936	$	309,813

F-14

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Condensed Combined Statements Of Income

(in thousands)

	Year Ended December 31,
	2002			2001			2000
Operating revenue
Home sales	$	362,697		$	316,098		$	367,724
Land sale		17,079			5,371			7,128
		379,776			321,469			374,852
Operating costs
Cost of sales — homes		(298,838	)		(258,997	)		(307,215	)
Cost of sales — land		(13,542	)		(4,214	)		(7,128	)
Sales and marketing		(10,814	)		(10,609	)		(11,567	)
Operating income		56,582			47,649			48,942
Other income, net		83			295			581
Net income	$	56,665		$	47,944		$	49,523
Allocation to owners
William Lyon Homes	$	27,748		$	22,384		$	24,416
Others		28,917			25,560			25,107
	$	56,665		$	47,944		$	49,523

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 returns of partners’ capital, approximately 50% of the profits and cash flows from joint ventures.

Certain joint ventures have obtained financing from construction lenders which amounted to $90,086,000 at December 31, 2002. As common practice required by commercial lenders, all of the joint ventures that have obtained financing are obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at the time. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance. All of the joint ventures that have obtained such financing are in the form of limited partnerships of which the Company is the general partner. While historically all liabilities of these partnerships have been satisfied out of the assets of such partnerships and while the Company believes that this will continue in the future, the Company, as general partner, is potentially responsible for all liabilities and indebtedness of these partnerships. In addition, the Company has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. The Company has also provided completion guarantees and repayment guarantees for some of the limited partnerships under their credit facilities. The repayment guarantees total $22,312,000 as of December 31, 2002 and only become effective upon repayment of the outstanding 12 ¹/2% Senior Notes.

During the year ended December 31, 2002, one of the joint ventures in which the Company is a general partner completed a land sale to the Company for $17,079,000 resulting in a profit of approximately

F-15

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

$3,537,000, all of which was allocated to the Company’s outside partner as preferred return in accordance with the joint venture agreement.

During the year ended December 31, 2002, one of the Company’s existing unconsolidated joint ventures (“Existing Venture”) was restructured such that the Company is required to purchase the 538 lots owned by the Existing Venture on a specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the outside partner of the Existing Venture (estimated to be $178,578,000, including an estimated preferred return of $36,911,000). During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64,468,000, which includes a $12,493,000 preferred return to the outside partner of the Existing Venture. The 242 lots were purchased by a newly formed joint venture (“New Venture”) between the Company and an outside partner. The Company is required to purchase the 242 lots owned by the New Venture on a specified takedown basis through May 15, 2004 at a purchase price equal to $74,210,000 plus a 13 ¹/2% preferred return on invested capital to the outside partner of the New Venture. Because the Company is required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company now controls both ventures, the financial statements of both ventures have been consolidated with the Company’s financial statements as of December 31, 2002, including real estate inventories of $101,849,000 and minority interest in consolidated joint ventures of $80,647,000. During the year ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for $19,765,000, which includes a $3,953,000 preferred return to the outside partner of the Existing Venture. The 44 lots were purchased through a land banking arrangement (see Note 10 for additional information regarding the Company’s land banking arrangements). The intercompany sale and related profit from the 242 lots and the 44 lots have been eliminated in consolidation.

Note 5—Notes Payable and 12 ¹/2% Senior Notes

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

	December 31,
	2002		2001
Notes payable:
Revolving Credit Facilities	$	118,068	$	76,053
Construction notes payable		25,218		21,795
Purchase money notes payable—land acquisitions		28,861		34,358
Collateralized mortgage obligations under revolving mortgage warehouse credit facility, secured by first trust deed mortgage notes receivable		18,139		10,985
Unsecured line of credit		5,500		8,000
		195,786		151,191
12 1/2% Senior Notes due July 1, 2003		70,279		70,279
	$	266,065	$	221,470

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

	Year Ended December 31,
	2002			2001			2000
Interest incurred	$	26,783		$	21,908		$	26,012
Interest capitalized		(26,783	)		(21,681	)		(20,455	)
Interest expense	$	—		$	227		$	5,557

F-16

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Senior Notes

As of December 31, 2002, the Company’s outstanding balance under its 12 ¹/2% Senior Notes was $70,279,000. On May 1, 2001, the Company completed a consent solicitation with respect to the 12 ¹/2% Senior Notes and received consents from holders of $39,279,000 of the then outstanding notes to extend the maturity date from July 1, 2001 to July 1, 2003 and to make certain amendments to the note covenants. Although the Company initially intended to accept consents from no more than 50% of holders, the Company elected to accept additional consents, as contemplated by the consent solicitation documents. The consenting holders received a fee of 4% of the principal balance. Subsequently, during May and June 2001, the Company had also repurchased $31,444,000 of the Senior Notes from non-consenting holders.

In June 2001, General William Lyon, Chairman and Chief Executive Officer of the Company, and a trust for which his son William Harwell Lyon is a beneficiary, purchased from the Company at par $30,000,000 of the 12 ¹/2% Senior Notes. William H. McFarland, another member of the Company’s Board of Directors, purchased from the Company at par $1,000,000 of the 12 ¹/2% Senior Notes. In parity with holders consenting during the consent solicitation, these Directors received a consent fee of 4% of the principal balance and consented to the amendments effected by the Company’s consent solicitation statement dated February 28, 2001.

In July 2001, the Company repaid all of the remaining 12 ¹/2% Senior Notes which matured on July 1, 2001 amounting to $5,893,000.

In April, May and November 2000, the Company purchased $22,799,000 principal amount of its outstanding 12 ¹/2% Senior Notes at a cost of $22,107,000. The net gain resulting from the purchase was $496,000 after giving effect to income taxes of $26,000 and amortization of related loan costs of $128,000. Such gain is reflected as an extraordinary item in the Company’s results of operations for the year ended December 31, 2000.

The 12 ¹/2% Senior Notes due July 1, 2001 are obligations of William Lyon Homes, a Delaware corporation (“Delaware Lyon”), and are unconditionally guaranteed on a senior basis by William Lyon Homes, Inc., a California corporation and a wholly-owned subsidiary of Delaware Lyon. However, William Lyon Homes, Inc. has granted liens on substantially all of its assets as security for its obligations under the Revolving Credit Facilities and other loans. Because the William Lyon Homes, Inc. guarantee is not secured, holders of the 12 ¹/2% Senior Notes are effectively junior to borrowings under the Revolving Credit Facilities with respect to such assets. Delaware Lyon and its consolidated subsidiaries are referred to collectively herein as the “Company.” Interest on the 12 ¹/2% Senior Notes is payable on January 1 and July 1 of each year.

The 12 ¹/2% Senior Notes are senior obligations of Delaware Lyon and rank pari passu in right of payment to all existing and future unsecured indebtedness of Delaware Lyon, and senior in right of payment to all future indebtedness of the Company which by its terms is subordinated to the 12 ¹/2% Senior Notes.

Upon certain changes of control as described in the Indenture, Delaware Lyon must offer to repurchase the 12 ¹/2% Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase.

The Indenture governing the 12 ¹/2% Senior Notes restricts Delaware Lyon and certain of its subsidiaries with respect to, among other things: (i) the payment of dividends on and redemptions of capital stock,

F-17

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(ii) the incurrence of indebtedness or the issuance of preferred stock, (iii) the creation of certain liens, (iv) consolidations or mergers with or transfer of all or substantially all of its assets and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions.

As of December 31, 2002, the outstanding 12 ¹/2% Senior Notes with a face value of $70,279,000 have a fair value of approximately the face value, in the opinion of the Company’s management.

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

CONSOLIDATING BALANCE SHEET

December 31, 2002

(in thousands)

	Unconsolidated
	Delaware Lyon		William Lyon Homes, Inc.			Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	13,890		$	2,804	$	—		$	16,694
Receivables		—		9,468			19,266		—			28,734
Real estate inventories		—		491,906			46		—			491,952
Investments in and advances to unconsolidated joint ventures		—		65,209			195		—			65,404
Property and equipment, net		—		1,962			169		—			2,131
Deferred loan costs		586		755			—		—			1,341
Goodwill		—		5,896			—		—			5,896
Other assets		—		4,519			910		—			5,429
Investments in subsidiaries		180,033		(1,222	)		—		(178,811	)		—
Intercompany receivables		79,308		7,972			—		(87,280	)		—
	$	259,927	$	600,355		$	23,390	$	(266,091	)	$	617,581
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	34,311		$	570	$	—		$	34,881
Accrued expenses		—		52,736			1,576		—			54,312
Notes payable		—		177,647			18,139		—			195,786
12 1/2% Senior Notes		70,279		—			—		—			70,279
Intercompany payables		7,972		79,308			—		(87,280	)		—
Total liabilities		78,251		344,002			20,285		(87,280	)		355,258
Minority interest in consolidated joint ventures		—		80,647			—		—			80,647
Stockholders’ equity		181,676		175,706			3,105		(178,811	)		181,676
	$	259,927	$	600,355		$	23,390	$	(266,091	)	$	617,581

F-18

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING BALANCE SHEET

December 31, 2001

(in thousands)

	Unconsolidated
	Delaware Lyon		William Lyon Homes, Inc.		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	17,270	$	2,481	$	—		$	19,751
Receivables		—		9,736		16,488		—			26,224
Real estate inventories		—		299,932		7,403		—			307,335
Investments in and advances to unconsolidated joint ventures		—		25,359		41,394		—			66,753
Property and equipment, net		—		1,944		227		—			2,171
Deferred loan costs		1,993		838		—		—			2,831
Goodwill		—		5,896		—		—			5,896
Other assets		—		2,691		57		—			2,748
Investments in subsidiaries		147,567		49,174		—		(196,741	)		—
Intercompany receivables		79,308		7,972		—		(87,280	)		—
	$	228,868	$	420,812	$	68,050	$	(284,021	)	$	433,709
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	19,114	$	232	$	—		$	19,346
Accrued expenses		—		38,956		2,536		—			41,492
Notes payable		—		139,168		12,023		—			151,191
12 1/2% Senior Notes		70,279		—		—		—			70,279
Intercompany payables		7,972		79,308		—		(87,280	)		—
Total liabilities		78,251		276,546		14,791		(87,280	)		282,308
Minority interest in consolidated joint ventures		—		784		—		—			784
Stockholders’ equity		150,617		143,482		53,259		(196,741	)		150,617
	$	228,868	$	420,812	$	68,050	$	(284,021	)	$	433,709

F-19

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2002

(in thousands)

	Unconsolidated
	Delaware Lyon		William Lyon Homes, Inc.			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	536,178		$	66,232		$	—		$	602,410
Management fees		—		9,202			1,690			—			10,892
		—		545,380			67,922			—			613,302
Operating costs
Cost of sales		—		(454,291	)		(59,443	)		—			(513,734	)
Sales and marketing		—		(19,796	)		(3,066	)		—			(22,862	)
General and administrative		—		(39,016	)		(350	)		—			(39,366	)
		—		(513,103	)		(62,859	)		—			(575,962	)
Equity in income of unconsolidated joint ventures		—		23,154			4,594			—			27,748
Income from subsidiaries		49,511		9,906			—			(59,417	)		—
Operating income		49,511		65,337			9,657			(59,417	)		65,088
Other income (expense), net		—		(2,297	)		4,990			—			2,693
Income before income taxes and extraordinary item		49,511		63,040			14,647			(59,417	)		67,781
Provision for income taxes
Income taxes — net of benefit		—		(18,270	)		—			—			(18,270	)
Net income	$	49,511	$	44,770		$	14,647		$	(59,417	)	$	49,511

F-20

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2001

(in thousands)

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

F-21

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2000

(in thousands)

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

F-22

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2002

(in thousands)

	Unconsolidated
	Delaware Lyon			William Lyon Homes, Inc.			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net income	$	49,511		$	44,770		$	14,647		$	(59,417	)	$	49,511
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		—			1,235			120			—			1,355
Equity in income of unconsolidated joint ventures		—			(23,154	)		(4,594	)		—			(27,748	)
Income from subsidiaries		(49,511	)		(9,906	)		—			59,417			—
Provision for income taxes		—			18,270			—			—			18,270
Net changes in operating assets and liabilities:
Receivables		—			(8,142	)		4,375			—			(3,767	)
Intercompany receivables/payables		(1,407	)		1,407			—			—			—
Real estate inventories		—			(30,483	)		7,357			—			(23,126	)
Deferred loan costs		1,407			83			—			—			1,490
Other assets		—			(1,828	)		(853	)		—			(2,681	)
Accounts payable		—			8,129			338			—			8,467
Accrued expenses		—			(5,404	)		(176	)		—			(5,580	)
Net cash provided by operating activities		—			(5,023	)		21,214			—			16,191
Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			(29,194	)		45,793			—			16,599
Net change in mortgage notes receivable		—			2,945			(7,153	)		—			(4,208	)
Purchases of property and equipment		—			(1,253	)		(62	)		—			(1,315	)
Investment in subsidiaries		—			60,302			—			(60,302	)		—
Advances to affiliates		18,452			—			—			(18,452	)		—
Net cash provided by investing activities		18,452			32,800			38,578			(78,754	)		11,076
Financing activities:
Proceeds from borrowings on notes payable		—			580,585			333,014			—			913,599
Principal payments on notes payable		—			(593,131	)		(326,898	)		—			(920,029	)
Distributions to/contributions from shareholders		—			(12,546	)		(64,801	)		77,347			—
Common stock issued for exercised options		1,118						—						1,118
Common stock purchased		(19,570	)		—			—			—			(19,570	)
Minority interest distributions, net		—			(4,658	)		(784	)		—			(5,442	)
Advances from affiliates		—			(1,407	)		—			1,407			—
Net cash used in financing activities		(18,452	)		(31,157	)		(59,469	)		78,754			(30,324	)
Net decrease in cash and cash equivalents		—			(3,380	)		323			—			(3,057	)
Cash and cash equivalents at beginning of year		—			17,270			2,481			—			19,751
Cash and cash equivalents at end of year	$	—		$	13,890		$	2,804		$	—		$	16,694

F-23

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2001

(in thousands)

	Unconsolidated
	Delaware Lyon			William Lyon Homes, Inc.			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net income	$	47,678		$	44,215		$	26,750		$	(70,965	)	$	47,678
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		—			2,399			120			—			2,519
Equity in income of unconsolidated joint ventures		—			(6,405	)		(15,979	)		—			(22,384	)
Income from subsidiaries		(47,678	)		(23,287	)		—			70,965			—
Provision for income taxes		—			5,847			—			—			5,847
Net changes in operating assets and liabilities:
Receivables		—			(2,195	)		4,675			—			2,480
Intercompany receivables/payables		1,812			(1,812	)		—			—			—
Real estate inventories		—			(24,279	)		(6,906	)		—			(31,185	)
Deferred loan costs		(1,812	)		(265	)		—			—			(2,077	)
Other assets		—			(129	)		36			—			(93	)
Accounts payable		—			(6,401	)		(15	)		—			(6,416	)
Accrued expenses		—			590			743			—			1,333
Net cash used in operating activities		—			(11,722	)		9,424			—			(2,298	)
Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			(846	)		3,246			—			2,400
Net change in mortgage notes receivable		—			—			(5,869	)		—			(5,869	)
Purchases of property and equipment		—			(537	)		(93	)		—			(630	)
Investment in subsidiaries		—			8,775			—			(8,775	)		—
Advances to affiliates		6,495			—			—			(6,495	)		—
Net cash used in investing activities		6,495			7,392			(2,716	)		(15,270	)		(4,099	)
Financing activities:
Proceeds from borrowings on notes payable		—			468,144			219,497			—			687,641
Principal payments on notes payable		—			(455,072	)		(214,637	)		—			(669,709	)
Repurchase of 12 1/2% Senior Notes		(51,637	)		—			—			—			(51,637	)
Reissuance of 12 1/2% Senior Notes		44,715			—			—			—			44,715
Distributions to/contributions from shareholders		—			3,608			(11,052	)		7,444			—
Common stock issued for exercised options		427			—			—			—			427
Advances from affiliates		—			(7,826	)		—			7,826			—
Net cash provided by financing activities		(6,495	)		8,854			(6,192	)		15,270			11,437
Net increase in cash and cash equivalents		—			4,524			516			—			5,040
Cash and cash equivalents at beginning of year		—			12,746			1,965			—			14,711
Cash and cash equivalents at end of year	$	—		$	17,270		$	2,481		$	—		$	19,751

F-24

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2000

(in thousands)

	Unconsolidated
	Delaware Lyon			William Lyon Homes, Inc.			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net income	$	39,268		$	37,010		$	34,588		$	(71,598	)	$	39,268
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		—			2,412			87			—			2,499
Equity in income of unconsolidated joint ventures		—			(3,251	)		(21,165	)		—			(24,416	)
Income from subsidiaries		(38,772	)		(32,826	)		—			71,598			—
Extraordinary gain on repurchase of Senior Notes		(561	)		—			—			—			(561	)
Provision for income taxes		—			12,383			—			—			12,383
Net changes in operating assets and liabilities:
Receivables		—			(1,391	)		1,278			—			(113	)
Intercompany receivables/payables		(327	)		327			—			—			—
Real estate inventories		—			(34,872	)		5,494			—			(29,378	)
Deferred loan costs		392			449			—			—			841
Other assets		—			(321	)		(71	)		—			(392	)
Accounts payable		—			10,300			(191	)		—			10,109
Accrued expenses		—			(994	)		95			—			(899	)
Net cash provided by operating activities		—			(10,774	)		20,115			—			9,341
Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			5,221			19,197			—			24,418
Net change in mortgage notes receivable		—			642			(3,941	)		—			(3,299	)
Purchases of property and equipment		—			(1,617	)		(273	)		—			(1,890	)
Investment in subsidiaries		—			37,983			—			(37,983	)		—
Advances to affiliates		21,451			—			—			(21,451	)		—
Net cash provided by investing activities		21,451			42,229			14,983			(59,434	)		19,229
Financing activities:
Proceeds from borrowings on notes payable		—			350,673			116,773			—			467,446
Principal payments on notes payable		—			(349,265	)		(112,743	)		—			(462,008	)
Repurchase of 12 1/2% Senior Notes		(22,107	)		—			—			—			(22,107	)
Distributions to/contributions from shareholders		—			646			(37,973	)		37,327			—
Common stock issued for exercised options		656			—			—			—			656
Advances from affiliates		—			(22,107	)		—			22,107			—
Net cash used in financing activities		(21,451	)		(20,053	)		(33,943	)		59,434			(16,013	)
Net increase in cash and cash equivalents		—			11,402			1,155			—			12,557
Cash and cash equivalents at beginning of year		—			1,344			810			—			2,154
Cash and cash equivalents at end of year	$	—		$	12,746		$	1,965		$	—		$	14,711

F-25

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revolving Credit Facilities

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

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

As a common practice required by commercial lenders, the Company is obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at any time. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance. The entire revolving credit facility balance is subject to these obligations as of December 31, 2002.

Unsecured Revolving Line

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

F-26

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Construction Notes Payable

At December 31, 2002, the Company had construction notes payable amounting to $25,218,000 related to various real estate projects. The notes are due as units close or at various dates on or before June 11, 2004 and bear interest at rates of prime plus 0.25% to 14%, with a weighted-average rate of 5.206% at December 31, 2002. As of December 31, 2002, $10,935,000 of the construction notes payable were subject to the loan-to-value or loan-to-cost ratio maintenance obligations described above.

Seller Financing

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

Revolving Mortgage Warehouse Credit Facility

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

Prime Interest Rates

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

Note 6—Stockholders’ equity

Stock Repurchase

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

F-27

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Stock Option Plans

Effective on May 9, 2000, the Company’s Board of Directors approved the William Lyon Homes 2000 Stock Incentive Plan (the “Plan”) and authorized an initial 1,000,000 shares of common stock to be reserved for issuance under the Plan. Under the Plan, options may be granted from time to time to key employees, officers, directors, consultants and advisors of the Company. The Plan is administered by the Stock Option Committee of the Board of Directors (the “Committee”). The Committee is generally empowered to interpret the Plan, prescribe rules and regulations relating thereto, determine the terms of the option agreements, amend them with the consent of the optionee, determine the employees to whom options are to be granted, and determine the number of shares subject to each option and the exercise price thereof. The per share exercise price for options will not be less than 100% of the fair market value of a share of common stock on the date the option is granted. The options will be exercisable for a term determined by the Committee, not to exceed ten years from the date of grant, and vest as follows: one year from date of grant—33 ¹/3%; two years from date of grant—33 ¹/3%; and three years from date of grant—33 ¹/3%.

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

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

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

F-28

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

estimated the fair value of the stock options issued in 2001 at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.00%; a dividend yield of 0.00%; a volatility factor for the market price of the Company’s common stock of 0.618; and a weighted average expected life of seven years for the stock options.

Incentive Compensation Plan

The Company’s Board of Directors has approved a Cash Bonus Plan for all of the Company’s full-time, salaried employees, including the Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”), Chief Financial Officer (“CFO”), Division Presidents, Executives, Managers, Field Construction Staff, and certain other employees. Under the terms of this plan, the CEO, the COO, and the CFO are eligible to receive bonuses based upon specified percentages of the Company’s pre-tax, pre-bonus income. Division Presidents are eligible to receive bonuses based upon specified percentages of their respective division pre-tax, pre-bonus income. All other participants are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income. Awards are recorded in the period earned, but are paid out over two years, with 75% paid out following the determination of bonus awards, and 25% paid out one year later. The deferred amount will be forfeited in the event of termination for any reason except retirement, death or disability.

Executive Deferred Compensation Plan

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

Note 7—Income taxes

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

	Year Ended December 31,
	2002			2001			2000
Current
Federal	$	(23,525	)	$	2,467		$	(1,063	)
State		(6,038	)		(3,318	)		(2,033	)
		(29,563	)		(851	)		(3,096	)
Deferred
Federal		9,656			(3,989	)		—
State		1,637			(1,007	)		—
		11,293			(4,996	)		—
Income tax benefits credited to additional paid-in capital		—			—			(9,287	)
	$	(18,270	)	$	(5,847	)	$	(12,383	)
Provision for income taxes before extraordinary item	$	(18,270	)	$	(5,847	)	$	(12,357	)
Provision for income taxes on extraordinary item		—			—			(26	)
	$	(18,270	)	$	(5,847	)	$	(12,383	)

F-29

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

	Year Ended December 31,
	2002			2001			2000
Provision for Federal income taxes at the statutory rate	$	(23,723	)	$	(18,734	)	$	(17,895	)
Provision for state income taxes, net of Federal income tax benefits		(2,860	)		(2,811	)		(1,321	)
Extraordinary item—gain from retirement of debt		—			—			(183	)
Valuation allowance for deferred tax asset		8,348			15,490			7,650
Other		(35	)		208			(634	)
	$	(18,270	)	$	(5,847	)	$	(12,383	)

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

	December 31,
	2002			2001
Deferred tax assets
Reserves deducted for financial reporting purposes not allowable for tax purposes	$	3,880		$	3,102
Compensation deductible for tax purposes when paid		2,802			2,082
Interest expensed for financial reporting purposes and capped for tax purposes		104			256
Net operating loss and alternative minimum tax credit carryovers		1,830			2,963
State income tax provisions deductible when paid for Federal tax purposes		1,780			816
Effect of book/tax differences for joint ventures		410			750
Valuation allowance		—			(9,969	)
		10,806			—
Deferred tax liabilities
Effect of book/tax differences for joint ventures		(4,509	)		(4,996	)
	$	6,297		$	(4,996	)

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

F-30

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Note 8—Other gains

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

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

Note 9—Related party transactions

The Company and certain members of the Company’s Board of Directors entered into certain transactions with respect to the Company’s 12 ¹/2% Senior Notes as described in Note 5.

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

On October 26, 2000, the Company’s Board of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 579 lots for a total purchase price of $12,581,000 from an entity controlled by William Lyon and William H. Lyon. The terms of the purchase agreement provide for an initial option payment of $1,000,000 and a rolling option takedown of the lots. Phase takedowns of approximately 20 lots each are anticipated to occur at two to three month intervals for each of several product types through September 2004. In addition, one-half of the net profits in excess of six percent from the development are to be paid to the seller. During the years ended December 31, 2002 and 2001, the Company purchased 183 and 143 lots, respectively, under this agreement for a total purchase price of $4,150,000 and $2,777,000, respectively. In addition, during the year ended December 31, 2002, payments in the amount of $1,614,000 were made for one-half of the net profits in excess of six percent from the development. This land acquisition qualifies as an affiliate transaction under the Company’s 12 ¹/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994 (“Indenture”). Pursuant to the terms of the Indenture, the Company has determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company has delivered to the Trustee under the Indenture a

F-31

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

F-32

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Note 10—Commitments and contingencies

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

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

The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers its right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit equal to 20% or less of the total purchase price. Additionally, the Company may be subject to other penalties if lots are not acquired. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots are not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. The deposits and penalties related to such land banking projects have been recorded in the accompanying balance sheet. The financial statements of these entities are not consolidated with the Company’s consolidated financial statements. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider, general housing market conditions and geographic preferences. Summary information with respect to the Company’s land banking arrangements is as follows as of December 31, 2002 (dollars in thousands):

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

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

F-33

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

assessments. Assessment district bonds issued after May 21, 1992 are accounted for under the provisions of 91-10, “Accounting for Special Assessment and Tax Increment Financing Entities” issued by the Emerging Issues Task Force of the Financial Accounting Standards Board on May 21, 1992, and recorded as liabilities in the Company’s consolidated balance sheet, if the amounts are fixed and determinable.

As of December 31, 2002, the Company had $4,014,000 of outstanding irrevocable standby letters of credit to guarantee the Company’s financial obligations under certain land banking arrangements and other contractual arrangements in the normal course of business. Letters of credit totaling $3,263,000 related to land banking arrangements are recorded on the accompanying balance sheet. The beneficiary may draw upon these letters of credit in the event of a contractual default by the Company relating to each respective obligation. These letters of credit have a stated term of 12 months and have varying maturities throughout 2003, at which time the Company may be required to renew to coincide with the term of the respective arrangement.

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

See Notes 4 and 5 for additional information relating to the Company’s guarantee arrangements.

F-34

William Lyon Homes

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 11—Unaudited summarized quarterly financial information

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

	Three Months Ended
	March 31, 2002			June 30, 2002			September 30, 2002			December 31, 2002
Sales	$	90,149		$	127,417		$	182,998		$	201,846
Other income, costs and expenses, net		(86,359	)		(117,559	)		(164,036	)		(166,675	)
Income before income taxes		3,790			9,858			18,962			35,171
Provision for income taxes		(677	)		(2,826	)		(5,212	)		(9,555	)
Net income	$	3,113		$	7,032		$	13,750		$	25,616
Basic earnings per common share	$	0.30		$	0.68		$	1.34		$	2.63
Diluted earnings per common share	$	0.29		$	0.66		$	1.30		$	2.56

	Three Months Ended
	March 31, 2001			June 30, 2001			September 30, 2001			December 31, 2001
Sales	$	72,455		$	105,222		$	107,629		$	173,750
Other income, costs and expenses, net		(65,662	)		(94,467	)		(94,483	)		(150,919	)
Income before income taxes		6,793			10,755			13,146			22,831
Provision for income taxes		(712	)		(1,137	)		(1,468	)		(2,530	)
Net income	$	6,081		$	9,618		$	11,678		$	20,301
Basic earnings per common share	$	0.58		$	0.91		$	1.10		$	1.91
Diluted earnings per common share	$	0.57		$	0.90		$	1.08		$	1.89
	Three Months Ended
	March 31, 2000			June 30, 2000			September 30, 2000			December 31, 2000
Sales	$	65,373		$	94,345		$	88,716		$	158,432
Other income, costs and expenses, net		(57,341	)		(82,903	)		(79,820	)		(135,673	)
Income before income taxes and extraordinary item		8,032			11,442			8,896			22,759
Provision for income taxes		(393	)		(4,271	)		(1,332	)		(6,361	)
Income before extraordinary item		7,639			7,171			7,564			16,398
Extraordinary item—gain from retirement of debt, net of applicable income taxes		—			496			—			—
Net income	$	7,639		$	7,667		$	7,564		$	16,398
Basic and diluted earnings per common share:
Before extraordinary item	$	0.73		$	0.68		$	0.72		$	1.56
Extraordinary item		—			0.05			—			—
After extraordinary item	$	0.73		$	0.73		$	0.72		$	1.56

F-35

$250,000,000

% Senior Notes due 2013

PROSPECTUS

            , 2003

UBS Warburg Salomon Smith Barney

PART II

Information Not Required In Prospectus

Item 14.    Other Expenses of Issuance and Distribution

The following table sets forth the various expenses, all of which will be borne by the Registrant, in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates except for the SEC registration fee and the NASD filing fee.

SEC registration fee	$	22,445
NASD filing fee		25,500
Rating Agency fees		100,000
Trustee fees and expenses		6,000
Accounting fees and expenses		215,000
Legal fees and expenses		870,000
Printing and Engraving fees and expenses		410,000
Miscellaneous		161,055
Total		$1,810,000	(1)

(1) Of this amount, $810,000 was expensed in 2002 as reflected in the income statement for the year ended December 31, 2002.

Item 15.    Indemnification of Directors and Officers

WILLIAM LYON HOMES

Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against amounts paid and expenses incurred in connection with an action or proceeding to which he or she is or is threatened to be made a party by reason of such position, if such person shall have acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal proceeding, if such person had no reasonable cause to believe his or her conduct was unlawful; provided that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the adjudicating court determines that such indemnification is proper under the circumstances.

Section 102(b)(7) of the Delaware General Corporation Law provides that a corporation may eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provisions shall not eliminate or limit the liability of a director (1) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under section 174 of the Delaware General Corporation Law, or (4) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring before the date when such provision becomes effective.

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Article VII of William Lyon Homes (“Delaware Lyon”) Certificate of Incorporation provides that no director of Delaware Lyon shall be personally liable to corporation or its stockholders for monetary damages for any breach of fiduciary duty by such a director as a director, provided, however, that a director shall be liable to the extent provided by applicable law (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which such director derived an improper personal benefit. No amendment to or repeal of Article VII of Delaware Lyon’s Certificate of Incorporation shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the Delaware General Corporation Law is amended to further eliminate or limit the personal liability of directors, the liability of a director of Delaware Lyon shall be limited or eliminated to the fullest extent permitted by the Delaware General Corporation Law, as amended. Delaware Lyon’s bylaws contain provisions substantially similar to those found in Article VII of Delaware Lyon’s Certificate of Incorporation.

Article IX of Delaware Lyon’s Certificate of Incorporation provides that each person who was or is made a party to or is threatened to be made a party to or is involuntarily involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that he or she is or was a director or officer of Delaware Lyon, or is or was serving (during his or her tenure as a director and/or an officer) at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, whether the basis of such Proceeding is an alleged action or inaction in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law (or other applicable law), as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection with such Proceeding. Such director or officer shall have the right to be paid by the corporation for expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law (or other applicable law) requires, the payment of such expenses in advance of the final disposition of any such Proceeding shall be made only upon receipt by the corporation of an undertaking by or on behalf of such director or officer to repay all amounts so advanced if it should be determined ultimately that he or she is not entitled to be indemnified under Article IX or otherwise. Delaware Lyon may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, including the right to be paid by the corporation the expenses incurred in defending any Proceeding in advance of its final disposition, to any employee or agent of the corporation to the fullest extent of the provisions of Article IX of the Delaware Lyon’s Certificate of Incorporation or otherwise with respect to the indemnification and advancement of expenses of directors and officers of the corporation. Delaware Lyon’s bylaws contain provisions substantially similar to those found in Article IX of Delaware Lyon’s Certificate of Incorporation.

Delaware Lyon has entered into indemnification agreements with certain of its directors and certain of its executive officers, among others, to provide them with the maximum indemnification allowed under Delaware Lyon’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 Delaware Lyon’s director, officer or employee, to the extent such indemnification is permitted by the laws of Delaware. Additionally, as permitted under Delaware General Corporation Law § 145(g), Delaware Lyon has obtained directors and officers liability insurance that provides insurance coverage for certain liabilities which may be incurred by the Delaware Lyon’s

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directors and officers in their capacity as such. The insurance obtained by Delaware Lyon also provides insurance coverage for certain liabilities which may be incurred by the directors and officers of the subsidiaries of Delaware Lyon in their capacities as such. None of the Guarantor Registrants have separately obtained directors and officers liability insurance.

WILLIAM LYON HOMES, INC.

The bylaws of William Lyon Homes, Inc. (“California Lyon”) contain various provisions regarding the indemnification of agents of the corporation. These provisions, which are substantially similar to California General Corporation Law §§ 317(a)-(f), read in their entirety as follows:

(a) For the purposes of this Section 5.06, “agent” means any person who is or was a director, officer, employee, or other agent of this corporation, or is or was serving at the request of this corporation as a director, officer, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of this corporation or of another enterprise at the request of such predecessor corporation; “proceeding” means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative, or investigative; and “expenses” includes, without limitation, attorneys’ fees and any expenses of establishing a right to indemnification under subparagraph (d) or (e) (3) of this section 5.06.

(b) The corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation) by reason of the fact that such person is or was an agent of the corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the corporation, and in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interest of the corporation or that the person had reasonable cause to believe that the person’s conduct was unlawful.

(c) The corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an agent of the corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. No indemnification shall be made under this subparagraph (c):

(1) In respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation in the performance of such person’s duty to the corporation, unless and only to the extent that the court in which such action was brought shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for the expenses which such court shall determine;

(2) Of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval; or

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(3) Of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval.

(d) To the extent that an agent of a corporation has been successful on the merits in defense of any proceeding referred to in subparagraph (b) or (c) or in defense of any claim, issue or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith.

(e) Except as provided in subparagraph (d) above, any indemnification shall be made by the corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in subparagraph (b) or (c), by:

(1) A majority vote of a quorum consisting of directors who are not parties to such proceeding;

(2) Approval of the shareholders, with the shares owned by the person to be indemnified not being entitled to vote thereon; or

(3) The court in which such proceeding is or was pending upon application made by the corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by the corporation.

(f) Expenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the agent to repay such amount unless it shall be determined ultimately that the agent is entitled to be indemnified as authorized in this section.

Additionally, as permitted under California General Corporation Law § 317(i), California Lyon’s bylaws state that California Lyon shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent’s status as such whether or not the corporation would have the power to indemnify the agent against such liability under other provisions of the bylaws.

CALIFORNIA GUARANTORS

Section 317 of the California General Corporation Law (the “CGCL”) allows a corporation, in certain circumstances, to indemnify its directors and officers against certain expenses (including attorneys’ fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with threatened, pending or completed civil, criminal, administrative or investigative actions, suits or proceedings (other than an action by or in the right of the corporation), in which such persons were or are parties, or are threatened to be made parties, by reason of the fact that they were or are directors or officers of the corporation, if such persons acted in good faith and in a manner they reasonably believed to be in the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. In addition, the corporation is in certain circumstances permitted to indemnify its directors and officers against certain expenses incurred in connection with the defense or settlement of a threatened, pending or completed action by or in the right of the corporation, and against amounts paid in settlement of any such action, if such persons acted in good faith and in a manner they believed to be in the best interests of the corporation and its shareholders, provided that the specified court approval is obtained.

Section 204(a)(10) of the CGCL allows a corporation to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of the corporation for breach of the director’s

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duty to the corporation, except for the liability of a director resulting from (i) acts or omissions involving intentional misconduct or a knowing and culpable violation of law, (ii) any transaction from which a director derived an improper personal benefit, (iii) acts or omissions showing a reckless disregard for the director’s duty to the corporation or its shareholders, (iv) acts or omissions constituting an unexcused pattern of inattention to the director’s duty, or (v) the making of an illegal distribution to shareholders or an illegal loan or guaranty.

PH-LP Ventures and PH Ventures—San Jose

The Articles of Incorporation and Bylaws for PH-LP Ventures and PH Ventures—San Jose authorize these corporations to indemnify their respective directors and officers through bylaw provisions, agreements, a vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the CGCL, subject only to the applicable limits set forth in Section 204 of the CGCL with respect to actions for breach of duty to a corporation and its shareholders.

The Articles of Incorporation and Bylaws for PH-LP Ventures and PH Ventures-San Jose also state that liability of the directors of these corporations for monetary damages shall be eliminated to the fullest extent permissible under California law.

California Equity Funding, Inc., Duxford Financial, Inc., Sycamore CC, Inc. , Presley CMR, Inc., HSP, Inc. and Presley Homes

The Articles of Incorporation for California Equity Funding, Inc., Duxford Financial, Inc., Sycamore CC, Inc., Presley CMR, Inc., HSP, Inc. and Presley Homes authorize these corporations to indemnify their respective officers and directors to the fullest extent permissible under California law. The Bylaws of each of these corporations make such indemnification mandatory.

The Articles of Incorporation for California Equity Funding, Inc., Duxford Financial, Inc., Sycamore CC, Inc., Presley CMR, Inc., HSP, Inc. and Presley Homes also state that liability of the directors of these corporations for monetary damages shall be eliminated to the fullest extent permissible under the CGCL, as amended from time to time.

PH-Rielly Ventures

The Articles of Incorporation for PH-Rielly Ventures authorize the corporation to indemnify its directors and officers through bylaw provisions, agreements, a vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the CGCL, subject only to the applicable limits set forth in Section 204 of the CGCL with respect to actions for breach of duty to the corporation and its shareholders.

Section 6 of the Bylaws of PH-Rielly Ventures contains various provisions regarding the indemnification of agents of the corporation. Sections 6.1 through 6.6, which are modeled after CGCL §§ 317(a)-(f), are substantially similar to the indemnification provisions found in California Lyon’s Bylaws as set forth above. Sections 6.7 through 6.10 of the Bylaws of PH-Rielly Ventures are modeled after CGCL §§ 317(g)-(j), respectively, and the provisions found in these sections of the corporation’s Bylaws are substantially similar to the provisions of the corresponding section of the CGCL.

The Articles of Incorporation for PH-Rielly Ventures also state that liability of the directors of these corporations for monetary damages shall be eliminated to the fullest extent permissible under California law.

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Carmel Mountain Ranch

The Partnership Agreement of Carmel Mountain Ranch states that Carmel Mountain Ranch shall indemnify the managing partner and its affiliates for any expenses or liabilities (including attorneys’ fees and costs of investigation and defense) they may incur by reason of the managing partner being the managing partner of Carmel Mountain Ranch, by providing any services to or for Carmel Mountain Ranch, in connection with any joint activities or other transactions in which Carmel Mountain Ranch engages with the managing partner or its affiliates or by virtue of the Partnership Agreement, whether or not due to their negligence, and whether or not disclosed, unless such expense or liability is caused by the gross negligence or willful misconduct of the person or entity seeking indemnification.

The Partnership Agreement of Carmel Mountain Ranch also states that the managing partner and its affiliates will not be liable to the Carmel Mountain Ranch or the partners as such for any errors in judgment or any acts or omissions, whether or not due to their negligence, and whether or not disclosed, unless caused by the gross negligence or willful misconduct.

ARIZONA GUARANTORS

Arizona Revised Statutes (“ARS”) § 10-851 allows a corporation, in certain circumstances, to indemnify its directors against costs and expenses (including attorneys’ fees) reasonably incurred in connection with threatened, pending or completed civil, criminal, administrative or investigative actions, suits or proceedings, in which such persons were or are parties, or are threatened to be made parties, by reason of the fact that they were or are directors of the corporation, if such persons acted in good faith and either (i) in a manner they reasonably believed to be in the best interests of the corporation (if acting in a official capacity), or (ii) in a manner they reasonably believed was at least not opposed to the corporation’s best interests (in all other cases). A corporation may indemnify its directors with respect to any criminal action or proceeding if, in addition to the above conditions being met, the individual had no reasonable cause to believe his or her conduct was unlawful. Indemnification in connection with a proceeding by or in the right of the corporation, if permitted, is limited to reasonable expenses incurred in connection with the proceeding.

ARS § 10-852 provides that, unless limited by its articles of incorporation, a corporation shall indemnify a director who was the prevailing party, on the merits or otherwise, in the defense of any proceeding to which the director was a party because the director is or was a director of the corporation against reasonable expenses incurred by the director in connection with the proceeding. ARS § 10-852 also provides that, under certain circumstances, unless limited by its articles of incorporation or other provisions of the ARS, a corporation shall indemnify an outside director against liability. ARS § 10-854 provides that, unless a corporation’s articles of incorporation provide otherwise, a director of a corporation who is a party to a proceeding may apply for indemnification or an advance for expenses to the court conducting the proceeding or another court of competent jurisdiction. Upon receipt of an application, a court may order indemnification or advance for expenses if it determines either (i) the director is entitled to mandatory indemnification under ARS § 10-852, or (ii) the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances.

ARS § 10-856 provides that a corporation may indemnify and advance expenses to an officer of the corporation who is a party to a proceeding because the individual is or was an officer of the corporation to the same extent as a director. If the individual is an officer but not a director (or is both but is made a party to the proceeding solely because of an act or omission as an officer), a corporation may indemnify and advance expenses to the further extent as may be provided by the articles of incorporation, the

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bylaws, a resolution of the board of directors, or contract except for (i) liability in connection with a proceeding by or in the right of the corporation other than for reasonable expenses incurred in connection with the proceeding, or (ii) liability arising out of conduct that constitutes (a) receipt by the officer of a financial benefit to which the officer is not entitled, (b) an intentional infliction of harm on the corporation or the shareholders, or (c) an intentional violation of criminal law. An officer of a corporation who is not a director is entitled to mandatory indemnification as a prevailing party under ARS § 10-852 and may apply to a court under § 10-854 for indemnification or an advance for expenses, in each case to the same extent to which a director is entitled to indemnification or advance for expenses under those sections.

Mountain Gate Ventures, Inc. and William Lyon Southwest, Inc.

The Articles of Incorporation for both Mountain Gate Ventures, Inc. and William Lyon Southwest, Inc. provide that these corporations shall indemnify their respective directors and officers in all circumstances in which such indemnification is permitted by law. The Bylaws of these corporations state that the directors and officers of these corporations shall be indemnified to the maximum extent allowed under the Arizona Business Corporation Act and not prohibited by the articles of incorporation.

The Articles of Incorporation for both Mountain Gate Ventures, Inc. and William Lyon Southwest, Inc. also state that, to the fullest extent permitted by the ARS, as amended from time to time, directors of these corporations shall not be liable to the corporations or their stockholders for monetary damages for any action taken or any failure to take any action as a director.

DELAWARE GUARANTOR

St. Helena Westminster Estates, LLC

The Limited Liability Company Agreement of St. Helena Westminster Estates, LLC states that St. Helena Westminster Estates, LLC indemnifies and agrees to hold a member wholly harmless from and against any loss, expense or damage suffered by a member by reason of anything which such member may do or refrain from doing for and on behalf of St. Helena Westminster Estates, LLC and in furtherance of its interest, provided, however, that St. Helena Westminster Estates, LLC is not required to indemnify a member from any loss, expense or damage which such member may suffer as a result of such member’s willful misconduct or gross negligence in performing or in failing to perform such member’s duties hereunder and any such indemnity shall be recoverable only from the assets of St. Helena Westminster Estates, LLC.

The Limited Liability Company Agreement of St. Helena Westminster Estates, LLC also states that no member of St. Helena Westminster Estates, LLC shall be liable or accountable in damages or otherwise to St. Helena Westminster Estates, LLC for any error of judgment or any mistake of fact or law or for anything that such member may do or refrain from doing except in the case of willful misconduct or gross negligence.

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Item 16.    Exhibits

Exhibit No.		Description
1.1		Form of Underwriting Agreement.
4.1		Proposed Form of Indenture (including form of notes and form of guarantees).
5.1		Opinion of Irell & Manella LLP.
10.1		Mortgage Warehouse Loan and Security Agreement dated as of June 28, 2002, by and among Duxford Financial, Inc. and Bayport Mortgage, L.P., the borrowers, and First Tennessee Bank.
12.1	(2)	Statement of computation of ratio of earnings to fixed charges.
23.1		Consent of Irell & Manella LLP (included in Exhibit 5.1).
23.2		Consent of Ernst & Young LLP.
24.1	(1)	Powers of Attorney
25.1	(2)	Statement of eligibility of trustee on Form T-1.
25.2		Amendment No. 1 to Statement of eligibility of trustee on Form T-1

(1) Previously filed with the Form S-3 filed by the Registrants on August 16, 2002.

(2) Previously filed with Amendment No. 1 to the Form S-3 filed by the Registrants on February 27, 2003.

Item 17.    Undertakings

(a)    The undersigned registrants hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrants’ annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(b)    Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrants pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrants of expenses incurred or paid by a director, officer or controlling person of the registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrants will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

(c)    The undersigned registrants hereby undertake that:

(1)    For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2)    For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Issuer Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 8^th day of March, 2003.

WILLIAM LYON HOMES, INC.
By:	/s/    WADE H. CABLE
	WADE H. CABLE
	Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* General William Lyon	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 8, 2003
/s/    WADE H. CABLE                             Wade H. Cable	Director, President and Chief Operating Officer	March 8, 2003
* Michael D. Grubbs	Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer)	March 8, 2003
* W. Douglass Harris	Vice President and Corporate Controller	March 8, 2003

*By:	/s/    WADE H. CABLE
	Wade H. Cable
	Attorney-in-Fact

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 8^th day of March, 2003.

WILLIAM LYON HOMES
By:	/s/    WADE H. CABLE
	WADE H. CABLE
	Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* General William Lyon	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 8, 2003
/s/    WADE H. CABLE             Wade H. Cable	Director, President and Chief Operating Officer	March 8, 2003
* General James E. Dalton	Director	March 8, 2003
* Richard E. Frankel	Director	March 8, 2003
* William H. Lyon	Director	March 8, 2003
* William H. McFarland	Director	March 8, 2003
* Michael L. Meyer	Director	March 8, 2003
* Raymond A. Watt	Director	March 8, 2003
* Randolph W. Westerfield	Director	March 8, 2003

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Signature	Title	Date
* Michael D. Grubbs	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	March 8, 2003
* W. Douglass Harris	Vice President and Corporate Controller	March 8, 2003

*By:	/S/    WADE H. CABLE
	Wade H. Cable
	Attorney-in-Fact

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 8^th day of March, 2003.

CALIFORNIA EQUITY FUNDING, INC.
By:	/s/    MICHAEL D. GRUBBS
	MICHAEL D. GRUBBS Director, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* Alan D. Uman	President and Chief Executive Officer (Principal Executive Officer)	March 8, 2003
/s/    MICHAEL D. GRUBBS         Michael D. Grubbs	Director, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)	March 8, 2003
* W. Douglass Harris	Director, Vice President and Corporate Controller	March 8, 2003

*By:	/s/    WADE H. CABLE
	Wade H. Cable
	Attorney-in-Fact

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this  11^th day of March, 2003.

CARMEL MOUNTAIN RANCH
By:	WILLIAM LYON HOMES, INC.,      Its General Partner
	By:	/s/    WADE H. CABLE
		WADE H. CABLE
		Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/    GENERAL WILLIAM LYON         General William Lyon	Chairman of the Board of Directors and Chief Executive Officer of William Lyon Homes, Inc. (Principal Executive Officer)	March 11, 2003
/s/    WADE H. CABLE         Wade H. Cable	Director, President and Chief Operating Officer of William Lyon Homes, Inc.	March 11, 2003
/s/    MICHAEL D. GRUBBS         Michael D. Grubbs	Director, Senior Vice President and Chief Financial Officer of William Lyon Homes, Inc. (Principal Financial Officer)	March 11, 2003
/s/    W. DOUGLASS HARRIS         W. Douglass Harris	Vice President and Corporate Controller of William Lyon Homes, Inc.	March 11, 2003

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 8^th day of March, 2003.

DUXFORD FINANCIAL, INC.
By:	/s/    WADE H. CABLE
	WADE H. CABLE
	Director and Executive Vice President

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* Richard E. Frankel	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 8, 2003
* General William Lyon	Vice Chairman of the Board of Directors and Executive Vice President	March 8, 2003
/s/    WADE H. CABLE        Wade H. Cable	Director and Executive Vice President	March 8, 2003
* Michael D. Grubbs	Senior Vice President, Chief Financial Officer and Assistant Secretary (Principal Financial Officer)	March 8, 2003
* W. Douglass Harris	Vice President and Treasurer (Principal Accounting Officer)	March 8, 2003

*By:	/s/    WADE H. CABLE
	Wade H. Cable Attorney-in-Fact

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 11th day of March, 2003.

HSP, INC.
By:	/s/    C. DEAN STEWART
	C. DEAN STEWART
	Director and President

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/    C. DEAN STEWART         C. Dean Stewart	Director and President (Principal Executive Officer)	March 11, 2003
/S/    WADE H. CABLE         Wade H. Cable	Director	March 11, 2003
/s/    LARRY I. SMITH         Larry I. Smith	Director and Senior Vice President	March 11, 2003
/s/    W. DOUGLASS HARRIS         W. Douglass Harris	Treasurer (Principal Financial Officer)	March 11, 2003

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 8^th day of March, 2003.

MOUNTAIN GATE VENTURES, INC.
By:	/s/    WADE H. CABLE
	WADE H. CABLE
	Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* General William Lyon	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March  8, 2003
/s/    WADE H. CABLE        Wade H. Cable	Director, President and Chief Operating Officer	March  8, 2003
* Michael D. Grubbs	Director, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)	March  8, 2003
* W. Douglass Harris	Vice President and Corporate Controller	March  8, 2003

*By:	/s/    WADE H. CABLE
	Wade H. Cable
	Attorney-in-Fact

S-8

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 11^th day of March, 2003.

OX I OXNARD, L.P.
By:	WILLIAM LYON HOMES, INC.,     Its General Partner
	By:	/s/    WADE H. CABLE
		WADE H. CABLE
		Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* General William Lyon	Chairman of the Board of Directors and Chief Executive Officer of William Lyon Homes, Inc. (Principal Executive Officer)	March  11, 2003
/s/    WADE H. CABLE          Wade H. Cable	Director, President and Chief Operating Officer of William Lyon Homes, Inc.	March  11, 2003
* Michael D. Grubbs	Director, Senior Vice President and Chief Financial Officer of William Lyon Homes, Inc. (Principal Financial Officer)	March  11, 2003
* W. Douglass Harris	Vice President and Corporate Controller of William Lyon Homes, Inc.	March  11, 2003

*By:	/s/    WADE H. CABLE
	Wade H. Cable
	Attorney-in-Fact

S-9

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 8^th day of March, 2003.

PH-LP VENTURES
By:	/s/    WADE H. CABLE
	WADE H. CABLE
	Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* General William Lyon	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 8, 2003
/s/    WADE H. CABLE          Wade H. Cable	Director, President and Chief Operating Officer	March 8, 2003
* Michael D. Grubbs	Director, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)	March 8, 2003
* W. Douglass Harris	Vice President and Corporate Controller	March 8, 2003

*By:	/s/    WADE H. CABLE
	Wade H. Cable Attorney-in-Fact

S-10

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 8^th day of March, 2003.

PH-RIELLY VENTURES
By:	/S/    WADE H. CABLE
	WADE H. CABLE
	Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* General William Lyon	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 8, 2003
/s/    WADE H. CABLE          Wade H. Cable	Director, President and Chief Operating Officer	March 8, 2003
* Michael D. Grubbs	Director, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)	March 8, 2003
* W. Douglass Harris	Vice President and Corporate Controller	March 8, 2003

*By:	/s/    WADE H. CABLE
	Wade H. Cable Attorney-in-Fact

S-11

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 11^th day of March, 2003.

PH VENTURES—SAN JOSE
By:	/s/    WADE H. CABLE
	WADE H. CABLE
	Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/    GENERAL WILLIAM LYON         General William Lyon	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 11, 2003
/s/    WADE H. CABLE         Wade H. Cable	Director, President and Chief Operating Officer	March 11, 2003
/s/    MICHAEL D. GRUBBS         Michael D. Grubbs	Director, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)	March 11, 2003
/s/    W. DOUGLASS HARRIS         W. Douglass Harris	Vice President and Corporate Controller	March 11, 2003

S-12

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 8^th day of March, 2003.

PRESLEY CMR, INC.
By:	/s/    WADE H. CABLE
	WADE H. CABLE
	Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* General William Lyon	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 8, 2003
/s/    WADE H. CABLE          Wade H. Cable	Director, President and Chief Operating Officer	March 8, 2003
* Michael D. Grubbs	Director, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)	March 8, 2003
* W. Douglass Harris	Vice President and Corporate Controller	March 8, 2003

*By:	/s/    WADE H. CABLE
	Wade H. Cable
	Attorney-in-Fact

S-13

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 11^th day of March, 2003.

PRESLEY HOMES
By:	/s/    WADE H. CABLE
	WADE H. CABLE
	Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/    GENERAL WILLIAM LYON         General William Lyon	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 11, 2003
/s/    WADE H. CABLE         Wade H. Cable	Director, President and Chief Operating Officer	March 11, 2003
/s/    MICHAEL D. GRUBBS         Michael D. Grubbs	Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer)	March 11, 2003
/s/    W. DOUGLASS HARRIS         W. Douglass Harris	Vice President and Corporate Controller	March 11, 2003

S-14

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 11^th day of March, 2003.

ST. HELENA WESTMINSTER ESTATES, LLC
By:	WILLIAM LYON HOMES, INC.,     Its Sole Member
	By:	/s/    WADE H. CABLE
		WADE H. CABLE
		Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/    GENERAL WILLIAM LYON         General William Lyon	Chairman of the Board of Directors and Chief Executive Officer of William Lyon Homes, Inc. (Principal Executive Officer)	March 11, 2003
/s/    WADE H. CABLE         Wade H. Cable	Director, President and Chief Operating Officer of William Lyon Homes, Inc.	March 11, 2003
/s/    MICHAEL D. GRUBBS         Michael D. Grubbs	Director, Senior Vice President and Chief Financial Officer of William Lyon Homes, Inc. (Principal Financial Officer)	March 11, 2003
/s/    W. DOUGLASS HARRIS         W. Douglass Harris	Vice President and Corporate Controller of William Lyon Homes, Inc.	March 11, 2003

S-15

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 8^th day of March, 2003.

SYCAMORE CC, INC.
By:	/s/    WADE H. CABLE
	WADE H. CABLE
	Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* General William Lyon	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 8, 2003
/s/    WADE H. CABLE          Wade H. Cable	Director, President and Chief Operating Officer	March 8, 2003
* Michael D. Grubbs	Director, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)	March 8, 2003
* W. Douglass Harris	Vice President and Corporate Controller	March 8, 2003

*By:	/s/    WADE H. CABLE
	Wade H. Cable
	Attorney-in-Fact

S-16

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Guarantor Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newport Beach, California on this 8^th day of March, 2003.

WILLIAM LYON SOUTHWEST, INC.
By:	/s/    WADE H. CABLE
	WADE H. CABLE
	Director, President and Chief Operating Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
* General William Lyon	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 8, 2003
/s/    WADE H. CABLE          Wade H. Cable	Director, President and Chief Operating Officer	March 8, 2003
* Michael D. Grubbs	Director, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)	March 8, 2003
* W. Douglass Harris	Vice President and Corporate Controller	March 8, 2003

*By:	/s/    WADE H. CABLE
	Wade H. Cable
	Attorney-in-Fact

S-17

Exhibit Index

Exhibit No.		Description
1.1		Form of Underwriting Agreement.
4.1		Proposed Form of Indenture (including form of notes and form of guarantees).
5.1		Opinion of Irell & Manella LLP.
10.1		Mortgage Warehouse Loan and Security Agreement dated as of June 28, 2002, by and among Duxford Financial, Inc. and Bayport Mortgage, L.P., the borrowers, and First Tennessee Bank.
12.1	(2)	Statement of computation of ratio of earnings to fixed charges.
23.1		Consent of Irell & Manella LLP (included in Exhibit 5.1).
23.2		Consent of Ernst & Young LLP.
24.1	(1)	Powers of Attorney.
25.1	(2)	Statement of eligibility of trustee on Form T-1.
25.2		Amendment No. 1 to Statement of eligibility of trustee on Form T-1

(1) Previously filed with the Form S-3 filed by the Registrants on August 16, 2002.

(2) Previously filed with Amendment No. 1 to the Form S-3 filed by the Registrants on February 27, 2003.

EX-1.1

EXHIBIT 1.1

WILLIAM LYON HOMES, INC.

$250,000,000 [            ]% Senior Notes due 2013

UNDERWRITING AGREEMENT

March [ ], 2003

New York, New York

UBS Warburg LLC

299 Park Avenue

New York, New York 10171

Salomon Smith Barney Inc.

388 Greenwich Street

New York, NY 10013

Ladies and Gentlemen:

William Lyon Homes, Inc., a California corporation (the “Company”), and each of the Guarantors (as defined herein) (together with the Company, the “Issuers”) agree with you as follows:

1.    Issuance of Notes.    The Company proposes to issue and sell to UBS Warburg LLC and Salomon Smith Barney Inc. (the “Underwriters”) $250,000,000 aggregate principal amount of [            ]% Senior Notes due 2013 (the “Notes”). The Notes will be issued pursuant to an indenture (the “Indenture”), to be dated the Closing Date (as defined herein), by and among the Company, the Guarantors and U.S. Bank National Association, as trustee (the “Trustee”). The Company’s obligations under the Notes and the Indenture will be unconditionally guaranteed (the “Guarantees”) on an unsecured senior basis by each of the entities listed on Schedule I hereto, including, without limitation, William Lyon Homes, a Delaware corporation (“Parent”) (each, a “Guarantor” and collectively the “Guarantors”). All references herein to the Notes include the related Guarantees, unless the context otherwise requires.

The Issuers have filed, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively, the “Act”), with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-3 (File No. 333-98287), including a prospectus, relating to the Notes and the Guarantees, which incorporates by reference documents which the Issuers have filed or will file in accordance with the provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (collectively, the “Exchange Act”). The Issuers have furnished to you, for use by the Underwriters and by dealers, copies of one or more preliminary prospectuses containing the prospectus included in the registration statement and the docu-

ments incorporated by reference therein (each such preliminary prospectus being referred to herein as a “Preliminary Prospectus”) relating to the Notes. Except where the context otherwise requires, the registration statement referred to above, as amended when it became effective, including all documents filed as a part thereof or incorporated by reference therein, and including any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 424(b) under the Act and deemed to be part of such registration statement at the time of effectiveness pursuant to Rule 430(A) under the Act and also including any registration statement filed pursuant to Rule 462(b) under the Act, is referred to herein as the “Registration Statement,” and the prospectus included in the Registration Statement, including all documents incorporated therein by reference, in the form filed by the Issuers with the Commission pursuant to Rule 424(b) under the Act on or before the second business day after the date hereof (or such earlier time as may be required under the Act) or, if no such filing is required, the form of final prospectus included in the Registration Statement at the time it became effective, is herein called the “Prospectus.” Any reference herein to the Registration Statement, the Prospectus, any Preliminary Prospectus or any amendment or supplement thereto shall be deemed to refer to and include the documents incorporated by reference therein prior to completion of the offering of the Notes by the Underwriters, and any reference herein to the terms “amend,” “amendment” or “supplement” with respect to the Registration Statement, the Prospectus or any Preliminary Prospectus shall be deemed to refer to and include the filing after the execution hereof of any document with the Commission deemed to be incorporated by reference therein prior to completion of the offering of the Notes by the Underwriters. For purposes of this Agreement, all references to the Registration Statement or Prospectus or to any amendment or supplement thereto shall be deemed to include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”).

This Agreement, the Notes, the Guarantees and the Indenture are hereinafter sometimes referred to collectively as the “Note Documents.”

2.    Agreements to Sell and Purchase.    On the basis of the representations, warranties and covenants of the Underwriters contained in this Agreement, the Company agrees to issue and sell to the Underwriters, and, on the basis of the representations, warranties and covenants of the Issuers contained in this Agreement and subject to the terms and conditions contained in this Agreement, the Underwriters severally agree to purchase from the Company the aggregate principal amount of the Notes set forth opposite their respective names in Schedule II hereto. The purchase price for the Notes shall be [            ]% of their principal amount, plus accrued interest, if any, from March [ ], 2003 to the Closing Date (as hereinafter defined). The Issuers are advised by you that the Underwriters intend (i) to make a public offering of their respective portions of the Notes as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Notes upon the terms set forth in the Prospectus. You may from time to time increase or decrease the public offering price after the initial public offering to such extent as you may determine.

2

3.    Delivery and Payment.    Delivery of, and payment of the purchase price for, the Notes shall be made at 10:00 a.m., New York City time, on March [            ], 2003 (such date and time, the “Closing Date”) at the offices of Cahill Gordon & Reindel at 80 Pine Street, New York, New York 10005. The Closing Date and the location of delivery of and the form of payment for the Notes may be varied by mutual agreement between the Underwriters and the Company.

One or more of the Notes in global form registered in such names as the Underwriters may request upon at least one business day’s notice prior to the Closing Date and having an aggregate principal amount corresponding to the aggregate principal amount of the Notes shall be delivered by the Company to the Underwriters (or as the Underwriters direct) for inspection at least one business day prior to the Closing Date, against payment by the Underwriters of the purchase price therefor by means of transfer of immediately available funds to such account or accounts specified by the Company upon at least one business day’s notice prior to the Closing Date, or by such means as the parties hereto shall agree prior to the Closing Date.

4.    Agreements of the Issuers.    The Issuers, jointly and severally, covenant and agree with the Underwriters as follows:

(a)  To furnish such information as may be required and otherwise to cooperate in qualifying the Notes for offering and sale under the securities or blue sky laws of such states as you may designate and to maintain such qualifications in effect so long as required for the distribution of the Notes; provided that no Issuer shall be required to qualify as a foreign corporation or to consent to the service of process under the laws of any such state (except service of process with respect to the offering and sale of the Notes); and to promptly advise you of the receipt by any Issuer of any notification with respect to the suspension of the qualification of the Notes for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. Notwithstanding the foregoing, no Issuer shall be required to qualify the offer and sale of the Notes or the Guarantees in any state if it shall be determined by counsel to the Underwriters that such qualification is preempted by reason of Section 18 of the Act.

(b)  To make immediately available to the Underwriters in New York City, and from time to time to furnish to the Underwriters, as many copies of the Prospectus (or of the Prospectus as amended or supplemented if the Company shall have made any amendments or supplements thereto after the effective date of the Registration Statement) as the Underwriters may reasonably request for the purposes contemplated by the Act; if any Underwriter is required to deliver a prospectus after the nine-month period referred to in Section 10(a)(3) of the Act in connection with the sale of the Notes, the Issuers will prepare promptly upon request such amendment or amend

3

ments to the Registration Statement and such prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act.

(c)  To advise you promptly and (if requested by you) to confirm such advice in writing, (i) when any post-effective amendment to the Registration Statement becomes effective and (ii) if Rule 430A under the Act is used, when the Prospectus is filed with the Commission pursuant to Rule 424(b) under the Act (which the Company agrees to file in a timely manner under such Rules).

(d)  To advise you promptly, confirming such advice in writing, of any request by the Commission for amendments or supplements to the Registration Statement or Prospectus or for additional information with respect thereto, or of notice of institution of proceedings for, or the entry of a stop order suspending the effectiveness of the Registration Statement and, if the Commission should enter a stop order suspending the effectiveness of the Registration Statement, to make every reasonable effort to obtain the lifting or removal of such order as soon as possible; to advise you promptly of any proposal to amend or supplement the Registration Statement or Prospectus including by filing any documents that would be incorporated therein by reference and to file no such amendment or supplement to which you shall reasonably object in writing.

(e)  Subject to Section 4(n) hereof, to file promptly all reports and any definitive proxy or information statement required to be filed by the Issuers with the Commission in order to comply with the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Notes, and to promptly notify you of such filing.

(f)  If necessary or appropriate, to file a registration statement pursuant to Rule 462(b) under the Act.

(g)  To furnish to you promptly for a period of three years from the date of this Agreement (i) copies of any reports or other communications required to be furnished to holders of the Notes pursuant to the Indenture, (ii) copies of documents or reports filed with any national securities exchange on which any class of securities of any Issuer is listed, without exhibits unless requested, and (iii) such other information as you may reasonably request regarding any Issuer.

(h)  To advise the Underwriters promptly of the happening of any event within the time during which a Prospectus relating to the Notes is required to be delivered under the Act which could require the making of any change in the Prospectus then being used, or in the information incorporated therein by reference, so that the Prospectus would not include an untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in the light of the circum

4

stances under which they are made, not misleading, and, during such time, to prepare and furnish, at the Company’s expense, to the Underwriters promptly such amendments or supplements to such Prospectus as may be necessary to reflect any such change and to furnish you a copy of such proposed amendment or supplement before filing any such amendment or supplement with the Commission.

(i)  To make generally available to its security holders, and to deliver to you, an earnings statement of the Company (which will satisfy the provisions of Section 11(a) of the Act) covering a period of twelve months beginning after the effective date of the Registration Statement (as defined in Rule 158(c) of the Act) as soon as is reasonably practicable after the termination of such twelve-month period but not later than March [ ], 2004.

(j)  To furnish to you three copies of the Registration Statement, as initially filed with the Commission, and of all amendments thereto (including all exhibits thereto and documents incorporated by reference therein).

(k)  To furnish to you as early as practicable prior to the Closing Date, but not later than two business days prior thereto, a copy of the latest available unaudited interim consolidated financial statements, if any, of Parent and the Subsidiaries (as hereinafter defined) which have been read by the Company’s independent certified public accountants, as stated in their letter to be furnished pursuant to Section 7(b) hereof.

(l)  To apply the net proceeds from the sale of the Notes in the manner set forth under the caption “Use of Proceeds” in the Prospectus.

(m)  To pay all costs, expenses, fees and taxes (other than any transfer taxes and fees, and disbursements of counsel for the Underwriters except as set forth under Section 6 hereof and (iii), (iv) and (vi) below) in connection with (i) the preparation and filing of the Registration Statement, each Preliminary Prospectus, the Prospectus, and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (ii) the registration, issue, sale and delivery of the Notes, (iii) the producing, word processing and/or printing of this Agreement, any dealer agreements and any closing documents (including compilations thereof) and the reproduction and/or printing and furnishing of copies of each thereof to the Underwriters and (except closing documents) to dealers (including costs of mailing and shipment), (iv) the qualification of the Notes for offering and sale under state laws and the determination of their eligibility for investment under state law as aforesaid (including the legal fees and filing fees and other disbursements of counsel for the Underwriters) and the printing and furnishing of copies of any blue sky surveys or legal investment surveys to the Underwriters and to dealers, (v) any listing of the Notes on any securities exchange or

5

qualification of the Notes for quotation on the Nasdaq Stock Market and any registration thereof under the Exchange Act, (vi) any filing for review of the public offering of the Notes by NASD Regulation, Inc., including the legal fees and filing fees and other disbursements of counsel to the Underwriters, (vii) the costs and expenses of the Issuers relating to presentations or meetings undertaken in connection with the marketing of the offer and sale of the Notes to prospective investors and the Underwriters’ sales forces, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel, lodging and other expenses incurred by the officers of the Issuers, any such consultants, and the cost of any aircraft chartered in connection with the road show, (viii) the preparation, notarization (if necessary) and delivery of the Note Documents and all other agreements, memoranda, correspondence and documents prepared and delivered in connection with this Agreement, (ix) the issuance, transfer and delivery by the Company and the Guarantors of the Notes and the Guarantees, respectively, to the Underwriters, (x) the preparation of certificates for the Notes, (xi) the approval of the Notes by the Depository Trust Company (“DTC”) for book-entry transfer, (xii) the rating of the Notes by rating agencies, (xiii) the fees and expenses of the Trustee and its counsel, and (xiv) the performance of the Issuers’ other obligations under the Note Documents. Except as provided in this Section 4(m) and Section 6, the Issuers shall not be responsible for your expenses, including the expenses of your counsel, and transfer taxes on resale of any of the Notes.

(n)  To furnish to you, before filing with the Commission subsequent to the effective date of the Registration Statement and during the period referred to in paragraph (e) above, a copy of any document proposed to be filed pursuant to Section 13, 14 or 15(d) of the Exchange Act.

(o)  If, at the time this Agreement is executed and delivered, it is necessary for any post-effective amendment thereto to be declared effective before the offering of the Notes may commence, the Issuers will endeavor to cause such post-effective amendment to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when the Registration Statement or such post-effective amendment has become effective.

(p)  Until 90 days following the Closing Date, not, without the prior written consent of UBS Warburg LLC, to sell or contract to sell or announce the offering of any debt securities of any of the Issuers with characteristics and terms similar to those of the Notes.

(q)  To do and perform all things required to be done and performed under the Note Documents by them prior to or after the Closing Date and to satisfy all conditions precedent on their part to the delivery of the Notes.

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(r)  To comply in all material respects with all of their obligations set forth in the representations letter of the Company to DTC relating to the approval of the Notes by DTC for “book-entry” transfer and to use their best efforts to obtain approval of the Notes by DTC for “book-entry” transfer.

5.    Representations and Warranties.    The Issuers, jointly and severally, represent and warrant to the Underwriters as follows:

(a)  The Registration Statement has become effective under the Act and no stop order proceedings with respect thereto are pending or, to the knowledge of the Issuers, threatened under the Act.

(b)  The Issuers have not received, and have no notice of, any order of the Commission preventing or suspending the use of any Preliminary Prospectus, or instituting proceedings for that purpose; each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the last Preliminary Prospectus distributed in connection with the offering of the Notes, as of its date, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; the Registration Statement complied, when it became effective, complies and will comply in all material respects with the provisions of the Act and the Prospectus will comply in all material respects with the provisions of the Act and any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement have been and will be so described or filed; the Registration Statement did not, when it became effective, does not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Issuers make no warranty or representation with respect to any statement contained in any Preliminary Prospectus, the Registration Statement or the Prospectus in reliance upon and in conformity with information concerning an Underwriter and furnished in writing by or on behalf of such Underwriter through UBS Warburg LLC to the Company expressly for use in such Preliminary Prospectus, the Registration Statement or the Prospectus; the documents incorporated by reference in each Preliminary Prospectus, the Registration Statement and the Prospectus, at the time they were filed with the Commission, complied in all material respects with the requirements of the Exchange Act, and at the time they were filed with the Commission did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the

7

statements therein, in light of the circumstances under which they were made, not misleading; and the Issuers have not distributed any offering material in connection with the offering or sale of the Notes other than the Registration Statement, any Preliminary Prospectus, the Prospectus or any other materials, if any, permitted by the Act.

(c)  The Parent’s capitalization as of December 31, 2002 is as set forth under the heading “Actual” in the section of the Prospectus entitled “Capitalization” and the Parent’s adjusted capitalization at such date, as adjusted to give effect to the sale of the Notes and the application of the proceeds therefrom is as set forth under the heading entitled “As Adjusted” in the section of the Prospectus entitled “Capitalization.” All of the issued and outstanding equity interests of each Issuer have been duly and validly authorized and issued, have been issued in compliance with all federal and state securities laws and were not issued in violation of any preemptive right, right of first refusal or similar right. All of the issued and outstanding equity interests of each Issuer that is a corporation are fully paid and non-assessable.

(d)  Each of the Issuers has been duly incorporated or formed, as the case may be, and is validly existing in good standing under the laws of its state of organization or formation, with full corporate, limited liability company or partnership power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement.

(e)  Each Issuer is duly qualified to do business as a foreign corporation, limited liability company or partnership in good standing in each jurisdiction where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business, properties, financial condition, results of operation or prospects of Parent and the Subsidiaries (as defined below) taken as a whole (a “Material Adverse Effect”), and each Issuer is in compliance in all material respects with the laws, orders, rules, regulations and directives issued or administered by such jurisdictions. Parent has no subsidiaries (as defined in the Prospectus in the section entitled “Description of Notes”) other than those entities listed on Schedule III (collectively, the “Subsidiaries”), which is a true and complete list of each Subsidiary’s jurisdiction of incorporation or formation, its stockholders and the percentage of its equity owned by Parent (directly or indirectly); other than the Subsidiaries, Parent does not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity other than those listed on Schedule IV (collectively, the “Joint Ventures”); complete and correct copies of the certificates of incorporation and of the bylaws of the Issuers and all amendments thereto have been made available to you or your counsel, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date; all of the outstanding equity interests of each of

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the Subsidiaries have been duly authorized and validly issued and (except as otherwise described in this Section 5(e) or Schedule III) are owned directly or indirectly by Parent subject to no security interest, other encumbrance or adverse claims; all of the issued and outstanding equity interests of each Subsidiary that is a corporation are fully paid and non-assessable; no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligation into shares of capital stock or ownership interests in the Subsidiaries are outstanding, except for rights to purchase pursuant the operating agreements of Cerro Plata Associates, LLC and 242 Cerro Plata, LLC.

(f)  Each of the Issuers has all requisite power and authority to execute, deliver and perform all of its obligations under the Note Documents to which it is a party and to consummate the transactions contemplated by the Note Documents to be consummated by such party and, without limitation, the Company has all requisite corporate power and authority to issue, sell and deliver the Notes and each Guarantor has all requisite power and authority to execute, deliver and perform all its obligations under its Guarantee. Each of the Issuers has duly authorized the execution, delivery and performance of each of the Note Documents to which it is a party. The descriptions of the Notes, the Guarantees and the Indenture in the Registration Statement and Prospectus fairly summarize in all material respects the provisions thereof.

(g)  The Indenture, when duly executed and delivered by each Issuer (assuming the due authorization, execution and delivery thereof by the Trustee), will be a legally binding and valid obligation of each Issuer, enforceable against each of them in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity and the discretion of the court before which any proceedings therefor may be brought, whether in a court of equity or law (collectively, the “Enforceability Exceptions”).

(h)  The Notes, when issued, authenticated by the Trustee and delivered by the Company against payment by the Underwriters in accordance with the terms of this Agreement and the Indenture, will be legally binding and valid obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with its terms, except that enforceability thereof may be limited by the Enforceability Exceptions.

(i)  The Guarantees, when the Guarantees are executed in accordance with the terms of the Indenture and delivered by the Guarantors and the Notes are executed, issued, authenticated and delivered by the Company against payment by the Underwriters in accordance with the terms of this Agreement and the Indenture, will be le

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gally binding and valid obligations of the Guarantors, enforceable against each of them in accordance with their terms, except that enforceability thereof may be limited by the Enforceability Exceptions.

(j)  This Agreement has been duly authorized, executed and delivered by each of the Issuers.

(k)  No approval, authorization, consent or order of or filing with any governmental or regulatory authority or agency is required in connection with the issuance and sale of the Notes or the consummation by the Issuers of the transactions as contemplated hereby other than such as have been or will be obtained or made under the Act and the Trust Indenture Act of 1939, as amended, and any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Notes and Guarantees are being offered by the Underwriters or under the rules and regulations of the National Association of Securities Dealers, Inc.

(l)  None of Parent or any Subsidiary is (A) in violation of its charter, bylaws or other constitutive documents, (B) in default (or, with notice or lapse of time or both, would be in default) in the performance or observance of any obligation, agreement, covenant or condition contained in any bond, debenture, note, indenture, mortgage, deed of trust, loan or credit agreement, lease, license, franchise agreement, authorization, permit, certificate or other agreement or instrument to which any of them is a party or by which any of them is bound or to which any of their assets or properties is subject (collectively, “Agreements and Instruments”), (C) in violation of any law, statute, rule or regulation applicable to Parent or any Subsidiary or their respective assets or properties, including applicable provisions of the Sarbanes-Oxley Act of 2002, or (D) in violation of any judgment, order or decree of any domestic or foreign court or governmental agency or authority having jurisdiction over Parent or any Subsidiary or their respective assets or properties, which in the case of clauses (B), (C) and (D) herein, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(m)  The execution, delivery and performance by each of the Issuers of the Note Documents to which it is a party, including the consummation of the offer and sale of the Notes, does not and will not violate, conflict with or constitute a breach of any of the terms or provisions of or a default (or an event that with notice or lapse of time or both, would constitute a default) under, or require consent under (that has, if required, not been obtained), or result in the creation or imposition of a lien, charge or encumbrance on any property or assets of the Company or any Guarantor pursuant to (A) the charter, bylaws or other constitutive documents of any of the Company or any Guarantor, (B) any of the Agreements and Instruments or any of the agreements of the Joint Ventures, except as would not reasonably be expected to have a Material Ad

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verse Effect, (C) any law, statute, rule or regulation applicable to the Company or any Guarantor or their respective assets or properties or (D) any judgment, order or decree of any domestic or foreign court or governmental agency or authority having jurisdiction over the Company or any Guarantor or their respective assets or properties.

(n) Ernst & Young LLP, whose report on the consolidated financial statements of the Parent is filed with the Commission as part of the Registration Statement and Prospectus, are independent public accountants as required by the Act.

(o) The audited financial statements included in the Registration Statement and the Prospectus present fairly the consolidated financial position of Parent as of the dates indicated and the consolidated results of operations and cash flows of Parent and the Subsidiaries for the periods specified and have been prepared in compliance with the requirements of the Act and in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved (except as disclosed therein); the other financial and statistical data with respect to the Parent and the Subsidiaries set forth in the Registration Statement and the Prospectus are accurately presented in all material respects and prepared on a basis consistent with the financial statements and books and records of the Parent and the Subsidiaries; and there are no financial statements (historical or pro forma) that are required to be included in the Registration Statement and the Prospectus that are not included as required.

(p) Each of the Issuers has all necessary licenses, authorizations, consents and approvals and has made all necessary filings required under any federal, state or local law, regulation or rule, and has obtained all necessary authorizations, consents and approvals from other persons, in order to conduct its respective business except in each case to the extent that the failure to hold, file or obtain would not have a Material Adverse Effect. None of the Issuers is in violation of, or in default under, any such license, authorization, consent or approval or any federal, state or local law, regulation or rule or any decree, order or judgment applicable to such Issuer the effect of which could reasonably be expected to have a Material Adverse Effect.

(q) All legal or governmental proceedings, affiliate transactions, contracts, licenses, agreements, leases or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement have been so described or filed as required.

(r) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been (i) any material adverse change, or any development involving a prospective material adverse change in the business, properties, management, financial condition, results of operation or prospects of Parent and the Subsidiaries taken as a whole, (ii) any transaction not in the ordinary course of business which is material to Parent and the Subsidiaries taken as a

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whole that has not been disclosed in the Registration Statement, (iii) any obligation, direct or contingent, which is material to Parent and the Subsidiaries taken as a whole, incurred by Parent or the Subsidiaries that is not in the ordinary course of business or (iv) any change in the capital stock or outstanding indebtedness of Parent or the Subsidiaries except for changes of the types generally disclosed or described in the Registration Statement; none of the Issuers has any material contingent obligation which is not disclosed or described in the Registration Statement.

(s) All material tax returns required to be filed by Parent or any of the Subsidiaries have been filed, and all taxes and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to tax or penalties applicable thereto due or claimed to be due from such entities, have been paid, other than those being contested in good faith and for which adequate reserves have been provided.

(t) Insurance covering Parent’s and each of the Subsidiaries’ properties, operations, personnel and businesses as the Company deems adequate and as previously disclosed to the Underwriters is maintained by either Parent, the Company or the Subsidiary itself; such insurance insures against such losses and risks to an extent which is adequate in accordance with customary industry practice to protect the Parent and the Subsidiaries and their businesses; all such insurance is outstanding and fully in force on the date hereof and will be outstanding and duly in force at the Closing Date.

(u) Neither Parent nor any of the Subsidiaries has sustained since the date of the last financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree which could reasonably be expected to have a Material Adverse Effect.

(v) Except for those contracts or agreements disclosed in the Registration Statement to be terminated or repaid, none of the Issuers has sent or received any communication regarding termination of, or intent not to renew, any of the contracts or agreements referred to or described in, or filed as an exhibit to, the Registration Statement or any document incorporated by reference therein, and no such termination or non-renewal has been threatened by any of the Issuers or, to the knowledge of the Issuers after due inquiry, any other party to any such contract or agreement.

(w) Parent and each of the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with manage-

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ment’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(x) Any statistical and market-related data included in the Prospectus are based on or derived from sources that the Company believes to be reliable and accurate, and the Company has obtained the written consent to the use of such data from such sources to the extent required.

(y) Neither Parent nor any of the Subsidiaries nor any of their respective directors, officers, affiliates or controlling persons has taken, directly or indirectly, any action designed, or which has constituted or might reasonably be expected to cause or result, under the Exchange Act or otherwise, in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Notes.

(z) Neither Parent nor any of the Subsidiaries nor, to the Issuers’ knowledge, any employee or agent of Parent or the Subsidiaries, has made any payment of funds of Parent or the Subsidiaries or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Registration Statement or Prospectus.

(aa) (i) Parent or the Subsidiaries own, or have obtained valid and enforceable licenses for, or other rights to use, the inventions, patent applications, patents, trademarks (both registered and unregistered), trade names, copyrights and trade secrets, which the Company believes are necessary for the conduct of its business and which the failure to own, license or have such rights could reasonably be expected to have a Material Adverse Effect (collectively, “Intellectual Property”); (ii) to the knowledge of the Issuers, there are no third parties who have or will be able to establish their rights to any Intellectual Property that could reasonably be expected to have a Material Adverse Effect except for the ownership rights of the owners of the Intellectual Property which is licensed to the Parent or Subsidiaries; (iii) to the knowledge of the Issuers, there is no infringement by third parties of any Intellectual Property that could reasonably be expected to have a Material Adverse Effect; (iv) there is no pending or to the knowledge of the Issuers threatened action, suit, proceeding or claim by others challenging the Issuers’ rights in or to any Intellectual Property that if resolved against the Issuers could reasonably be expected to have a Material Adverse Effect; (v) there is no pending or to the knowledge of the Issuers threatened action, suit, proceeding or claim by others challenging the validity or scope of any Intellectual Property that if resolved against the Issuers could reasonably be expected to have a Material Adverse Effect; and (vi) there is no pending or to the Issuers’ knowledge threatened action, suit, proceeding or claim by others that the Issuers infringe or otherwise violate any patent, trademark, copyright, trade secret or other proprietary rights of oth-

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ers that if resolved against the Issuers could reasonably be expected to have a Material Adverse Effect.

(bb) Neither Parent nor any of the Subsidiaries is engaged in any unfair labor practice; except for matters which would not have a Material Adverse Effect individually or in the aggregate to the Parent and the Subsidiaries, (i) there is no unfair labor practice complaint pending or, to the knowledge of the Issuers, threatened against Parent or any of the Subsidiaries before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under collective bargaining agreements is pending, or, to the knowledge of the issuers, threatened against Parent or any of the Subsidiaries that if resolved against Parent or the Subsidiaries could reasonably be expected to have a Material Adverse Effect, (ii) no strike, labor dispute, slowdown or stoppage pending or, to the knowledge of the Issuers, threatened against Parent or any of the Subsidiaries that could reasonably be expected to have a Material Adverse Effect and (iii) no union representation dispute currently existing concerning the employees of Parent or any of the Subsidiaries. To the best knowledge of the respective managements of Parent or any of the Subsidiaries, (i) no union organizing activities are currently taking place concerning the employees of Parent or any of the Subsidiaries and (ii) there has been no violation of any federal, state or local law relating to discrimination in the hiring, promotion or pay of employees, of any applicable wage or hour laws, nor any provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”) or the rules and regulations promulgated thereunder concerning the employees of Parent or any of the Subsidiaries, which in either case could reasonably be expected to have a Material Adverse Effect.

(cc) (i) Each of Parent and the Subsidiaries is in compliance with and has no liability under any and all applicable laws, statutes, ordinances, regulations, rules, decrees, orders, judgments, consent orders, consent decrees or other binding requirements and the common law relating to the protection of public health or the environment or the release or threatened release of hazardous material (including, without limitation, any material, substance, waste, constituent, compound, pollutant or contaminant, including, without limitation, petroleum (including, without limitation, crude oil or any fraction thereof or any petroleum product)) (collectively, “Environmental Laws”) and (ii) each of Parent and the Subsidiaries is in compliance with all terms and conditions of any required permits, licenses and authorizations, and is also in compliance with all other applicable limitations, restrictions, conditions, standards, prohibitions, requirements and obligations contained in the Environmental Laws except in the case of clauses (i) and (ii) when such failure to comply or liability would not have a Material Adverse Effect.

(dd) In the ordinary course of their respective businesses, Parent and each of the Subsidiaries conducts a periodic review of the effect of the Environmental Laws

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on its respective businesses, operations and properties, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for cleanup, closure of properties or compliance with the Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties); there are no past or present events, conditions, activities, practices, actions, or plans relating to the business operations or properties of Parent or any of the Subsidiaries that could be reasonably expected to interfere with or prevent compliance or continued compliance with the Environmental Laws and to have a Material Adverse Effect, or which could be reasonably expected to give rise to any liability based on or related to the Environmental Laws having a Material Adverse Effect.

(ee) Parent and each of the Subsidiaries has good and marketable title to all property (real and personal) described in the Prospectus as being owned by each of them as of the dates set forth in the Prospectus, except as sold or disposed of in the ordinary course of business and free and clear of all liens, claims, security interests or other encumbrances, except as described in the Prospectus or arising in the ordinary course of business; all the property described in the Registration Statement and the Prospectus as being held under lease by Parent or a Subsidiary is held thereby under valid, subsisting and enforceable leases.

(ff) All material taxes, fees and other governmental charges that are due and payable on or prior to the Closing Date in connection with the execution, delivery and performance of the Note Documents and the execution, delivery and sale of the Notes shall have been paid by or on behalf of the Issuers at or prior to the Closing Date.

(gg) Except as set forth in the Registration Statement and Prospectus, there is (i) no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending or, to the knowledge of the Issuers, threatened or contemplated, to which Parent or any Subsidiary is or may be a party or to which the business, assets or property of such person is or may be subject, (ii) no statute, rule, regulation or order that has been enacted, adopted or issued or, to the knowledge of the Issuers, that has been proposed by any governmental body or agency, domestic or foreign, (iii) no injunction, restraining order or order of any nature by a federal or state court or foreign court of competent jurisdiction to which Parent or any Subsidiary is or may be subject that (x) in the case of clause (i) above, if determined adversely to Parent or any Subsidiary, could, individually or in the aggregate, reasonably be expected (1) to have a Material Adverse Effect or (2) to interfere with or adversely affect the issuance of the Notes or the Guarantees in any jurisdiction or adversely affect the consummation of the transactions contemplated by any of the Note Documents and (y) in the case of clauses (ii) and (iii) above, could, individually or in

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the aggregate, reasonably be expected (1) to have a Material Adverse Effect or (2) to interfere with or adversely affect the issuance of the Notes or the Guarantees in any jurisdiction.

(hh) None of Parent or any Subsidiary is, or after giving effect to the offering and sale of the Notes will be, an “investment company” or a company “controlled” by an “investment company” incorporated in the United States within the meaning of the Investment Company Act of 1940, as amended.

(ii) None of Parent or any Subsidiary (or any agent thereof acting on their behalf) has taken, and none of them will take, any action that might cause this Agreement or the issuance or sale of the Notes to violate Regulations T, U or X of the Board of Governors of the Federal Reserve System, as in effect, or as the same may hereafter be in effect, on the Closing Date.

(jj) As of the date hereof (immediately prior to and after giving effect to the issuance of the Notes and the use of proceeds) the Company and each Guarantor are and will be Solvent. No Issuer is contemplating either the filing of a petition by it under any bankruptcy or insolvency law or the liquidating of all or a substantial portion of its property, and no Issuer has knowledge of any person contemplating the filing of any such petition against any Issuer. As used herein, “Solvent” shall mean, for any person on a particular date, that on such date (i) the fair value of the property of such person is greater than the total amount of liabilities at fair valuation, including, without limitation, contingent liabilities, of such person, (ii) the present fair salable value of the assets of such person is not less than the amount that will be required to pay the probable liability of such person on its debts as they become absolute and matured, (iii) such person does not intend to, and does not believe that it will, incur debts and liabilities beyond such person’s ability to pay as such debts and liabilities mature, (iv) such person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such person’s property would constitute an unreasonably small capital and (v) such person is able to pay its debts as they become due and payable.

(kk) Except as described in the section entitled “Underwriting” in the Registration Statement and Prospectus, there are no contracts, agreements or understandings between Parent or any Subsidiary and any other person other than the Underwriters that would give rise to a valid claim against Parent, any Subsidiary or the Underwriters for a brokerage commission, finder’s fee or like payment in connection with the issuance, purchase and sale of the Notes.

(ll) The Issuers and the transactions contemplated by this Agreement meet the requirements and conditions for using a registration statement on Form S-3 under the Act.

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(mm) The Indenture has been qualified under the Trust Indenture Act of 1939, as amended.

(nn) Parent’s guarantees of the credit facilities between DV I Thousand Oaks, L.P. and Bank One, N.A. and between Valencia Partners, L.P. and Bank One, N.A. that would by their terms spring into effect upon the redemption of Parent’s 12 ½% Senior Notes due July 1, 2003 will be terminated upon the Closing Date.

(oo) None of the Issuers nor any of their affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes.

Each certificate or document signed by any officer of the Issuers and delivered to the Underwriters or counsel for the Underwriters pursuant to, or in connection with, this Agreement shall be deemed to be a representation and warranty by the Issuers to the Underwriters as to the matters covered by such certificate or document. The Issuers acknowledge that the Underwriters and, for purposes of the opinions to be delivered to the Underwriters pursuant to Section 7 of this Agreement, counsel to the Issuers and counsel to the Underwriters will rely upon the accuracy and truth of the foregoing representations and the Issuers hereby consent to such reliance.

6. Reimbursement of Underwriters’ Expenses. If the Notes are not delivered for any reason other than the termination of this Agreement pursuant to Section 9 hereof or the default by one or more of the Underwriters in its or their respective obligations hereunder, the Issuers shall, in addition to paying the amounts described in Section 4(m) hereof, reimburse the Underwriters for all of their out-of-pocket expenses, including the fees and disbursements of their counsel.

7. Conditions of Underwriters’ Obligations. The several obligations of the Underwriters hereunder are subject to the accuracy of the representations and warranties on the part of the Issuers on the date hereof and at the Closing Date, and the performance by the Issuers of their respective obligations hereunder and to the following additional conditions precedent:

(a) The Issuers shall furnish to you at the Closing Date an opinion of Irell & Manella LLP, counsel for the Issuers, addressed to the Underwriters in form and substance satisfactory to Cahill Gordon & Reindel, counsel for the Underwriters.

(b) The Issuers shall furnish to you at the Closing Date an opinion of Bryan Cave LLP, Arizona counsel to Mountain Gate Ventures, Inc. and William Lyon Southwest, Inc., addressed to the Underwriters in form and substance satisfactory to Cahill Gordon & Reindel, counsel for the Underwriters.

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(c) You shall have received from Ernst & Young LLP letters dated, respectively, the date of this Agreement and the Closing Date and addressed to the Underwriters (with reproduced copies for each of the Underwriters) in the forms heretofore approved by UBS Warburg LLC.

(d) You shall have received at the Closing Date the favorable opinion of Cahill Gordon & Reindel, counsel for the Underwriters, dated the Closing Date, as to the matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters.

(e) No amendment or supplement to the Registration Statement or Prospectus, including documents deemed to be incorporated by reference therein, shall have been filed to which the Underwriters reasonably objected in writing.

(f) If Rule 430A under the Act is used, the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) under the Act, at or before 5:30 P.M., New York City time, on the second full business day after the date of this Agreement.

(g) All filings with the Commission required by Rule 424 under the Act to have been filed by the Closing Date shall have been made within the applicable time period prescribed for such filing by Rule 424.

(h) Prior to the Closing Date (i) no stop order with respect to the effectiveness of the Registration Statement shall have been issued under the Act and be remaining in effect and no proceedings initiated under Section 8(d) or 8(e) of the Act shall be pending; (ii) the Registration Statement and all amendments thereto, or modifications thereof, if any, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and (iii) the Prospectus and all amendments or supplements thereto, or modifications thereof, if any, shall not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading.

(i) Between the time of execution of this Agreement and the Closing Date no material adverse change, financial or otherwise, in the business, assets, properties, prospects, condition or results of operations of Parent and the Subsidiaries, taken as a whole, shall have occurred or become known to the Issuers.

(j) The Company shall have delivered to you on the Closing Date a certificate signed by two of its executive officers to the effect that the representations and warranties of each Issuer as set forth in this Agreement are true and correct as of the date hereof and such date, that each Issuer has performed such of its obligations under

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this Agreement as are to be performed at or before the Closing Date and that the conditions set forth in paragraphs (h) and (i) of this Section 7 have been satisfied.

(k) Between the time of execution of this Agreement and the Closing Date, there shall not have occurred any downgrading, nor shall any notice or announcement have been given or made of (i) any intended or potential downgrading or (ii) any surveillance or review or possible change that does not indicate an improvement, in the rating accorded any securities of, or guaranteed by, Parent or any Subsidiary by any “nationally recognized statistical rating organization,” as that term is defined in Rule 436(g)(2) under the Act.

(l) All agreements set forth in the representation letter to the Company to DTC relating to the approval of the Notes by DTC for “book-entry” transfer shall have been complied with.

(m) The Notes shall have been approved for listing on the New York Stock Exchange, subject to official notice of issuance.

(n) Either Parent’s 12 ½% Senior Notes due July 1, 2003 shall have been (i) redeemed and cancelled on the Closing Date or (ii) called for redemption with sufficient funds to redeem such notes being deposited with the trustee under the indenture governing such notes on the Closing Date.

(o) Prior to the Closing Date, the Issuers shall have furnished to the Underwriters such further certificates and documents as the Underwriters may reasonably request.

8. Effective Date of Agreement; Termination. This Agreement shall become effective when the parties hereto have executed and delivered this Agreement.

The obligations of the several Underwriters hereunder shall be subject to termination in the absolute discretion of UBS Warburg LLC, if, since the time of execution of this Agreement or the earlier respective dates as of which information is given in the Registration Statement and Prospectus, (y) there has been any material adverse change (financial or otherwise) or any development involving a prospective material adverse change (financial or otherwise) occurs, in the business, assets, properties, prospects, condition or results of operations of the Parent and the Subsidiaries, taken as a whole, which would, in the judgment of UBS Warburg LLC, make it impracticable or inadvisable to market the Notes on the terms and in the manner contemplated by the Registration Statement and the Prospectus, or (z) (i) there shall have occurred any downgrading, or any notice shall have been given of (A) any intended or potential downgrading or (B) any surveillance or review or possible change that does not indicate an improvement, in the rating accorded any securities of or guaranteed by Parent or any Subsidiary by any “nationally recognized statistical rating organization,” as that

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term is defined in Rule 436(g)(2) under the Act, or (ii) if, at any time prior to the Closing Date (a) a suspension or material limitation in trading in securities generally on the New York Stock Exchange has occurred, (b) a suspension or material limitation in trading of Parent’s securities on the New York Stock Exchange has occurred, (c) a general moratorium on commercial banking activities has been declared by either Federal or New York State authorities or a material disruption in commercial banking or securities settlement or clearance services in the United States has occurred, (d) there is an outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war or (e) there occurs any other calamity or crisis or any change in financial, political or economic conditions in the United States or elsewhere, of such magnitude in its effect on the financial markets of the United States as, in each of clauses (a) through (e), in the judgment of UBS Warburg LLC, would make it impracticable to market the Notes on the terms and in the manner contemplated by the Registration Statement and the Prospectus.

If UBS Warburg LLC elects to terminate this Agreement as provided in this Section 8, the Issuers and each other Underwriter shall be notified promptly by letter or telegram.

If the sale to the Underwriters of the Notes, as contemplated by this Agreement, is not carried out by the Underwriters for any reason permitted under this Agreement or if such sale is not carried out because the Issuers shall be unable to comply with any of the terms of this Agreement, the Issuers shall not be under any obligation or liability under this Agreement (except to the extent provided in Sections 4(m), 6 and 10 hereof), and the Underwriters shall be under no obligation or liability to the Issuers under this Agreement (except to the extent provided in Section 10 hereof) or to one another hereunder.

9. Increase in Underwriters’ Commitments. Subject to Sections 7 and 8, if any Underwriter shall default in its obligation to take up and pay for the Notes (together with the Guarantee endorsed thereon) to be purchased by it hereunder (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 8 hereof) and if the aggregate principal amount of Notes which all Underwriters so defaulting shall have agreed but failed to take up and pay for does not exceed 10% of the total aggregate principal amount of Notes, the non-defaulting Underwriters shall take up and pay for (in addition to the aggregate principal amount of Notes they are obligated to purchase pursuant to Section 2 hereof) the aggregate principal amount of Notes agreed to be purchased by all such defaulting Underwriters, as hereinafter provided. Such Notes shall be taken up and paid for by such non-defaulting Underwriter or Underwriters in such amount or amounts as you may designate with the consent of each Underwriter so designated or, in the event no such designation is made, such Notes shall be taken up and paid for by all non-defaulting Underwriters pro rata in proportion to the aggregate number of Notes set opposite the names of such non-defaulting Underwriters in Schedule II.

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Without relieving any defaulting Underwriter from its obligations hereunder, the Company agrees with the non-defaulting Underwriters that it will not sell any Notes hereunder unless all of the Notes are purchased by the Underwriters (or by substituted Underwriters selected by you with the approval of the Company or selected by the Company with your approval).

If a new Underwriter or Underwriters are substituted by the Underwriters or by the Company for a defaulting Underwriter or Underwriters in accordance with the foregoing provision, the Company or you shall have the right to postpone the Closing Date for a period not exceeding five business days in order that any necessary changes in the Registration Statement and Prospectus and other documents may be effected.

The term Underwriter as used in this Agreement shall refer to and include any Underwriter substituted under this Section 9 with like effect as if such substituted Underwriter had originally been named in Schedule II.

If the aggregate principal amount of Notes which the defaulting Underwriter or Underwriters agreed to purchase exceeds 10% of the aggregate principal amount of Notes which all Underwriters agreed to purchase hereunder, and if neither the non-defaulting Underwriters nor the Company shall make arrangements within the five business day period stated above for the purchase of all the Notes which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Issuers to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Issuers. Nothing in this paragraph, and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.

10. Indemnity and Contribution. (a) Each of the Issuers, jointly and severally, agrees to indemnify, defend and hold harmless each Underwriter, its partners, directors and officers, and any person who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, any such Underwriter or any such person may incur under the Act, the Exchange Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Issuers) or in a Prospectus (the term Prospectus for the purpose of this Section 10 being deemed to include any Preliminary Prospectus, the Prospectus and the Prospectus as amended or supplemented by the Issuers), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in either such Registration Statement or Prospectus or necessary to make the statements made therein not misleading, except insofar as

21

any such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by or on behalf of any Underwriter through UBS Warburg LLC to the Company expressly for use with reference to such Underwriter in such Registration Statement or such Prospectus or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or such Prospectus or necessary to make such information not misleading.

If any action, suit or proceeding (together, a “Proceeding”) is brought against an Underwriter or any such person in respect of which indemnity may be sought against the Issuers pursuant to the foregoing paragraph, such Underwriter or such person shall promptly notify the Company in writing of the institution of such Proceeding and the Issuers shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided, however, that the omission to so notify the Company shall not relieve the Issuers from any liability which the Issuers may have to any Underwriter or any such person or otherwise, other than pursuant to Section 10(a) to the extent that the Issuers are materially prejudiced as a result of such omission to so notify. Such Underwriter or such person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter or of such person unless the employment of such counsel shall have been authorized in writing by the Issuers in connection with the defense of such Proceeding or the Issuers shall not have, within a reasonable period of time in light of the circumstances, employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from, additional to or in conflict with those available to the Issuers (in which case the Issuers shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the Issuers and paid as incurred (it being understood, however, that the Issuers shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). The Issuers shall not be liable for any settlement of any Proceeding effected without the written consent of the Company but if settled with the written consent of the Company, the Issuers, jointly and severally, agree to indemnify and hold harmless any Underwriter and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without the Company’s written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have reimbursed the indemni-

22

fied party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days’ prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and does not include an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party.

(b) Each Underwriter severally agrees to indemnify, defend and hold harmless the Issuers, their directors and officers, and any person who controls the Issuers within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, the Issuers or any such person may incur under the Act, the Exchange Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by or on behalf of such Underwriter through UBS Warburg LLC to the Company expressly for use with reference to such Underwriter in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Issuers) or in a Prospectus, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or such Prospectus or necessary to make such information not misleading, it being understood and agreed that the only such information furnished by or on behalf of each Underwriter consists of the third, fifth and sixth paragraphs under the caption “Underwriting” in the Prospectus.

If any Proceeding is brought against the Issuers or any such person in respect of which indemnity may be sought against any Underwriter pursuant to the foregoing paragraph, the Issuers or such person shall promptly notify such Underwriter in writing of the institution of such Proceeding and such Underwriter shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided, however, that the omission to so notify such Underwriter shall not relieve such Underwriter from any liability which such Underwriter may have to the Issuers or any such person or otherwise, other than pursuant to Section 10(b) to the extent that such Underwriter is materially prejudiced as a result of such omission to so notify. The Issuers or such person shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Issuers or such person unless the employment of such counsel shall have been authorized in writing by such Underwriter in connection with the defense of such Proceeding or such Underwriter shall not have, within a reasonable period of time in light of the circumstances, employed counsel to

23

have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to or in conflict with those available to such Underwriter (in which case such Underwriter shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties, but such Underwriter may employ counsel and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such Underwriter), in any of which events such fees and expenses shall be borne by such Underwriter and paid as incurred (it being understood, however, that such Underwriter shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). No Underwriter shall be liable for any settlement of any such Proceeding effected without the written consent of such Underwriter but if settled with the written consent of such Underwriter, such Underwriter agrees to indemnify and hold harmless the Issuers and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days’ prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and does not include an admission of fault, culpability or failure to act, by or on behalf of such indemnified party.

(c) If the indemnification provided for in this Section 10 is unavailable to an indemnified party under subsections (a) and (b) of this Section 10 in respect of any losses, damages, expenses, liabilities or claims referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, damages, expenses, liabilities or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Issuers on the one hand and the Underwriters on the other hand from the offering of the Notes or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Issuers on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such losses, damages, expenses, liabilities or claims, as well as any other relevant equitable considerations. The

24

relative benefits received by the Issuers on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, bear to the aggregate public offering price of the Notes. The relative fault of the Issuers on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Issuers or by the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, damages, expenses, liabilities and claims referred to in this subsection shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating, preparing to defend or defending any Proceeding.

(d) The Issuers and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in subsection (c) above. Notwithstanding the provisions of this Section 10, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Notes underwritten by such Underwriter and distributed to the public were offered to the public exceeds the amount of any damage which such Underwriter has otherwise been required to pay by reason of such untrue statement or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations to contribute pursuant to this Section 10 are several in proportion to their respective underwriting commitments and not joint.

(e) The indemnity and contribution agreements contained in this Section 10 and the covenants, warranties and representations of the Issuers contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of any Underwriter, its partners, directors or officers or any person (including each partner, officer or director of such person) who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf of the Issuers, their directors or officers or any person who controls the Issuers within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and shall survive any termination of this Agreement or the issuance and delivery of the Notes. The Issuers and each Underwriter agree promptly to notify each other of the commencement of any Proceeding against it and, in the case of the Issuers, against any of the Issuers’ officers or directors, in connection with the issuance and sale of the Notes, or in connection with the Registration Statement or Prospectus.

25

11. Notice. All communications with respect to or under this Agreement, except as may be otherwise specifically provided in this Agreement, shall be in writing and, if sent to the Underwriters, shall be mailed, delivered, or telegraphed or telecopied and confirmed in writing to UBS Warburg LLC, 299 Park Avenue, New York, New York 10171 (telephone: (212) 821-3000, fax: (212) 821-6890), Attention: Syndicate Department, with a copy to Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005 (telephone: (212) 701-3000, fax: (212) 269-5420), Attention: Daniel J. Zubkoff, Esq., and shall be sent for informational purposes only, and shall not constitute notice, to UBS Warburg LLC, 677 Washington Blvd., Stamford, Connecticut 06901 (telephone: (203) 719-3000, fax: (203) 719-0680), Attention: Legal Department; and if sent to the Issuers, shall be mailed, delivered or, telegraphed or telecopied and confirmed in writing to William Lyon Homes, Inc., 4490 Von Karman, Newport Beach, CA 92660 (telephone: (949) 833-3600, fax: (949) 252-2575), Attention: Michael Grubbs, with a copy to Irell & Manella LLP, 840 Newport Center Drive, Suite 400, Newport Beach, CA 92660-6324 (telephone: (949) 760-0991, fax: (949) 760-5200), Attention: Meredith Jackson, Esq.

All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged by telecopier machine, if telecopied; and one business day after being timely delivered to a next-day air courier.

12. Governing Law; Construction. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (“Claim”), directly or indirectly, shall be governed by, and construed in accordance with, the laws of the State of New York. The Section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement.

13. Submission to Jurisdiction. Except as set forth below, no Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have jurisdiction over the adjudication of such matters, and the Issuers consent to the jurisdiction of such courts and personal service with respect thereto. The Issuers hereby consent to personal jurisdiction, service and venue in any court in which any Claim arising out of or in any way relating to this Agreement is brought by any third party against any Underwriter or any indemnified party. Each of the Underwriters and each of the Issuers (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) waives all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement. The Issuers, jointly and severally, agree that a final judgment in any such action, proceeding or counterclaim brought in any such court shall be

26

conclusive and binding upon the Issuers and may be enforced in any other courts in the jurisdiction of which the Issuers are or may be subject, by suit upon such judgment.

14. Parties at Interest. The Agreement herein set forth has been and is made solely for the benefit of the Underwriters and the Issuers and to the extent provided in Section 10 hereof the controlling persons, directors and officers referred to in such section, and their respective successors, assigns, heirs, personal representatives and executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from any of the Underwriters) shall acquire or have any right under or by virtue of this Agreement.

15. Counterparts. This Agreement may be signed by the parties in one or more counterparts which together shall constitute one and the same agreement among the parties.

16. Successors and Assigns. This Agreement shall be binding upon the Underwriters and the Issuers and their successors and assigns and any successor or assign of any substantial portion of the Issuers’ and any of the Underwriters’ respective businesses and/or assets.

27

If the foregoing correctly sets forth the understanding among the Issuers and the Underwriters, please so indicate in the space provided below for the purpose, whereupon this letter and your acceptance shall constitute a binding agreement among the Issuers and the Underwriters.

Very truly yours, WILLIAM LYON HOMES, INC.
By:
	Name: Title:
William Lyon Homes California Equity Funding, Inc. PH - LP Ventures Duxford Financial, Inc. Sycamore CC, Inc. Presley CMR, Inc. William Lyon Southwest, Inc. PH - Reilly Ventures Mountain Gate Ventures, Inc. Presley Homes HSP, Inc. PH Ventures - San Jose
By:
	Name: Title:
OX I Oxnard, L.P.
By:	William Lyon Homes, Inc.,     its general partner
By:
	Name: Title:

S-1

St. Helena Westminster Estates, LLC
By:	William Lyon Homes, Inc., its sole member
By:
	Name: Title:
Carmel Mountain Ranch
By:	William Lyon Homes, Inc., its general partner
By:
	Name: Title:

S-2

	Confirmed and accepted as of the date first above written: UBS WARBURG LLC
By:
	Name: Title:
By:
	Name: Title:
	SALOMON SMITH BARNEY INC.
By:
	Name: Title:

S-3

Schedule I

Guarantors

William Lyon Homes

California Equity Funding, Inc.

PH - LP Ventures

Duxford Financial, Inc.

Sycamore CC, Inc.

Presley CMR, Inc.

William Lyon Southwest, Inc.

PH - Reilly Ventures

Mountain Gate Ventures, Inc.

OX I Oxnard, L.P.

Presley Homes

HSP, Inc.

PH Ventures - San Jose

Carmel Mountain Ranch

St. Helena Westminster Estates, LLC

Schedule II

Underwriters	Principal Amount of Notes
UBS Warburg LLC	$
Salomon Smith Barney Inc.	$
Total	$	250,000,000

Schedule III

Subsidiary	Jurisdiction of Incorporation or Formation	Stockholders	% Owned by Parent (directly or indirectly)
William Lyon Homes, Inc.	California	William Lyon Homes (Del.)	100%
California Equity Funding, Inc.	California	William Lyon Homes (Del.)	100%
Duxford Financial, Inc.	California	William Lyon Homes (Del.)	100%
Presley Homes	California	William Lyon Homes, Inc. (CA)	100%
HSP, Inc.	California	William Lyon Homes, Inc. (CA)	100%
PH Ventures—San Jose	California	William Lyon Homes, Inc. (CA)	100%
Duxford Title Reinsurance Co.	Vermont	William Lyon Homes, Inc. (CA)	100%
Sycamore CC, Inc.	California	William Lyon Homes, Inc. (CA)	100%
Presley CMR, Inc.	California	William Lyon Homes, Inc. (CA)	100%
Carmel Mountain Ranch	California	William Lyon Homes, Inc. (CA)	50%
		Presley CMR, Inc.	50%
OX I Oxnard, L.P.	California	Presley CMR, Inc. William Lyon	99% 1%
		Homes, Inc. (CA)
PH-LP Ventures	California	William Lyon Homes, Inc. (CA)	100%
St. Helena Westminster Estates, LLC	Delaware	William Lyon Homes, Inc. (CA)	100%

William Lyon Southwest, Inc.	Arizona	William Lyon Homes, Inc. (CA)	100%
PH-Reilly Ventures	California	William Lyon Homes, Inc. (CA)	100%
Mountain Gate Ventures, Inc.	Arizona	William Lyon Homes, Inc. (CA)	100%
Fairway Farms, LLC	Arizona	William Lyon Homes, Inc. (CA)	90%
Cerro Plata Associates, LLC	Delaware	William Lyon Homes, Inc. (CA)	13%
242 Cerro Plata, LLC	Delaware	William Lyon Homes, Inc. (CA)	12.5%

34

Schedule IV

Entity	Description of Equity Interest
Bayport Mortgage, L.P.	general partnership interest
California Pacific Mortgage, L.P.	general partnership interest
Duxford Escrow, Inc.	common stock
Laurel Creek Associates, LLC	membership interest
Reston Associates, LLC	membership interest
Hampton Road Associates, LLC	membership interest
Henry Ranch, LLC	membership interest
Otay R-29, LLC	membership interest
4S Lot 12, LLC	membership interest
4S Lots 2 & 8, LLC	membership interest
White Cloud Estates-Simi Valley, L.P.	general partnership interest
Meadowlark—San Marcos, L.P.	general partnership interest
CP at Forster Ranch, L.P.	general partnership interest
Valencia Partners, L.P.	general partnership interest
Brentwood Legends, L.P.	general partnership interest
Lyon Harada, L.P.	general partnership interest
Lyon Morgan Creek, L.P.	general partnership interest
Lyon Waterfront, LLC	membership interest
PLC/Lyon Waterfront Residential, LLC	membership interest
Summerlane-HB, L.P.	general partnership interest
Atlanta & Beach, L.P.	general partnership interest
Woodlake, L.P.	general partnership interest
Stonebriar, L.P.	general partnership interest
DV I Thousand Oaks, L.P.	general partnership interest
OX II Oxnard, L.P.	general partnership interest
Lyon Moorpark, L.P.	general partnership interest
Hercules Overlook, L.P.	general partnership interest
Valencia II Associates, LLC	membership interest
Tustin Villas Partners, LLC	membership interest

Marble Mountain Partners, LLC	membership interest
Tustin Vistas Partners, LLC	membership interest
Lyon East Garrison Company, LLC	membership interest

EX-4.1

EXHIBIT 4.1

WILLIAM LYON HOMES, INC.,

THE GUARANTORS named herein

and

U.S. BANK NATIONAL ASSOCIATION, as Trustee

INDENTURE

Dated as of March [            ], 2003

[            ]% Senior Notes due 2013

CROSS-REFERENCE TABLE

TIA		Indenture
Section	Section
310	(a)(1)	7.10
	(a)(2)	7.10
	(a)(3)	N.A.
	(a)(4)	N.A.
	(a)(5)	N.A.
	(b)	7.08; 7.10; 12.02
	(b)(1)	7.10
	(c)	N.A.
311	(a)	7.11
	(b)	7.11
	(c)	N.A.
312	(a)	2.06
	(b)	12.03
	(c)	12.03
313	(a)	7.06
	(b)(1)	N.A.
	(b)(2)	7.06
	(c)	7.06; 12.02
	(d)	7.06
314	(a)	4.02; 4.04; 12.02
	(b)	N.A.
	(c)(1)	12.04
	(c)(2)	12.04
	(c)(3)	N.A.
	(d)	N.A.
	(e)	12.05
	(f)	N.A.
315	(a)	7.01(b)
	(b)	7.05; 12.02
	(c)	7.01(a)
	(d)	7.01(c)
	(e)	6.12
316	(a) (last sentence)	2.10
	(a)(1)(A)	6.05
	(a)(1)(B)	6.04
	(a)(2)	N.A.
	(b)	6.08
	(c)	8.04
317	(a)(1)	6.09
	(a)(2)	6.10
	(b)	2.05; 7.12
318	(a)	12.01

N.A. means Not Applicable

Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture

TABLE OF CONTENTS
		Page
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01.	Definitions.	1
SECTION 1.02.	Other Definitions.	33
SECTION 1.03.	Incorporation by Reference of Trust Indenture Act.	34
SECTION 1.04.	Rules of Construction.	34
ARTICLE TWO
THE NOTES
SECTION 2.01.	Amount of Notes.	35
SECTION 2.02.	Form and Dating.	36
SECTION 2.03.	Execution and Authentication.	36
SECTION 2.04.	Registrar and Paying Agent.	37
SECTION 2.05.	Paying Agent To Hold Money in Trust.	37
SECTION 2.06.	Holder Lists.	38
SECTION 2.07.	Transfer and Exchange.	38
SECTION 2.08.	Replacement Notes.	39
SECTION 2.09.	Outstanding Notes.	39
SECTION 2.10.	Treasury Notes.	40
SECTION 2.11.	Temporary Notes.	40
SECTION 2.12.	Cancellation.	40
SECTION 2.13.	Defaulted Interest.	40
SECTION 2.14.	CUSIP Number.	41
SECTION 2.15.	Deposit of Moneys.	41
SECTION 2.16.	Book-Entry Provisions for Global Notes.	41
SECTION 2.17.	Computation of Interest.	43
ARTICLE THREE
REDEMPTION
SECTION 3.01.	Election To Redeem; Notices to Trustee.	43
SECTION 3.02.	Selection by Trustee of Notes To Be Redeemed.	43
SECTION 3.03.	Notice of Redemption.	44
SECTION 3.04.	Effect of Notice of Redemption.	45
SECTION 3.05.	Deposit of Redemption Price.	45

-i-

Page

SECTION 3.06.	Notes Redeemed in Part.	45
ARTICLE FOUR
COVENANTS
SECTION 4.01.	Payment of Notes.	46
SECTION 4.02.	Reports to Holders.	46
SECTION 4.03.	Waiver of Stay, Extension or Usury Laws.	46
SECTION 4.04.	Compliance Certificate.	47
SECTION 4.05.	Taxes.	47
SECTION 4.06.	Limitations on Additional Indebtedness.	48
SECTION 4.07.	[Intentionally Omitted]	50
SECTION 4.08.	Limitations on Restricted Payments.	50
SECTION 4.09.	Limitations on Asset Sales.	52
SECTION 4.10.	Limitations on Transactions with Affiliates.	54
SECTION 4.11.	Limitations on Liens.	56
SECTION 4.12.	Conduct of Business.	57
SECTION 4.13.	Additional Note Guarantees.	57
SECTION 4.14.	Limitations on Dividend and Other Restrictions Affecting Restricted Subsidiaries.	57
SECTION 4.15.	Limitations on Designation of Unrestricted Subsidiaries.	59
SECTION 4.16.	Maintenance of Consolidated Tangible Net Worth.	61
SECTION 4.17.	Maintenance of Properties; Insurance; Compliance with Law.	62
SECTION 4.18.	Payments for Consent.	62
SECTION 4.19.	Legal Existence.	63
SECTION 4.20.	Change of Control Offer.	63
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01.	Limitations on Mergers, Consolidations, Etc.	64
SECTION 5.02.	Successor Person Substituted.	66
ARTICLE SIX
DEFAULTS AND REMEDIES
SECTION 6.01.	Events of Default.	66
SECTION 6.02.	Acceleration.	68
SECTION 6.03.	Other Remedies.	68
SECTION 6.04.	Waiver of Past Defaults and Events of Default.	69

-ii-

SECTION 6.05.	Control by Majority.	69
SECTION 6.06.	Limitation on Suits.	69
SECTION 6.07.	No Personal Liability of Directors, Officers, Employees and Stockholders.	70
SECTION 6.08.	Rights of Holders To Receive Payment.	70
SECTION 6.09.	Collection Suit by Trustee.	70
SECTION 6.10.	Trustee May File Proofs of Claim.	70
SECTION 6.11.	Priorities.	71
SECTION 6.12.	Undertaking for Costs.	71
SECTION 6.13.	Restoration of Rights and Remedies.	72
ARTICLE SEVEN
TRUSTEE
SECTION 7.01.	Duties of Trustee.	72
SECTION 7.02.	Rights of Trustee.	73
SECTION 7.03.	Individual Rights of Trustee.	74
SECTION 7.04.	Trustee’s Disclaimer.	74
SECTION 7.05.	Notice of Defaults.	75
SECTION 7.06.	Reports by Trustee to Holders.	75
SECTION 7.07.	Compensation and Indemnity.	75
SECTION 7.08.	Replacement of Trustee.	76
SECTION 7.09.	Successor Trustee by Consolidation, Merger, etc.	77
SECTION 7.10.	Eligibility; Disqualification.	77
SECTION 7.11.	Preferential Collection of Claims Against Issuer.	78
SECTION 7.12.	Paying Agents.	78
ARTICLE EIGHT
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 8.01.	Without Consent of Holders.	78
SECTION 8.02.	With Consent of Holders.	79
SECTION 8.03.	Compliance with Trust Indenture Act.	80
SECTION 8.04.	Revocation and Effect of Consents.	80
SECTION 8.05.	Notation on or Exchange of Notes.	81
SECTION 8.06.	Trustee To Sign Amendments, etc.	81
ARTICLE NINE
DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 9.01.	Discharge of Indenture.	82

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Page

SECTION 9.02.	Legal Defeasance.	83
SECTION 9.03.	Covenant Defeasance.	83
SECTION 9.04.	Conditions to Defeasance or Covenant Defeasance.	84
SECTION 9.05.	Deposited Money and U.S. Government Obligations To Be Held in Trust; Other Miscellaneous Provisions.	85
SECTION 9.06.	Reinstatement.	86
SECTION 9.07.	Moneys Held by Paying Agent.	86
SECTION 9.08.	Moneys Held by Trustee.	86
ARTICLE TEN
GUARANTEE OF NOTES
SECTION 10.01.	Guarantee.	87
SECTION 10.02.	Execution and Delivery of Guarantee.	88
SECTION 10.03.	Limitation of Guarantee.	88
SECTION 10.04.	Release of Guarantor.	89
SECTION 10.05.	Waiver of Subrogation.	89
ARTICLE ELEVEN
[INTENTIONALLY OMITTED]
ARTICLE TWELVE
MISCELLANEOUS
SECTION 12.01.	Trust Indenture Act Controls.	90
SECTION 12.02.	Notices.	90
SECTION 12.03.	Communications by Holders with Other Holders.	91
SECTION 12.04.	Certificate and Opinion as to Conditions Precedent.	92
SECTION 12.05.	Statements Required in Certificate and Opinion.	92
SECTION 12.06.	Rules by Trustee and Agents.	92
SECTION 12.07.	Governing Law.	93
SECTION 12.08.	No Adverse Interpretation of Other Agreements.	93
SECTION 12.09.	No Recourse Against Others.	93
SECTION 12.10.	Successors.	93
SECTION 12.11.	Multiple Counterparts.	94
SECTION 12.12.	Table of Contents, Headings, etc.	94
SECTION 12.13.	Separability.	94

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Page

EXHIBITS
Exhibit A.	Form of Note	A-1
Exhibit B.	Form of Legend for Global Note	B-1
Exhibit C.	Form of Guarantee	C-1

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INDENTURE, dated as of [            ], 2003, among WILLIAM LYON HOMES, INC., a California corporation, as issuer (the “Issuer”), the Guarantors (as hereinafter defined) and U.S. BANK NATIONAL ASSOCIATION, as trustee (the “Trustee”).

Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders.

ARTICLE ONE

DEFINITIONS AND INCORPORATION BY REFERENCE

SECTION 1.01.        Definitions.

“Acquired Indebtedness” means (1) with respect to any Person that becomes a Restricted Subsidiary after the Issue Date (other than a Consolidated Joint Venture or a Restricted Joint Venture), Indebtedness of such Person and its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary that was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary and (2) with respect to the Parent or any Restricted Subsidiary, any Indebtedness of a Person (other than the Parent or a Restricted Subsidiary) existing at the time such Person is merged with or into the Parent or a Restricted Subsidiary, or Indebtedness expressly assumed by the Parent or any Restricted Subsidiary in connection with the acquisition of an asset or assets from another Person, which Indebtedness was not, in any case, incurred by such other Person in connection with, or in contemplation of, such merger or acquisition.

“Additional Notes” shall mean up to $150.0 million aggregate principal amount of Notes having identical terms and conditions to the Notes issued pursuant to Article Two and in compliance with Section 4.06.

“Adjusted Net Assets” of a Guarantor at any date shall mean the lesser of the amount by which (x) the fair value of the property of such Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities), but excluding liabilities under the Guarantee, of such Guarantor at such date and (y) the present fair salable value of the assets of such Guarantor at such date exceeds the amount that will be required to pay the probable liability of such Guarantor on its debts and all other fixed and contingent liabilities (after giving effect to all other fixed and contingent liabilities and after giving effect to any collection from any Subsidiary of such Guarantor in respect of the obligations of such Guarantor under the Guarantee), excluding Indebtedness in respect of the Guarantee, as they become absolute and matured.

“Affiliate” of any Person means any other Person which directly or indirectly controls or is controlled by, or is under direct or indirect common control with, the referent Person. For purposes of Section 4.10, Affiliates shall be deemed to include, with respect to

any Person, any other Person (1) which beneficially owns or holds, directly or indirectly, 10% or more of any class of the Voting Stock of the referent Person, (2) of which 10% or more of the Voting Stock is beneficially owned or held, directly or indirectly, by the referent Person or (3) with respect to an individual, any immediate family member of such Person. For purposes of this definition, “control” of a Person shall mean the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.

“Agent” means any Registrar, Paying Agent or agent for service or notices and demands.

“amend” means to amend, supplement, restate, amend and restate or otherwise modify; and “amendment” shall have a correlative meaning.

“asset” means any asset or property.

“Asset Acquisition” means:

(1)    an Investment by the Parent or any Restricted Subsidiary in any other Person if, as a result of such Investment, such Person shall become a Restricted Subsidiary, or shall be merged with or into the Parent or any Restricted Subsidiary, or

(2)    the acquisition by the Parent or any Restricted Subsidiary of all or substantially all of the assets of any other Person or any division or line of business of any other Person.

“Asset Sale” means any sale, issuance, conveyance, transfer, lease, assignment or other disposition by the Parent or any Restricted Subsidiary to any Person other than the Parent or any Restricted Subsidiary (including by means of a Sale and Leaseback Transaction or a merger or consolidation) (collectively, for purposes of this definition, a “transfer”), in one transaction or a series of related transactions, of any assets (including Equity Interests) of the Parent or any of its Restricted Subsidiaries other than in the ordinary course of business. For purposes of this definition, the term “Asset Sale” shall not include:

(1)    transfers of cash or Cash Equivalents;

(2)    transfers of assets (including Equity Interests) that are governed by, and made in accordance with Section 5.01.

(3)    Permitted Investments and Restricted Payments permitted under Section 4.08.

(4)    the creation or realization of any Permitted Lien;

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(5)    transactions in the ordinary course of business, including, without limitation, dedications and other donations to governmental authorities, sales (directly or indirectly), leases, sales and leasebacks and other dispositions of (A) homes, improved land and unimproved land, whether in single or multiple lots, (B) real estate (including related amenities and improvements), whether in single or multiple lots and (C) Equity Interests of a Subsidiary, the assets of which consist entirely of amenities and improvements related to real estate, such as golf courses, and real estate underlying such amenities and improvements;

(6)    dispositions of mortgage loans and related assets and mortgage-backed securities in the ordinary course of a mortgage lending business; and

(7)    any transfer or series of related transfers that, but for this clause, would be Asset Sales, if after giving effect to such transfers, the aggregate Fair Market Value of the assets transferred in such transaction or any such series of related transactions does not exceed $2.0 million.

“Attributable Indebtedness”, when used with respect to any Sale and Leaseback Transaction, means, as at the time of determination, the present value (discounted at a rate equivalent to the Issuer’s then-current weighted average cost of funds for borrowed money as at the time of determination, compounded on a semi-annual basis) of the total obligations of the lessee for rental payments during the remaining term of any Capitalized Lease included in any such Sale and Leaseback Transaction.

“Bankruptcy Law” means Title 11 of the United States Code, as amended, or any similar federal or state law for the relief of debtors.

“Board of Directors” means, with respect to any Person, the board of directors or comparable governing body of such Person.

“Board Resolution” means a copy of a resolution certified pursuant to an Officers’ Certificate to have been duly adopted by the Board of Directors of the Issuer and to be in full force and effect, and delivered to the Trustee.

“Borrowing Base” means, at any time of determination, the sum of the following without duplication:

(1)    100% of all cash and Cash Equivalents held by the Parent, any Restricted Subsidiary (other than a Consolidated Joint Venture) or any Restricted Joint Venture;

(2)    80% of the book value of Developed Land for which no construction has occurred;

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(3)    90% of the cost of the land and construction costs including capitalized interest (as reasonably allocated by the Parent) for all Units for which there is an executed purchase contract with a buyer not Affiliated with the Parent, less any deposits, down payments or earnest money;

(4)    85% of the cost of the land and construction costs including capitalized interest (as reasonably allocated by the Parent) for all Units for which construction has begun and for which there is not an executed purchase agreement with a buyer not Affiliated with the Parent; and

(5)    50% of the costs of Entitled Land (other than Developed Land) on which improvements have not commenced, less mortgage Indebtedness (other than under a Credit Facility) applicable to such land;

provided that the aggregate amount of assets of a Restricted Joint Venture (whether or not it is a Restricted Subsidiary) comprising a portion of the Borrowing Base shall not exceed, at such time of determination, 125% of the amount of Permitted Restricted Joint Venture Indebtedness then outstanding of such Restricted Joint Venture.

“Business Day” means a day other than a Saturday, Sunday or other day on which banking institutions in New York are authorized or required by law to close.

“Capitalized Lease” means a lease required to be capitalized for financial reporting purposes in accordance with GAAP.

“Capitalized Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under a Capitalized Lease, and the amount of such obligation shall be the capitalized amount thereof determined in accordance with GAAP.

“Cash Equivalents” means:

(1)    marketable obligations with a maturity of 360 days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof;

(2)    demand and time deposits and certificates of deposit or acceptances with a maturity of 180 days or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $500 million and is assigned at least a “B” rating by Thomson Financial BankWatch;

(3)    commercial paper maturing no more than 180 days from the date of creation thereof issued by a corporation that is not the Parent or an Affiliate of the Par-

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ent, and is organized under the laws of any State of the United States of America or the District of Columbia and rated at least A-1 by S&P or at least P-1 by Moody’s;

(4)    repurchase obligations with a term of not more than ten days for underlying securities of the types described in clause (1) above entered into with any commercial bank meeting the specifications of clause (2) above; and

(5)    investments in money market or other mutual funds substantially all of whose assets comprise securities of the types described in clauses (1) through (4) above.

“Change of Control” means the occurrence of any of the following events:

(1)    the Parent shall cease to own beneficially and of record all of the Equity Interests of the Issuer;

(2)    any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause that person or group shall be deemed to have “beneficial ownership” of all securities that any such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of Voting Stock representing more than 50% of the voting power of the total outstanding Voting Stock of the Parent;

(3)    during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Parent (together with any new directors whose election to such Board of Directors or whose nomination for election by the stockholders of the Parent was approved by a vote of the majority of the directors of the Parent then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Parent;

(4)    (a) all or substantially all of the assets of the Parent and the Restricted Subsidiaries are sold or otherwise transferred to any Person other than a Wholly-Owned Restricted Subsidiary or one or more Permitted Holders or (b) the Parent consolidates or merges with or into another Person other than a Permitted Holder or any Person other than a Permitted Holder consolidates or merges with or into the Parent, in either case under this clause (4), in one transaction or a series of related transactions in which immediately after the consummation thereof Persons owning Voting Stock representing in the aggregate 100% of the total voting power of the Voting Stock of the Parent immediately prior to such consummation do not own Voting Stock representing

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a majority of the total voting power of the Voting Stock of the Parent or the surviving or transferee Person; or

(5)    the Parent or the Issuer shall adopt a plan of liquidation or dissolution or any such plan shall be approved by the stockholders of the Parent or the Issuer.

“Consolidated Amortization Expense” for any period means the amortization expense of the Parent and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP.

“Consolidated Cash Flow Available for Fixed Charges” for any period means, without duplication, the sum of the amounts for such period of

(1)    Consolidated Net Income, plus

(2)    in each case only to the extent (and in the same proportion) deducted in determining Consolidated Net Income and with respect to the portion of Consolidated Net Income attributable to any Restricted Subsidiary (other than the Issuer) only if a corresponding amount would be permitted at the date of determination to be distributed to the Issuer or the Parent by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders,

(a)    Consolidated Income Tax Expense,

(b)    Consolidated Amortization Expense (but only to the extent not included in Consolidated Interest Expense),

(c)    Consolidated Depreciation Expense,

(d)    Consolidated Interest Expense and interest and other charges amortized to “cost of sales—homes” or “cost of sales—lots, land and other”, and

(e)    all other non-cash items reducing the Consolidated Net Income (excluding any non-cash charge that results in an accrual of a reserve for cash charges in any future period) for such period,

in each case determined on a consolidated basis in accordance with GAAP, minus

(3)    the aggregate amount of all non-cash items, determined on a consolidated basis, to the extent such items increased Consolidated Net Income for such period.

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“Consolidated Depreciation Expense” for any period means the depreciation expense of the Parent and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP.

“Consolidated Fixed Charge Coverage Ratio” means the ratio of Consolidated Cash Flow Available for Fixed Charges during the most recent four consecutive full fiscal quarters for which internal financial statements are available (the “Four-Quarter Period”) ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the “Transaction Date”) to Consolidated Interest Incurred for the Four-Quarter Period. For purposes of this definition, Consolidated Cash Flow Available for Fixed Charges and Consolidated Interest Incurred shall be calculated after giving effect on a pro forma basis for the period of such calculation to:

(1)    the incurrence of any Indebtedness, the inclusion of any Indebtedness on the balance sheet or the issuance of any Preferred Stock, in each case of the Parent or any Restricted Subsidiary (and the application of the proceeds thereof) and any repayment of other Indebtedness or redemption of other Preferred Stock (and the application of the proceeds therefrom) (other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to any revolving credit arrangement) occurring during the Four-Quarter Period or at any time subsequent to the last day of the Four-Quarter Period and on or prior to the Transaction Date, as if such incurrence, repayment, issuance or redemption, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four-Quarter Period; and

(2)    any Asset Sale or Asset Acquisition (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of the Parent or any Restricted Subsidiary (including any Person who becomes a Restricted Subsidiary as a result of such Asset Acquisition) incurring Acquired Indebtedness and also including any Consolidated Cash Flow Available for Fixed Charges (including any pro forma expense and cost reductions calculated on a basis consistent with Regulation S-X under the Exchange Act) associated with any such Asset Acquisition) occurring during the Four-Quarter Period or at any time subsequent to the last day of the Four-Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition or other disposition (including the incurrence of, or assumption or liability for, any such Indebtedness or Acquired Indebtedness) occurred on the first day of the Four-Quarter Period.

If the Parent or any Restricted Subsidiary directly or indirectly guarantees Indebtedness of a third Person (other than a Restricted Subsidiary, in the case of the Parent, or the Parent or another Restricted Subsidiary, in the case of a Restricted Subsidiary), the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if the

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Parent or such Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed Indebtedness.

In calculating Consolidated Interest Incurred for purposes of determining the denominator (but not the numerator) of this Consolidated Fixed Charge Coverage Ratio:

(1)    interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on this Indebtedness in effect on the Transaction Date;

(2)    if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four-Quarter Period; and

(3)    notwithstanding clause (1) or (2) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements with a term of at least one year after the Transaction Date relating to Hedging Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of these agreements.

“Consolidated Income Tax Expense” for any period means the provision for taxes of the Parent and the Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP.

“Consolidated Indebtedness” means, as of any date, the total Indebtedness of the Parent and the Restricted Subsidiaries as of such date, determined on a consolidated basis.

“Consolidated Interest Expense” for any period means the sum, without duplication, of the total interest expense (other than interest and other charges amortized to “cost of sales—homes” or “cost of sales—lots, land and other”) of the Parent and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP and including, without duplication,

(1)    imputed interest on Capitalized Lease Obligations and Attributable Indebtedness,

(2)    commissions, discounts and other fees and charges owed with respect to letters of credit securing financial obligations, bankers’ acceptance financing and receivables financings,

8

(3)    the net costs associated with Hedging Obligations,

(4)    amortization of debt issuance costs, debt discount or premium and other financing fees and expenses,

(5)    the interest portion of any deferred payment obligations,

(6)    all other non-cash interest expense,

(7)    the product of (a) all dividend payments on any series of Disqualified Equity Interests of the Parent or any Preferred Stock of any Restricted Subsidiary (other than any such Disqualified Equity Interests or any Preferred Stock held by the Parent or a Wholly-Owned Restricted Subsidiary), multiplied by (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of the Parent and the Restricted Subsidiaries, expressed as a decimal,

(8)    all interest payable with respect to discontinued operations, and

(9)    all interest on any Indebtedness of any other Person (other than a Restricted Subsidiary, in the case of the Parent, or the Parent or another Restricted Subsidiary, in the case of a Restricted Subsidiary) guaranteed by the Parent or any Restricted Subsidiary.

“Consolidated Interest Incurred” for any period means the sum, without duplication, of (1) Consolidated Interest Expense and (2) interest capitalized for such period (including interest capitalized with respect to discontinued operations but not including interest or other charges amortized to “cost of sales—homes” or “cost of sales—lots, land and other”).

“Consolidated Joint Venture” means a Joint Venture in existence on the Issue Date which becomes a Subsidiary because of a change in GAAP relating to consolidation.

“Consolidated Joint Venture Indebtedness” means Indebtedness of Consolidated Joint Ventures included on the consolidated balance sheet of the Parent and its Restricted Subsidiaries.

“Consolidated Net Income” for any period means the net income (or loss) of the Parent and the Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded from such net income (to the extent otherwise included therein), without duplication:

(1)    the net income (or loss) of any Person (other than a Restricted Subsidiary) in which any Person other than the Parent or any of its Restricted Subsidiaries

9

has an ownership interest, except to the extent that cash in an amount equal to any such income has actually been received by the Parent or any of its Restricted Subsidiaries during such period;

(2)    except to the extent includible in the consolidated net income of the Parent pursuant to the foregoing clause (1), the net income (or loss) of any Person that accrued prior to the date that (a) such Person becomes a Restricted Subsidiary or is merged into or consolidated with the Parent or any Restricted Subsidiary or (b) the assets of such Person are acquired by the Parent or any Restricted Subsidiary;

(3)    the net income of any Restricted Subsidiary (other than the Issuer) during such period to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of that income is not permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary during such period;

(4)    that portion of the net income of any Restricted Subsidiary (other than the Issuer) that is not a Guarantor and is not a Wholly-Owned Restricted Subsidiary attributable to the portion of the Equity Interests of such Restricted Subsidiary that is not owned by the Parent or the Restricted Subsidiaries;

(5)    for the purposes of calculating the Restricted Payments Basket only, in the case of a successor to the Parent or the Issuer by consolidation, merger or transfer of its assets, any income (or loss) of the successor prior to such merger, consolidation or transfer of assets;

(6)    other than for purposes of calculating the Restricted Payments Basket, any gain (or loss), together with any related provisions for taxes on any such gain (or the tax effect of any such loss), realized during such period by the Parent or any Restricted Subsidiary upon (a) the acquisition of any securities, or the extinguishment of any Indebtedness, of the Parent or any Restricted Subsidiary or (b) any Asset Sale by the Parent or any Restricted Subsidiary; and

(7)    other than for purposes of calculating the Restricted Payments Basket, any extraordinary gain (or extraordinary loss), together with any related provision for taxes on any such extraordinary gain (or the tax effect of any such extraordinary loss), realized by the Parent or any Restricted Subsidiary during such period.

In addition, any return of capital with respect to an Investment that increased the Restricted Payments Basket pursuant to clause (3)(d) of the first paragraph of Section 4.08 or decreased the amount of Investments outstanding pursuant to clause (14) of the definition

10

of “Permitted Investments” shall be excluded from Consolidated Net Income for purposes of calculating the Restricted Payments Basket.

“Consolidated Net Worth” means, with respect to any Person as of any date, the consolidated stockholders’ equity of such Person, determined on a consolidated basis in accordance with GAAP, less (without duplication) (1) any amounts thereof attributable to Disqualified Equity Interests of such Person or its Subsidiaries or any amount attributable to Unrestricted Subsidiaries (other than Cerro Plata Associates, LLC and 242 Cerro Plata, LLC) and (2) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within twelve months after the acquisition of such business) subsequent to the Issue Date in the book value of any asset owned by such Person or a Subsidiary of such Person.

“Consolidated Tangible Assets” means, as of any date, the total amount of assets of the Parent and the Restricted Subsidiaries on a consolidated basis at the end of the fiscal quarter immediately preceding such date, as determined in accordance with GAAP, less (1) Intangible Assets and (2) any assets securing Non-Recourse Indebtedness.

“Consolidated Tangible Net Worth” means, with respect to any Person as of any date, the Consolidated Net Worth of such Person as of such date less (without duplication) all Intangible Assets of such Person as of such date.

“Credit Facilities” means (i) the Loan Agreement dated as of September 25, 2000 between the Issuer and Residential Funding Corporation, as amended, (ii) the Master Loan Agreement dated as of August 31, 2000 between the Issuer and Guaranty Federal Bank, F.S.B, as amended, and (iii) the Revolving Line of Credit Loan Agreement dated as of September 21, 2000 between the Issuer and California Bank & Trust, as amended, in each case (i), (ii) and (iii), including any notes, guarantees, collateral and security documents, instruments and agreements executed in connection therewith (including Hedging Obligations related to the Indebtedness incurred thereunder), and in each case as amended or refinanced from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of borrowings or other Indebtedness outstanding or available to be borrowed thereunder) all or any portion of the Indebtedness under such agreements, and any successor or replacement agreement or agreements with the same or any other agents, creditor, lender or group of creditors or lenders. Notwithstanding the foregoing, “Credit Facilities” shall not include any agreements relating to Consolidated Joint Venture Indebtedness or Permitted Restricted Joint Venture Indebtedness.

“Custodian” means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.

“Default” means (1) any Event of Default or (2) any event, act or condition that, after notice or the passage of time or both, would be an Event of Default.

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“Depository” means, with respect to the Notes issued in the form of one or more Global Notes, The Depository Trust Company or another Person designated as Depository by the Issuer, which Person must be a clearing agency registered under the Exchange Act.

“Designation” has the meaning given to this term in Section 4.15; and “Designate” and “Designated” shall have correlative meanings.

“Designation Amount” has the meaning given to this term in Section 4.15.

“Developed Land” means all Entitled Land of the Parent, its Restricted Subsidiaries (other than Consolidated Joint Ventures) and the Restricted Joint Ventures which is undergoing active development or is ready for vertical construction.

“Directly Related Assets” means, with respect to any particular property, assets directly related thereto or derived therefrom, such as proceeds (including insurance proceeds), products, rents, and profits thereof and improvements and accessions thereto.

“Disqualified Equity Interests” of any Person means any class of Equity Interests of such Person that, by their terms, or by the terms of any related agreement or of any security into which they are convertible, puttable or exchangeable, are, or upon the happening of any event or the passage of time would be, required to be redeemed by such Person, whether or not at the option of the holder thereof, or mature or are mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, in whole or in part, on or prior to the date which is 91 days after the final maturity date of the Notes; provided, however, that any class of Equity Interests of such Person that, by its terms, authorizes such Person to satisfy in full its obligations with respect to the payment of dividends or upon maturity, redemption (pursuant to a sinking fund or otherwise) or repurchase thereof or otherwise by the delivery of Equity Interests that are not Disqualified Equity Interests, and that are not convertible, puttable or exchangeable for Disqualified Equity Interests or Indebtedness, will not be deemed to be Disqualified Equity Interests so long as such Person satisfies its obligations with respect thereto solely by the delivery of Equity Interests that are not Disqualified Equity Interests; provided, further, however, that any Equity Interests that would not constitute Disqualified Equity Interests but for provisions thereof giving holders thereof (or the holders of any security into or for which such Equity Interests are convertible, exchangeable or exercisable) the right to require the Issuer to redeem such Equity Interests upon the occurrence of a change in control occurring prior to the final maturity date of the Notes shall not constitute Disqualified Equity Interests if the change in control provisions applicable to such Equity Interests are no more favorable to such holders than the provisions of Section 4.20 and such Equity Interests specifically provide that such Person will not redeem any such Equity Interests pursuant to such provisions prior to the Issuer’s purchase of the Notes as required pursuant to the provisions of Section 4.20.

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“Entitled Land” means all land of the Parent, its Restricted Subsidiaries (other than Consolidated Joint Ventures) and the Restricted Joint Ventures (a) on which Units may be constructed or which may be utilized for commercial, retail or industrial uses, in each case, under applicable laws and regulations and (b) the intended use by the Parent for which is permissible under the applicable regional plan, development agreement or applicable zoning ordinance.

“Equity Interests” of any Person means (1) any and all shares or other equity interests (including common stock, preferred stock, limited liability company interests and partnership interests) in such Person and (2) all rights to purchase, warrants or options (whether or not currently exercisable), participations or other equivalents of or interests in (however designated) such shares or other interests in such Person.

“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

“Fair Market Value” means, with respect to any asset, the price (after taking into account any liabilities relating to such assets) that would be negotiated in an arm’s-length transaction for cash between a willing seller and a willing and able buyer, neither of which is under any compulsion to complete the transaction, as such price is determined in good faith by the Board of Directors of the Parent or a duly authorized committee thereof, as evidenced by a resolution of such Board or committee.

“GAAP” means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, as in effect from time to time.

“guarantee” means a direct or indirect guarantee by any Person of any Indebtedness of any other Person and includes any obligation, direct or indirect, contingent or otherwise, of such Person: (1) to purchase or pay (or advance or supply funds for the purchase or payment of) Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm’s-length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise); or (2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part). Notwithstanding the foregoing, the liability of a general partner for the Indebtedness of a partnership that is secured by assets of such partnership whose Fair Market Value on the Issue Date exceeds the amount of such Indebtedness shall not be deemed to be a guarantee for purposes of this definition; provided that (i) the general partner has not otherwise guaranteed or assumed such Indebtedness, (ii) such Indebtedness is not included on

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the balance sheet of the general partner and is not required to be so included in accordance with GAAP as in effect on the date of such determination (except, in each case in this clause (ii), if the partnership was a Joint Venture which became a Subsidiary and which was Designated as an Unrestricted Subsidiary in accordance with the fourth paragraph of Section 4.15), (iii) to the extent the aggregate amount of liabilities of the Parent and the Restricted Subsidiaries that would constitute guarantees but for this sentence on the date of determination exceeds $115.0 million less the aggregate amount of Indebtedness outstanding under clause (15) of the definition of “Permitted Indebtedness” on the date of determination, then such excess shall be deemed to be guarantees by the Parent and the Restricted Subsidiaries and (iv) such partnership was in existence on the Issue Date. “guarantee,” when used as a verb, and “guaranteed” have correlative meanings.

“Guarantors” means the Parent and each Restricted Subsidiary of the Parent on the Issue Date (other than the Issuer), and each other Person that is required to become a Guarantor by the terms of this Indenture after the Issue Date, in each case, until such Person is released from its Note Guarantee. On the Issue Date, the Guarantors will be the Parent, California Equity Funding, Inc., a California corporation, PH-LP Ventures, a California corporation, Duxford Financial, Inc., a California corporation, Sycamore CC, Inc., a California corporation, Presley CMR, Inc., a California corporation, William Lyon Southwest, Inc., an Arizona corporation, PH-Reilly Ventures, a California corporation, Mountain Gate Ventures, Inc., an Arizona corporation, and OX I Oxnard, L.P., a California limited partnership, Carmel Mountain Ranch, a California general partnership, HSP, Inc., a California corporation, PH Ventures-San Jose, a California corporation, Presley Homes, a California corporation and St. Helena Westminster Estates, LLC, a Delaware limited liability company.

“Hedging Obligations” of any Person means the obligations of such Person pursuant to (1) any interest rate swap agreement, interest rate collar agreement or other similar agreement or arrangement designed to protect such Person against fluctuations in interest rates, (2) agreements or arrangements designed to protect such Person against fluctuations in foreign currency exchange rates in the conduct of its operations, or (3) any forward contract, commodity swap agreement, commodity option agreement or other similar agreement or arrangement designed to protect such Person against fluctuations in commodity prices, in each case entered into in the ordinary course of business for bona fide hedging purposes and not for the purpose of speculation.

“Holder” means any registered holder, from time to time, of the Notes.

“incur” means, with respect to any Indebtedness or obligation, incur, create, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to such Indebtedness or obligation; provided that (1) the Indebtedness of a Person existing at the time such Person became a Restricted Subsidiary or at the time such Person merged with or into the Parent or a Restricted Subsidiary shall be deemed to have been incurred at such time and (2) neither the accrual of interest nor the accretion of original issue discount shall be deemed to be an incurrence of Indebtedness.

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“Indebtedness” of any Person at any date means, without duplication:

(1)      all liabilities, contingent or otherwise, of such Person for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof);

(2)      all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;

(3)      all obligations of such Person in respect of letters of credit or other similar instruments (or reimbursement obligations with respect thereto);

(4)      all obligations of such Person to pay the deferred and unpaid purchase price of property or services, except trade payables and accrued expenses incurred by such Person in the ordinary course of business in connection with obtaining goods, materials or services;

(5)      the maximum fixed redemption or repurchase price of all Disqualified Equity Interests of such Person;

(6)      all Capitalized Lease Obligations of such Person;

(7)      all Indebtedness of others secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person;

(8)      all Indebtedness of others guaranteed by such Person to the extent of such guarantee; provided that (i) Indebtedness of the Parent or its Subsidiaries that is guaranteed by the Parent or the Parent’s Subsidiaries shall be counted only once in the calculation of the amount of Indebtedness of the Parent and its Subsidiaries on a consolidated basis and (ii) only the liabilities relating to any such guarantee that are recorded as liabilities, or required (in accordance with GAAP) to be recorded as liabilities, on the balance sheet of such Person shall be considered Indebtedness of such Person (it being understood that any increase in liabilities recorded or required to be recorded on such Person’s balance sheet shall be deemed to be an “incurrence” of Indebtedness by such Person at the time of such increase);

(9)      all Attributable Indebtedness;

(10)    to the extent not otherwise included in this definition, Hedging Obligations of such Person;

(11)    all obligations of such Person under conditional sale or other title retention agreements relating to assets purchased by such Person; and

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(12)    the liquidation value of Preferred Stock of a Subsidiary of such Person issued and outstanding and held by any Person other than such Person (or one of its Wholly-Owned Restricted Subsidiaries).

Notwithstanding the foregoing, the following shall not be considered Indebtedness: (a) earn-outs or similar profit sharing or participation arrangements provided for in acquisition agreements which are determined on the basis of future operating earnings or other similar performance criteria (which are not determinable at the time of acquisition) of the acquired assets or entities, (b) accrued expenses, trade payables, customer deposits or deferred income taxes arising in the ordinary course of business, (c) the liability of a general partner for the Indebtedness of a partnership that is secured by assets of such partnership whose Fair Market Value on the Issue Date exceeds the amount of such Indebtedness; provided that, in the case of this clause (c), (i) the general partner has not otherwise guaranteed or assumed such Indebtedness, (ii) such Indebtedness is not included on the balance sheet of the general partner and is not required to be so included in accordance with GAAP as in effect on the date of such determination (except, in each case in this clause (ii), if the partnership is a Consolidated Joint Venture which was Designated as an Unrestricted Subsidiary in accordance with the fourth paragraph of Section 4.15), (iii) to the extent the aggregate amount of liabilities of the Parent and the Restricted Subsidiaries that would constitute Indebtedness but for this clause (c) on the date of determination exceeds $115.0 million less the aggregate amount of Indebtedness outstanding under clause (15) of the definition of “Permitted Indebtedness” on the date of determination, then such excess shall be considered Indebtedness of the Parent and the Restricted Subsidiaries and (iv) such partnership was in existence on the Issue Date, (d) completion guarantees entered into in the ordinary course of business and (e) obligations in respect of district improvement bonds pertaining to roads, sewers and other infrastructure. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above, the maximum liability of such Person for any such contingent obligations at such date and, in the case of clause (7), the lesser of (a) the Fair Market Value of any asset subject to a Lien securing the Indebtedness of others on the date that the Lien attaches and (b) the amount of the Indebtedness secured; provided, however, that the amount outstanding at any time of any Indebtedness issued with original issue discount shall be deemed to be the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time, as determined in accordance with GAAP. For purposes of clause (5), the “maximum fixed redemption or repurchase price” of any Disqualified Equity Interests that do not have a fixed redemption or repurchase price shall be calculated in accordance with the terms of such Disqualified Equity Interests as if such Disqualified Equity Interests were redeemed on any date on which an amount of Indebtedness outstanding shall be required to be determined pursuant to this Indenture.

“Indenture” means this Indenture as amended, restated or supplemented from time to time.

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“Independent Director” means a director of the Parent who

(1)    is independent with respect to the transaction at issue;

(2)    does not have any material financial interest in the Parent or any of its Affiliates (other than as a result of holding securities of the Parent); and

(3)    has not and whose Affiliates or affiliated firm has not, at any time during the twelve months prior to the taking of any action hereunder, directly or indirectly, received, or entered into any understanding or agreement to receive, compensation, payment or other benefit, of any type or form, from the Parent or any of its Affiliates, other than customary directors’ fees and indemnity and insurance arrangements for serving on the Board of Directors of the Parent or any Affiliate and reimbursement of out-of-pocket expenses for attendance at the Parent’s or Affiliate’s board and board committee meetings.

“Independent Financial Advisor” means an accounting, appraisal or investment banking firm of nationally recognized standing that is, in the reasonable judgment of the Parent’s Board of Directors, qualified to perform the task for which it has been engaged and disinterested and independent with respect to the Parent and its Affiliates; provided,however, that the prior rendering of service to the Parent or an Affiliate of the Parent shall not, by itself, disqualify the advisor.

“Intangible Assets” means, with respect to any Person, all unamortized debt discount and expense, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, write-ups of assets over their carrying value (other than write-ups which occurred prior to the Issue Date and other than, in connection with the acquisition of an asset, the write-up of the value of such asset to its Fair Market Value in accordance with GAAP on the date of acquisition) and all other items which would be treated as intangibles on the consolidated balance sheet of such Person prepared in accordance with GAAP.

“Interest Payment Dates” means each [            ] and [            ], commencing [            ], 2003.

“Investments” of any Person means, without duplication:

(1)    all direct or indirect investments by such Person in any other Person in the form of loans, advances or capital contributions or other credit extensions constituting Indebtedness of such other Person, and any guarantee of Indebtedness of any other Person;

(2)    all purchases (or other acquisitions for consideration) by such Person of Indebtedness, Equity Interests or other securities of any other Person;

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(3)    all other items that would be classified as investments on a balance sheet of such Person prepared in accordance with GAAP; and

(4)    the Designation of any Subsidiary as an Unrestricted Subsidiary.

Except as otherwise expressly specified in this definition, the amount of any Investment (other than an Investment made in cash) shall be the Fair Market Value thereof on the date such Investment is made. The amount of any Investment pursuant to clause (4) shall be the Designation Amount determined in accordance with Section 4.15. If the Parent or any Restricted Subsidiary sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary, the Parent shall be deemed to have made an Investment on the date of any such sale or other disposition equal to the Fair Market Value of the Equity Interests of and all other Investments in such Restricted Subsidiary not sold or disposed of, which amount shall be determined by the Board of Directors of the Parent. Notwithstanding the foregoing, redemptions of Equity Interests of the Parent shall be deemed not to be Investments.

“Issue Date” means [            ], 2003, the date on which the Notes are originally issued.

“Issuer” means the party named as such in the first paragraph of this Indenture until a successor replaces such party pursuant to Article Five and thereafter means the successor.

“Joint Venture” means a corporation, limited liability company, partnership or other entity engaged in a Permitted Business (other than an entity constituting a Subsidiary of the Parent) in which the Parent or any of its Restricted Subsidiaries owns, directly or indirectly, at least 10% of the Equity Interests.

“Lien” means, with respect to any asset, any mortgage, deed of trust, lien (statutory or other), pledge, lease, easement, restriction, covenant, charge, security interest or other encumbrance of any kind or nature in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, and any lease in the nature thereof, any option or other agreement to sell, and any filing of, or agreement to give, any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction (other than cautionary filings in respect of operating leases).

“Moody’s” means Moody’s Investors Service, Inc., and its successors; provided, that any reference to a particular rating by Moody’s shall be construed to apply to the corresponding rating of any successor.

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“Net Available Proceeds” means, with respect to any Asset Sale, the proceeds thereof in the form of cash or Cash Equivalents, net of

(1)  brokerage commissions and other fees and expenses (including fees and expenses of legal counsel, accountants and investment banks) of such Asset Sale;

(2)  provisions for taxes payable as a result of such Asset Sale (after taking into account any available tax credits or deductions and any tax sharing arrangements);

(3)  amounts required to be paid to any Person (other than the Parent or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale or having a Lien thereon;

(4)  payments of unassumed liabilities (not constituting Indebtedness) relating to the assets sold at the time of, or within 30 days after the date of, such Asset Sale; and

(5)  appropriate amounts to be provided by the Parent or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the Parent or any Restricted Subsidiary, as the case may be, after such Asset Sale, including pensions and other postemployment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers’ Certificate of the Parent delivered to the Trustee; provided, however, that any amounts remaining after adjustments, revaluations or liquidations of such reserves shall constitute Net Available Proceeds.

“Non-Recourse Indebtedness” with respect to any Person means Indebtedness of such Person for which (1) the sole legal recourse for collection of principal and interest on such Indebtedness is against the specific property identified in the instruments evidencing or securing such Indebtedness and such property was acquired with the proceeds of such Indebtedness or such Indebtedness was incurred within 90 days after the acquisition of such property and (2) no other assets of such Person may be realized upon in collection of principal or interest on such Indebtedness.

“Notes” means the [            ]% Senior Notes due 2013 issued by the Issuer, as amended from time to time in accordance with the terms hereof, that are issued pursuant to this Indenture.

“Obligation” means any principal, interest, penalties, fees, indemnification, reimbursements, costs, expenses, damages and other liabilities payable under the documentation governing any Indebtedness.

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“Offer” has the meaning set forth in the definition of “Offer to Purchase.”

“Offer Expiration Date” has the meaning set forth in the definition of “Offer to Purchase.”

“Offer to Purchase” means a written offer (the “Offer”) sent by or on behalf of the Issuer by first-class mail, postage prepaid, to each Holder at its address appearing in the register for the Notes on the date of the Offer offering to purchase up to the principal amount of Notes specified in such Offer at the purchase price specified in such Offer (as determined pursuant to this Indenture). Unless otherwise required by applicable law, the Offer shall specify an expiration date (the “Offer Expiration Date”) of the Offer to Purchase, which shall be not less than 30 Business Days nor more than 60 days after the date of such Offer, and a settlement date (the “Purchase Date”) for purchase of Notes to occur no later than three Business Days after the Offer Expiration Date. The Offer shall contain all the information required by applicable law to be included therein. The Offer shall also contain information concerning the business of the Parent and its Subsidiaries which the Issuer in good faith believes will enable such Holders to make an informed decision with respect to the Offer to Purchase. Such information shall include, at a minimum, (i) the most recent annual and quarterly financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the document required to be delivered to Holders pursuant to Section 4.02 (which requirements may be satisfied by delivery of such documents together with the Offer), (ii) a description of material developments in the Issuer’s business subsequent to the date of the latest of such financial statements referred to in clause (i) (including a description of the events requiring the Issuer to make the Offer to Purchase), (iii) if applicable, appropriate pro forma financial information concerning the Offer to Purchase and the events requiring the Issuer to make the Offer to Purchase and (iv) any other information required by applicable law to be included therein. The Offer shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Offer to Purchase. The Offer shall also state:

(1)  the Section of this Indenture pursuant to which the Offer to Purchase is being made;

(2)  the Offer Expiration Date and the Purchase Date;

(3)  the aggregate principal amount of the outstanding Notes offered to be purchased by the Issuer pursuant to the Offer to Purchase (including, if less than 100%, the manner by which such amount has been determined pursuant to the Section of this Indenture requiring the Offer to Purchase) (the “Purchase Amount”);

(4)  the purchase price to be paid by the Issuer for each $1,000 aggregate principal amount of Notes accepted for payment (the “Purchase Price”);

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(5)  that the Holder may tender all or any portion of the Notes registered in the name of such Holder and that any portion of a Note tendered must be tendered in an integral multiple of $1,000 principal amount;

(6)  the place or places where Notes are to be surrendered for tender pursuant to the Offer to Purchase;

(7)  that interest on any Note not tendered or tendered but not purchased by the Issuer pursuant to the Offer to Purchase will continue to accrue;

(8)  that on the Purchase Date the Purchase Price will become due and payable upon each Note being accepted for payment pursuant to the Offer to Purchase and that interest thereon shall cease to accrue on and after the Purchase Date;

(9)  that each Holder electing to tender all or any portion of a Note pursuant to the Offer to Purchase will be required to surrender such Note, with the form entitled “Option of Holder to Elect Purchase” on the reverse of the Note completed, at the place or places specified in the Offer prior to the close of business on the Offer Expiration Date (such Note being, if the Issuer so requires, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer duly executed by, the Holder thereof or its attorney duly authorized in writing);

(10)  that Holders will be entitled to withdraw all or any portion of Notes tendered if the Issuer receives, not later than the close of business on the fifth Business Day preceding the Offer Expiration Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder tendered, the certificate number of the Note the holder tendered and a statement that such Holder is withdrawing all or a portion of its tender;

(11)  that (a) if Notes in an aggregate principal amount less than or equal to the Purchase Amount are duly tendered and not withdrawn pursuant to the Offer to Purchase, the Issuer shall purchase all such Notes and (b) if Notes in an aggregate principal amount in excess of the Purchase Amount are tendered and not withdrawn pursuant to the Offer to Purchase, the Issuer shall purchase Notes having an aggregate principal amount equal to the Purchase Amount on a pro rata basis (with such adjustments as may be deemed appropriate so that only Notes in denominations of $1,000 principal amount or integral multiples thereof shall be purchased); and

(12)  that in the case of any Holder whose Note is purchased only in part, the Issuer shall execute and deliver to the Holder of such Note without service charge, a new Note or Notes, of any authorized denomination as requested by such Holder, in an aggregate principal amount equal to and in exchange for the unpurchased portion of the Note so tendered.

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An Offer to Purchase shall be governed by and effected in accordance with the provisions above pertaining to any Offer.

On or before the Purchase Date, the Issuer shall (i) accept for payment Notes or portions thereof tendered and not withdrawn pursuant to the Offer, (ii) deposit with the Trustee U.S. Dollars sufficient to pay the Purchase Price, plus accrued interest, if any, of all Notes to be purchased and (iii) deliver to the Trustee Notes so accepted together with an Officers’ Certificate stating the Notes or portions thereof being purchased by the Issuer. The Trustee shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the Purchase Price, plus accrued interest, if any, thereon.

“Officer” of any Person means any of the following of such Person: the Chairman of the Board of Directors, the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President, the Treasurer or the Secretary.

“Officers’ Certificate” of any Person means a certificate signed by two Officers of such Person.

“Opinion of Counsel” means a written opinion reasonably satisfactory in form and substance to the Trustee from legal counsel, which counsel is reasonably acceptable to the Trustee, stating the matters required by Section 12.05 and delivered to the Trustee.

“Parent” means William Lyon Homes, a Delaware corporation.

“Pari Passu Indebtedness” means any Indebtedness of the Issuer or any Guarantor that ranks pari passu as to payment with the Notes or the Note Guarantee of such Guarantor, as applicable.

“Permitted Business” means the businesses engaged in by the Parent and its Subsidiaries on the Issue Date as described in the Prospectus and businesses that are reasonably related thereto or reasonable extensions thereof.

“Permitted Holders” means General William Lyon, his wife, his lineal descendants and his other close family members, any corporation, limited liability company or partnership in which he has voting control and is the direct and beneficial owner of a majority of the Equity Interests and any trust for the benefit of him, his wife, his lineal descendants or his other close family members.

“Permitted Investment” means:

(1)  Investments by the Parent or any Restricted Subsidiary in (a) the Issuer or any Guarantor or (b) in any Person that is or will become immediately after

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such Investment a Guarantor or that will merge or consolidate into the Issuer or a Guarantor;

(2)  Investments in the Parent by any Restricted Subsidiary;

(3)  loans and advances to directors, employees and officers of the Parent and the Restricted Subsidiaries for bona fide business purposes and to purchase Equity Interests of the Parent not in excess of $2.0 million at any one time outstanding;

(4)  Hedging Obligations incurred pursuant to clause (4) of the second paragraph of Section 4.06;

(5)  Cash Equivalents;

(6)  receivables owing to the Parent or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Parent or any such Restricted Subsidiary deems reasonable under the circumstances;

(7)  Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers;

(8)  Investments made by the Parent or any Restricted Subsidiary as a result of consideration received in connection with an Asset Sale made in compliance with Section 4.09;

(9)  lease, utility and other similar deposits in the ordinary course of business;

(10)  Investments made by the Parent or a Restricted Subsidiary for consideration consisting only of Qualified Equity Interests;

(11)  stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Parent or any Restricted Subsidiary or in satisfaction of judgments;

(12)  Investments in existence on the Issue Date;

(13)  Investments (with each Investment being valued as of the date made and without regard to subsequent changes in value) made by the Parent or any Restricted Subsidiary in Joint Ventures, Consolidated Joint Ventures, Restricted Joint Ventures or in Unrestricted Subsidiaries in an aggregate amount at any one time

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outstanding not to exceed the sum of (x) 15% of the Parent’s Consolidated Tangible Net Worth at December 31, 2002 plus (y) in the case of the disposition or repayment of or return on any Investment in a Joint Venture, Consolidated Joint Venture or Unrestricted Subsidiary, which Investment was in existence on December 31, 2002, an amount equal to the return of capital after December 31, 2002 with respect to such Investment (to the extent not included in the computation of Consolidated Net Income), less the cost of the disposition of such Investment and net of taxes;

(14)  completion guarantees entered into in the ordinary course of business;

(15)  the Designation of a Subsidiary as an Unrestricted Subsidiary in accordance with the fourth paragraph of Section 4.15; and

(16)  other Investments in an aggregate amount not to exceed $5.0 million at any one time outstanding (with each Investment being valued as of the date made and without regard to subsequent changes in value).

The amount of Investments outstanding at any time pursuant to clause (16) above shall be deemed to be reduced:

(a)  upon the disposition or repayment of or return on any Investment made pursuant to clause (16) above, by an amount equal to the return of capital with respect to such Investment to the Parent or any Restricted Subsidiary (to the extent not included in the computation of Consolidated Net Income), less the cost of the disposition of such Investment and net of taxes; and

(b)  upon a Redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, by an amount equal to the lesser of (x) the Fair Market Value of the Parent’s proportionate interest in such Subsidiary immediately following such Redesignation, and (y) the aggregate amount of Investments in such Subsidiary that increased (and did not previously decrease) the amount of Investments outstanding pursuant to clause (16) above.

“Permitted Liens” means the following types of Liens:

(1)  (a)  statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business and (b) Liens for taxes, assessments or governmental charges or claims, in either case, for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof;

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(2)  Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);

(3)  Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person’s obligations in respect of bankers’ acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods;

(4)  Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents, goods covered thereby and other assets relating to such letters of credit and products and proceeds thereof;

(5)  Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Parent or any Restricted Subsidiary, including rights of offset and setoff;

(6)  bankers’ Liens, rights of setoff and other similar Liens existing solely with respect to cash and Cash Equivalents on deposit in one or more accounts maintained by the Parent or any Restricted Subsidiary, in each case granted in the ordinary course of business in favor of the bank or banks with which such accounts are maintained, securing amounts owing to such bank with respect to cash management and operating account arrangements, including those involving pooled accounts and netting arrangements; provided that in no case shall any such Liens secure (either directly or indirectly) the repayment of any Indebtedness;

(7)  leases or subleases, licenses or sublicenses, (or any Liens related thereto) granted to others that do not materially interfere with the ordinary course of business of the Parent or any Restricted Subsidiary;

(8)  Liens arising from filing Uniform Commercial Code financing statements regarding leases;

(9)  Liens securing all of the Notes and Liens securing any Note Guarantee;

(10)  Liens in favor of the Trustee under and as permitted by this Indenture;

(11)  Liens existing on the Issue Date securing Indebtedness outstanding on the Issue Date;

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(12)  Liens in favor of the Issuer or a Guarantor;

(13)  Liens securing Indebtedness under the Credit Facilities incurred pursuant to clause (1) of Section 4.06;

(14)  without limiting any other clause in this definition of “Permitted Liens,” Liens securing Indebtedness of the Parent or any Restricted Subsidiary permitted to be incurred under this Indenture; provided, that the aggregate amount of all Consolidated Indebtedness of the Parent and the Restricted Subsidiaries secured by Liens (including all Indebtedness permitted to be secured by the other provisions of this definition, but excluding Non-Recourse Indebtedness) shall not exceed 30% of Consolidated Tangible Assets at any one time outstanding (after giving effect to the incurrence of such Indebtedness and the use of the proceeds thereof);

(15)  Liens securing Non-Recourse Indebtedness of the Parent or any Restricted Subsidiary permitted to be incurred under this Indenture; provided, that such Liens apply only to (a) the property financed out of the net proceeds of such Non-Recourse Indebtedness within 90 days after the incurrence of such Non-Recourse Indebtedness and (b) Directly Related Assets;

(16)  Liens securing Purchase Money Indebtedness permitted to be incurred under this Indenture; provided that such Liens apply only to (a) the property acquired, constructed or improved with the proceeds of such Purchase Money Indebtedness within 90 days after the incurrence of such Purchase Money Indebtedness and (b) Directly Related Assets;

(17)  Liens securing Acquired Indebtedness permitted to be incurred under this Indenture; provided that the Liens do not extend to assets not subject to such Lien at the time of acquisition (other than Directed Related Assets) and are no more favorable to the lienholders than those securing such Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by the Parent or a Restricted Subsidiary;

(18)  Liens on assets of a Person existing at the time such Person is acquired or merged with or into or consolidated with the Parent or any such Restricted Subsidiary (and not created in anticipation or contemplation thereof);

(19)  Liens to secure Attributable Indebtedness permitted to be incurred under this Indenture; provided that any such Lien shall not extend to or cover any assets of the Parent or any Restricted Subsidiary other than (a) the assets which are the subject of the Sale and Leaseback Transaction in which the Attributable Indebtedness is incurred and (b) Directly Related Assets;

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(20)  Liens securing Consolidated Joint Venture Indebtedness permitted to be incurred under this Indenture; provided that, with respect to Indebtedness of any particular Consolidated Joint Venture, such Liens do not extend to assets other than those of the Consolidated Joint Venture;

(21)  Liens securing Permitted Restricted Joint Venture Indebtedness permitted to be incurred under this Indenture; provided that, with respect to Indebtedness of any particular Restricted Joint Venture, such Liens do not extend to assets other than those of the Restricted Joint Venture;

(22)  Liens to secure Refinancing Indebtedness which is incurred to refinance any Indebtedness which has been secured by a Lien permitted under this Indenture and which has been incurred in accordance with the provisions of this Indenture; provided that in each case such Liens do not extend to any additional assets (other than Directly Related Assets);

(23)  attachment or judgment Liens not giving rise to a Default and which are being contested in good faith by appropriate proceedings;

(24)  easements, rights-of-way, restrictions and other similar charges or encumbrances not materially interfering with the ordinary course of business of the Parent and its Subsidiaries;

(25)  zoning restrictions, licenses, restrictions on the use of real property or minor irregularities in title thereto, which do not materially impair the use of such real property in the ordinary course of business of the Parent and its Subsidiaries or the value of such real property for the purpose of such business;

(26)  Liens on Equity Interests in an Unrestricted Subsidiary to the extent that such Liens secure Indebtedness of such Unrestricted Subsidiary owing to lenders who have also been granted Liens on assets of such Unrestricted Subsidiary to secure such Indebtedness; and

(27)  any option, contract or other agreement to sell an asset; provided such sale is not otherwise prohibited under this Indenture.

“Permitted Restricted Joint Venture Indebtedness” means Indebtedness of a Restricted Joint Venture incurred pursuant to clause (1) of Section 4.06.

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“Permitted Unrestricted Subsidiary Debt” means Indebtedness of an Unrestricted Subsidiary:

(1)  as to which neither the Parent nor any Restricted Subsidiary (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable as a guarantor or otherwise, or (c) constitutes the lender, other than, in the case of clause (a) or (b), obligations of the Parent or any Restricted Subsidiary arising as a result of being the general partner of such Unrestricted Subsidiary to the extent such obligations do not constitute Indebtedness of the Parent or such Restricted Subsidiary in accordance with the definition of “Indebtedness”; and

(2)  as to which the lenders have been notified in writing that they will not have any recourse to the Equity Interests or assets of the Parent or any Restricted Subsidiary.

“Person” means any individual, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other entity of any kind.

“Physical Notes” means certificated Notes in registered form in substantially the form set forth in Exhibit A.

“Plan of Liquidation” with respect to any Person, means a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise): (1) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such Person otherwise than as an entirety or substantially as an entirety; and (2) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition of all or substantially all of the remaining assets of such Person to creditors and holders of Equity Interests of such Person.

“Preferred Stock” means, with respect to any Person, any and all preferred or preference stock or other equity interests (however designated) of such Person whether now outstanding or issued after the Issue Date.

“principal” means, with respect to the Notes, the principal of, and premium, if any, on the Notes.

“Prospectus” means the Prospectus dated March [            ], 2003, pursuant to which the Notes were offered.

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“Purchase Amount” has the meaning set forth in the definition of “Offer to Purchase.”

“Purchase Date” has the meaning set forth in the definition of “Offer to Purchase.”

“Purchase Money Indebtedness” means Indebtedness, including Capitalized Lease Obligations, of the Parent or any Restricted Subsidiary incurred for the purpose of financing all or any part of the purchase price of property, plant or equipment used in the business of the Parent or any Restricted Subsidiary or the cost of installation, construction or improvement thereof; provided, however, that (1) the amount of such Indebtedness shall not exceed such purchase price or cost (including financing costs), (2) such Indebtedness shall not be secured by any asset other than the specified asset being financed or, in the case of real property or fixtures, including additions and improvements, the real property to which such asset is attached and Directly Related Assets and (3) such Indebtedness shall be incurred within 90 days after such acquisition of such asset by the Parent or such Restricted Subsidiary or such installation, construction or improvement.

“Purchase Price” has the meaning set forth in the definition of “Offer to Purchase.”

“Qualified Equity Interests” means Equity Interests of the Parent other than Disqualified Equity Interests; provided that such Equity Interests shall not be deemed Qualified Equity Interests to the extent sold or owed to a Subsidiary of the Parent or financed, directly or indirectly, using funds (1) borrowed from the Parent or any Subsidiary of the Parent until and to the extent such borrowing is repaid or (2) contributed, extended, guaranteed or advanced by the Parent or any Subsidiary of the Parent (including, without limitation, in respect of any employee stock ownership or benefit plan).

“Qualified Equity Offering” means the issuance and sale of Qualified Equity Interests; provided, however, that cash proceeds therefrom equal to not less than 100% of the aggregate principal amount of any Notes to be redeemed are received by the Issuer as a capital contribution immediately prior to such redemption.

“Ratio Exception” has the meaning set forth in the proviso in the first paragraph of Section 4.06.

“redeem” means to redeem, repurchase, purchase, defease, retire, discharge or otherwise acquire or retire for value; and “redemption” shall have a correlative meaning.

“Redemption Date” when used with respect to any Note to be redeemed means the date fixed for such redemption pursuant to the terms of the Notes.

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“Redesignation” has the meaning given to such term in Section 4.15.

“refinance” means to refinance, repay, prepay, replace, renew or refund.

“Refinancing Indebtedness” means Indebtedness of the Parent or a Restricted Subsidiary issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used substantially concurrently to redeem or refinance in whole or in part, or constituting an amendment of, any Indebtedness of the Parent or any Restricted Subsidiary (the “Refinanced Indebtedness”) in a principal amount not in excess of the principal amount of the Refinanced Indebtedness so repaid or amended (plus the amount of any premium paid and the amount of reasonable expenses incurred by the Parent or any Restricted Subsidiary in connection with such repayment or amendment) (or, if such Refinancing Indebtedness refinances Indebtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commitment under such revolving credit facility or other agreement); provided that:

(1)  if the Refinanced Indebtedness was subordinated to or pari passu with the Notes or the Note Guarantees, as the case may be, then such Refinancing Indebtedness, by its terms, is expressly pari passu with (in the case of Refinanced Indebtedness that was pari passu with) or subordinate in right of payment to (in the case of Refinanced Indebtedness that was subordinated to) the Notes or the Note Guarantees, as the case may be, at least to the same extent as the Refinanced Indebtedness;

(2)  the Refinancing Indebtedness is scheduled to mature either (a) no earlier than the Refinanced Indebtedness being repaid or amended or (b) after the maturity date of the Notes;

(3)  the portion, if any, of the Refinancing Indebtedness that is scheduled to mature on or prior to the maturity date of the Notes has a Weighted Average Life to Maturity at the time such Refinancing Indebtedness is incurred that is equal to or greater than the Weighted Average Life to Maturity of the portion of the Refinanced Indebtedness being repaid that is scheduled to mature on or prior to the maturity date of the Notes; and

(4)  the Refinancing Indebtedness is secured only to the extent, if at all, and by the assets, that the Refinanced Indebtedness being repaid, extended or amended is secured.

“Responsible Officer” when used with respect to the Trustee, means an officer or assistant officer assigned to the corporate trust department of the Trustee (or any successor group of the Trustee) with direct responsibility for the administration of this Indenture and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject.

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“Restricted Joint Venture” means a partnership formed after the Issue Date which, at the time of its formation, constituted a Joint Venture (whether or not it subsequently becomes a Restricted Subsidiary) and of which the Issuer or any Guarantor is a general partner, to the extent that (i) the Indebtedness of such partnership is secured by assets whose Fair Market Value on the date of determination exceed the amount of such Indebtedness and (ii) the general partner has not otherwise guaranteed or assumed such Indebtedness.

“Restricted Payment” means any of the following:

(1)  the declaration or payment of any dividend or any other distribution on Equity Interests of the Parent or any Restricted Subsidiary or any payment made to the direct or indirect holders (in their capacities as such) of Equity Interests of the Parent or any Restricted Subsidiary, including, without limitation, any payment in connection with any merger or consolidation involving the Parent or the Issuer, but excluding (a) dividends or distributions payable solely in Qualified Equity Interests and (b) in the case of Restricted Subsidiaries, dividends or distributions payable to the Parent or to a Restricted Subsidiary and pro rata dividends or distributions payable to minority stockholders of any Restricted Subsidiary;

(2)  the redemption of any Equity Interests of the Parent or any Restricted Subsidiary, including, without limitation, any payment in connection with any merger or consolidation involving the Parent or the Issuer, but excluding any such Equity Interests held by the Parent or any Restricted Subsidiary;

(3)  any Investment other than a Permitted Investment; or

(4)  any redemption prior to the scheduled maturity or prior to any scheduled repayment of principal or sinking fund payment, as the case may be, in respect of Subordinated Indebtedness.

“Restricted Payments Basket” has the meaning given to such term in the first paragraph of Section 4.08.

“Restricted Subsidiary” means any Subsidiary of the Parent other than an Unrestricted Subsidiary.

“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors; provided, that any reference to a particular rating by S&P shall be construed to apply to the corresponding rating of any successor.

“Sale and Leaseback Transaction” means, with respect to any Person, an arrangement with any bank, insurance company or other lender or investor or to which such lender or investor is a party, providing for the leasing by such Person of any asset of such Person

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which has been or is being sold or transferred by such Person to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such asset.

“SEC” means the U.S. Securities and Exchange Commission.

“Secretary’s Certificate” means a certificate signed by the Secretary of the Parent.

“Securities Act” means the U.S. Securities Act of 1933, as amended.

“Significant Subsidiary” means (1) any Restricted Subsidiary (other than the Issuer) that would be a “significant subsidiary” as defined in Regulation S-X promulgated pursuant to the Securities Act as such Regulation is in effect on the Issue Date and (2) any Restricted Subsidiary (other than the Issuer) that, when aggregated with all other Restricted Subsidiaries (other than the Issuer) that are not otherwise Significant Subsidiaries and as to which any event described in clause (7) or (8) of Section 6.01 has occurred and is continuing, would constitute a Significant Subsidiary under clause (1) of this definition.

“Subordinated Indebtedness” means Indebtedness of the Issuer or any Guarantor that is subordinated in right of payment to the Notes or the Note Guarantees, respectively.

“Subsidiary” means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity that is or is required to be consolidated in the consolidated financial statements of such Person in accordance with GAAP. Unless otherwise specified, “Subsidiary” refers to a Subsidiary of the Parent.

“Subsidiary Guarantor” means any Guarantor other than the Parent.

“Trust Indenture Act” or “TIA” means the Trust Indenture Act of 1939, as amended.

“Trustee” means the party named as such in this Indenture until a successor replaces it pursuant to this Indenture and thereafter means the successor.

“Unit” means a residence, whether single or part of a multifamily building, whether completed or under construction, held by the Parent, any Restricted Subsidiary (other than Consolidated Joint Ventures) or any Restricted Joint Venture for sale in the ordinary course of business.

“Unrestricted Subsidiary” means (1) any Subsidiary that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors of the Parent in accordance with Section 4.15 and (2) any Subsidiary of an Unrestricted Subsidiary.

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“U.S. Government Obligations” means direct non-callable obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged.

“Voting Stock” with respect to any Person, means securities of any class of Equity Interests of such Person entitling the holders thereof (whether at all times or only so long as no senior class of stock or other relevant equity interest has voting power by reason of any contingency) to vote in the election of members of the Board of Directors of such Person.

“Weighted Average Life to Maturity” when applied to any Indebtedness at any date, means the number of years obtained by dividing (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment by (2) the then outstanding principal amount of such Indebtedness.

“Wholly-Owned Restricted Subsidiary” means a Restricted Subsidiary of which 100% of the Equity Interests (except for directors’ qualifying shares or certain minority interests owned by other Persons solely due to local law requirements that there be more than one stockholder, but which interest is not in excess of what is required for such purpose) are owned directly by the Parent or through one or more Wholly-Owned Restricted Subsidiaries.

SECTION 1.02.    Other Definitions.

The definitions of the following terms may be found in the sections indicated as follows:

Term	Defined in Section
“Affiliate Transaction”	4.10
“Agent Members”	2.16	(a)
“Change of Control Date”	4.20
“Change of Control Offer”	4.20
“Change of Control Payment Date”	4.20
“Change of Control Purchase Price”	4.20
“Covenant Defeasance”	9.03
“Deficiency Date”	4.16
“Designation”	4.15
“Designation Amount”	4.15
“Events of Default”	6.01
“Excess Proceeds”	4.09
“Global Notes”	2.16	(a)

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“Legal Defeasance”	9.02
“Minimum Tangible Net Worth”	4.16
“Mortgage Subsidiary”	4.06
“Net Proceeds Deficiency”	4.09
“Net Proceeds Offer”	4.09
“Net Worth Offer”	4.16
“Net Worth Offer Amount	4.16
“Offered Price”	4.09
“Pari Passu Indebtedness Price	4.09
“Paying Agent”	2.04
“Payment Amount”	4.09
“Permitted Indebtedness”	4.06
“Ratio Exception”	4.06
“Redesignation”	4.15
“Registrar”	2.04
“Successor”	5.01

SECTION 1.03.    Incorporation by Reference of Trust Indenture Act.

Whenever this Indenture refers to a provision of the TIA, the portion of such provision required to be incorporated herein in order for this Indenture to be qualified under the TIA is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings:

“indenture securities” means the Notes.

“indenture securityholder” means a Holder or Noteholder.

“indenture to be qualified” means this Indenture.

“indenture trustee” or “institutional trustee” means the Trustee.

“obligor on the indenture securities” means the Issuer, the Guarantors or any other obligor on the Notes.

All other terms used in this Indenture that are defined by the TIA, defined in the TIA by reference to another statute or defined by SEC rule have the meanings therein assigned to them.

SECTION 1.04.    Rules of Construction.

Unless the context otherwise requires:

(1)  a term has the meaning assigned to it herein, whether defined expressly or by reference;

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(2)  “or” is not exclusive;

(3)  words in the singular include the plural, and in the plural include the singular;

(4)  words used herein implying any gender shall apply to both genders;

(5)  “herein”, “hereof” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other Subsection;

(6)  unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP as in effect from time to time, applied on a basis consistent with the most recent audited consolidated financial statements of the Issuer; and

(7)  “$,” “U.S. Dollars” and “United States Dollars” each refer to United States dollars, or such other money of the United States that at the time of payment is legal tender for payment of public and private debts.

ARTICLE TWO

THE NOTES

SECTION 2.01.    Amount of Notes.

The Trustee shall authenticate (i) Notes for original issue on the Issue Date in the aggregate principal amount not to exceed $250,000,000 and (ii) subject to Section 4.06, Additional Notes in the aggregate principal amount not to exceed $150,000,000, upon a written order of the Issuer in the form of an Officers’ Certificate of the Issuer. The Officers’ Certificate shall specify the amount of Notes to be authenticated and the date on which the Notes are to be authenticated. The aggregate principal amount of Notes outstanding at any time may not exceed $350,000,000, except as provided in Sections 2.08 and 2.09.

Upon receipt of a written order of the Issuer in the form of an Officers’ Certificate, the Trustee shall authenticate Notes in substitution for Notes originally issued to reflect any name change of the Issuer. Any Additional Notes shall be part of the same issue as the Notes being issued on the date hereof and will vote on all matters as one class with the Notes being issued on the date hereof, including, without limitation, waivers, amendments, redemptions and Offers to Purchase. For the purposes of this Indenture, except for Section 4.06, references to the Notes include Additional Notes, if any.

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SECTION 2.02.    Form and Dating.

The Notes and the Trustee’s certificate of authentication with respect thereto shall be substantially in the form set forth in Exhibit A, which is incorporated in and forms a part of this Indenture. The Notes may have notations, legends or endorsements required by law, rule or usage to which the Issuer is subject. Each Note shall be dated the date of its authentication.

The terms and provisions contained in the Notes shall constitute, and are expressly made, a part of this Indenture and, to the extent applicable, the Issuer, the Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and agree to be bound thereby.

The Notes may be presented for registration of transfer and exchange at the offices of the Registrar.

SECTION 2.03.    Execution and Authentication.

Two Officers shall sign, or one Officer shall sign and one Officer (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall attest to, the Notes for the Issuer by manual or facsimile signature.

If an Officer whose signature is on a Note was an Officer at the time of such execution but no longer holds that office at the time the Trustee authenticates the Note, the Note shall be valid nevertheless.

No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Note shall have been authenticated and delivered hereunder but never issued and sold by the Issuer, and the Issuer shall deliver such Note to the Trustee for cancellation as provided in Section 2.12, for all purposes of this Indenture such Note shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture.

The Trustee may appoint an authenticating agent reasonably acceptable to the Issuer to authenticate the Notes. Unless otherwise provided in the appointment, an authenticating agent may authenticate the Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Issuer and Affiliates of the

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Issuer. Each Paying Agent is designated as an authenticating agent for purposes of this Indenture.

The Notes shall be issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof.

SECTION 2.04.    Registrar and Paying Agent.

The Issuer shall maintain an office or agency (which shall be located in the Borough of Manhattan in The City of New York, State of New York) where Notes may be presented for registration of transfer or for exchange (the “Registrar”), and an office or agency where Notes may be presented for payment (the “Paying Agent”) and an office or agency where notices and demands to or upon the Issuer, if any, in respect of the Notes and this Indenture may be served. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Issuer may have one or more additional Paying Agents. The term “Paying Agent” includes any additional Paying Agent. The Issuer may change any Paying Agent or Registrar without prior notice to the Trustee or the Holders. Neither the Issuer nor any Affiliate thereof may act as Paying Agent.

The Issuer shall enter into an appropriate agency agreement, which shall incorporate the provisions of the TIA, with any Agent that is not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Issuer shall notify the Trustee of the name and address of any such Agent. If the Issuer fails to maintain a Registrar or Paying Agent or fails to give the foregoing notice, the Trustee shall act as such and shall be entitled to appropriate compensation in accordance with Section 7.07.

The Issuer initially appoints the Trustee as Registrar, Paying Agent and Agent for service of notices and demands in connection with the Notes and this Indenture.

SECTION 2.05.    Paying Agent To Hold Money in Trust.

Each Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by the Paying Agent for the payment of principal of or premium or interest on the Notes (whether such money has been paid to it by the Issuer or any other obligor on the Notes or the Guarantors), and the Issuer and the Paying Agent shall notify the Trustee of any default by the Issuer (or any other obligor on the Notes) in making any such payment. Money held in trust by the Paying Agent need not be segregated except as required by law and in no event shall the Paying Agent be liable for any interest on any money received by it hereunder. The Issuer at any time may require the Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed and the Trustee may at any time during the continuance of any Event of Default specified in Section 6.01 (1) or (2), upon written request to the Paying Agent, require such Paying Agent to pay forthwith all money so held by it to the Trustee

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and to account for any funds disbursed. Upon making such payment, the Paying Agent shall have no further liability for the money delivered to the Trustee.

SECTION 2.06.    Holder Lists.

The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of the Holders. If the Trustee is not the Registrar, the Issuer shall furnish to the Trustee at least five Business Days before each Interest Payment Date, and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders.

SECTION 2.07.    Transfer and Exchange.

Subject to Section 2.16, when Notes are presented to the Registrar with a request from the Holder of such Notes to register a transfer or to exchange them for an equal principal amount of Notes of other authorized denominations, the Registrar shall register the transfer as requested. Every Note presented or surrendered for registration of transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Registrar, duly executed by the Holder thereof or his attorneys duly authorized in writing. To permit registrations of transfers and exchanges, the Issuer shall issue and execute and the Trustee shall authenticate new Notes (and the Guarantors shall execute the guarantee thereon) evidencing such transfer or exchange at the Registrar’s request. No service charge shall be made to the Holder for any registration of transfer or exchange. The Issuer may require from the Holder payment of a sum sufficient to cover any transfer taxes or other governmental charge that may be imposed in relation to a transfer or exchange, but this provision shall not apply to any exchange pursuant to Section 2.11, 3.06, 4.09, 4.20 or 8.05 (in which events the Issuer shall be responsible for the payment of such taxes). The Registrar shall not be required to exchange or register a transfer of any Note for a period of 15 days immediately preceding the mailing of notice of redemption of Notes to be redeemed or of any Note selected, called or being called for redemption except the unredeemed portion of any Note being redeemed in part.

Any Holder of the Global Note shall, by acceptance of such Global Note, agree that transfers of the beneficial interests in such Global Note may be effected only through a book entry system maintained by the Holder of such Global Note (or its agent), and that ownership of a beneficial interest in the Global Note shall be required to be reflected in a book entry.

Each Holder of a Note agrees to indemnify the Issuer and the Trustee against any liability that may result from the transfer, exchange or assignment of such Holder’s Note in violation of any provision of this Indenture and/or applicable U.S. Federal or state securities law.

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Except as expressly provided herein, neither the Trustee nor the Registrar shall have any duty to monitor the Issuer’s compliance with or have any responsibility with respect to the Issuer’s compliance with any Federal or state securities laws.

SECTION 2.08.    Replacement Notes.

If a mutilated Note is surrendered to the Registrar or the Trustee, or if the Holder of a Note claims that the Note has been lost, destroyed or wrongfully taken, the Issuer shall issue and the Trustee shall authenticate a replacement Note (and the Guarantors shall execute the guarantee thereon) if the Holder of such Note furnishes to the Issuer and the Trustee evidence reasonably acceptable to them of the ownership and the destruction, loss or theft of such Note and if the requirements of Section 8-405 of the New York Uniform Commercial Code as in effect on the date of this Indenture are met. If required by the Trustee or the Issuer, an indemnity bond shall be posted, sufficient in the judgment of both to protect the Issuer, the Guarantors, the Trustee or any Paying Agent from any loss that any of them may suffer if such Note is replaced. The Issuer may charge such Holder for the Issuer’s reasonable out-of-pocket expenses (including, without limitation, attorneys’ fees and disbursements) in replacing such Note and the Trustee may charge the Issuer for the Trustee’s expenses (including, without limitation, attorneys’ fees and disbursements) in replacing such Note. Every replacement Note shall constitute a contractual obligation of the Issuer.

SECTION 2.09.    Outstanding Notes.

The Notes outstanding at any time are all Notes that have been authenticated by the Trustee except for (a) those cancelled by it, (b) those delivered to it for cancellation, (c) to the extent set forth in Sections 9.01 and 9.02, on or after the date on which the conditions set forth in Section 9.01 or 9.02 have been satisfied, those Notes theretofore authenticated and delivered by the Trustee hereunder and (d) those described in this Section 2.09 as not outstanding. Subject to Section 2.10, a Note does not cease to be outstanding because the Issuer or one of its Affiliates holds the Note.

If a Note is replaced pursuant to Section 2.08, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser in whose hands such Note is a legal, valid and binding obligation of the Issuer.

If the Paying Agent holds, in its capacity as such, on any maturity date, money sufficient to pay all accrued interest and principal with respect to the Notes payable on that date and is not prohibited from paying such money to the Holders thereof pursuant to the terms of this Indenture, then on and after that date such Notes cease to be outstanding and interest on them ceases to accrue.

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SECTION 2.10.    Treasury Notes.

In determining whether the Holders of the required principal amount of Notes have concurred in any declaration of acceleration or notice of default or direction, waiver or consent or any amendment, modification or other change to this Indenture, Notes owned by the Issuer or any other Affiliate of the Issuer shall be disregarded as though they were not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent or any amendment, modification or other change to this Indenture, only Notes as to which a Responsible Officer of the Trustee has received an Officers’ Certificate stating that such Notes are so owned shall be so disregarded. Notes so owned which have been pledged in good faith shall not be disregarded if the pledgee established to the satisfaction of the Trustee the pledgee’s right so to act with respect to the Notes and that the pledgee is not the Issuer, a Guarantor, any other obligor on the Notes or any of their respective Affiliates.

SECTION 2.11.    Temporary Notes.

Until definitive Notes are prepared and ready for delivery, the Issuer may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have variations that the Issuer considers appropriate for temporary Notes. Without unreasonable delay, the Issuer shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes. Until such exchange, temporary Notes shall be entitled to the same rights, benefits and privileges as definitive Notes.

SECTION 2.12.    Cancellation.

The Issuer at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall (subject to the record-retention requirements of the Exchange Act) destroy cancelled Notes. The Issuer may not reissue or resell, or issue new Notes to replace, Notes that the Issuer has redeemed or paid, or that have been delivered to the Trustee for cancellation.

SECTION 2.13.    Defaulted Interest.

If the Issuer defaults on a payment of interest on the Notes, it shall pay the defaulted interest, plus (to the extent permitted by law) any interest payable on the defaulted interest, in accordance with the terms hereof, to the Persons who are Holders on a subsequent special record date, which date shall be at least five Business Days prior to the payment date. The Issuer shall fix such special record date and payment date in a manner satisfactory to the Trustee. At least 10 days before such special record date, the Issuer shall mail to each Holder

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a notice that states the special record date, the payment date and the amount of defaulted interest, and interest payable on defaulted interest, if any, to be paid. The Issuer may make payment of any defaulted interest in any other lawful manner not inconsistent with the requirements (if applicable) of any securities exchange on which the Notes may be listed and, upon such notice as may be required by such exchange, if, after written notice given by the Issuer to the Trustee of the proposed payment pursuant to this sentence, such manner of payment shall be deemed practicable by the Trustee.

SECTION 2.14.    CUSIP Number.

The Issuer in issuing the Notes may use a “CUSIP” number, and if so, such CUSIP number shall be included in notices of redemption or exchange as a convenience to Holders; provided, that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes, and that reliance may be placed only on the other identification numbers printed on the Notes. The Issuer shall promptly notify the Trustee of any such CUSIP number used by the Issuer in connection with the issuance of the Notes and of any change in the CUSIP number.

SECTION 2.15.    Deposit of Moneys.

Prior to 10:00 a.m., New York City time, on each Interest Payment Date and maturity date, the Issuer shall have deposited with the Paying Agent in immediately available funds money sufficient to make cash payments, if any, due on such Interest Payment Date or maturity date, as the case may be, in a timely manner which permits the Trustee to remit payment to the Holders on such Interest Payment Date or maturity date, as the case may be. The principal and interest on Global Notes shall be payable to the Depository or its nominee, as the case may be, as the sole registered owner and the sole holder of the Global Notes represented thereby. The principal and interest on Physical Notes shall be payable, either in person or by mail, at the office of the Paying Agent.

SECTION 2.16.    Book-Entry Provisions for Global Notes.

(a) The Notes issued on the Issue Date initially shall be represented by one or more notes in registered, global form without interest coupons (collectively, the “Global Notes”). The Global Notes shall bear legends as set forth in Exhibit B. The Global Notes initially shall (i) be registered in the name of the Depository or the nominee of such Depository, in each case for credit to an account of an Agent Member and (ii) be delivered to the Trustee as custodian for such Depository. Members of, or direct or indirect participants in, the Depository (“Agent Members”) shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Notes, and the Depository may be treated by the Issuer, the Trustee and any agent of the Issuer or the Trustee as the absolute owner of the Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Issuer, the Trustee or

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any agent of the Issuer or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Note.

(b) Transfers of Global Notes shall be limited to transfer in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Notes may be transferred or exchanged for Physical Notes in accordance with the rules and procedures of the Depository. In addition, a Global Note shall be exchangeable for Physical Notes if (i) the Depository (x) notifies the Issuer (and the Issuer notifies the Trustee) that it is unwilling or unable to continue as depository for such Global Note and the Issuer thereupon fails to appoint a successor depository or (y) has ceased to be a clearing agency registered under the Exchange Act and the Issuer thereupon fails to appoint a successor depository, (ii) the Issuer, at its option, notifies the Trustee in writing that it elects to cause the issuance of such Physical Notes or (iii) there shall have occurred and be continuing an Event of Default with respect to the Notes. In all cases, Physical Notes delivered in exchange for any Global Note or beneficial interests therein shall be registered in the names, and issued in any approved denominations, requested by or on behalf of the Depository (in accordance with its customary procedures).

(c) In connection with any transfer or exchange of a portion of the beneficial interest in any Global Note to beneficial owners pursuant to paragraph (b), the Registrar and Depository shall (if one or more Physical Notes are to be issued) reflect on their respective books and records the date and a decrease in the principal amount of the Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and the Issuer shall execute, and the Trustee shall upon receipt of a written order from the Issuer authenticate and make available for delivery, one or more Physical Notes of like tenor and amount.

(d) In connection with the transfer of Global Notes as an entirety to beneficial owners pursuant to paragraph (b), the Global Notes shall be deemed to be surrendered to the Trustee for cancellation, and the Issuer shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depository in writing in exchange for its beneficial interest in the Global Notes, an equal aggregate principal amount of Physical Notes of authorized denominations.

(e) Any beneficial interest in one of the Global Notes that is transferred to a Person who takes delivery in the form of an interest in another Global Note shall, upon transfer, cease to be an interest in such Global Note and become an interest in such other Global Note and, accordingly, shall thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in such other Global Note for as long as it remains such an interest.

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(f) The Holder of any Global Note may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes.

SECTION 2.17.    Computation of Interest.

Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months.

ARTICLE THREE

REDEMPTION

SECTION 3.01.    Election To Redeem; Notices to Trustee.

If the Issuer elects to redeem Notes pursuant to paragraph 6 of the Notes, at least 45 days prior to the Redemption Date (unless a shorter notice shall be agreed to in writing by the Trustee) but not more than 65 days before the Redemption Date, the Issuer shall notify the Trustee in writing of the Redemption Date, the principal amount of Notes to be redeemed and the redemption price, and deliver to the Trustee an Officers’ Certificate stating that such redemption will comply with the conditions contained in paragraph 6 of the Notes. Notice given to the Trustee pursuant to this Section 3.01 may not be revoked after the time that notice is given to Holders pursuant to Section 3.03.

SECTION 3.02.    Selection by Trustee of Notes To Be Redeemed.

In the event that less than all of the Notes are to be redeemed pursuant to a redemption made pursuant to paragraph 6 of the Notes, selection of the Notes for redemption shall be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not then listed on a national security exchange, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided, however, that no Notes of a principal amount of $1,000 or less shall be redeemed in part. If a partial redemption is made pursuant to the second paragraph of paragraph 6 of the Notes, selection of the Notes or portions thereof for redemption shall be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as is practicable (subject to the procedures of the Depository), unless that method is otherwise prohibited. The Trustee shall promptly notify the Issuer of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. The Trustee may select for redemption portions of the principal of the Notes that have denominations larger than $1,000. For all purposes of this Indenture unless the context otherwise requires, provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. The Issuer may acquire Notes by means

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other than redemption, whether pursuant to an Issuer tender offer, open market purchase or otherwise provided such acquisition does not otherwise violate the other terms of this Indenture.

SECTION 3.03.    Notice of Redemption.

At least 30 days, and no more than 60 days, before a Redemption Date, the Issuer shall mail, or cause to be mailed, a notice of redemption by first-class mail to each Holder of Notes to be redeemed at his or her last address as the same appears on the registry books maintained by the Registrar pursuant to Section 2.04.

The notice shall identify the Notes to be redeemed (including the CUSIP numbers thereof) and shall state:

(1)    the Redemption Date;

(2)    the redemption price and the amount of premium and accrued interest to be paid;

(3)    if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the Redemption Date and upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion will be issued;

(4)    the name and address of the Paying Agent;

(5)    that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price;

(6)    that unless the Issuer defaults in making the redemption payment, interest on Notes called for redemption ceases to accrue on and after the Redemption Date;

(7)    the provision of paragraph 6 of the Notes, as the case may be, pursuant to which the Notes called for redemption are being redeemed; and

(8)    the aggregate principal amount of Notes that are being redeemed.

At the Issuer’s written request made at least five Business Days prior to the date on which notice is to be given, the Trustee shall give the notice of redemption in the Issuer’s name and at the Issuer’s sole expense.

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SECTION 3.04.    Effect of Notice of Redemption.

Once the notice of redemption described in Section 3.03 is mailed, Notes called for redemption become due and payable on the Redemption Date and at the redemption price, including any premium, plus interest accrued to the Redemption Date. Upon surrender to the Paying Agent, such Notes shall be paid at the redemption price, including any premium, plus interest accrued to the Redemption Date, provided that if the Redemption Date is after a regular record date and on or prior to the Interest Payment Date, the accrued interest shall be payable to the Holder of the redeemed Notes registered on the relevant record date, and provided, further, that if a Redemption Date is a Legal Holiday, payment shall be made on the next succeeding Business Day and no interest shall accrue for the period from such Redemption Date to such succeeding Business Day.

SECTION 3.05.    Deposit of Redemption Price.

On or prior to 10:00 A.M., New York City time, on each Redemption Date, the Issuer shall deposit with the Paying Agent in immediately available funds money sufficient to pay the redemption price of, including premium, if any, and accrued interest on all Notes to be redeemed on that date other than Notes or portions thereof called for redemption on that date which have been delivered by the Issuer to the Trustee for cancellation.

On and after any Redemption Date, if money sufficient to pay the redemption price of, including premium, if any, and accrued interest on Notes called for redemption shall have been made available in accordance with the preceding paragraph, the Notes called for redemption will cease to accrue interest and the only right of the Holders of such Notes will be to receive payment of the redemption price of and, subject to the first proviso in Section 3.04, accrued and unpaid interest on such Notes to the Redemption Date. If any Note surrendered for redemption shall not be so paid, interest will be paid, from the Redemption Date until such redemption payment is made, on the unpaid principal of the Note and any interest not paid on such unpaid principal, in each case, at the rate and in the manner provided in the Notes.

SECTION 3.06.    Notes Redeemed in Part.

Upon surrender of a Note that is redeemed in part, the Trustee shall authenticate for the Holder thereof a new Note equal in principal amount to the unredeemed portion of the Note surrendered.

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ARTICLE FOUR

COVENANTS

SECTION 4.01.    Payment of Notes.

The Issuer shall pay the principal of and interest on the Notes on the dates and in the manner provided in the Notes and this Indenture. An installment of principal or interest shall be considered paid on the date it is due if the Trustee or Paying Agent holds on that date money designated for and sufficient to pay such installment.

The Issuer shall pay interest on overdue principal (including post-petition interest in a proceeding under any Bankruptcy Law), and overdue interest, to the extent lawful, at the rate specified in the Notes.

SECTION 4.02.    Reports to Holders.

Whether or not required by the SEC, so long as any Notes are outstanding, the Parent shall furnish to the Holders of Notes, within the time periods specified in the SEC’s rules and regulations (including any grace periods or extensions permitted by the SEC):

(1)    all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Parent were required to file these Forms, including a “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual information only, a report on the annual financial statements by the Parent’s certified independent accountants; and

(2)    all current reports that would be required to be filed with the SEC on Form 8-K if the Parent were required to file these reports.

In addition, whether or not required by the SEC, the Parent shall file a copy of all of the information and reports referred to in clauses (1) and (2) above with the SEC for public availability within the time periods specified in the SEC’s rules and regulations (unless the SEC will not accept the filing) and make the information available to securities analysts and prospective investors upon request.

SECTION 4.03.    Waiver of Stay, Extension or Usury Laws.

Each of the Issuer and the Guarantors covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, or plead (as a defense or otherwise) or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law which would prohibit or forgive any of the Issuer and the Guarantors

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from paying all or any portion of the principal of, premium, if any, and/or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that they may lawfully do so) each of the Issuer and the Guarantors hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

SECTION 4.04.    Compliance Certificate.

(a)    The Issuer shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers’ Certificate stating that a review of the activities of the Issuer and its Subsidiaries during such fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Issuer and the Guarantors have kept, observed, performed and fulfilled their obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge, the Issuer and the Guarantors have kept, observed, performed and fulfilled each and every covenant contained in this Indenture and are not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default shall have occurred, describing all such Defaults of which he or she may have knowledge and what action they are taking or propose to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Notes is prohibited or if such event has occurred, a description of the event and what action the Issuer and the Guarantors is taking or propose to take with respect thereto.

(b)    The Issuer and the Guarantors shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default, an Officers’ Certificate specifying such Default and what action the Issuer and the Guarantors are taking or propose to take with respect thereto.

(c)    The Issuer’s fiscal year currently ends on December 31. The Issuer will provide written notice to the Trustee of any change in its fiscal year.

SECTION 4.05.    Taxes.

The Issuer and the Guarantors shall, and shall cause each of their Subsidiaries to, pay prior to delinquency all material taxes, assessments, and governmental levies except as contested in good faith and by appropriate proceedings.

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SECTION 4.06.    Limitations on Additional Indebtedness.

The Parent shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, incur any Indebtedness; provided that the Issuer or any Guarantor may incur additional Indebtedness (including Acquired Indebtedness) if no Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of the Indebtedness and if, after giving effect thereto, either (a) the Consolidated Fixed Charge Coverage Ratio would be at least 2.00 to 1.00 or (b) the ratio of Consolidated Indebtedness to Consolidated Tangible Net Worth would be less than 3.00 to 1.00 (either (a) or (b), the “Ratio Exception”).

Notwithstanding the above, so long as no Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of the following Indebtedness, each of the following shall be permitted (the “Permitted Indebtedness”):

(1)    Indebtedness of the Parent and any Restricted Subsidiary under the Credit Facilities and Indebtedness of Restricted Joint Ventures in an aggregate amount at any time outstanding (whether incurred under the Ratio Exception or as Permitted Indebtedness) not to exceed the greater of (x) $215.0 million and (y) the amount of the Borrowing Base as of the date of such incurrence;

(2)    the Notes and the Note Guarantees issued on the Issue Date;

(3)    Indebtedness of the Parent and the Restricted Subsidiaries to the extent outstanding on the Issue Date (other than Indebtedness referred to in clauses (1) and (2) above, and after giving effect to the intended use of proceeds of the Notes);

(4)    Indebtedness of the Parent and the Restricted Subsidiaries under Hedging Obligations; provided that (a) such Hedging Obligations relate to payment obligations on Indebtedness otherwise permitted to be incurred by this Section 4.06, and (b) the notional principal amount of such Hedging Obligations at the time incurred does not exceed the principal amount of the Indebtedness to which such Hedging Obligations relate;

(5)    Indebtedness of the Parent owed to a Restricted Subsidiary and Indebtedness of any Restricted Subsidiary owed to the Parent or any other Restricted Subsidiary; provided, however, that (a) any Indebtedness of the Parent or the Issuer owed to a Restricted Subsidiary is unsecured and subordinated, pursuant to a written agreement, to the Parent or the Issuer’s obligations under this Indenture and the Notes and (b) upon any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or such Indebtedness being owed to any Person other than the Parent or a Restricted Subsidiary, such Restricted Subsidiary shall be deemed to have incurred Indebtedness not permitted by this clause (5);

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(6)    Indebtedness in respect of bid, performance or surety bonds issued for the account of the Parent or any Restricted Subsidiary in the ordinary course of business, including guarantees or obligations of the Parent or any Restricted Subsidiary with respect to letters of credit supporting such bid, performance or surety obligations (in each case other than for an obligation for money borrowed);

(7)    Purchase Money Indebtedness incurred by the Parent or any Restricted Subsidiary, in an aggregate amount not to exceed at any time outstanding $15.0 million;

(8)    Non-Recourse Indebtedness of the Parent or any Restricted Subsidiary incurred for the acquisition, development and/or improvement of real property and secured by Liens only on such real property and Directly Related Assets;

(9)    Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within five Business Days of incurrence;

(10)    Indebtedness arising in connection with endorsement of instruments for deposit in the ordinary course of business;

(11)    Refinancing Indebtedness with respect to Indebtedness incurred pursuant to the Ratio Exception, clause (2) or (3) above or this clause (11);

(12)    the guarantee by the Parent or any Restricted Subsidiary of Indebtedness (other than Permitted Restricted Joint Venture Indebtedness and Indebtedness incurred pursuant to clause (8), (13) or (15) hereof or, in the case of the guarantee by a Restricted Subsidiary that is not a Guarantor, pursuant to the Ratio Exception) of a Restricted Subsidiary, in the case of the Parent, or of the Parent or another Restricted Subsidiary, in the case of a Restricted Subsidiary, in either case, that was permitted to be incurred by another provision of this covenant;

(13)    Indebtedness of any Restricted Subsidiary engaged primarily in the mortgage origination and lending business (a “Mortgage Subsidiary”) under warehouse lines of credit and repurchase agreements, and Indebtedness secured by mortgage loans and related assets of such Restricted Subsidiary, in each case incurred in the ordinary course of such business; provided that the only legal recourse for collection of obligations owing on such Indebtedness is against such Restricted Subsidiary, any other Mortgage Subsidiary and their respective assets;

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(14)    Indebtedness of the Parent or any Restricted Subsidiary in an aggregate amount not to exceed $10.0 million at any time outstanding; and

(15)    Indebtedness of Consolidated Joint Ventures in an aggregate amount at any time outstanding not to exceed $115.0 million less the aggregate amount of liabilities that would constitute Indebtedness of the Parent and the Restricted Subsidiaries but for clause (c) of the last paragraph of the definition of “Indebtedness” on the date of determination.

For purposes of determining compliance with this Section 4.06, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness described in clauses (1) through (15) above or is entitled to be incurred pursuant to the Ratio Exception, the Parent shall, in its sole discretion, classify such item of Indebtedness and may divide and classify such Indebtedness in more than one of the types of Indebtedness described, except that (a) Indebtedness outstanding under the Credit Facilities on the Issue Date shall be deemed to have been incurred under clause (1) above and (b) Indebtedness of Joint Ventures on the date they become Consolidated Joint Ventures shall be deemed to have been incurred under clause (15) above.

SECTION 4.07.    [Intentionally Omitted]

SECTION 4.08.    Limitations on Restricted Payments.

The Parent shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, make any Restricted Payment if at the time of such Restricted Payment:

(1)    a Default shall have occurred and be continuing or shall occur as a consequence thereof;

(2)    the Parent cannot incur $1.00 of additional Indebtedness pursuant to the Ratio Exception; or

(3)    the amount of such Restricted Payment, when added to the aggregate amount of all other Restricted Payments made after the Issue Date (other than Restricted Payments made pursuant to clause (2), (3) or (5) of the next paragraph), exceeds the sum (the “Restricted Payments Basket”) of (without duplication):

(a)    50% of Consolidated Net Income for the period (taken as one accounting period) commencing on the first day of the first full fiscal quarter commencing after the Issue Date to and including the last day of the fiscal quarter ended immediately prior to the date of such calculation for which consolidated financial statements are available (or, if such Consolidated Net Income shall be a deficit, minus 100% of such aggregate deficit), plus

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(b)    100% of the aggregate net cash proceeds received by the Parent either (x) as contributions to the common equity of the Parent after the Issue Date or (y) from the issuance and sale of Qualified Equity Interests after the Issue Date, other than to the extent any such proceeds are used to redeem Notes in accordance with paragraph 6(b) of the Notes, plus

(c)    the aggregate amount by which Indebtedness of the Parent or any Restricted Subsidiary is reduced on the Parent’s balance sheet upon the conversion or exchange (other than by a Subsidiary of the Parent) of Indebtedness issued subsequent to the Issue Date into Qualified Equity Interests (less the amount of any cash, or the fair value of assets, distributed by the Parent or any Restricted Subsidiary upon such conversion or exchange), plus

(d)    in the case of the disposition or repayment of or return on any Investment that was treated as a Restricted Payment made after the Issue Date, an amount (to the extent not included in the computation of Consolidated Net Income) equal to the lesser of (i) the return of capital with respect to such Investment and (ii) the amount of such Investment that was treated as a Restricted Payment, in either case, less the cost of the disposition of such Investment and net of taxes, plus

(e)    upon a Redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the lesser of (i) the Fair Market Value of the Parent’s proportionate interest in such Subsidiary immediately following such Redesignation, and (ii) the aggregate amount of the Parent’s Investments in such Subsidiary to the extent such Investments reduced the amount available for subsequent Restricted Payments under this clause (3) and were not previously repaid or otherwise reduced, plus

(f)    $5.0 million.

The foregoing provisions will not prohibit:

(1)    the payment by the Parent or any Restricted Subsidiary of any dividend within 60 days after the date of declaration thereof, if on the date of declaration the payment would have complied with the provisions of this Indenture;

(2)    so long as no Default shall have occurred and be continuing at the time of or as a consequence of such redemption, the redemption of any Equity Interests of the Parent or any Restricted Subsidiary in exchange for, or out of the proceeds of the substantially concurrent issuance and sale of, Qualified Equity Interests;

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(3)    so long as no Default shall have occurred and be continuing at the time of or as a consequence of such redemption, the redemption of Subordinated Indebtedness of the Parent or any Restricted Subsidiary (a) in exchange for, or out of the proceeds of the substantially concurrent issuance and sale of, Qualified Equity Interests or (b) in exchange for, or out of the proceeds of the substantially concurrent incurrence of, Refinancing Indebtedness permitted to be incurred under Section 4.06 and the other terms of this Indenture;

(4)    so long as no Default shall have occurred and be continuing at the time of or as a consequence of such redemption, the redemption of Equity Interests of the Parent held by officers, directors or employees or former officers, directors or employees (or their transferees, estates or beneficiaries under their estates), upon their death, disability, retirement, severance or termination of employment or service; provided that the aggregate cash consideration paid for all such redemptions shall not exceed $2.0 million during any calendar year; or

(5)    repurchases of Equity Interests deemed to occur upon the exercise of stock options if the Equity Interests represents a portion of the exercise price thereof;

provided that no issuance and sale of Qualified Equity Interests pursuant to clause (2) or (3) above shall increase the Restricted Payments Basket, except to the extent the proceeds thereof exceed the amounts used to effect the transactions described therein.

SECTION 4.09.    Limitations on Asset Sales.

The Parent shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless:

(1)    the Parent or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets included in such Asset Sale; and

(2)    at least 75% of the total consideration received in such Asset Sale or series of related Asset Sales consists of cash or Cash Equivalents.

For purposes of clause (2), the following shall be deemed to be cash:

(a)    the amount (without duplication) of any Indebtedness (other than Subordinated Indebtedness) of the Parent or such Restricted Subsidiary that is expressly assumed by the transferee in such Asset Sale and with respect to which the Parent or such Restricted Subsidiary, as the case may be, is unconditionally released by the holder of such Indebtedness,

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(b)    the amount of any obligations received from such transferee that are within 60 days converted by the Parent or such Restricted Subsidiary to cash (to the extent of the cash actually so received), and

(c)    the Fair Market Value of any assets (other than securities, unless such securities represent Equity Interests in an entity engaged solely in a Permitted Business, such entity becomes a Restricted Subsidiary and the Parent or a Restricted Subsidiary acquires voting and management control of such entity) received by the Parent or any Restricted Subsidiary to be used by it in the Permitted Business.

If at any time any non-cash consideration received by the Parent or any Restricted Subsidiary, as the case may be, in connection with any Asset Sale is repaid or converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then the date of such repayment, conversion or disposition shall be deemed to constitute the date of an Asset Sale hereunder and the Net Available Proceeds thereof shall be applied in accordance with this Section 4.09.

If the Parent or any Restricted Subsidiary engages in an Asset Sale, the Parent or such Restricted Subsidiary shall, no later than 360 days following the consummation thereof, apply all or any of the Net Available Proceeds therefrom to:

(1)    repay any Indebtedness under the Credit Facilities and, in the case of any such Indebtedness under any revolving credit facility, effect a permanent reduction in the availability of such revolving credit facility;

(2)    repay any Indebtedness which was secured by the assets sold in such Asset Sale; and/or

(3)    invest all or any part of the Net Available Proceeds thereof in the purchase of assets (other than securities, unless such securities represent Equity Interests in an entity engaged solely in a Permitted Business, such entity becomes a Restricted Subsidiary and the Parent or a Restricted Subsidiary acquires voting and management control of such entity) to be used by the Parent or any Restricted Subsidiary in the Permitted Business.

The amount of Net Available Proceeds not applied or invested as provided in this paragraph will constitute “Excess Proceeds.”

When the aggregate amount of Excess Proceeds equals or exceeds $10.0 million, the Issuer shall be required to make an Offer to Purchase from all Holders and, if applicable, redeem (or make an offer to do so) any Pari Passu Indebtedness of the Issuer the provisions of which require the Issuer to redeem such Indebtedness with the proceeds from

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any Asset Sales (or offer to do so), in an aggregate principal amount of Notes and such Pari Passu Indebtedness equal to the amount of such Excess Proceeds as follows:

(1)    the Issuer shall (a) make an Offer to Purchase (a “Net Proceeds Offer”) to all Holders, and (b) redeem (or make an offer to do so) any such other Pari Passu Indebtedness, pro rata in proportion to the respective principal amounts of the Notes and such other Indebtedness required to be redeemed, the maximum principal amount of Notes and Pari Passu Indebtedness that may be redeemed out of the amount (the “Payment Amount”) of such Excess Proceeds;

(2)    the offer price for the Notes shall be payable in cash in an amount equal to 100% of the principal amount of the Notes tendered pursuant to a Net Proceeds Offer, plus accrued and unpaid interest thereon, if any, to the date such Net Proceeds Offer is consummated (the “Offered Price”), and the redemption price for such Pari Passu Indebtedness (the “Pari Passu Indebtedness Price”) shall be as set forth in the related documentation governing such Indebtedness;

(3)    if the aggregate Offered Price of Notes validly tendered and not withdrawn by Holders thereof exceeds the pro rata portion of the Payment Amount allocable to the Notes, Notes to be purchased shall be selected on a pro rata basis; and

(4)    upon completion of such Net Proceeds Offer in accordance with the foregoing provisions, the amount of Excess Proceeds with respect to which such Net Proceeds Offer was made shall be deemed to be zero.

To the extent that the sum of the aggregate Offered Price of Notes tendered pursuant to a Net Proceeds Offer and the aggregate Pari Passu Indebtedness Price paid to the holders of such Pari Passu Indebtedness is less than the Payment Amount relating thereto (such shortfall constituting a “Net Proceeds Deficiency”), the Issuer may use the Net Proceeds Deficiency, or a portion thereof, for general corporate purposes, subject to the provisions of this Indenture.

The Issuer shall comply with applicable tender offer rules, including the requirements of Rule 14e-1 under the Exchange Act and any other applicable laws and regulations in connection with the purchase of Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with this Section 4.09, the Issuer shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.09 by virtue of this compliance.

SECTION 4.10.    Limitations on Transactions with Affiliates.

The Parent shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, in one transaction or a series of related transactions, sell, lease, transfer or otherwise

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dispose of any of its assets to, or purchase any assets from, or enter into any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (an “Affiliate Transaction”), unless:

(1)    such Affiliate Transaction is on terms that are no less favorable to the Parent or the relevant Restricted Subsidiary than those that may have been obtained in a comparable transaction at such time on an arm’s-length basis by the Parent or that Restricted Subsidiary from a Person that is not an Affiliate of the Parent or that Restricted Subsidiary; and

(2)    the Parent delivers to the Trustee:

(a)    with respect to any Affiliate Transaction involving aggregate value expended or received by the Parent or any Restricted Subsidiary in excess of $2.0 million, an Officers’ Certificate of the Parent certifying that such Affiliate Transaction complies with clause (1) above and a Secretary’s Certificate which sets forth and authenticates a resolution that has been adopted by the Independent Directors approving such Affiliate Transaction; and

(b)    with respect to any Affiliate Transaction involving aggregate value expended or received by the Parent or any Restricted Subsidiary of $10.0 million or more, the certificates described in the preceding clause (a) and (x) a written opinion as to the fairness of such Affiliate Transaction to the Parent or such Restricted Subsidiary from a financial point of view or (y) a written appraisal supporting the value of such Affiliate Transaction, in either case, issued by an Independent Financial Advisor.

The foregoing restrictions shall not apply to

(1)    transactions exclusively between or among (a) the Parent and one or more Restricted Subsidiaries or (b) Restricted Subsidiaries; provided, in each case, that no Affiliate of the Parent (other than another Restricted Subsidiary) owns Equity Interests of any such Restricted Subsidiary;

(2)    reasonable director, officer, employee and consultant compensation (including bonuses) and other benefits (including retirement, health, stock and other benefit plans) and indemnification and insurance arrangements;

(3)    the allocation of employee services among the Parent, its Subsidiaries and the Joint Ventures on a fair and equitable basis in the ordinary course of business; provided that, in the case of any such Subsidiary or Joint Venture, no officer, director or stockholder of the Parent beneficially owns any Equity Interests in such Subsidiary

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or Joint Venture (other than indirectly through ownership of Equity Interests in the Parent);

(4)    loans and advances permitted by clause (3) of the definition of “Permitted Investments”;

(5)    any agreement as in effect as of the Issue Date or any extension, amendment or modification thereto (so long as any such extension, amendment or modification satisfies the requirements set forth in clause (1) of the first paragraph of this Section 4.10) or any transaction contemplated thereby;

(6)    Restricted Payments which are made in accordance with Section 4.08 and Permitted Investments (other than any Permitted Investment made in accordance with clause (13) of the definition of “Permitted Investments” to the extent that such Permitted Investment is in a Joint Venture or Unrestricted Subsidiary of which any officer, director or stockholder of the Parent beneficially owns any Equity Interests (other than indirectly through ownership of Equity Interests in the Parent));

(7)    licensing of trademarks to, and allocation of overhead, sales and marketing, travel and like expenses among, the Parent, its Subsidiaries and the Joint Ventures on a fair and equitable basis in the ordinary course of business; provided that, in the case of any such Subsidiary or Joint Venture, no officer, director or stockholder of the Parent beneficially owns any Equity Interests in such Subsidiary or Joint Venture (other than indirectly through ownership of Equity Interests in the Parent); or

(8)    sales or other dispositions of Qualified Equity Interests for cash by the Parent to an Affiliate.

SECTION 4.11.    Limitations on Liens.

The Parent shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or permit or suffer to exist any Lien of any nature whatsoever (other than Permitted Liens) against any assets of the Parent or any Restricted Subsidiary (including Equity Interests of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom, unless contemporaneously therewith:

(1)    in the case of any Lien securing an obligation that ranks pari passu with the Notes or a Note Guarantee, effective provision is made to secure the Notes or such Note Guarantee, as the case may be, at least equally and ratably with or prior to such obligation with a Lien on the same collateral; and

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(2)    in the case of any Lien securing an obligation that is subordinated in right of payment to the Notes or a Note Guarantee, effective provision is made to secure the Notes or such Note Guarantee, as the case may be, with a Lien on the same collateral that is prior to the Lien securing such subordinated obligation,

in each case, for so long as such obligation is secured by such Lien.

SECTION 4.12.    Conduct of Business.

The Parent will not, and will not permit any Restricted Subsidiary to, engage in any business other than the Permitted Business.

SECTION 4.13.    Additional Note Guarantees.

If, after the Issue Date, (a) the Parent or any Restricted Subsidiary shall acquire or create another Subsidiary (other than (i) a Subsidiary that has been designated an Unrestricted Subsidiary and (ii) a Joint Venture that has become a Restricted Subsidiary because of a change in GAAP relating to consolidation) or (b) any Unrestricted Subsidiary is redesignated a Restricted Subsidiary, then, in each such case, the Parent shall cause such Restricted Subsidiary to:

(1)    execute and deliver to the Trustee (a) a supplemental indenture in form and substance satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Issuer’s obligations under the Notes and this Indenture and (b) a notation of guarantee in respect of its Note Guarantee; and

(2)    deliver to the Trustee one or more Opinions of Counsel that such supplemental indenture (a) has been duly authorized, executed and delivered by such Restricted Subsidiary and (b) constitutes a valid and legally binding obligation of such Restricted Subsidiary in accordance with its terms.

SECTION 4.14.    Limitations on Dividend and Other Restrictions Affecting Restricted Subsidiaries.

The Parent shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or permit to exist or become effective any consensual encumbrance or consensual restriction on the ability of any Restricted Subsidiary (other than the Issuer) to:

(a)    pay dividends or make any other distributions on or in respect of its Equity Interests;

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(b)    make loans or advances or pay any Indebtedness or other obligation owed to the Parent or any other Restricted Subsidiary; or

(c)    transfer any of its assets to the Parent or any other Restricted Subsidiary; except for:

(1)    encumbrances or restrictions existing under or by reason of applicable law;

(2)    encumbrances or restrictions existing under this Indenture, the Notes and the Note Guarantees;

(3)    non-assignment provisions of any contract or any lease entered into in the ordinary course of business;

(4)    encumbrances or restrictions existing under agreements existing on the date of this Indenture (including, without limitation, the Credit Facilities) as in effect on that date;

(5)    restrictions on the transfer of assets subject to any Lien permitted under this Indenture imposed by the holder of such Lien;

(6)    restrictions on the transfer of assets imposed under any agreement to sell such assets permitted under this Indenture to any Person pending the closing of such sale;

(7)    any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the assets of any Person, other than the Person or the assets so acquired;

(8)    encumbrances or restrictions arising in connection with Refinancing Indebtedness; provided, however, that any such encumbrances and restrictions are not materially more restrictive than those contained in the agreements creating or evidencing the Indebtedness being refinanced;

(9)    customary provisions in leases, licenses, partnership agreements, limited liability company organizational governance documents, joint venture agreements and other similar agreements entered into in the ordinary course of business that restrict the transfer of leasehold interests or ownership interests in such partnership, limited liability company, joint venture or similar Person;

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(10)    Purchase Money Indebtedness incurred in compliance with Section 4.06 that impose restrictions of the nature described in clause (c) above on the assets acquired;

(11)    Non-Recourse Indebtedness incurred in compliance with Section 4.06 that impose restrictions of the nature described in clause (c) above on the assets secured by such Non-Recourse Indebtedness or on the Equity Interests in the Person holding such assets;

(12)    customary restrictions in other Indebtedness incurred in compliance with Section 4.06, provided that such restrictions, taken as a whole, are, in the good faith judgment of the Parent’s Board of Directors, no more materially restrictive with respect to such encumbrances and restrictions than those contained in the existing agreements referenced in clause (4) above; and

(13)    any encumbrances or restrictions imposed by any amendments or refinancings of the contracts, instruments or obligations referred to in clauses (1) through (12) above; provided that such amendments or refinancings are, in the good faith judgment of the Parent’s Board of Directors, no more materially restrictive with respect to such encumbrances and restrictions than those prior to such amendment or refinancing.

SECTION 4.15.    Limitations on Designation of Unrestricted Subsidiaries.

The Parent may designate any Subsidiary of the Parent (other than the Issuer) as an “Unrestricted Subsidiary” under this Indenture (a “Designation”) only if:

(1)    no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; and

(2)    the Parent would be permitted to make, at the time of such Designation, (a) a Permitted Investment or (b) an Investment pursuant to the first paragraph of Section 4.08 above, in either case, in an amount (the “Designation Amount”) equal to the Fair Market Value of the Parent’s proportionate interest in such Subsidiary on such date.

No Subsidiary shall be Designated as an “Unrestricted Subsidiary” unless such Subsidiary:

(1)    has no Indebtedness other than Permitted Unrestricted Subsidiary Debt;

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(2)    is not party to any agreement, contract, arrangement or understanding with the Parent or any Restricted Subsidiary unless the terms of the agreement, contract, arrangement or understanding (i) are no less favorable to the Parent or the Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Parent or such Restricted Subsidiary or (ii) would be permitted as (a) an Affiliate Transaction under and in compliance with Section 4.10, (b) an Asset Sale under and in compliance with Section 4.09, (c) a Permitted Investment or (d) an Investment under and in compliance with Section 4.08;

(3)    is a Person with respect to which neither the Parent nor any Restricted Subsidiary has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve the Person’s financial condition or to cause the Person to achieve any specified levels of operating results; and

(4)    has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Parent or any Restricted Subsidiary.

If, at any time after the Designation, any Unrestricted Subsidiary fails to meet the requirements set forth in the preceding paragraph, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of the Subsidiary and any Liens on assets of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary as of the date and, if the Indebtedness is not permitted to be incurred under Section 4.06 or the Lien is not permitted under Section 4.11, the Parent shall be in default of the applicable covenant.

Notwithstanding the foregoing, the Parent may Designate a Subsidiary as an Unrestricted Subsidiary without complying with the first two paragraphs of this Section 4.15 if (a) such Subsidiary is a Consolidated Joint Venture and (b) such Designation is made within 30 days of such Joint Venture becoming a Subsidiary. Any such Unrestricted Subsidiary shall, however, be required subsequent to such Designation to comply with the immediately preceding paragraph; provided that such Unrestricted Subsidiary shall not be deemed to be in violation of the requirements set forth in the second paragraph of this covenant to the extent that the Indebtedness, obligation, agreement or other arrangement that would otherwise violate such paragraph was in existence at the time such Joint Venture became a Subsidiary as in effect at such time.

The Parent may not Designate the Issuer as an Unrestricted Subsidiary. As of the Issue Date, the Parent shall be deemed to have Designated Duxford Title Reinsurance Company, Cerro Plata Associates, LLC, 242 Cerro Plata, LLC and Fairway Farms, LLC as Unrestricted Subsidiaries.

The Parent may redesignate an Unrestricted Subsidiary as a Restricted Subsidiary (a “Redesignation”) only if:

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(1)    no Default shall have occurred and be continuing at the time of and after giving effect to such Redesignation; and

(2)    all Liens, Indebtedness and Investments of such Unrestricted Subsidiary outstanding immediately following such Redesignation would, if incurred or made at such time, have been permitted to be incurred or made for all purposes of this Indenture.

All Designations and Redesignations must be evidenced by resolutions of the Board of Directors of the Parent delivered to the Trustee and certifying compliance with the foregoing provisions.

SECTION 4.16.    Maintenance of Consolidated Tangible Net Worth.

If the Parent’s Consolidated Tangible Net Worth declines below $75.0 million (the “Minimum Tangible Net Worth”) at the end of any fiscal quarter, the Parent must deliver an Officers’ Certificate to the Trustee within 55 days after the end of that fiscal quarter (100 days after the end of any fiscal year) to notify the Trustee. If, on the last day of each of any two consecutive fiscal quarters (the last day of the second fiscal quarter being referred to as a “Deficiency Date”), the Parent’s Consolidated Tangible Net Worth is less than the Minimum Tangible Net Worth of the Parent, then the Issuer must make an Offer to Purchase (a “Net Worth Offer”) to all Holders of Notes to purchase 10% of the aggregate principal amount of the Notes originally issued (the “Net Worth Offer Amount”) at a purchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest thereon, if any, to the date of purchase; provided, however, that no such Net Worth Offer shall be required if, after the Deficiency Date but prior to the date the Issuer is required to make the Net Worth Offer, capital in cash or Cash Equivalents is contributed for Qualified Equity Interests sufficient to increase the Parent’s Consolidated Tangible Net Worth after giving effect to such contribution to an amount equal to or above the Minimum Tangible Net Worth.

The Issuer must make the Net Worth Offer no later than 65 days after each Deficiency Date (110 days if such Deficiency Date is the last day of the Parent’s fiscal year). The Net Worth Offer is required to remain open for a period of 20 Business Days following its commencement or for such longer period as required by law. The Issuer is required to purchase the Net Worth Offer Amount of the Notes on a designated date no later than five Business Days after the termination of the Net Worth Offer, or if less than the Net Worth Offer Amount of Notes shall have been tendered, all Notes then tendered.

If the aggregate principal amount of Notes tendered exceeds the Net Worth Offer Amount, the Issuer is required to purchase the Notes tendered to it pro rata among the Notes tendered (with such adjustments as may be appropriate so that only Notes in denominations of $1,000 and integral multiples thereof shall be purchased).

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In no event shall the failure of the Parent’s Consolidated Tangible Net Worth to equal or exceed the Minimum Tangible Net Worth at the end of any fiscal quarter be counted toward the requirement to make more than one Net Worth Offer. The Issuer may reduce the principal amount of Notes to be purchased pursuant to the Net Worth Offer by subtracting 100% of the principal amount (excluding premium) of the Notes redeemed by the Issuer prior to the purchase (otherwise than under this provision). The Issuer, however, may not credit Notes that have been previously used as a credit against any obligation to repurchase Notes pursuant to this provision.

The Issuer shall comply with applicable tender offer rules, including the requirements of Rule 14e-1 under the Exchange Act and any other applicable laws and regulations in connection with the purchase of Notes pursuant to a Net Worth Offer. To the extent that the provisions of any securities laws or regulations conflict with this Section 4.16, the Issuer shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.16 by virtue of this compliance.

SECTION 4.17.    Maintenance of Properties; Insurance; Compliance with Law.

(a)    The Parent shall, and shall cause each of its Restricted Subsidiaries to, at all times cause all properties used or useful in the conduct of their business to be maintained and kept in good condition, repair and working order (reasonable wear and tear excepted) and supplied with all necessary equipment, and shall cause to be made all necessary repairs, renewals, replacements, necessary betterments and necessary improvements thereto.

(b)    The Parent shall maintain, and shall cause to be maintained for each of its Restricted Subsidiaries, insurance covering such risks as are usually and customarily insured against by corporations similarly situated in the markets where the Parent and the Restricted Subsidiaries conduct homebuilding operations, in such amounts as shall be customary for corporations similarly situated and with such deductibles and by such methods as shall be customary and reasonably consistent with past practice.

(c)    The Parent shall, and shall cause each of its Subsidiaries to, comply with all statutes, laws, ordinances or government rules and regulations to which they are subject, non-compliance with which would materially adversely affect the business, earnings, properties, assets or financial condition of the Parent and its Subsidiaries taken as a whole.

SECTION 4.18.    Payments for Consent.

The Parent shall not, and shall not cause or permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Notes unless such consideration is offered to be paid or agreed to be paid to all Holders which so consent, waive or

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agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement.

SECTION 4.19.    Legal Existence.

Subject to Article Five, the Parent shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its legal existence, and the corporate, partnership or other existence of each Restricted Subsidiary, in accordance with the respective organizational documents (as the same may be amended from time to time) of each Restricted Subsidiary and the rights (charter and statutory), licenses and franchises of the Parent and its Restricted Subsidiaries; provided that the Parent shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Restricted Subsidiaries (other than the Issuer) if the Board of Directors of the Parent shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Parent and its Restricted Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders.

SECTION 4.20.    Change of Control Offer.

Upon the occurrence of a Change of Control, the Issuer shall be obligated to make an Offer to Purchase (the “Change of Control Offer”), and shall purchase, on a Business Day (the “Change of Control Payment Date”) not more than 60 nor less than 30 days following the date notice of the Change of Control is mailed to each Holder, all of the then outstanding Notes at a purchase price (the “Change of Control Purchase Price”) equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the Change of Control Payment Date. The Change of Control Offer shall remain open for at least 20 Business Days and until the close of business on the Change of Control Payment Date.

Within 30 days following the date upon which a Change of Control occurs (the “Change of Control Date”), the Issuer shall send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. The notice to the Holders shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Change of Control Offer.

Any amounts remaining after the purchase of Notes pursuant to a Change of Control Offer shall be returned by the Trustee to the Issuer.

The Issuer’s obligation to make a Change of Control Offer will be satisfied if a third party makes the Change of Control Offer in the manner and at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer made by the Issuer and purchases all Notes properly tendered and not withdrawn under the Change of Control Offer.

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The Issuer shall comply with applicable tender rules, including the requirements of Rule 14e-1 under the Exchange Act and any other applicable laws and regulations in connection with the purchase of Notes pursuant to a Change of Control Offer. To the extent the provisions of any securities laws or regulations conflict with the provisions under this Section 4.20, the Issuer shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 4.20 by virtue thereof.

ARTICLE FIVE

SUCCESSOR CORPORATION

SECTION 5.01.    Limitations on Mergers, Consolidations, Etc.

Neither the Parent nor the Issuer shall, directly or indirectly, in a single transaction or a series of related transactions, (a) consolidate or merge with or into any Person (other than a merger that satisfies the requirements of clause (1) below with a Wholly-Owned Restricted Subsidiary solely for the purpose of changing the Parent’s or the Issuer’s jurisdiction of incorporation, as the case may be, to another State of the United States), or sell, lease, transfer, convey or otherwise dispose of or assign all or substantially all of the assets of the Parent or the Parent and the Restricted Subsidiaries (taken as a whole) or the Issuer or the Issuer and the Restricted Subsidiaries that are Subsidiaries of the Issuer (taken as a whole), as the case may be, to any Person or (b) adopt a Plan of Liquidation unless, in either case:

(1)    either:

(a)    the Parent or the Issuer, as the case may be, will be the surviving or continuing Person; or

(b)    the Person formed by or surviving such consolidation or merger or to which such sale, lease, conveyance or other disposition shall be made (or, in the case of a Plan of Liquidation, any Person to which assets are transferred) (collectively, the “Successor”) is a corporation or limited liability company organized and existing under the laws of any State of the United States of America or the District of Columbia, and the Successor expressly assumes, by supplemental indenture in form and substance satisfactory to the Trustee, all of the obligations of the Issuer or the Parent, as the case may be, under the Notes or the Parent’s Note Guarantee, as applicable, and this Indenture; provided that, in the case of the Issuer, at any time the Successor is a limited liability company, there shall be a co-issuer of the Notes that is a corporation;

(2)    immediately prior to and immediately after giving effect to such transaction and the assumption of the obligations as set forth in clause (1)(b) above

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and the incurrence of any Indebtedness to be incurred in connection therewith, no Default shall have occurred and be continuing; and

(3)    immediately after and giving effect to such transaction and the assumption of the obligations set forth in clause (1)(b) above and the incurrence of any Indebtedness to be incurred in connection therewith, and the use of any net proceeds therefrom on a pro forma basis, (a) the Consolidated Net Worth of the Parent or the Successor, as the case may be, would be at least equal to the Consolidated Net Worth of the Parent immediately prior to such transaction (disregarding the effect of fees, commissions, discounts, taxes and other amounts payable in respect of such transaction) and (b) the Parent or the Successor, as the case may be, could incur $1.00 of additional Indebtedness pursuant to the Ratio Exception.

For purposes of this Section 5.01, any Indebtedness of the Successor which was not Indebtedness of the Parent or the Issuer, as the case may be, immediately prior to the transaction shall be deemed to have been incurred in connection with such transaction.

Except as provided under Section 10.04, no Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person) another Person, whether or not affiliated with such Subsidiary Guarantor, unless:

(1)    either:

(a)    such Subsidiary Guarantor will be the surviving or continuing Person; or

(b)    the Person formed by or surviving any such consolidation or merger assumes, by supplemental indenture in form and substance satisfactory to the Trustee, all of the obligations of such Subsidiary Guarantor under the Note Guarantee of such Subsidiary Guarantor and this Indenture; and

(2)    immediately after giving effect to such transaction, no Default shall have occurred and be continuing.

For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the assets of one or more Restricted Subsidiaries, the Equity Interests of which constitute all or substantially all of the assets of the Parent or the Issuer, will be deemed to be the transfer of all or substantially all of the assets of the Parent or the Issuer, as the case may be.

Notwithstanding the foregoing, any Restricted Subsidiary (other than the Issuer) may merge into the Parent or another Restricted Subsidiary.

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SECTION 5.02.    Successor Person Substituted.

Upon any consolidation, combination or merger of the Issuer or a Guarantor, or any transfer of all or substantially all of the assets of the Parent or the Issuer in accordance with Section 5.01, in which the Issuer or such Guarantor is not the continuing obligor under the Notes or its Note Guarantee, the surviving entity formed by such consolidation or into which the Issuer or such Guarantor is merged or to which the conveyance, lease or transfer is made will succeed to, and be substituted for, and may exercise every right and power of, the Issuer or such Guarantor under this Indenture, the Notes and the Note Guarantees with the same effect as if such surviving entity had been named therein as the Issuer or such Guarantor and, except in the case of a conveyance, transfer or lease, the Issuer or such Guarantor, as the case may be, will be released from the obligation to pay the principal of and interest on the Notes or in respect of its Note Guarantee, as the case may be, and all of the Issuer’s or such Guarantor’s other obligations and covenants under the Notes, this Indenture and its Note Guarantee, if applicable.

ARTICLE SIX

DEFAULTS AND REMEDIES

SECTION 6.01.    Events of Default.

Each of the following is an “Event of Default”:

(1)    failure by the Issuer to pay interest on any of the Notes when it becomes due and payable and the continuance of any such failure for 30 days;

(2)    failure by the Issuer to pay the principal on any of the Notes when it becomes due and payable, whether at stated maturity, upon redemption, upon purchase, upon acceleration or otherwise;

(3)    failure by the Parent or the Issuer to comply with any of its agreements or covenants described above under Section 5.01 or in respect of its obligations to make a Change of Control Offer;

(4)    failure by the Parent or the Issuer to comply with any other agreement or covenant in this Indenture and continuance of this failure for 30 days after written notice of the failure has been given to the Issuer by the Trustee or by the Holders of at least 25% of the aggregate principal amount of the Notes then outstanding;

(5)    default under any mortgage, indenture or other instrument or agreement under which there may be issued or by which there may be secured or evidenced Indebtedness (other than Non-Recourse Indebtedness) of the Parent or any Restricted

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Subsidiary, whether such Indebtedness now exists or is incurred after the Issue Date, which default:

(a)    is caused by a failure to pay when due principal on such Indebtedness within the applicable express grace period,

(b)    results in the acceleration of such Indebtedness prior to its express final maturity, or

(c)    results in the commencement of judicial proceedings to foreclose upon, or to exercise remedies under applicable law or applicable security documents to take ownership of, the assets securing such Indebtedness, and

in each case, the principal amount of such Indebtedness, together with any other Indebtedness with respect to which an event described in clause (a), (b) or (c) has occurred and is continuing, aggregates $10.0 million or more;

(6)    one or more judgments or orders that exceed $10.0 million in the aggregate (net of amounts covered by insurance or bonded) for the payment of money have been entered by a court or courts of competent jurisdiction against the Parent or any Restricted Subsidiary and such judgment or judgments have not been satisfied, stayed, annulled or rescinded within 60 days of being entered;

(7)    the Parent, the Issuer or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law:

(a)    commences a voluntary case,

(b)    consents to the entry of an order for relief against it in an involuntary case,

(c)    consents to the appointment of a Custodian of it or for all or substantially all of its assets, or

(d)    makes a general assignment for the benefit of its creditors;

(8)    a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:

(a)    is for relief against the Parent, the Issuer or any Significant Subsidiary as debtor in an involuntary case,

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(b)    appoints a Custodian of the Parent, the Issuer or any Significant Subsidiary or a Custodian for all or substantially all of the assets of the Parent, the Issuer or any Significant Subsidiary, or

(c)    orders the liquidation of the Parent, the Issuer or any Significant Subsidiary,

and the order or decree remains unstayed and in effect for 60 days; or

(9)    the Note Guarantee of the Parent or any Note Guarantee of any Significant Subsidiary ceases to be in full force and effect (other than in accordance with the terms of such Note Guarantee and this Indenture) or is declared null and void and unenforceable or found to be invalid or any Guarantor denies its liability under its Note Guarantee (other than by reason of release of a Guarantor from its Note Guarantee in accordance with the terms of this Indenture and the Note Guarantee).

SECTION 6.02.    Acceleration.

If an Event of Default (other than an Event of Default specified in clause (7) or (8) of Section 6.01 with respect to the Issuer), shall have occurred and be continuing, the Trustee, by written notice to the Issuer, or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding, by written notice to the Issuer and the Trustee, may declare all amounts owing under the Notes to be due and payable immediately. Upon such declaration of acceleration, the aggregate principal of and accrued and unpaid interest on the outstanding Notes shall immediately become due and payable; provided, however, that after such acceleration, but before a judgment or decree based on acceleration, the Holders of a majority in aggregate principal amount of such outstanding Notes may rescind and annul such acceleration if all Events of Default, other than the nonpayment of accelerated principal and interest, have been cured or waived as provided in this Indenture. If an Event of Default specified in clause (7) or (8) of Section 6.01 with respect to the Issuer occurs, all outstanding Notes shall become due and payable without any further action or notice.

SECTION 6.03.    Other Remedies.

If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of, or premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture and may take any necessary action requested of it as Trustee to settle, compromise, adjust or otherwise conclude any proceedings to which it is a party.

The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not

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impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. Any costs associated with actions taken by the Trustee under this Section 6.03 shall be reimbursed to the Trustee by the Issuer.

SECTION 6.04.    Waiver of Past Defaults and Events of Default.

Subject to Sections 6.02, 6.08 and 8.02, the Holders of a majority in aggregate principal amount of the notes then outstanding have the right to waive any existing Default or compliance with any provision of this Indenture or the Notes. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereto.

SECTION 6.05.      Control by Majority.

The Holders of a majority in aggregate principal amount of the Notes then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee by this Indenture. The Trustee, however, may refuse to follow any direction that conflicts with law or this Indenture or that the Trustee determines may be unduly prejudicial to the rights of another Holder not taking part in such direction, and the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, determines that the action so directed may not lawfully be taken or if the Trustee in good faith shall, by a Responsible Officer, determine that the proceedings so directed may involve it in personal liability or be unduly prejudicial to the rights of another Holder; provided that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction.

SECTION 6.06.    Limitation on Suits.

No Holder will have any right to institute any proceeding with respect to this Indenture or for any remedy thereunder, unless the Trustee:

(1)    has failed to act for a period of 60 days after receiving written notice of a continuing Event of Default by such Holder and a request to act by Holders of at least 25% in aggregate principal amount of Notes outstanding;

(2)    has been offered indemnity satisfactory to it in its reasonable judgment; and

(3)    has not received from the Holders of a majority in aggregate principal amount of the outstanding Notes a direction inconsistent with such request.

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However, such limitations do not apply to a suit instituted by a Holder of any Note for enforcement of payment of the principal of or interest on such Note on or after the due date therefor (after giving effect to the grace period specified in clause (1) of Section 6.01).

SECTION 6.07.    No Personal Liability of Directors, Officers, Employees and Stockholders.

No director, officer, employee, incorporator or stockholder of the Issuer or any Guarantor will have any liability for any obligations of the Issuer under the Notes or this Indenture or of any Guarantor under its Note Guarantee or this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes and the Note Guarantees.

SECTION 6.08.    Rights of Holders To Receive Payment.

Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal of, or premium, if any, and interest of the Note on or after the respective due dates expressed in the Note, or to bring suit for the enforcement of any such payment on or after such respective dates, is absolute and unconditional and shall not be impaired or affected without the consent of the Holder.

SECTION 6.09.    Collection Suit by Trustee.

If an Event of Default in payment of principal, premium or interest specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Issuer or any Guarantor (or any other obligor on the Notes) for the whole amount of unpaid principal and accrued interest remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate set forth in the Notes, and such further amounts as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.

SECTION 6.10.    Trustee May File Proofs of Claim.

The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07) and the Holders allowed in any judicial proceedings relative to the Issuer or any Guarantor (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims

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and to distribute the same after deduction of its charges and expenses to the extent that any such charges and expenses are not paid out of the estate in any such proceedings and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07.

Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan or reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceedings.

SECTION 6.11.    Priorities.

If the Trustee collects any money pursuant to this Article Six, it shall pay out the money in the following order:

FIRST: to the Trustee for amounts due under Section 7.07;

SECOND: to Holders for amounts due and unpaid on the Notes for principal, premium, if any, and interest as to each, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes; and

THIRD: to the Issuer or, to the extent the Trustee collects any amount from any Guarantor, to such Guarantor.

The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section 6.11.

SECTION 6.12.    Undertaking for Costs.

In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys’ fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.12 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.08 or a suit by Holders of more than 10% in principal amount of the Notes then outstanding.

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SECTION 6.13.    Restoration of Rights and Remedies.

If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every case, subject to any determination in such proceeding, the Issuer, the Guarantors, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted.

ARTICLE SEVEN

TRUSTEE

SECTION 7.01.    Duties of Trustee.

(a)    If an Event of Default actually known to a Responsible Officer of the Trustee has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the same circumstances in the conduct of his or her own affairs.

(b)    Except during the continuance of an Event of Default:

(1)    The Trustee need perform only those duties that are specifically set forth in this Indenture and no others.

(2)    In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform on their face to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein).

(c)    The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that:

(1)    This paragraph does not limit the effect of paragraph (b) of this Section 7.01.

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(2)    The Trustee shall not be liable for any error of judgment made in good faith, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts.

(3)    The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to the terms hereof.

(4)    No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its rights, powers or duties if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risk or liability is not reasonably assured to it.

(d)    Whether or not therein expressly so provided, paragraphs (a), (b), (c) and (e) of this Section 7.01 shall govern every provision of this Indenture that in any way relates to the Trustee.

(e)    The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it in its sole discretion against any loss, liability, expense or fee.

(f)    The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Issuer or any Guarantor. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by the law.

SECTION 7.02.    Rights of Trustee.

Subject to Section 7.01:

(1)    The Trustee may rely on any document reasonably believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document.

(2)    Before the Trustee acts or refrains from acting, it may require an Officers’ Certificate or an Opinion of Counsel, or both, which shall conform to the provisions of Section 12.05. The Trustee shall be protected and shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion.

(3)    The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed by it with due care.

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(4)    The Trustee shall not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers; provided that the Trustee’s conduct does not constitute gross negligence or willful misconduct.

(5)    The Trustee may consult with counsel of its selection, and the advice or opinion of such counsel as to matters of law shall be full and complete authorization and protection from liability in respect of any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel.

(6)    Except with respect to Sections 4.01, 4.02 and 4.04, the Trustee shall have no duty to inquire as to the performance of the Issuer’s and the Guarantors’ covenants in Article Four hereof. In addition, the Trustee shall not be deemed to have knowledge of any Default or Event of Default except (1) any Event of Default occurring pursuant to Sections 6.01(1) and 6.01(2) or (ii) any Default or Event of Default of which the Trustee shall have received written notice in the manner set forth in this Indenture or an officer of the Trustee shall have obtained actual knowledge. Delivery of reports, information and documents to the Trustee under Section 4.02 is for informational purposes only and the Trustee’s receipt of the foregoing shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Issuer’s and the Guarantors’ compliance with any of their covenants thereunder (as to which the Trustee is entitled to rely exclusively on an Officers’ Certificate).

SECTION 7.03.    Individual Rights of Trustee.

The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may make loans to, accept deposits from, perform services for or otherwise deal with the either of the Issuer or any Guarantor, or any Affiliates thereof, with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. The Trustee, however, shall be subject to Sections 7.10 and 7.11.

SECTION 7.04.    Trustee’s Disclaimer.

The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes or any Guarantee, it shall not be accountable for the Issuer’s or any Guarantor’s use of the proceeds from the sale of Notes or any money paid to the Issuer or any Guarantor pursuant to the terms of this Indenture and it shall not be responsible for any statement in the Notes, Guarantee or this Indenture other than its certificate of authentication.

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SECTION 7.05.    Notice of Defaults.

The Trustee shall, within 90 days after becoming aware of the occurrence of any Default with respect to the Notes, give the Holders notice of all uncured Defaults thereunder known to it; provided, however, that, except in the case of an Event of Default in payment with respect to the Notes or a Default in complying with Section 5.01, the Trustee shall be protected in withholding such notice if and so long as a committee of its Responsible Officers in good faith determines that the withholding of such notice is in the interest of the Holders.

SECTION 7.06.    Reports by Trustee to Holders.

If required by TIA § 313(a), within 60 days after May 15 of any year, commencing May 15, 2003 the Trustee shall mail to each Holder a brief report dated as of such May 15 that complies with TIA § 313(a). The Trustee also shall comply with TIA § 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA § 313(c) and TIA § 313(d).

Reports pursuant to this Section 7.06 shall be transmitted by mail:

(1)    to all Holders of Notes, as the names and addresses of such Holders appear on the Registrar’s books; and

(2)    to such Holders of Notes as have, within the two years preceding such transmission, filed their names and addresses with the Trustee for that purpose.

A copy of each report at the time of its mailing to Holders shall be filed with the SEC and each stock exchange on which the Notes are listed. The Issuer shall promptly notify the Trustee when the Notes are listed on any stock exchange.

SECTION 7.07.    Compensation and Indemnity.

The Issuer and the Guarantors shall pay to the Trustee and Agents from time to time reasonable compensation for its services hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust). The Issuer and the Guarantors shall reimburse the Trustee and Agents upon request for all reasonable disbursements, expenses and advances incurred or made by it in connection with its duties under this Indenture, including the reasonable compensation, disbursements and expenses of the Trustee’s agents and counsel.

The Issuer and the Guarantors shall indemnify each of the Trustee and any predecessor Trustee for, and hold each of them harmless against, any and all loss, damage, claim, liability or expense, including without limitation taxes (other than taxes based on the

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income of the Trustee or such Agent) and reasonable attorneys’ fees and expenses incurred by each of them in connection with the acceptance or performance of its duties under this Indenture including the reasonable costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder (including, without limitation, settlement costs). The Trustee or Agent shall notify the Issuer and the Guarantors in writing promptly of any claim asserted against the Trustee or Agent for which it may seek indemnity. However, the failure by the Trustee or Agent to so notify the Issuer and the Guarantors shall not relieve the Issuer and Guarantors of their obligations hereunder except to the extent the Issuer and the Guarantors are prejudiced thereby.

Notwithstanding the foregoing, the Issuer and the Guarantors need not reimburse the Trustee for any expense or indemnify it against any loss or liability incurred by the Trustee through its negligence or bad faith. To secure the payment obligations of the Issuer and the Guarantors in this Section 7.07, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee except such money or property held in trust to pay principal of and interest on particular Notes. The obligations of the Issuer and the Guarantors under this Section 7.07 to compensate and indemnify the Trustee, Agents and each predecessor Trustee and to pay or reimburse the Trustee, Agents and each predecessor Trustee for expenses, disbursements and advances shall be joint and several liabilities of the Issuer and each of the Guarantors and shall survive the resignation or removal of the Trustee and the satisfaction, discharge or other termination of this Indenture, including any termination or rejection hereof under any Bankruptcy Law.

When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(7) or (8) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law.

For purposes of this Section 7.07, the term “Trustee” shall include any trustee appointed pursuant to this Article Seven.

SECTION 7.08.    Replacement of Trustee.

The Trustee may resign by so notifying the Issuer and the Guarantors in writing. The Holders of a majority in principal amount of the outstanding Notes may remove the Trustee by notifying the Issuer and the removed Trustee in writing and may appoint a successor Trustee with the Issuer’s written consent, which consent shall not be unreasonably withheld. The Issuer may remove the Trustee at its election if:

(1)    the Trustee fails to comply with Section 7.10;

(2)    the Trustee is adjudged a bankrupt or an insolvent;

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(3)    a receiver or other public officer takes charge of the Trustee or its property; or

(4)    the Trustee otherwise becomes incapable of acting.

If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Issuer shall promptly appoint a successor Trustee.

If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Issuer or the Holders of a majority in principal amount of the outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee.

If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.

A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer. Immediately following such delivery, the retiring Trustee shall, subject to its rights under Section 7.07, transfer all property held by it as Trustee to the successor Trustee, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Issuer obligations under Section 7.07 shall continue for the benefit of the retiring Trustee.

SECTION 7.09.    Successor Trustee by Consolidation, Merger, etc.

If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust assets to, another entity, subject to Section 7.10, the successor entity without any further act shall be the successor Trustee; provided such entity shall be otherwise qualified and eligible under this Article Seven.

SECTION 7.10.    Eligibility; Disqualification.

This Indenture shall always have a Trustee who satisfies the requirements of TIA § 310(a)(1) and (2) in every respect. The Trustee (together with its corporate parent) shall have a combined capital and surplus of at least $75,000,000 as set forth in the most recent applicable published annual report of condition. The Trustee shall comply with TIA § 310(b), including the provision in § 310(b)(1).

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SECTION 7.11.    Preferential Collection of Claims Against Issuer.

The Trustee shall comply with TIA § 311(a), excluding any creditor relationship listed in TIA § 311 (b). A Trustee who has resigned or been removed shall be subject to TIA § 311(a) to the extent indicated therein.

SECTION 7.12.    Paying Agents.

The Issuer shall cause each Paying Agent other than the Trustee to execute and deliver to it and the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 7.12:

(A)    that it will hold all sums held by it as agent for the payment of principal of, or premium, if any, or interest on, the Notes (whether such sums have been paid to it by the Issuer or by any obligor on the Notes) in trust for the benefit of Holders or the Trustee;

(B)    that it will at any time during the continuance of any Event of Default, upon written request from the Trustee, deliver to the Trustee all sums so held in trust by it together with a full accounting thereof; and

(C)    that it will give the Trustee written notice within three (3) Business Days of any failure of the Issuer (or by any obligor on the Notes) in the payment of any installment of the principal of, premium, if any, or interest on, the Notes when the same shall be due and payable.

ARTICLE EIGHT

AMENDMENTS, SUPPLEMENTS AND WAIVERS

SECTION 8.01.    Without Consent of Holders.

The Issuer, the Guarantors and the Trustee may amend, waive or supplement this Indenture, the Note Guarantees or the Notes without consent of any Holder:

(1)    to provide for the assumption of the Issuer’s obligations to the Holders pursuant to Section 5.01;

(2)    to provide for uncertificated Notes in addition to or in place of certificated Notes;

(3)    to cure any ambiguity, defect or inconsistency;

(4)    to release any Guarantor from any of its obligations under its Notes Guarantee or this Indenture (to the extent permitted by this Indenture);

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(5)    to comply with SEC rules and regulations or changes to applicable law;

(6)    to maintain the qualification of this Indenture under the TIA; or

(7) to make any other change that does not materially adversely affect the rights of any Holder hereunder.

The Trustee is hereby authorized to join with the Issuer and the Guarantors in the execution of any supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations which may be therein contained, but the Trustee shall not be obligated to enter into any such supplemental indenture which adversely affects its own rights, duties or immunities under this Indenture.

SECTION 8.02.    With Consent of Holders.

This Indenture or the Notes may be amended with the consent (which may include consents obtained in connection with a tender offer or exchange offer for Notes) of the Holders of at least a majority in principal amount of the Notes then outstanding, and any existing Default under, or compliance with any provision of, this Indenture may be waived (other than any continuing Default in the payment of the principal or interest on the Notes) with the consent (which may include consents obtained in connection with a tender offer or exchange offer for Notes) of the Holders of a majority in principal amount of the Notes then outstanding; provided that:

(a)    no such amendment may, without the consent of the Holders of two-thirds in aggregate principal amount of Notes then outstanding, amend the obligation of the Parent or the Issuer under Section 4.20 or the related definitions that could adversely affect the rights of any Holder; and

(b)    without the consent of each Holder affected, the Issuer, the Guarantors and the Trustee may not:

(1)    change the maturity of any Note;

(2)    reduce the amount, extend the due date or otherwise affect the terms of any scheduled payment of interest on or principal of the Notes;

(3)    reduce any premium payable upon optional redemption of the Notes, change the date on which any Notes are subject to redemption or otherwise alter the provisions with respect to the redemption of the Notes;

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(4)    make any Note payable in money or currency other than that stated in the Notes;

(5)    modify or change any provision of this Indenture or the related definitions to subordinate the Notes or any Note Guarantee to other Indebtedness in a manner that adversely affects the Holders;

(6)    reduce the percentage of Holders necessary to consent to an amendment or waiver to this Indenture or the Notes;

(7)    impair the rights of Holders to receive payments of principal of or interest on the Notes;

(8)    release the Parent from any of its obligations under its Note Guarantee or this Indenture, except as permitted by this Indenture; or

(9)    make any change in this Section 8.02.

After an amendment, supplement or waiver under this Section 8.02 becomes effective, the Issuer shall mail to the Holders a notice briefly describing the amendment, supplement or waiver.

Upon the written request of the Issuer, accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the receipt by the Trustee of evidence reasonably satisfactory to the Trustee of the consent of the Holders as aforesaid and upon receipt by the Trustee of the documents described in Section 8.06, the Trustee shall join with the Issuer and the Guarantors in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee’s own rights, duties or immunities under this Indenture, in which case the Trustee may, but shall not be obligated to, enter into such supplemental indenture.

It shall not be necessary for the consent of the Holders under this Section 8.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof.

SECTION 8.03.    Compliance with Trust Indenture Act.

Every amendment or supplement to this Indenture or the Notes shall comply with the TIA as then in effect.

SECTION 8.04.    Revocation and Effect of Consents.

Until an amendment, supplement, waiver or other action becomes effective, a consent to it by a Holder of a Note is a continuing consent conclusive and binding upon such

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Holder and every subsequent Holder of the same Note or portion thereof, and of any Note issued upon the transfer thereof or in exchange therefor or in place thereof, even if notation of the consent is not made on any such Note. Any such Holder or subsequent Holder, however, may revoke the consent as to his Note or portion of a Note, if the Trustee receives the written notice of revocation before the date the amendment, supplement, waiver or other action becomes effective.

The Issuer may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement, or waiver. If a record date is fixed, then, notwithstanding the preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only such Persons, shall be entitled to consent to such amendment, supplement, or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date unless the consent of the requisite number of Holders has been obtained.

After an amendment, supplement, waiver or other action becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (1) through (9) of Section 8.02. In that case the amendment, supplement, waiver or other action shall bind each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder’s Note.

SECTION 8.05.    Notation on or Exchange of Notes.

If an amendment, supplement, or waiver changes the terms of a Note, the Trustee (in accordance with the specific written direction of the Issuer) shall request the Holder of the Note (in accordance with the specific written direction of the Issuer) to deliver it to the Trustee. In such case, the Trustee shall place an appropriate notation on the Note about the changed terms and return it to the Holder. Alternatively, if the Issuer or the Trustee so determines, the Issuer in exchange for the Note shall issue, the Guarantors shall endorse, and the Trustee shall authenticate a new Note that reflects the changed terms. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver.

SECTION 8.06.    Trustee To Sign Amendments, etc.

The Trustee shall sign any amendment, supplement or waiver authorized pursuant to this Article Eight if the amendment, supplement or waiver does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such amendment, supplement or waiver the Trustee shall be entitled to receive and, subject to Section 7.01, shall be fully protected in relying upon an Officers’ Certificate and an Opinion of Counsel stating, in addition to the matters required by Section 12.04, that such amendment, supplement or waiver is authorized or permitted

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by this Indenture and is a legal, valid and binding obligation of the Issuer and Guarantors, enforceable against the Issuer and Guarantors in accordance with its terms (subject to customary exceptions).

ARTICLE NINE

DISCHARGE OF INDENTURE; DEFEASANCE

SECTION 9.01.    Discharge of Indenture.

The Issuer may terminate its obligations and the obligations of the Guarantors under the Notes, the Guarantees and this Indenture, except the obligations referred to in the last paragraph of this Section 9.01, if

(1)    all the Notes that have been authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from this trust) have been delivered to the Trustee for cancellation, or

(2)    (a) all Notes not delivered to the Trustee for cancellation otherwise have become due and payable or have been called for redemption pursuant to paragraph 6 of the Notes, and the Issuer has irrevocably deposited or caused to be deposited with the Trustee trust funds in trust in an amount of money sufficient to pay and discharge the entire Indebtedness (including all principal and accrued interest) on the Notes not theretofore delivered to the Trustee for cancellation,

(b)    the Issuer has paid all sums payable by it under this Indenture,

(c)    the Issuer has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at maturity or on the date of redemption, as the case may be, and

(d)    the Trustee, for the benefit of the Holders, has a valid, perfected, exclusive security interest in this trust.

In addition, the Issuer must deliver an Officers’ Certificate and an Opinion of Counsel (as to legal matters) stating that all conditions precedent to satisfaction and discharge have been complied with.

After such delivery, the Trustee shall acknowledge in writing the discharge of the Issuer’s and the Guarantors’ obligations under the Notes, the Guarantees and this Indenture except for those surviving obligations specified below.

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Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Issuer in Sections 7.07, 9.05 and 9.06 shall survive.

SECTION 9.02.    Legal Defeasance.

The Issuer may at its option, by Board Resolution of the Board of Directors of the Issuer, be discharged from its obligations with respect to the Notes and the Guarantors discharged from their obligations under the Guarantees on the date the conditions set forth in Section 9.04 are satisfied (hereinafter, “Legal Defeasance”). For this purpose, such Legal Defeasance means that the Issuer shall be deemed to have paid and discharged the entire indebtedness represented by the Notes and to have satisfied all its other obligations under such Notes and this Indenture insofar as such Notes are concerned (and the Trustee, at the expense of the Issuer, shall, subject to Section 9.06, execute instruments in form and substance reasonably satisfactory to the Trustee and Issuer acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of outstanding Notes to receive solely from the trust funds described in Section 9.04 and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due, (B) the Issuer’s obligations with respect to such Notes under Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.11 and 4.19, (C) the rights, powers, trusts, duties, and immunities of the Trustee hereunder (including claims of, or payments to, the Trustee under or pursuant to Section 7.07) and (D) this Article Nine. Subject to compliance with this Article Nine, the Issuer may exercise its option under this Section 9.02 with respect to the Notes notwithstanding the prior exercise of its option under Section 9.03 with respect to the Notes.

SECTION 9.03.    Covenant Defeasance.

At the option of the Issuer, pursuant to a Board Resolution of the Board of Directors of the Issuer, (x) the Issuer and the Guarantors shall be released from their respective obligations under Sections 4.02 (except for obligations mandated by the TIA), 4.05 through 4.17, inclusive, and 4.20 and clause (3) of the first paragraph of Section 5.01 and (y) Section 6.01 (5) and (6) shall no longer apply with respect to the outstanding Notes on and after the date the conditions set forth in Section 9.04 are satisfied (hereinafter, “Covenant Defeasance”). For this purpose, such Covenant Defeasance means that the Issuer and the Guarantors may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such specified Section or portion thereof, whether directly or indirectly by reason of any reference elsewhere herein to any such specified Section or portion thereof or by reason of any reference in any such specified Section or portion thereof to any other provision herein or in any other document, but the remainder of this Indenture and the Notes shall be unaffected thereby.

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SECTION 9.04.    Conditions to Defeasance or Covenant Defeasance.

The following shall be the conditions to application of Section 9.02 or Section 9.03 to the outstanding Notes:

(1)    the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, U.S. legal tender, U.S. Government Obligations or a combination thereof, in such amounts as will be sufficient (without reinvestment) in the opinion of a nationally recognized firm of independent public accountants selected by the Issuer, to pay the principal of and interest on the Notes on the stated date for payment or on the redemption date of the principal or installment of principal of or interest on the Notes, and the Trustee must have a valid, perfected, exclusive security interest in such trust,

(2)    in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that:

(a)    the Issuer has received from, or there has been published by the Internal Revenue Service, a ruling, or

(b)    since the date hereof, there has been a change in the applicable U.S. federal income tax law,

in either case to the effect that, and based thereon this Opinion of Counsel shall confirm that, the Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the Legal Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred,

(3)    in the case of Covenant Defeasance, the Issuer shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that the Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Covenant Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if the Covenant Defeasance had not occurred,

(4)    no Default shall have occurred and be continuing on the date of such deposit (other than a Default resulting from the borrowing of funds to be applied to such deposit and the grant of any Lien securing such borrowing),

(5)    the Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material

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agreement or instrument to which the Parent or any of its Subsidiaries is a party or by which the Parent or any of its Subsidiaries is bound,

(6)    the Issuer shall have delivered to the Trustee an Officers’ Certificate stating that the deposit was not made by it with the intent of preferring the Holders over any other of its creditors or with the intent of defeating, hindering, delaying or defrauding any other of its creditors or others, and

(7)    the Issuer shall have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that the conditions provided for in, in the case of the Officers’ Certificate, clauses (1) through (6) and, in the case of the Opinion of Counsel, clauses (1) (with respect to the validity and perfection of the security interest), (2) and/or (3) and (5) of this paragraph have been complied with.

If the funds deposited with the Trustee to effect Covenant Defeasance are insufficient to pay the principal of and interest on the Notes when due, then the obligations of the Issuer and the Guarantors under this Indenture will be revived and no such defeasance will be deemed to have occurred.

SECTION 9.05.    Deposited Money and U.S. Government Obligations To Be Held in Trust; Other Miscellaneous Provisions.

All money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee pursuant to Section 9.04 in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent, to the Holders of such Notes, of all sums due and to become due thereon in respect of principal, premium, if any, and accrued interest, but such money need not be segregated from other funds except to the extent required by law.

The Issuer and the Guarantors shall (on a joint and several basis) pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 9.04 or the principal, premium, if any, and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes.

Anything in this Article Nine to the contrary notwithstanding, the Trustee shall deliver or pay to the Issuer from time to time any money or U.S. Government Obligations held by it as provided in Section 9.04 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance.

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SECTION 9.06.    Reinstatement.

If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 9.01, 9.02 or 9.03 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Issuer’s and each Guarantor’s obligations under this Indenture, the Notes and the Guarantees shall be revived and reinstated as though no deposit had occurred pursuant to this Article Nine until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 9.01; provided that if the Issuer or the Guarantors have made any payment of principal of, premium, if any, or accrued interest on any Notes because of the reinstatement of their obligations, the Issuer or the Guarantors, as the case may be, shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent.

SECTION 9.07.    Moneys Held by Paying Agent.

In connection with the satisfaction and discharge of this Indenture, all moneys then held by any Paying Agent under the provisions of this Indenture shall, upon written demand of the Issuer, be paid to the Trustee, or if sufficient moneys have been deposited pursuant to Section 9.04, to the Issuer (or, if such moneys had been deposited by the Guarantors, to such Guarantors), and thereupon such Paying Agent shall be released from all further liability with respect to such moneys.

SECTION 9.08.    Moneys Held by Trustee.

Subject to applicable law, any moneys deposited with the Trustee or any Paying Agent or then held by the Issuer or the Guarantors in trust for the payment of the principal of, or premium, if any, or interest on any Note that are not applied but remain unclaimed by the Holder of such Note for two years after the date upon which the principal of, or premium, if any, or interest on such Note shall have respectively become due and payable shall be repaid to the Issuer (or, if appropriate, the Guarantors), or if such moneys are then held by the Issuer or the Guarantors in trust, such moneys shall be released from such trust; and the Holder of such Note entitled to receive such payment shall thereafter, as an unsecured general creditor, look only to the Issuer and the Guarantors for the payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money shall thereupon cease; provided, that the Trustee or any such Paying Agent, before being required to make any such repayment, may, at the expense of the Issuer and the Guarantors, either mail to each Holder affected, at the address shown in the register of the Notes maintained by the Registrar pursuant to Section 2.03, or cause to be published once a week for two successive weeks, in a newspaper published in the English language, customarily published each Business Day and of general circulation in the City of New York, New York, a notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the

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date of such mailing or publication, any unclaimed balance of such moneys then remaining will be repaid to the Issuer. After payment to the Issuer or the Guarantors or the release of any money held in trust by the Issuer or any Guarantors, as the case may be, Holders entitled to the money must look only to the Issuer and the Guarantors for payment as general creditors unless applicable abandoned property law designates another Person.

ARTICLE TEN

GUARANTEE OF NOTES

SECTION 10.01.    Guarantee.

Subject to the provisions of this Article Ten, each Guarantor, by execution of this Indenture, jointly and severally, unconditionally guarantees to each Holder (i) the due and punctual payment of the principal of, and premium, if any, and interest on the Notes, when and as the same shall become due and payable, whether at maturity, by acceleration or otherwise, the due and punctual payment of interest on the overdue principal of, and premium and interest on the Notes, to the extent lawful, and the due and punctual payment of all other Obligations and due and punctual performance of all other obligations of the Issuer to the Holders or the Trustee all in accordance with the terms of such Note and this Indenture, and (ii) in the case of any extension of time of payment or renewal of any Notes or any of such other Obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Each Guarantor, by execution of this Indenture, agrees that its obligations hereunder shall be absolute and unconditional, irrespective of, and shall be unaffected by, any invalidity, irregularity or unenforceability of any such Note or this Indenture, any failure to enforce the provisions of any such Note or this Indenture, any waiver, modification or indulgence granted to the Issuer with respect thereto by the Holder of such Note, or any other circumstances which may otherwise constitute a legal or equitable discharge of a surety or such Guarantor.

Each Guarantor hereby waives diligence, presentment, demand for payment, filing of claims with a court in the event of merger or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, protest or notice with respect to any such Note or the Indebtedness evidenced thereby and all demands whatsoever, and covenants that this Guarantee will not be discharged as to any such Note except by payment in full of the principal thereof and interest thereon. Each Guarantor hereby agrees that, as between such Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, (i) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article Six for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (ii) in the event of any declaration of acceleration of such Obligations as provided in Article Six, such Obligations

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(whether or not due and payable) shall forthwith become due and payable by each Guarantor for the purpose of this Guarantee.

SECTION 10.02.    Execution and Delivery of Guarantee.

To further evidence the Guarantee set forth in Section 10.01, each Guarantor hereby agrees that a notation of such Guarantee, substantially in the form included in Exhibit C hereto, shall be endorsed on each Note authenticated and delivered by the Trustee and such Guarantee shall be executed by either manual or facsimile signature of an Officer or an Officer of a general partner, as the case may be, of each Guarantor. The validity and enforceability of any Guarantee shall not be affected by the fact that it is not affixed to any particular Note.

Each of the Guarantors hereby agrees that its Guarantee set forth in Section 10.01 shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Guarantee.

If an officer of a Guarantor whose signature is on this Indenture or a Guarantee no longer holds that office at the time the Trustee authenticates the Note on which such Guarantee is endorsed or at any time thereafter, such Guarantor’s Guarantee of such Note shall be valid nevertheless.

The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of any Guarantee set forth in this Indenture on behalf of the Guarantor.

SECTION 10.03.    Limitation of Guarantee.

The obligations of each Subsidiary Guarantor are limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Guarantee or pursuant to its contribution obligations under this Indenture, result in the obligations of such Subsidiary Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor.

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SECTION 10.04.    Release of Guarantor.

A Subsidiary Guarantor shall be released from all of its obligations under its Guarantee if:

(i)    all of the assets of such Subsidiary Guarantor have been sold or otherwise disposed of in a transaction in compliance with the terms of this Indenture (including Sections 4.09, 4.20 and 5.01);

(ii)    all of the Equity Interests held by the Parent and the Restricted Subsidiaries of such Subsidiary Guarantor have been sold or otherwise disposed of in a transaction in compliance with the terms of this Indenture (including Sections 4.20 and 5.01);

(iii)    the Subsidiary Guarantor is designated an Unrestricted Subsidiary in compliance with the terms of this Indenture (including Section 4.15);

and in each such case, the Issuer has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to such transactions have been complied with and that such release is authorized and permitted hereunder.

The Trustee shall execute any documents reasonably requested by the Issuer or a Subsidiary Guarantor in order to evidence the release of such Subsidiary Guarantor from its obligations under its Guarantee endorsed on the Notes and under this Article Ten.

SECTION 10.05.    Waiver of Subrogation.

Each Guarantor hereby irrevocably waives any claim or other rights which it may now or hereafter acquire against the Issuer that arise from the existence, payment, performance or enforcement of such Guarantor’s obligations under its Guarantee and this Indenture, including, without limitation, any right of subrogation, reimbursement, exoneration, indemnification, and any right to participate in any claim or remedy of any Holder of Notes against the Issuer, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Issuer, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or Note on account of such claim or other rights. If any amount shall be paid to any Guarantor in violation of the preceding sentence and the Notes shall not have been paid in full, such amount shall have been deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Holders, and shall forthwith be paid to the Trustee for the benefit of such Holders to be credited and applied upon the Notes, whether matured or unmatured, in accordance with the terms of this Indenture. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated

89

by this Indenture and that the waiver set forth in this Section 10.05 is knowingly made in contemplation of such benefits.

ARTICLE ELEVEN

[INTENTIONALLY OMITTED]

ARTICLE TWELVE

MISCELLANEOUS

SECTION 12.01.    Trust Indenture Act Controls.

If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. If any provision of this Indenture modifies any TIA provision that may be so modified, such TIA provision shall be deemed to apply to this Indenture as so modified. If any provision of this Indenture excludes any TIA provision that may be so excluded, such TIA provision shall be excluded from this Indenture.

The provisions of TIA §§ 310 through 317 that impose duties on any Person (including the provisions automatically deemed included unless expressly excluded by this Indenture) are a part of and govern this Indenture, whether or not physically contained herein.

SECTION 12.02.    Notices.

Except for notice or communications to Holders, any notice or communication shall be given in writing and delivered in person, sent by facsimile, delivered by commercial courier service or mailed by first-class mail, postage prepaid, addressed as follows:

If to the Issuer or any Guarantor:

WILLIAM LYON HOMES, INC.

4490 Von Karman Avenue

Newport Beach, CA 92660

Attention: Chief Financial Officer

Fax Number: (949) 252-2575

with, in the case of any notice furnished pursuant to Article Six, a copy to:

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IRELL & MANELLA LLP

1800 Avenue of the Stars

Suite 900

Los Angeles, CA 90067

Attention: Meredith Jackson, Esq.

Fax Number: (310) 277-1010

If to the Trustee:

U.S. BANK NATIONAL ASSOCIATION

180 East Fifth Street

St. Paul, MN 55101

Attention: Corporate Trust Department

Fax Number: (651) 244-0711

Such notices or communications shall be effective when received and shall be sufficiently given if so given within the time prescribed in this Indenture.

The Issuer, the Guarantors or the Trustee by written notice to the others may designate additional or different addresses for subsequent notices or communications.

Any notice or communication mailed to a Holder shall be mailed to him by first-class mail, postage prepaid, at his address shown on the register kept by the Registrar.

Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication to a Holder is mailed in the manner provided above, it shall be deemed duly given, whether or not the addressee receives it.

In case by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impossible to mail any notice as required by this Indenture, then such method of notification as shall be made with the approval of the Trustee shall constitute a sufficient mailing of such notice.

SECTION 12.03.    Communications by Holders with Other Holders.

Holders may communicate pursuant to TIA § 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Issuer, the Guarantors, the Trustee, the Registrar and anyone else shall have the protection of TIA § 312(c).

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SECTION 12.04.    Certificate and Opinion as to Conditions Precedent.

Upon any request or application by the Issuer or any Guarantor to the Trustee to take any action under this Indenture, the Issuer or such Guarantor shall furnish to the Trustee:

(1)    an Officers’ Certificate (which shall include the statements set forth in Section 12.05) stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and

(2)    an Opinion of Counsel (which shall include the statements set forth in Section 12.05) stating that, in the opinion of such counsel, all such conditions precedent have been complied with.

SECTION 12.05.    Statements Required in Certificate and Opinion.

Each certificate and opinion with respect to compliance by or on behalf of the Issuer or any Guarantor with a condition or covenant provided for in this Indenture shall include:

(1)    a statement that the Person making such certificate or opinion has read such covenant or condition;

(2)    a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

(3)    a statement that, in the opinion of such Person, it or he has made such examination or investigation as is necessary to enable it or him to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(4)    a statement as to whether or not, in the opinion of such Person, such covenant or condition has been complied with.

SECTION 12.06.    Rules by Trustee and Agents.

The Trustee may make reasonable rules for action by or meetings of Holders. The Registrar and Paying Agent may make reasonable rules for their functions.

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SECTION 12.07.    Governing Law.

This Indenture and the Notes shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York.

SECTION 12.08.    No Adverse Interpretation of Other Agreements.

This Indenture may not be used to interpret another indenture, loan, security or debt agreement of the Issuer or any Subsidiary thereof. No such indenture, loan, security or debt agreement may be used to interpret this Indenture.

SECTION 12.09.    No Recourse Against Others.

No recourse for the payment of the principal of or premium, if any, or interest, on any of the Notes, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Issuer or any Guarantor in this Indenture or in any supplemental indenture, or in any of the Notes, or because of the creation of any Indebtedness represented thereby, shall be had against any stockholder, officer, director or employee, as such, past, present or future, of the Issuer or of any successor corporation or against the property or assets of any such stockholder, officer, employee or director, either directly or through the Issuer or any Guarantor, or any successor corporation thereof, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the Notes are solely obligations of the Issuer and the Guarantors, and that no such personal liability whatever shall attach to, or is or shall be incurred by, any stockholder, officer, employee or director of the Issuer or any Guarantor, or any successor corporation thereof, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or the Notes or implied therefrom, and that any and all such personal liability of, and any and all claims against every stockholder, officer, employee and director, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of the Notes. It is understood that this limitation on recourse is made expressly for the benefit of any such shareholder, employee, officer or director and may be enforced by any of them.

SECTION 12.10.    Successors.

All agreements of the Issuer and the Guarantors in this Indenture and the Notes shall bind their respective successors. All agreements of the Trustee, any additional trustee and any Paying Agents in this Indenture shall bind its successor.

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SECTION 12.11.    Multiple Counterparts.

The parties may sign multiple counterparts of this Indenture. Each signed counterpart shall be deemed an original, but all of them together represent one and the same agreement.

SECTION 12.12.    Table of Contents, Headings, etc.

The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof.

SECTION 12.13.    Separability.

Each provision of this Indenture shall be considered separable and if for any reason any provision which is not essential to the effectuation of the basic purpose of this Indenture or the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

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IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed all as of the date and year first written above.

Very truly yours,

WILLIAM LYON HOMES, INC.

By:
	Name: Title:

WILLIAM LYON HOMES

By:
	Name: Title:

CALIFORNIA EQUITY FUNDING, INC.

By:
	Name: Title:

PH—LP VENTURES

By:
	Name: Title:

DUXFORD FINANCIAL, INC.

By:
	Name: Title:

S-1

SYCAMORE CC, INC.

By:
	Name: Title:

PRESLEY CMR, INC.

By:
	Name: Title:

WILLIAM LYON SOUTHWEST, INC.

By:
	Name: Title:

PH—REILLY VENTURES

By:
	Name: Title:

MOUNTAIN GATE VENTURES, INC.

By:
	Name: Title:

S-2

OX I OXNARD, L.P.
By:	William Lyon Homes, Inc.,
	its General Partner
By:
	Name:
	Title:

PRESLEY HOMES
By:
	Name:
	Title:

ST. HELENA WESTMINSTER ESTATES, LLC
By:	William Lyon Homes, Inc.
	its Sole Member
By:
	Name:
	Title:

CARMEL MOUNTAIN RANCH
By:	William Lyon Homes, Inc.
	its General Partner
By:
	Name:
	Title:

PH VENTURES—SAN JOSE
By:
	Name:
	Title:

HSP, INC.
By:
	Name:
	Title:

S-3

EXHIBIT A

CUSIP

WILLIAM LYON HOMES, INC.

No.     $

[    ]% SENIOR NOTE DUE 2013

WILLIAM LYON HOMES, INC., a California corporation (the “Company”), for value received, promises to pay to [            ] or registered assigns the principal sum of $ dollars on [        ], 2013.

Interest Payment Dates: [        ] and [        ].

Record Dates: [        ] and [        ].

Reference is made to the further provisions of this Note contained herein, which will for all purposes have the same effect as if set forth at this place.

A-1

IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers.

WILLIAM LYON HOMES, INC.

By:
	Name: Title:

Dated:

Certificate of Authentication

This is one of the [    ]% Senior Notes due 2013 referred to in the within-mentioned Indenture.

U.S. BANK NATIONAL ASSOCIATION, as Trustee

By:

Dated:

A-2

[FORM OF REVERSE OF NOTE]

WILLIAM LYON HOMES, INC.

[    ]% SENIOR NOTE DUE 2013

1.    Interest.    WILLIAM LYON HOMES, INC., a California corporation (the “Company”), promises to pay, until the principal hereof is paid or made available for payment, interest on the principal amount set forth on the face hereof at a rate of [    ]% per annum. Interest hereon will accrue from and including the most recent date to which interest has been paid or, if no interest has been paid, from and including [        ], 2003 to but excluding the date on which interest is paid. Interest shall be payable in arrears on each [    ] and [    ], commencing [        ], 2003. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal and on overdue interest (to the full extent permitted by law) at a rate of [    ]% per annum.

2.    Method of Payment.    The Company will pay interest hereon (except defaulted interest) to the Persons who are registered Holders at the close of business on [    ] or [    ] next preceding the interest payment date (whether or not a Business Day). Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. If a Holder has given wire transfer instructions to the Company at least ten Business days prior to the applicable payment date, the Company will make all payments on the Holder’s Notes in accordance with those instructions. Otherwise, payments on the Notes will be made at the office or agency of the Paying Agent and Registrar unless the Company elects to make interest payments by check mailed to the Holder entitled thereto at the address indicated on the register maintained by the Registrar for the Notes.

3.    Paying Agent and Registrar.    Initially, U.S. Bank National Association (the “Trustee”) will act as a Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without prior notice. Neither the Company nor any of its Affiliates may act as Paying Agent or Registrar.

4.    Indenture.    The Company issued the Notes under an Indenture dated as of [        ], 2003 (the “Indenture”) among the Company, the Guarantors (as defined in the Indenture) and the Trustee. This is one of an issue of Notes of the Company issued, or to be issued, under the Indenture. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code §§ 77aaa-77bbbb), as amended from time to time. The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of them. Capitalized and certain other terms used herein and not otherwise defined have the meanings set forth in the Indenture. The Notes are obligations of the Company limited in aggregate principal amount to $350,000,000, except as provided in Section 2.08 of the Indenture.

A-3

5.    [Intentionally Omitted]

6.    Optional Redemption.    (a) The Company, at its option, may redeem the Notes, in whole or in part, at any time on or after [    ], 2008, at the redemption prices (expressed as percentages of principal amount), set forth below, together, in each case, with accrued and unpaid interest thereon, if any, to the Redemption Date, if redeemed during the twelve month period beginning on [            ] of each year listed below:

Year	Redemption Price
2008	[        ]%
2009	[        ]%
2010	[        ]%
2011 and thereafter	100%

(b)    Notwithstanding the foregoing, at any time prior to [        ], 2006, the Company may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of one or more Qualified Equity Offerings at a redemption price equal to [    ]% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest thereon, if any, to the Redemption Date; provided that (1) at least 65% of the aggregate principal amount of Notes issued under the Indenture remains outstanding immediately after the occurrence of such redemption and (2) the redemption occurs within 90 days of the date of the closing of any such Qualified Equity Offering.

(c)    In the event of a redemption of fewer than all of the Notes, the Trustee shall select the Notes to be redeemed in compliance with the requirements of the principal national securities exchange, if any, while such Notes are listed, or if such Notes are not then listed on a national securities exchange, on a pro rata basis, by lot or in such other manner as the Trustee shall deem fair and appropriate; provided, however, that no Notes of a principal amount of less than $1,000 shall be redeemed in part. The Notes will be redeemable in whole or in part upon not less than 30 nor more than 60 days’ prior written notice, mailed by first class mail to a Holder’s last address as it shall appear on the register maintained by the Registrar of the Notes. On and after any redemption date, interest will cease to accrue on the Notes or portions thereof called for redemption unless the Company shall fail to redeem any such Note.

7.    Notice of Redemption.    Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at his registered address. On and after the Redemption Date, unless the Company defaults in making the redemption payment, interest ceases to accrue on Notes or portions thereof called for redemption.

8.    Offers To Purchase.    The Indenture provides that upon the occurrence of a Change of Control or certain Asset Sales or if the Parent’s Consolidated Tangible Net Worth falls below $75.0 million for two consecutive fiscal quarters and subject to further

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limitations contained therein, the Company shall make an offer to purchase outstanding Notes in accordance with the procedures set forth in the Indenture.

9.    [Intentionally Omitted]

10.    Denominations, Transfer, Exchange.    The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay to it any taxes and fees required by law or permitted by the Indenture. The Registrar shall not be required to exchange or register a transfer of any Note for a period of 15 days immediately preceding the mailing of notice of redemption of Notes to be redeemed or of any Note selected, called or being called for redemption except the unredeemed portion of any Note being redeemed in part.

11.    Persons Deemed Owners.    The registered Holder of this Note may be treated as the owner of this Note for all purposes.

12.    Unclaimed Money.    If money for the payment of principal or interest remains unclaimed for two years, the Trustee will pay the money back to the Company at its written request. After that, Holders entitled to the money must look to the Company for payment as general creditors unless an “abandoned property” law designates another Person.

13.    Amendment, Supplement, Waiver, Etc.    The Company, the Guarantors and the Trustee (if a party thereto) may, without the consent of the Holders of any outstanding Notes, amend, waive or supplement the Indenture or the Notes for certain specified purposes, including, among other things, curing ambiguities, defects or inconsistencies, maintaining the qualification of the Indenture under the Trust Indenture Act of 1939, as amended, and making any change that does not materially and adversely affect the rights of any Holder. Other amendments and modifications of the Indenture or the Notes may be made by the Company, the Guarantors and the Trustee with the consent of the Holders of not less than a majority of the aggregate principal amount of the outstanding Notes, subject to certain exceptions requiring the consent of either the Holders of (i) not less than two-thirds of the aggregate principal amount of the outstanding Notes or (ii) the Holders of the particular Notes to be affected.

14.    Restrictive Covenants.    The Indenture imposes certain limitations on the ability of the Parent and its Restricted Subsidiaries to, among other things, incur additional Indebtedness, make payments in respect of, or redeem, their Equity Interests or certain Indebtedness, make certain Investments, create or incur Liens, enter into transactions with Affiliates, enter into agreements restricting the ability of Restricted Subsidiaries to pay dividends and make distributions and on the ability of the Parent and the Company to merge or consolidate with any other Person or transfer all or substantially all of the Parent’s, the Company’s or

A-5

any Guarantor’s assets. Such limitations are subject to a number of important qualifications and exceptions. Pursuant to Section 4.04, the Company must annually report to the Trustee on compliance with such limitations.

15.    Successor Corporation.    When a successor corporation assumes all the obligations of its predecessor under the Notes and the Indenture and the transaction complies with the terms of Article Five of the Indenture, the predecessor corporation will, except as provided in Article Five, be released from those obligations.

16.    Defaults and Remedies.    Events of Default are set forth in the Indenture. Subject to certain limitations in the Indenture, if an Event of Default (other than an Event of Default specified in Section 6.01(7) or (8) with respect to the Company) occurs and is continuing, the Trustee, by written notice to the Issuer, or the Holders of not less than 25% in aggregate principal amount of the outstanding Notes, by written notice to the Issuer and the Trustee, may, declare all principal of and accrued interest on all Notes to be immediately due and payable and such amounts shall become immediately due and payable. If an Event of Default specified in Section 6.01(7) or (8) occurs with respect to the Company, the principal amount of and interest on, all Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing default (except a default in payment of principal, premium, if any, or interest on the Notes or a default in the observance or performance of any of the obligations of the Company under Article Five of the Indenture) if it determines that withholding notice is in their best interests.

17.    Trustee Dealings with Company.    The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not Trustee.

18.    Discharge.    The Company’s obligations pursuant to the Indenture will be discharged, except for obligations pursuant to certain sections thereof, subject to the terms of the Indenture, upon the payment of all the Notes or upon the irrevocable deposit with the Trustee of United States dollars or U.S. Government Obligations sufficient to pay when due principal of and interest on the Notes to maturity or redemption, as the case may be.

19.    Guarantees.    The Note will be entitled to the benefits of certain Guarantees made for the benefit of the Holders. Reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and obligations thereunder of the Guarantors, the Trustee and the Holders.

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20.    Authentication.    This Note shall not be valid until the Trustee signs the certificate of authentication on the other side of this Note.

21.    Governing Law.    This Note shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York. The Trustee, the Company, the Guarantor and the Holders agree to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to the Indenture or the Notes.

22.    Abbreviations.    Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TENANT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).

23.    Conflicts with the Indenture.    This Note is subject to all terms and conditions of the Indenture. To the extent that any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern.

The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to:

WILLIAM LYON HOMES, INC.

4490 Von Karman Avenue

Newport Beach, CA 92660

Attention: Chief Financial Officer

A-7

ASSIGNMENT

I or we assign and transfer this Note to:

(Insert assignee’s social security or tax I.D. number)

(Print or type name, address and zip code of assignee)

and irrevocably appoint:

Agent to transfer this Note on the books of the Company. The Agent may substitute another to act for him.

Date: _______________________ Your signature: _____________________________ (Sign exactly as your name appears on the other side of this Note)

Signature Guarantee:_______________            

SIGNATURE GUARANTEE

Signatures must be guaranteed by an “eligible guarantor institution” meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.

A-8

OPTION OF HOLDER TO ELECT PURCHASE

If you want to elect to have all or any part of this Note purchased by the Company pursuant to Section 4.09, Section 4.16 or Section 4.20 of the Indenture, check the appropriate box:

¨         Section 4.09     ¨         Section 4.16     ¨         Section 4.20

If you want to have only part of the Note purchased by the Company pursuant to Section 4.09, Section 4.16 or Section 4.20 of the Indenture, state the amount you elect to have purchased:

$______________________________________

(multiple of $1,000)

Date: _______________________ Your signature: _____________________________ (Sign exactly as your name appears on the other side of this Note)

Signature Guarantee:_____________________

SIGNATURE GUARANTEE

Signatures must be guaranteed by an “eligible guarantor institution” meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.

A-9

EXHIBIT B

[FORM OF LEGEND FOR GLOBAL NOTE]

Any Global Note authenticated and delivered hereunder shall bear a legend in substantially the following form:

This Note is a Global Note within the meaning of the indenture hereinafter referred to and is registered in the name of a depository or a nominee of a depository. This Note is not exchangeable for Notes registered in the name of a person other than the depository or its nominee except in the limited circumstances described in the indenture, and no transfer of this Note (other than a transfer of this Note as a whole by the depository to a nominee of the depository or by a nominee of the depository to the depository or another nominee of the depository) may be registered except in the limited circumstances described in the Indenture.

Unless this certificate is presented by an authorized representative of the Depository Trust Company (a New York corporation) (“DTC”) to the issuer or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of CEDE & CO. or in such other name as it requested by an authorized representative of DTC (and any payment is made to CEDE & CO. or such other entity as is requested by an authorized representative of DTC), any transfer, pledge or other use hereof for value or otherwise by or to any Person is wrongful inasmuch as the registered owner hereof, CEDE & CO., has an interest herein.

B-1

EXHIBIT C

NOTATION OF GUARANTEE

Each of the undersigned (the “Guarantors”) hereby jointly and severally unconditionally guarantees, to the extent set forth in the Indenture dated as of March [    ], 2003 by and among William Lyon Homes, Inc., as issuer, the Guarantors, as guarantors, and U.S. Bank National Association, as Trustee (as amended, restated or supplemented from time to time, the “Indenture”), and subject to the provisions of the Indenture, (a) the due and punctual payment of the principal of, and premium, if any, and interest on the Notes, when and as the same shall become due and payable, whether at maturity, by acceleration or otherwise, the due and punctual payment of interest on overdue principal of, and premium and interest on the Notes, to the extent lawful, and the due and punctual payment of all Obligations and due and punctual performance of all other obligations of the Issuer to the Holders or the Trustee, all in accordance with the terms set forth in Article Ten of the Indenture, and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise.

The obligations of the Guarantors to the Holders and to the Trustee pursuant to this Guarantee and the Indenture are expressly set forth in Article Ten of the Indenture, and reference is hereby made to the Indenture for the precise terms and limitations of this Guarantee. Each Holder of the Note to which this Guarantee is endorsed, by accepting such Note, agrees to and shall be bound by such provisions. To the extent that any provision of this Guarantee conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern.

[Signatures on Following Pages]

C-1

IN WITNESS WHEREOF, each of the Guarantors has caused this Guarantee to be signed by a duly authorized officer.

WILLIAM LYON HOMES

By:
	Name: Title:

CALIFORNIA EQUITY FUNDING, INC.

By:
	Name: Title:

PH—LP VENTURES

By:
	Name: Title:

DUXFORD FINANCIAL, INC.

By:
	Name: Title:

SYCAMORE CC, INC.

By:
	Name: Title:

C-2

PRESLEY CMR, INC.

By:
	Name: Title:

WILLIAM LYON SOUTHWEST, INC.

By:
	Name: Title:

PH—REILLY VENTURES

By:
	Name: Title:

MOUNTAIN GATE VENTURES, INC.

By:
	Name: Title:

OX I OXNARD, L.P.

By: William Lyon Homes, Inc., its General Partner

By:
	Name: Title:

PRESLEY HOMES

By:
	Name: Title:

FAIRWAY FARMS, LLC

By: Mountain Gate Ventures, Inc., its Sole Member

By:
	Name: Title:

ST. HELENA WESTMINSTER ESTATES, LLC

By: William Lyon Homes, Inc., its Sole Member

By:
	Name: Title:

CARMEL MOUNTAIN RANCH

By: William Lyon Homes, Inc., its General Partner

By:
	Name: Title:

PH VENTURES—SAN JOSE

By:
	Name: Title:

HSP, INC.

By:
	Name: Title:

C-3

EX-5.1

EXHIBIT 5.1

March 11, 2003

William Lyon Homes, Inc.

4490 Von Karman Avenue

Newport Beach, CA 92660

Ladies and Gentlemen:

We are counsel to William Lyon Homes, Inc., a California corporation (the “Company”) which has filed a registration statement on Form S-3 ( the “Registration Statement”) with the Securities and Exchange Commission under the Securities Act of 1933, as amended, on August 16, 2002 and as amended on February 27, 2003 and March 11, 2003 with respect to the proposed offer and sale of $200,000,000 aggregate principal amount of Senior Notes due 2013 (the “Senior Notes”). The Senior Notes will be issued under and are subject to the terms and provisions of an Indenture (the “Indenture”) by and among the Company, the guarantors named therein (the “Guarantors”) and U.S. Bank, NA, as trustee (the “Trustee”) and will be guaranteed pursuant to the Indenture by the Guarantors (the “Guarantees”). The Senior Notes, the Guarantees and the Indenture are referred to in this letter as the “Note Documents”.

In connection with rendering this opinion, we have made such investigations of law and fact as we have deemed appropriate for purposes thereof. In reliance thereon and subject to the assumptions and limitations set forth herein and the receipt by the Company and the Guarantors from the Securities and Exchange Commission of an order declaring the Registration Statement, as finally amended, effective, it is our opinion that when the Senior Notes and Guarantees thereof are executed, delivered and authenticated in accordance with the terms of the Indenture and issued and sold as described in the Registration Statement, the Senior Notes and the Guarantees will be duly authorized and valid and binding obligations of the Company and the Guarantors, respectively.

In rendering this opinion, as to matters of fact, we have relied upon documents provided to us by the Company. We have also been furnished with and relied upon, without investigation, a certificate of the Company with respect to certain factual matters. The individual attorneys in this firm have not undertaken any investigation to determine the existence or nonexistence of such facts, and no inference as to the extent of their knowledge should be drawn from the fact of their representation of the Company in this or any other instance.

William Lyon Homes, Inc.

March 11, 2003

Page 2

In our review, we have assumed, without investigation, the legal capacity and competency of all natural persons signing documents in their respective individual capacities, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, photostatic or telecopied copies, and the authenticity of the originals of such copies. We have also assumed the absence of any agreement or understanding that would modify, supplement or amend any of the documents reviewed by us.

We have assumed further that each of the parties to the Note Documents (including, without limitation, the Company and the Guarantors) is a validly existing corporation or limited partnership in good standing under the laws of its state of formation and has all requisite power and authority to execute, deliver and perform its obligations under each of the Note Documents to which it is a party, and the execution and delivery of such Note Documents by such party and performance of its obligations thereunder have been duly authorized by all necessary action and do not violate any law, regulation, order, judgment or decree applicable to such party. We have also assumed that the Note Documents are valid and binding agreements of the Trustee.

Our opinions set forth in this letter are subject to the following qualifications, limitations and exceptions:

(i) We render no opinion herein concerning matters involving the laws of any jurisdiction other than the State of New York and the United States of America. No opinion is expressed as to whether a California court would recognize and enforce any provision of the Indenture which provides that it and the Notes are to be governed by the laws of the State of New York.

(ii) We express no opinion concerning (a) the effect of any facts or circumstances occurring after the date hereof that would constitute a defense to the obligation of a guarantor or surety on the enforceability of any Guarantee against any Guarantor or (b) the effectiveness of any waiver of any such defense by any Guarantor under the Note Documents.

(iii) Our opinion set forth herein is subject to (a) the effect of any bankruptcy, insolvency, reorganization, moratorium, arrangement or similar laws affecting the enforcement of creditors’ rights generally (including, without limitation, the effect of statutory or other laws regarding fraudulent transfers or preferential transfers); and (b) general principles of equity, regardless of whether a matter is considered a proceeding in equity or at law, including without limitation concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance, injunctive relief or other equitable remedies.

(iv) We express no opinion regarding: (a) the effectiveness of any waiver (whether or not stated as such) under the Note Documents of, or any consent thereunder relating to, any unknown future rights or the rights of any party thereto existing, or duties owing to it, as a matter of law; (b) the effectiveness of any waiver (whether or not stated as such) contained in the Note Documents of

William Lyon Homes, Inc.

March 11, 2003

Page 3

rights of any party, or duties owing to it, that is broadly or vaguely stated or does not describe the right or duty purportedly waived with reasonable specificity; (c) the effectiveness of any waiver (whether or not stated as such) contained in the Note Documents of stay, extension or usury laws; (d) any provision of the Note Documents relating to indemnification, exculpation or contribution; or (e) any provision of the Note Documents requiring written amendments or waivers of such documents insofar as it suggests that oral or other modifications, amendments or waivers could not be effectively agreed upon by the parties or that the doctrine of promissory estoppel might not apply. We further note that New York statutory provisions and case law provide sureties and guarantors with rights and defenses which may preclude the enforcement of certain of the Note Documents or provisions contained therein that may be construed to give rise to guaranty or suretyship obligations, whether or not the parties thereto purport to waive such rights and defenses in the Note Documents.

(v) We express no opinion as to the legality, validity or binding effect of any related document, instrument or agreement or any other matter beyond the matters expressly set forth herein.

This opinion is rendered as of the date first written above and not at any later date and is rendered on the basis of facts known to us at the date of this opinion, and we do not undertake, and hereby expressly disclaim, any obligation to inform you of any changes in such facts, or changes in our knowledge, subsequent to the date of this opinion. Similarly, the opinion rendered herein is based upon applicable law as of the date of this opinion. We do not undertake, and hereby expressly disclaim, any obligation to inform you of changes in any applicable law or relevant principles of law, or changes in our interpretation of such law or principles, subsequent to the date of this opinion.

This opinion may be filed as an exhibit to the Registration Statement and may not be otherwise disclosed, quoted, filed with a governmental agency or otherwise used or relied upon without our prior written consent. However, consent is also given to the reference to this firm under the caption “Legal matters” in the prospectus contained in the Registration Statement. In giving this consent, we do not admit we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder.

Very truly yours,

/s/    IRELL & MANELLA LLP

Irell & Manella LLP

EX-10.1

EXHIBIT 10.1

June 28, 2002

Mark Carver

Duxford Financial, Inc. and/or Bayport Mortgage, L. P.

3300 Dove Street, Suite 200

Newport Beach, CA 92660

Re: Warehouse Facility Commitment Terms

Dear Mr. Carver:

First Tennessee Bank (“Bank”) is pleased to make a warehouse line of credit available to Duxford Financial, Inc. and/or Bayport Mortgage, L. P. (“Borrower”) based upon the following terms and in accordance with terms and conditions stated within the Mortgage warehouse loan and Security Agreement (“Agreement) pertaining to this facility. All terms contained within this letter (“Commitment Letter”) shall be binding and shall be considered to be part of the Agreement upon mutual acceptance by all parties. This loan commitment shall expire 30 days from the date of this letter unless accepted and executed prior to that date. This commitment replaces all prior warehouse facility commitments made to Duxford Financial, Inc. and/or Bayport Mortgage, L. P, by the Bank and is not in addition to any such prior commitments.

The terms of this commitment are as follows:

Total Maximum Line Amount:	$20,000,000.00
Committed Line:	$15,000,000.00
Uncommitted Line:	$5,000,000.00
Purpose:	To fund Borrower’s origination of single family residential mortgage loans which meet all eligible collateral criteria, as may be amended by Bank from time to time.
Interest Rate:	Equal to the Mortgage Note Rate, but no less than the Rate Floor, and no more than the Rate Cap.
Rate Floor:	One Month LIBOR
Rate Cap:	One Month LIBOR + 2.75%
Fees:	$40.00 per check advance under the line. $125.00 per wire advance under the line. Each mortgage loan must be funded with a separate advance made payable to a title company or insured closing attorney.
Advance rate:	The lesser of:
	1.	100% of the net funding amount on the HUD-1, or
	2.	The unpaid principal balance of the mortgage loan being originated.
	3.	99% of the Market Value of the mortgage loan being funded.

1

Maximum Dwell:	Forty-Five (45) days
Maximum Wet Period:	3 business days
Commitment Expiration:	5/31/2003
Eligible Collateral:	See Exhibit G of the Mortgage Warehouse Loan and Security Agreement.
Maximum Loan Size:	Loans in excess of $500,000.00 must be approved by Bank prior to funding.
Guarantor(s):	None
Financial Covenants:	1.	Borrower and William Lyon Homes, Inc. (parent company) agree to maintain a minimum net worth of $7,500,000.00 at all times as described within the Agreement.
	2.	Combined net worth of Borrower and Guarantor(s) to meet or exceed 5% of Borrower’s outstanding liabilities at ail times.
	3.	Borrower’s Liquidity when combined with the Liquidity of all guarantors shall at all times meet or exceed 5% of the Maximum Line amount.
Other Covenants:	1.	Borrower agrees to maintain fidelity and E&O coverage in force in an amount equal to at least $300,000 per incident, with a maximum deductible of $15,000.
	2.	Borrower agrees to provide Bank audited financial statements prepared in accordance with GAAP annually.
	3.	Borrower agrees to provide Bank unaudited financial statements prepared in accordance with GAAP quarterly.
	4.	Borrower agrees to provide Bank William Lyon Homes, Inc. (parent company) audited financial statements in accordance with GAAP annually.
	5.	Borrower agrees to provide Bank unaudited financial statements prepared in accordance with GAAP quarterly on parent company William Lyon Homes, Inc.
	6.	Borrower agrees not to use or attempt to use this warehouse facility to repurchase any mortgage loan.
	7.	Various other covenants, representations, and warranties as listed in the Mortgage Warehouse Loan and Security Agreement.

2

Please indicate your acceptance of these terms by executing below.

If you have any questions or if I may be of assistance in any way, please call.

Sincerely

/s/ GAITHER DAUGHERTY

Gaither Daugherty

Vice President—Warehouse Lending

Agreed to and accepted this 12 day of July, 2002

Duxford Financial, Inc,		Bayport Mortgage, L.P.
By:	/s/    MARK CARVER	By:	/s/    MARK CARVER
Its:	President	Its:	President
By:	/s/    RICHARD FRANKEL	By:	/s/    RICHARD FRANKEL
Its:		Its:

3

MORTGAGE WAREHOUSE LOAN AND SECURITY AGREEMENT

THIS AGREEMENT entered into effective as of this day, June 28, 2002, by and between Duxford Financial, Inc. and/or Bayport Mortgage, L. P., a California Corporation with offices at 1300 Dove Street, Suite 200, Newport Beach, CA 92660 (hereinafter sometimes referred to as “Borrower”) and First Tennessee Bank, 165 Madison Ave., Memphis, Tennessee (hereinafter referred to as “Bank”).

W I T N E S S E T H

WHEREAS, Borrower is engaged in the business of originating and/or acquiring mortgage loans secured by mortgages upon improved, residential real property, including mortgage loans insured or to be insured by the Federal Housing Administration (FHA), loans guaranteed or to be guaranteed by the Veterans Administration (VA) and conventional loans and

WHEREAS, Borrower desires to borrow money from Bank under the Line of Credit to assist in funding the origination and/or acquisition of such mortgage loans, granting unto the Bank a first lien security interest in (i) each such mortgage loan (ii) all contract and related rights with respect to each such Lock related thereto (iii) the proceeds from the sale of such mortgage loans (iv) all deposit accounts of Borrower maintained at Bank and (v) other collateral (collectively, “Collateral”) to secure such Line of Credit, and the Bank is willing to provide financing to assist in funding the origination and/or acquisition of such mortgage loans with advances under the Line of Credit on the security of such Collateral and

WHEREAS, this Agreement has been entered into by the parties for the purpose of confirming the terms and conditions under which all advances under the Line of Credit shall be made by the Bank on behalf of the Borrower to assist in funding the origination and/or acquisition of such mortgage loans.

NOW, THEREFORE, the parties mutually agree as follows:

1. DEFINITIONS

“Advance” shall mean any provision of money or credit to or for the benefit of Borrower pursuant to this Agreement.

“Advance Amount” shall mean the lesser of:

1. the sum of (a) the unpaid principal balance of the Eligible Mortgage Loan minus (2) all amounts shown on the HUD-1 which are to be disbursed to, or retained by, the Borrower plus (3) all amounts shown on the HUD-1 to be paid by the Borrower to arms-length third parties; OR

2. the unpaid principal balance of the Eligible Mortgage Loan; OR

3. 99% of the Purchase Price to be paid by the Qualified Investor.

“Advance Date” shall mean the date the Closing Check is presented to the Bank’s Mortgage Warehouse Lending Division for payment in accordance with Section 2.3. hereof.

“Advance Documents” with respect to any funding, shall mean the documentation described in Section 2.3.5.

“Advance Request and Supplemental Closing Instructions” shall mean that document to be executed by Borrower and Closing Agent with respect to each Eligible Mortgage Loan to be funded hereunder and which shall serve as a cash advance request hereunder by Borrower, in the form of Exhibit A attached hereto, which may be changed from time to time at the sole discretion of the Bank,

Bailee Letter’ shall mean a letter in the form of Exhibit C attached hereto which shall be attached to the front of every Mortgage Note by the Bank and used by the Bank and its bailees for the purposes stated therein.

“Bank” shall mean First Tennessee Bank, Memphis, Tennessee.

“Base Rate” shall mean the Bank’s base commercial rate of interest which is established from time to time by the Bank, each change in the Base Rate to become effective, without notice to the Borrower, on the effective date of each change in the Base Rate.

“Business Day” shall mean 8:30 AM until 4:00 PM, Central Time, any Monday, Tuesday, Wednesday. Thursday or Friday on which the Bank is open for the transaction of business in Memphis, Tennessee, All payments to the Warehouse Line of Credit received after 4:00 PM shall be included in the following Business Day.

“Closing Agent” shall mean the attorney or title company designated by the Borrower to close the Eligible Mortgage Loan on behalf of Borrower.

4

“Closing Check” shall mean a check or wire transfer drawn on the Warehouse Clearing Account and payable to the closing agent for the sole purpose of closing or acquiring an Eligible Mortgage Loan.

“Collateral” shall mean each Mortgage Note and such other collateral as may be pledged to Bank pursuant to this Agreement as described in section 2.8.1.

“Combined Net Worth” shall mean that sum calculated as follows from borrower and guarantor financial statements, each prepared as of the same date: Borrower’s Tangible Net worth plus Guarantor(s)’ Tangible Net Worth minus the sum of the following, if included in the Guarantor’s Tangible Net Worth: assets held jointly unless ail owners guaranty the debt secured hereby, Guarantor’s equity in the Borrower, receivables due from the Borrower, unverified and unrealized appreciation in personal residence(s), equity in automobiles and other personal property, and unsecured receivables, MINUS payables due to Borrower.

“Commitment Letter” shall mean that letter from the Bank to the Borrower which describes the terms under which this Agreement is being entered into and which shall be considered a part hereof, a copy of which is attached hereto as Exhibit “F”.

“Eligible Mortgage Loan” shall mean each residential loan evidenced by a Mortgage Note, Mortgage and related documents, which has been originated or acquired by the Borrower, and which has been, or is to be, pledged to the Bank as Collateral for the Line of Credit, and which meets all criteria specified in the Schedule of Eligible Mortgage Loan Criteria attached hereto as Exhibit “G”, and which may change from time to time at the sole discretion of the Bank.

“Eligible Prime Mortgage Loan” shall mean an Eligible Mortgage Loan which conforms to FHA, VA, FHLMC, or FNMA guidelines. An Eligible Mortgage Loan which conforms to all FNMA guidelines except maximum loan size and debt ratios shall be considered to be an Eligible Prime Mortgage Loan.

“Eligible Sub-prime Mortgage Loan” shall mean any Eligible Mortgage Loan which is not an Eligible Prime Mortgage Loan.

“Funding Date” shall mean the earlier of: 1. the date on the face of the Closing Check, which shall be equal to the date the proceeds from the Eligible Mortgage Loan are disbursed by the Closing Agent; OR 2. the date the Closing Check is deposited into an account of the Closing Agent.

“Guarantor(s)” shall mean None.

“Line of Credit” or “Loan” shall mean the credit facility governed hereby.

“Liquidity” shall mean the sum of all Borrower and Guarantor assets owned and held in cash or accounts which can be converted to cash within 30 days, including but not limited to checking accounts, money market or savings, certificates of deposit, and marketable securities. IRA’s owned and held in assets which can be converted to cash within 30 days will be discounted by a factor of 40%.

“Loan Account” shall mean that account established by the Bank pursuant to Section 2.2. hereof.

“Lock” with respect to any Eligible Mortgage Loan shall mean the obligation of a Qualified Investor to Purchase such Eligible Mortgage Loan upon its presentation to the Qualified Investor by or on behalf of the Borrower, as well as the full amount which such Qualified Investor has committed to pay for the same.

“Master Promissory Note” shall mean that note of even date herewith described in Section 2.2., a copy of which is            , attached hereto as Exhibit “B”, and any extensions, modifications, and renewals thereof.

“Maximum Line of Credit” shall be Twenty Million and no/100 Dollars ($20,000,000.00).

“Mortgage” shall mean or refer to the deed of trust, mortgage or other instrument granting to the Borrower, or the holder of such deed of trust, mortgage or instrument, a mortgage lien upon the property therein described.

“Mortgage Note Rate” shall mean the interest rate stated on each Mortgage Note.

“Mortgage Note” shall mean an original promissory note evidencing an Eligible Mortgage Loan.

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“Mortgagor” shall mean that person or persons executing and delivering the Mortgage Note and Mortgage.

“One Month LIBOR” shall mean the London Inter-Bank Offered Rate for a one month term as published in the Wall Street Journal, each change in One Month LIBOR to become effective, without notice to the Borrower, on the date of publication of each such change.

“Purchase” shall mean the act of a Qualified Investor or other person or entity providing funds and remittance advice to the Bank in accordance with the wire transfer instructions set forth on the applicable Bailee Letter in an amount and in a manner sufficient to cause Bank to release its security interest as provided hereunder.

“Purchase Date” shall mean the Business Day upon which the Bank receives both 1) the Purchase Price, plus all accrued interest and other payments, if any, due on the Purchase of the Eligible Mortgage Loan, and 2) remittance instructions pertaining to such purchase proceeds.

“Purchase Price” shall mean the dollar amount the Qualified Investor has contracted or agreed to pay for the Purchase of the particular Eligible Mortgage Loan, not including any premium or other sums allocated to or for the purchase of servicing rights and not including any sums for any interest that has or will have accrued on the Eligible Mortgage Loan from the date it is closed by the Closing Agent until the date the Eligible Mortgage loan is actually purchased by the Qualified Investor.

“Qualified Investor” shall mean an investor listed on Exhibit E attached hereto and approved by the Bank to Purchase Mortgage Loans.

“Tangible Net Worth” shall mean total assets minus total liabilities MINUS the sum of: goodwill, organization costs. receivables due from parties related to this credit, and other assets as specified by Bank as unacceptable, PLUS payables due to parties related to this credit, all measured in accordance with GAAP.

“Termination Date” shall mean the first to occur of (i) the maturity date stated in the Master Promissory Note, or (ii) the occurrence of an Event of Default.

“Warehouse Clearing Account” shall mean that account at Bank on which the Closing Checks will be drawn to fund, in whole or in part, the closing and/or acquisition of Eligible Mortgage Loans.

All financial terms used herein shall have the meaning ascribed thereto in accordance with generally accepted accounting principles.

2. WAREHOUSE LINE USAGE.

2.1. Maximum Line. The sum of all outstanding advances under this Agreement shall not exceed the maximum Line of Credit. Bank and Borrower agree that $15,000,000.00 of the Maximum Line of Credit shall be offered by the Bank on a committed basis, and that $5,000,000.00 of the Maximum Line of Credit shall be offered by the Bank on an uncommitted basis, Requests for advances of amounts offered on an uncommitted basis may or may not be honored by the Bank at the Bank’s sole discretion. Subject to the foregoing, the total amount of funds to be provided to the Closing Agent on Borrower’s behalf to assist in funding the origination of an Eligible Mortgage Loan shall not exceed the Advance Amount, unless otherwise agreed upon by Bank in writing. Bank shall have no obligation to make any advance under this Line of Credit against the security of any residential loan, the original principal amount of which exceeds five hundred thousand dollars ($500,000). In no case shall Bank have any obligation to make any Advance under this Line of Credit to the extent that such action may, in the judgment of the Bank, violate the legal lending limits applicable to Bank imposed by any applicable laws, rules, regulations or interpretations thereof. Borrower is aware that Advances made under the Line of Credit must be aggregated with other loans to Borrower and certain affiliates of Borrower for purposes of calculating Bank’s legal lending limit. Borrower represents and warrants to Bank that Borrower does not exceed Bank’s loan to one borrower limits.

2.2. Loan Account. Borrower shall execute a Master Promissory Note in the amount of the maximum Line of Credit and Bank shall maintain a Loan Account for the Borrower which shall be debited to the extent of any loans to or Advances for the account of Borrower made by Bank pursuant to this Agreement, Borrower’s Loan Account shall be credited with the proceeds of the sale of Eligible Mortgage Loans to Qualified Investors which are received in good funds by Bank, and with such other funds actually received by Bank to reduce Borrower’s indebtedness under the Line of Credit, Bank shall render to Borrower a monthly statement of Borrower’s Loan Account established pursuant to this

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Agreement showing all debits and credits thereto, which statement of account shall be considered correct and binding upon Borrower unless Borrower should give to Bank, within seven (7) days from receipt of such statement, written notice of any exceptions thereto, each of which exception shall be specified in such notice. It is the intention of the parties that Borrower’s indebtedness under this Agreement shall be evidenced by this Agreement and the Master Promissory Note.

2.3. Funding of Line. Bank will provide a Warehouse Clearing Account upon which Borrower will draw funds either by check or by wire transfer in an amount equal to the Advance Amount of the Eligible Mortgage Loan to be closed or acquired in accordance with Bank’s then-current funding procedures, which procedures Bank may change from time to time at its sole discretion. Advances under the Line of Credit will be made by the Bank (assuming all conditions precedent thereto have been met or waived by the Bank) to cover the Closing Check(s) given by Borrower to close or acquire the applicable Eligible Mortgage Loans. The Bank will charge a warehouse fee of $40.00 for each Advance under the Line of Credit funded via check. The Bank will charge a warehouse fee of $125.00 for each Advance under the Line of Credit funded via wire transfer, However, the Bank’s obligation to fund Advances under the line of Credit to cover the Closing Check presented to Bank in respect to any Eligible Mortgage Loan is subject to satisfaction of the following conditions precedent

2.3.1. The Borrower’s maximum Line of Credit shall not be exceeded

2.3.2. There shall exist no condition or event constituting an Event of Default as defined in Article 6 hereof or under the Master Promissory Note

2.3.3. The warranties included in Article 3 hereof shall be true and correct as though made at such time of presentment and Borrower shall have performed, or caused to have been performed, ail of its covenants under this Agreement through such time

2.3.4. Borrower shall have furnished the following documents to Bank with respect to each Eligible Mortgage Loan to be closed and funded hereunder no later than the date the Eligible Mortgage Loan is scheduled to be closed or acquired:

2.3.4.1. A copy of the Advance Request and Supplemental Closing Instructions, completed in all material respects and

2.3.4.2. Such other documentation as to any Eligible Mortgage Loan as the Bank may reasonably request.

2.3.5. Borrower shall deliver or have caused the Closing Agent to deliver to the Bank the following documents with respect to the Eligible Mortgage Loan closed and to be funded hereunder within two (2) Business Days following the closing of such Eligible Mortgage Loan:

2.3.5.1. The Advance Request and Supplemental Closing Instructions on the Bank’s then current form, completed in all material respects and manually executed by both the Borrower and the Closing Agent

2.3.5.2. An executed assignment in blank of the Mortgage, recordable but unrecorded

2.3.5.3. A copy of the Lock pertaining to each Eligible Prime Mortgage Loan

2.3.5.4. A copy of the Underwriter’s approval pertaining to each Eligible Sub-prime Mortgage Loan

2.3.5.5. A copy of the HUD-1 Settlement Statement

2.3.5.6. A Certified True Copy of the Mortgage

2.3.5.7. The original Mortgage Note manually executed by the Mortgagor under the Eligible Mortgage Loan, endorsed in blank, along with all addenda, riders, powers, and/or other documents which together constitute the entire negotiable Mortgage Note, plus a photocopy of the original Mortgage Note along with all addenda, riders, etc., and

2.3.5.8. Such other documentation as to any Eligible Mortgage loans as the Bank may have reasonably requested in writing, including any of the same as may be required by any Qualified Investor or any guarantor or purchaser of such Eligible Mortgage Loans.

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All documentation shall be satisfactory in form and substance to Bank, All such documentation requiring the signature of the Borrower shall have been signed by a duly authorized officer of Borrower, and Bank shall be and it is hereby so authorized, to rely upon any signature on any such document as having been authorized. Bank may, in its sole and absolute discretion, agree to and make an Advance to cover the Closing Check presented with regard to an Eligible Mortgage Loan(s) regardless of whether all of the documents required by Section 2.3.5. have been delivered to Bank within two (2) Business Days after the Eligible Mortgage Loan is closed if the requirements of Sections 2.3.1. through 2.3.4. have been met provided, however, that Bank’s determination to waive the requirements of the delivery of the Advance Documents to the Bank in accordance with Section 2.3.5. and to Advance funds sufficient to cover the Closing Check issued to the Closing Agent in respect to the particular Eligible Mortgage Loan(s) shall not be deemed to be or construed as a waiver of such term or condition with respect to any other Eligible Mortgage Loan or Loans, nor shall such operate as a waiver of Borrower’s breach of this Agreement by its failure to fulfill all conditions precedent. In such event, notwithstanding Bank’s decision to make the Advance sufficient to cover the Closing Check, Bank still may, in its sole and absolute discretion, declare an Event of Default hereunder and take such steps or actions hereunder or under the Master Promissory Note as are available, including, but not limited to, refusing to make any further Advances under this Agreement and/or accelerating the maturity of the Master Promissory Note.

Notwithstanding the occurrence of Termination Date the Bank, at its sole and absolute discretion, may thereafter permit the Borrower to draw funds hereunder in accordance with the terms, conditions and provisions hereof. Any draws permitted by Bank after the Termination Date shall not constitute an extension, renewal or modification of the Line of Credit or the Termination Date, the waiver by Bank of any Event of Default, or otherwise obligate the Bank to permit subsequent draws hereunder.

2.4. Additional Documentation. Borrower covenants that it will promptly obtain and deliver, or cause to be obtained and delivered any additional loan or other documentation reasonably requested by Bank which is customary in the mortgage banking business in order to make each Eligible Mortgage Loan marketable. Upon demand by the Bank, the Borrower shall deliver to the Bank any and all collateral pertaining to each Eligible Mortgage Loan.

2.5. Confirmation. Upon receipt of the documentation called for in subsection 2.3.5. above, Bank will review such documentation for adequacy and accuracy. In the event Bank should not receive all of the documentation required or requested with respect to the Eligible Mortgage Loan(s) within two (2) days of the Closing of the particular Eligible Mortgage Loan, Borrower covenants and agrees to deliver, or cause to be delivered, the missing or necessary documents to the Bank as soon as reasonably practical after receipt of notice of any document deficiency.

2.6. Repayment of Line of Credit. The entire principal amount of each individual Advance under the Line of Credit, and all fees and interest accrued thereon, shall be payable, on the earlier of:

2.6.1. Forty-Five (45) days from the Funding Date of the Eligible Mortgage Loan, or

2.6.2. The Purchase Date for the Eligible Mortgage Loan(s), or

2.6.3. The earliest date on which the Eligible Mortgage Loan becomes past due 60 days or more, or

2.6.4. The date the Borrower assigns, sells, transfers, conveys, or commences foreclosure upon the Eligible Mortgage Loan closed or acquired with respect thereto, or

2.6.5. Termination of this Agreement.

Interest on Line of Credit. Borrower agrees to pay interest from the Funding Date until the repayment of such Advance in accordance with Section 2.6., above. The disbursed and unpaid principal balances of the indebtedness secured hereby shall bear interest prior to repayment at a variable rate per annum (“Warehouse Rate”) which shall, from day to day, be equal to the lesser of (a) the maximum effective variable contract rate of interest (“Maximum Rate”) which Bank may from time to time lawfully charge, or (b) a rate equal to the Mortgage Note Rate. However, if the Mortgage Note Rate is greater than One Month LIBOR + 2.75%, the Warehouse Rate shall be equal to One Month LIBOR +2.75% or if the Mortgage Note Rate is less than One Month LIBOR, the Warehouse Rate shall be equal to One Month LIBOR, It is agreed that interest on the Master Promissory Note shall be calculated on the basis of a 365 (366 in Leap year) day year unless calculation on that basis would result in Bank receiving interest at a rate in excess of the maximum rate of interest which Bank is permitted by law to contract for and charge. in which case such indebtedness shall bear interest at such maximum rate, The indebtedness shall also bear interest after maturity

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(whether by demand, acceleration or otherwise) at the maximum rate of interest which Bank is permitted by law to contract for and charge thereon.

2.8. Bank’s Security Interest and Lien.

2.8.1. Grant of Security Interests. The Borrower hereby pledges, assigns, conveys, mortgages, transfers and grants to Bank a security interest in and to the following, and to the extent the documents, instruments or other items evidencing and representing the following have not been delivered to Borrower, Borrower hereby covenants and agrees to deliver such documents, instruments or other items (the “Collateral”) to Bank:

2.8.1.1. The Mortgage Note for or with respect to each Eligible Mortgage Loan funded in whole or in part with an Advance under this Line of Credit, and all of the indebtedness evidenced by such Mortgage Notes

2.8.1.2. Any and all contract rights of Borrower under or with respect to each Lock for an Eligible Mortgage Loan, including, but not limited to, the right to collect and retain the proceeds from the sale of any Eligible Mortgage Loan to a Qualified Investor (or any other purchaser should the Qualified Investor fail or refuse to Purchase the Eligible Mortgage Loan), together with any guarantees, security interests, escrows and deposits, if any, securing payments thereof arising from or under the contract and/or the Lock

2.8.1.3. All of its right, title and interest in and to the Mortgages and other instruments securing the payment of the indebtedness evidenced by the Mortgage Notes including, but not limited to, all escrows included thereunder and all servicing rights and proceeds from the sale of servicing rights, (and Borrower hereby subrogates the Bank to its position as lien holder to the end that Bank may, at its election, exercise, if necessary, in Borrower’s name, all of the rights of the beneficiary of said Mortgages and other similar security instruments)

2.8.1.4. All proceeds from the sale or transfer of each Eligible Mortgage Loan

2.8.1.5. All deposits of Borrower (whether general or special, time or demand, provisional or final, or individual or joint) maintained with or at Bank or any of its affiliates, custodians or designees

2.8.1.6. All escrows, deposits, and other monies or consideration received by or on behalf of Borrower with respect to each Eligible Mortgage Loan funded, in whole or in part with an Advance under this Line of Credit, including, but not limited to, escrows for insurance, taxes and interest and payments made under the Eligible Mortgage Loan by the Mortgagor

2.8.1.7. All proceeds of any hazard insurance which may arise from damage to or destruction of any property directly or indirectly securing Borrower’s indebtedness which may arise under this Agreement

2.8.1.8. Borrower’s right, title and interest in and to any private mortgage insurance in effect with respect to such Eligible Mortgage Loans and the proceeds thereof

2.8.1.9. Borrower’s right, title and interest in and to any hazard insurance, liability insurance and title insurance pertaining to the residences encompassed by the Eligible Mortgage Loans and proceeds thereof

2.8.1.10. All appraisals, surveys, insurance certificates, termite reports and other loan documents pertaining to the Eligible Mortgage Loans delivered to the Bank.

2.8.1.11. All general intangibles pertaining to the Eligible Mortgage Loans delivered to the Bank

2.8.1.12. All of the Borrower’s ledger and account cards, computer tapes, disks and printouts, and books and records of Borrower; and any and all other properties and assets of Borrower of whatever nature, tangible or intangible, wherever located and whether now or hereafter existing relating to the Eligible Mortgage Loans delivered to the Bank

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whether now existing or hereafter acquired or created, whether owned beneficially or of record and whether owned individually, jointly or otherwise, together with any and all products and proceeds thereof, all payments and other distributions with respect thereto and any and all renewals, substitutions, modifications and extensions of any and all of the foregoing (the “Collateral”), as security for the full and timely payment and satisfaction of all of the Borrower’s obligations hereunder and under the Master Promissory Note, or under any other note or agreement with the Bank, in all cases as and when due. Items released in writing by Bank from time to time from the lien of this Agreement shall no longer be considered Collateral hereunder. But this assignment is made for the purpose of securing an indebtedness of the Borrower to the Bank, and it is a condition hereof that in the event the Borrower should well and fully perform all its duties, both direct and indirect, as obligor under this Agreement and the Master Promissory Note heretofore executed, together with any and all other obligations of Borrower, this assignment shall be void. But in the event of any default by Borrower in any obligation to the Bank or under any other agreement or promissory note, then, and in such event, Bank shall have all rights accorded Borrower under such documents, and Bank may take and receive ail payment under the Mortgage Note(s) and other Collateral assigned hereby and any and all proceeds or product thereof, and take any legal action in respect of such Collateral as the Borrower might absent this assignment. This assignment constitutes a pledge and creates and grants and Borrower hereby creates and grants to Bank a security interest, under the terms of the Uniform Commercial Code in the above described Collateral and all remedies afforded by the Uniform Commercial Code for default are hereby granted unto the Bank. Furthermore, the pledge created hereunder may be perfected by the delivery of the Mortgage Notes to a third party as bailee and failure of Bank to have physical possession thereof shall not in such event invalidate this pledge or its perfection, if such bailee is given notice of this assignment.

2.8.2 Collateral Assignments. Notwithstanding the security interest granted by Borrower to Bank in the Collateral, Borrower understands and agrees that should Bank request such in writing, Borrower will execute and deliver to its Closing Agent(s) for subsequent delivery to Bank, a separate Collateral Assignment of Notes, Deeds of Trust/Mortgages and Security Agreement with respect to each Eligible Mortgage Loan to be funded, in whole or in part with an Advance or Advances hereunder. Borrower also will execute and deliver with this Agreement a separate Collateral Assignment of Contract Rights and Security Agreement with respect to each Qualified Investor to which it will sell Eligible Mortgage Loans funded, in whole or in part hereunder, and for each new Qualified Investor with which Borrower contracts hereafter to sell Eligible Mortgage Loans to be funded, in whole or in part hereunder. Notwithstanding the fact that separate instruments will be used, the security interests granted herein shall be in addition to the security interests granted in each such document, and not in substitution or cancellation thereof, so that Bank’s security interest in the Collateral shall be construed and expanded to the fullest extent possible.

2.8.3. Collateral Documentation. Borrower covenants and agrees to deliver to Bank such assignments, pledges deeds, financing statements, consents, bailments, and other instruments, documents and agreements as Bank or its counsel may deem necessary or appropriate to evidence, confirm, effect or perfect any security interest granted or required to be granted under this Agreement, the Master Promissory Note, or any other instrument or agreement as may be acceptable to Bank. Borrower hereby irrevocably authorizes the Bank in its discretion: (i) to file without the signature of the Borrower any and all financing statements, modifications and continuations in respect to the Collateral and the transactions contemplated by this Agreement (ii) to sign any such statement, modification or continuation on behalf of the Borrower if the Bank deems such signature necessary or desirable under applicable law and (iii) to file a carbon, photographic or other reproduction of any financing statement or modification if the Bank deems such filing necessary or desirable under applicable law provided that so long as no Event of Default is then continuing, the Bank shall accord the Borrower an opportunity to review and sign any proposed financing statement or modification (but not continuation), with the Bank exercising its authority hereunder to sign on behalf of the Borrower if the Borrower has not signed within a reasonable period of time (not to exceed 30 days) and provided further that the failure to send any such copy for review or signature shall not affect the validity or enforceability of any such signature and filing by the Bank. The Borrower shall promptly reimburse the Bank for all costs and expenses incurred in            , connection with the preparation and filing of any such document, including, but not limited to, stamp taxes, recording taxes; privilege taxes, and filing fees. The Bank shall send a copy of any such filing to the Borrower provided, however, that the failure to send that copy shall not affect the validity or enforceability of any such filing. The Bank shall not be liable for any mistake in or failure to file any financing statement, modification or continuation.

2.8.4. Right of Setoff. Borrower acknowledges that in addition to the Collateral which Borrower has pledged to Bank to secure its obligations to the Bank pursuant to this Agreement, and any other borrowings, Bank shall have such other or additional liens and rights as may be available, including, but not limited to, the right of setoff against all of Borrower’s right, title and interest in and to the balance of every deposit account of Borrower at

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Bank, now or at anytime hereafter existing. Bank shall have a right to offset any amounts owed by the Borrower under this Agreement and/or the Master Promissory Note against amounts held in every deposit account of the Borrower at the Bank. Borrower acknowledges and agrees that in addition to such other rights as Bank may have, and not by way of limitation, should Bank in good faith ever deem itself to be insecure at any time in relation to any obligations of Borrower to Bank, whether arising in connection with this Agreement or otherwise, any and all obligations and liabilities of Borrower to Bank shall become due and payable forthwith without notice or demand and Borrower hereby expressly authorizes Bank to apply any balance of deposits and any sums credited by or due from Bank to Borrower in general account or otherwise,, to the payment of any and all obligations and liabilities of Borrower to Bank.

2.8.5. Release of Security Interests and Liens. With respect to the Eligible Mortgage Loans that are subject to this Agreement, Bank shall, upon receipt in full of the entire Purchase Price and upon the request of Borrower, execute and promptly deliver to Borrower a security release certification certifying to Borrower that Bank has released its security interest in and to the related Eligible Mortgage Loans and any and all contract rights with respect to the related Lock. Borrower acknowledges and understands, however, that any release under this section is not intended to nor shall it be construed as a release of any security interest Bank may have in the proceeds from the sale of such Eligible Mortgage Loans, or of any other security interests Bank may have pursuant hereto.

3. WARRANTIES, COVENANTS AND REPORTS OF BORROWER

3.1. Warranties and Affirmative Covenants of Borrower. While any obligation hereunder remains unpaid, Borrower represents and warrants to, and covenants with Bank:

3.1.1. Payment of Amounts Due. Borrower will pay the fees, interest and principal on Advances and the debit balance, if any, of Borrower’s Loan Account and Master Promissory Note executed pursuant hereto in accordance with the terms hereof and thereof, and will observe, perform and comply with every covenant, term and condition herein and therein expressed or implied on the part of Borrower to be observed, performed or complied with,

3.1.2. Corporate Existence and Business. Borrower is duly organized, qualified and in good standing under the laws of the State of California and in those states where it does business. and Borrower will maintain and preserve its corporate existence, rights and franchises in full force and effect.

3.1.3. Authorization. The execution of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action and this Agreement, the Master Promissory Note, and all other documents to be executed by Borrower in connection herewith and therewith are valid and binding obligations of the Borrower enforceable against Borrower in accordance with their respective terms.

3.1.4. Accounts and Reports. Borrower will maintain a standard system of accounting in accordance with generally accepted accounting principles and practices and will furnish to Bank any financial reports or other information requested as normally prepared by the Borrower. At reasonable times Bank may inspect and copy Borrower’s books and records which relate to Bank’s collateral.

3.1.5. Adverse Changes. Borrower will promptly notify Bank of any material adverse change in its financial condition, of the occurrence of an Event of Default hereunder, or of the filing of any suit or proceeding in which an adverse decision could have a material adverse effect upon it or its business.

3.1.6. Known Defaults. Borrower is not knowingly in default in the performance of any obligations to other financial institutions or to Federal, State or Municipal authorities.

3.1.7. Use of Proceeds. Borrower will not request an Advance under the Line of Credit or otherwise use or attempt to use the proceeds of any such Advance other than to fund the origination or acquisition of the specific Eligible Mortgage Loan for which Borrower requests funding under the Line of Credit. In addition, Borrower will not use or draw a Closing Check for any other purpose but to fund all or some portion of the closing or acquisition of the Eligible Mortgage Loan for which the documents required by Section 2.3.4. have been provided to Bank, and no Closing Check shall be written for an amount which exceeds the Advance Amount.

3.1.8. Qualified Closing Agent. Borrower will employ or engage only those persons or entities as a Closing Agent for any Eligible Mortgage Loan to be funded with an Advance under the Line of Credit as shall not have been disapproved by Bank prior to the date the Eligible Mortgage Loan is scheduled to close. Borrower represents

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and warrants that as to each Closing Agent who is an attorney, Borrower will have satisfied itself as to the character, standing, integrity, and ability of such Closing Agent and, at a minimum, will have in its possession an insured attorney closing letter or similar certification for the proposed Closing Agent issued by a reputable title company. In no event, however, shall a Closing Agent be an employee, director, officer, shareholder or interest holder of Borrower, or otherwise an affiliate of Borrower.

3.1.9. Standard Documentation. Borrower will use its best efforts to ensure that the Closing Agent uses only such documentation as is acceptable to FHA, VA or FNMA, or that of the Qualified Investor which has issued a Lock to Purchase the Eligible Mortgage Loan. In the event the Closing Agent proposes to use a nonconforming document, Borrower will provide, or cause such Closing Agent to provide, a copy of said documentation to Bank at least ten (10) Business Days prior to the scheduled closing of such Eligible Mortgage Loan. Notwithstanding the provision of such nonconforming documentation to Bank, Borrower represents and warrants that the use of such nonconforming documentation in connection with the Eligible Mortgage Loan will not violate the Lock in respect thereof, will not give the Qualified Investor the right to refuse to Purchase the Eligible Mortgage Loan for the Purchase Price, and will not otherwise adversely affect the marketability of such Eligible Mortgage Loan in the secondary mortgage market.

3.1.10. Possession of Eligible Mortgage Loan Documents. Prior to the time Bank has received payment in full for any Advance to fund a particular Eligible Mortgage Loan, Borrower will not request or accept delivery of the original Mortgage Note, and if any such documents are delivered to Borrower in error or otherwise, Borrower will immediately notify Bank of such event by telephone and cause such documents to be delivered as soon as practical to Bank.

3.1.11. Net Worth, Liquidity, and Debt-to-Equity.

3.1.11.1 Borrower’s Tangible Net Worth will at all times remain above $1,500,000.00.

3.1.11.2 Combined Net Worth shall at all times meet or exceed 5% of Borrower’s total liabilities.

3.1.11.3 Combined Net Worth shall at all times meet or exceed $1,500,000.00.

3.1.11.4 Borrower’s Liquidity when combined with the Liquidity of all guarantors shall at all times meet or exceed 5% of the Maximum Line amount.

3:2. Borrower’s Covenants with Respect to All Mortgages. Borrower covenants with respect to each Eligible Mortgage Loan to be funded hereunder that as of the closing of each such Eligible Mortgage Loan:

3.2.1. Title Insurance. Such Eligible Mortgage Loan will have the form of title insurance or title opinion required by FHA, VA, FNMA, GNMA, FHLMC, or the Qualified investor’s requirements, whichever is applicable.

3.2.2. Mortgages Will Comply With Locks. Such Eligible Mortgage Loan will conform in all material respects with all requirements of the Lock to Purchase it, and with customary standards and requirements for purchase and sale by investors in the secondary market.

3.2.3. Validity and Enforceability. To the best of Borrower’s knowledge, each deed of trust note or mortgage note, promissory note or bond, deed of trust, mortgage and similar instrument included in each Eligible Mortgage Loan shall have been executed by a person legally competent to execute such papers and shall be a legally valid and enforceable obligation of said person. In addition each mortgage note, promissory note or similar instrument will be a negotiable instrument under the laws of the state having jurisdiction over such note and the negotiability thereof, and the endorsement of such note or instrument by Borrower, whether such endorsement appears on the body of the note or is accomplished by use of an allonge, is an effective endorsement of the note which does not and will not adversely affect the negotiability of such note or instrument.

3.2.4. Maintain Records of Eligible Mortgage Loans. Borrower will maintain complete and accurate records and books of account covering all collections, payments on and other proceeds of each Eligible Mortgage Loan, and all payments from Qualified Investors with respect to any such loans. Borrower will permit Bank to inspect all the records and books and supporting data and to make copies and extracts therefrom at its place of business during ordinary business hours and upon request of Bank will furnish to Bank any information with respect to any Eligible Mortgage Loan.

3.2.5. Maintain Security Interest of Bank. Borrower will furnish to Bank such documents as Bank may at any time deem necessary or desirable to perfect and maintain in perfected status Bank’s security interest in the Collateral hereunder, to

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enable Bank to enforce any Eligible Mortgage Loan or Lock, or to enable Bank to make direct sales and transmittals of Eligible Mortgage Loans to Qualified Investors, and have the proceeds of such sales remitted directly to Bank,

3.2.6. Fidelity Bond. Borrower will maintain fidelity bond coverage in an amount at least equal to $300,000 per incident with a maximum $15,000 deductible, and an errors and omissions insurance policy in an amount at least equal to $300,000 per incident with a maximum of $15,000 deductible, in form and coverage and with a company satisfactory to Bank with respect to all officers, directors, agents, employees of Borrower, Borrower agrees to name Bank as direct loss payee with respect to both policies and/or coverages. Borrower agrees to provide satisfactory evidence of in-force policies upon request, including irrevocable designation of loss payee.

3.2.7. Cooperate with Bank. Borrower will cooperate at all times through its officers, agents, employees and directors with all officers, agents, employees, attorneys, audit representatives, and accountants of the Bank with respect to this Agreement and all actions contemplated or permitted hereunder.

3.2.8. Deliver Collateral. If at any time the value of the Collateral, as determined by Bank with reference to objective secondary market criteria such as, for example, the FHLMC posted rate, securing the obligations of Borrower hereunder, shall be less than the amount Advanced on such Eligible Mortgage Loan, Borrower shall, upon demand of Bank, deliver to Bank additional collateral or other Eligible Mortgage Loan documentation or related papers as may be deemed necessary by Bank to meet said requirements and secure the obligation of Borrower hereunder.

3.2.9. Notice of Cancellation. If any Lock which is part of the Collateral pledged to Bank is canceled, or should a Qualified Investor threaten to cancel any such Lock, Borrower will immediately notify Bank of such cancellation or threat in writing.

3.3. Negative Covenants of Borrower. Without the prior written consent of the Bank, which consent shall not be unreasonably withheld, and while any obligation hereunder remains unpaid

3.3.1. Merger, Consolidation, Sale of Assets. Borrower will not enter into any merger, consolidation, share exchange or similar transaction or, except in the ordinary course of business, sell or transfer all or a substantial part of its assets or earning power.

3.3.2. Change of Management. Borrower will not change its management or substantially change its ownership.

3.3.3. Prepayment of Eligible Mortgage Loans. Borrower will not permit any Mortgagor to prepay any installment of principal and interest on any Eligible Mortgage Loan, unless such prepayments is remitted directly to Bank to reduce Borrower’s indebtedness arising under this Agreement.

3.4. Reports to be Furnished by Borrower. While any obligation hereunder remains unpaid, Borrower agrees to provide Bank with the following reports and information on the following time basis:

3.4.1. To be. provided .annually, within 90 days of the fiscal year end of Borrower:

- Audited financial statements of Borrower and parent company William Lyon Homes, Inc. prepared in accordance with GAAP.

3.4.2. To be provided quarterly, within 45 days of the end of Borrower’s fiscal quarter:

- Unaudited financial statements of Borrower and parent company William Lyon Homes, Inc. prepared in accordance with GAAP.

4. LOCKS

Borrower agrees to have a Lock in its possession related to each Eligible Prime Mortgage Loan to be originated or acquired hereunder, and to comply with all Qualified Investor requirements in order to maintain each such Lock in full force until the Purchase Date.

4.1. Compliance with Locks. Prior to funding any Advance requested under the Line of Credit, Bank may require (i) evidence of a Lock with respect to the Eligible Mortgage Loan to be funded by such Advance, and (ii) that it be

13

satisfied that Borrower can meet the requirements of each such Lock, and (iii) that notice has been given to the Closing Agent of Bank’s security interest in the Collateral, and (iv) that the Eligible Mortgage Loans can be and will be assigned to Qualified Investors directly by Bank, and (v) that Bank will be entitled and able receive the Purchase Price therefor under each Lock.

4.2. Sale of Eligible Mortgage Loans. With respect to each Eligible Mortgage Loan, Borrower agrees that:

4.2.1. It will cooperate with Bank to ensure that the Eligible Mortgage Loan is sold to the applicable or appropriate Qualified Investor within the time provided in the Lock unless extended by mutual agreement of which Bank is a party.

4.2.2. Bank shall have the right to deliver all Eligible Mortgage Loans sold to Qualified Investors and to receive the proceeds from the sale thereof, and Borrower shall provide all papers, documents and instruments not in the possession of Bank required by the Lock, and will take all acts necessary to comply with the requirements of Qualified Investor within the relevant time period.

4.2.3. If an Eligible Mortgage Loan is not sold within the applicable time limits provided in paragraphs 1 or 2 above, the Borrower shall immediately reduce its indebtedness under this Agreement by the amount of the Advance to fund the closing of the Eligible Mortgage Loan affected, with applicable interest thereon, unless Bank, in its sole and absolute discretion, should determine to allow otherwise or to, for example, enter into a “workout” situation with Borrower with respect to such Eligible Mortgage Loan or Loans.

5. RESERVED

6. EVENTS OF DEFAULT: REMEDIES

6.1. Events of Default. Upon the occurrence of any of the following events, all of the Borrower’s liabilities hereunder and under the Master Promissory Note shall, without further notice, at the sole option of the Bank, become immediately due without demand for payment thereof: (a) the failure of any obligor (which term shall include the Borrower, together with all endorsers, sureties and guarantors of the note) to perform any agreement hereunder or related to the loan evidenced by the Note (b) the filing of any action for the appointment of a receiver for, the making of a general assignment for the benefit of creditors by, or any other act of insolvency of any obligor, however expressed or indicated (c) the entry of a materially adverse judgment against any obligor (d) the filing of any materially adverse lien against any property of any obligor (e) the taking of possession of any substantial part of the property of any obligor at the instance of any governmental authority (f) the dissolution, merger, consolidation or reorganization or change in control of any obligor (g) the reasonable determination by the Bank that a material adverse change has occurred in the financial condition of any obligor (h) the assignment by the undersigned of any equity or other right in any of the Collateral to any person or entity other than Bank without the prior written consent of Bank (i) the Bank deeming itself to be insecure or (j) the failure to make any payment or any other default on any other indebtedness owing by the undersigned to Bank.

6.2. Bank’s Rights and Remedies Upon Default. Upon the occurrence of an Event of Default or upon default in any payment of principal or interest when due or at the time or on the terms provided in any instrument evidencing or related to any indebtedness of Borrower arising hereunder or in connection herewith, the indebtedness arising hereunder shall, at the absolute option of Bank, become immediately due and payable, or upon the non-performance by Borrower or any secondarily liable party of any of the agreements or covenants contained herein or in any of the papers related to the indebtedness arising hereunder or in connection herewith, or in case of any depreciation in the value of said Collateral below the market value agreed upon, the said indebtedness shall at the absolute option of the Bank become immediately due and payable, and in any such event Bank shall have full power and authority at any time or times thereafter to exercise all or any one or more of the remedies and shall have all of the rights of a secured party under the Uniform Commercial Code of Tennessee (Code), and is hereby authorized immediately to sell the whole or any part of the Collateral for the indebtedness evidenced hereby and by the Master Promissory Note, or any substitute therefore or additions thereto, at any brokers’ board or at public or private sale, at the sole option of Bank, without notice of the amounts due or claimed to be due, without demand for payment, without advertisement and without notice of sale, each and all of which is hereby expressly waived, except such notice as is required under said Code and to apply the net proceeds of such sale after deduction of all expenses for collection, sale or delivery, including, but not limited to, attorneys fees and expenses, to the payment of the indebtedness to Bank specifically secured hereby, returning the surplus, if any, to Borrower unless other disposition thereof is required by said Code, Upon any sale by virtue hereof, Bank may purchase, unless otherwise prohibited by said Code, the whole or any part of the aforesaid Collateral discharged from any statutory right of redemption, equity or redemption, exemption from execution, or similar rights all of which are hereby expressly waived and released. Any requirement of said Code for reasonable notice shall be met, if such notice is mailed, postage prepaid, to Borrower at the address of Borrower as shown on the

14

records of Bank at least five (5) days prior to the time of the sale, disposition or other event or thing giving rise to the requirement of notice.

6.3. Deposits, Set-off. Etc. It is further agreed that any moneys or other property at any time in the possession of Bank belonging to Borrower,, and any deposits, balance of deposits or other sums at any time credited by or due from Bank to Borrower, may at all times, at the option of Bank, be held and treated as collateral security for the payment of liability of Borrower to Bank as provided hereunder and under the terms of the Master Promissory Note, and Bank may, at its sole option and at any time or from time to time after default, set off the amount due or to become due hereon against any claim of Borrower against Bank. To effect these rights Borrower agrees, upon request by Bank, immediately to endorse, sign and execute all necessary instruments as Bank may request.

6.4. Exercise of Rights and Remedies. No delay or omission to exercise any right, remedy or power shall impair the right, remedy or power nor shall be construed to be a waiver of any Event of Default or an acquiescence therein. No waiver of any Event of Default shall extend to any subsequent Event of Default.

7. POWER OF ATTORNEY

Borrower shall execute a power of attorney substantially in the form attached as Exhibit D.

8. TERMINATION

This Agreement shall terminate on the Termination Date, unless terminated earlier due to a breach by Borrower provided, however, the indebtedness arising under this Agreement shall mature as provided in Section 2.6. hereof. Termination of this Agreement shall not affect the rights, liabilities, and obligations of the parties with respect to Eligible Mortgage Loans funded prior to or after termination, or with respect to any security therefore. At the termination, Borrower shall pay to Bank in full all obligations which may have arisen under this Agreement, specifically including the payment of the debit balance of the I-pan Account and the Master Promissory Note.

9. INDEMNITY

Borrower shall indemnify Bank and hold Bank harmless against each and every cost, loss, or expense, including court costs and attorney’s fees, arising from any failure of Borrower to comply with any governmental or regulatory requirements in connection with any Eligible Mortgage Loan.

10. MISCELLANEOUS

10.1. Place of Payment of Obligations. All sums payable to Bank hereunder shall be paid in Memphis, Tennessee, at Bank’s principal banking office, the address of which is set forth above, or such other place as Bank may designate.

10.2. Notices. All notices, requests, consents and demands shall be in writing and shall be mailed by certified or registered mail, return receipt requested, postage prepaid, to the addresses of Borrower and Bank, respectively, at the addresses above set out.

10.3. Survival of Agreements. All covenants, agreements, representations and warranties made herein shall survive the termination of this Agreement with respect to all Eligible Mortgage Loans made hereunder prior to such termination, until payment in full of Borrower’s obligations hereunder and under the Master Promissory Note. All statements contained in any certificate or other instrument delivered by Borrower hereunder shall be deemed to constitute representations and warranties made by Borrower.

10.4. Parties in Interest. All covenants and agreements contained in this Agreement shall bind and inure to the benefit of the respective successors and assigns of the parties hereto.

10.5. Entire Agreement. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof.

10.6. Governing Law. This Agreement shall be deemed a contract made under the laws of Tennessee, and shall be construed and enforced in accordance with and governed by the laws of Tennessee, except with respect to the rate of interest on the Master Promissory Note or Loan Account, which shall be governed by applicable provisions of federal law.

10.7. Counterparts. This Agreement may be executed simultaneously in several counterparts, all of which together shall constitute one and the same instrument.

10.8. Expenses of Enforcement. Borrower agrees to pay all reasonable attorneys’ fees, expenses and other costs and charges incurred in the execution of the transaction described herein, including, but not limited to, the documentation

15

thereof, the collection of any indebtedness arising under this Agreement, the enforcement of the Bank’s rights hereunder. the protection and preservation of any Collateral securing any indebtedness hereunder, the perfection of any security interest or lien contemplated hereby, and maintaining the perfected status of the same. Borrower’s ‘Loan Account may be debited by the amount of such expenses the payment of which shall be secured in the same manner as loans made hereunder.

IN WITNESS WHEREOF, the parties, through their authorized officers have executed this Agreement effective as of the date set out above on this              day of             , 20            .

FIRST TENNESSEE BANK		DUXFORD FINANCIAL, INC.
By:	/s/    GAITHER DAUGHERTY	By:	/s/    MARI CARVER
Its:	Vice President	Its:	President
		By:	/s/    RICHARD FRANKEL
		Its:
		BAYPORT MORTGAGE, L. P.
		By:	/s/ MARK CARVER
		Its:
		By:	/s/ RICHARD FRANKEL
		Its:

16

EXHIBIT A

ADVANCE REQUEST and

SUPPLEMENTAL CLOSING INSTRUCTIONS

Duxford Financial, Inc. and/or Bayport Mortgage, L.P.

1. ADVANCE REQUEST

A.     Borrower & Property Address _____________________________ Last Name                     First Initial _____________________________ Address _____________________________ City                                 Zip B.     Mortgage Loan description: Loan Type: FHAIVA Jumbo
Conventional Conforming Amt of Note: $______________ Date of Note:_______________ Interest Rate:_______________ Pymt. Term (Months)_________ Investor:___________________ Loan Number Conventional Non-Conforming Only: Lien Position: 1st                     2nd FICO Score:____________________ Loan to Value Ratio:______________ Debt Ratios:_____________/_______

Cashier’s Check To Be Payable EXACTLY As Follows:                                                                                           

Title Insurer:                                                                                                                                                              

The undersigned authorized representative of Duxford Financial, Inc. and/or Bayport Mortgage. L.P. (“Mortgage Company”) hereby requests an advance under that certain Mortgage Warehouse Loan and Security Agreement (the “Agreement”), between Mortgage Company and First Tennessee Bank, Memphis, Tennessee (the “Bank”) and hereby certifies each of the following: 1) all of the information set forth above is true and correct, and 2) the property which will be used to secure the above Mortgage Loan is one-to-four family residential real property ready for immediate occupancy, and 3) the mortgage loan is an Eligible Mortgage Loan as that term is defined within the Agreement. Pursuant to the Agreement, the undersigned authorized representative hereby 1) pledges, assigns, transfers and grants to Bank a security interest in the Mortgage loan described above and all related Collateral as defined In the Agreement to secure the indebtedness and obligations of the Mortgage Company to the Bank, and 2) agrees to hold all documents related to the Mortgage Loan funded hereby in trust for and an behalf of Bank until delivered to Bank in accordance with the Agreement, and 3) hereby certifies that it has in Its possession an insured closing letter pertaining to the closing agent used to close this Mortgage Loan, and 4) the closing agent is not in any way affiliated with either the Mortgage Company or the borrower.

Duxford Financial, Inc. and/or Bayport Mortgage, L.P.

By:                                                                                                                                            

Authorized Representative

MORTGAGE COMPANY’S SUPPLEMENTAL CLOSING INSTRUCTIONS

In addition to all other loan closing Instructions, and superseding any Instructions to the contrary, Duxford Financial, Inc., and/or Bayport Mortgage, L.P. hereby instructs the closing agent (whether attorney or title company) as follows:

1. As Closing Agent in this transaction, you are hereby expressly authorized by Duxford Financial, Inc. and/or Bayport Mortgage, L.P. to close the loan described in Section 1.A, above, (the “Mortgage Loan”) as its agent in the loan closing. However, if you do not agree to follow these Supplemental Closing Instructions or will not sign this document, you are not authorized to close the Mortgage Loan nor to accept the proceeds from the Mortgage Loan.

2. Please be aware that First Tennessee Bank (the “Bank”), as warehouse lender in this transaction, will have a first priority security interest In the Mortgage Loan to be closed herewith. On behalf of the Bank, Duxford Financial, Inc., and/or Bayport Mortgage, L.P., hereby instructs you to hold the note evidencing the Mortgage Loan for the benefit of the Bank, and to transmit same to the delivery address indicated below, and to no other address except pursuant to written instructions delivered to you by Bank.

3. After consummation of the loan closing, please sign this document indicating that the loan described in 1.A, has been closed and that all loan closing instructions have been followed.

4. Within 1 business day after settlement, please sign below and deliver this document. AND the original note evidencing the Mortgage Loan. AND such other documents as the Mortgage Company may direct you to deliver to the address indicated below.

5. Submit the mortgage or deed of trust to the proper recording agent for recording, thereby creating a valid lien on the property described in Section 1.A., above, Subject only to those encumbrances shown in Schedule B of the title insurance binder.

The documents described in paragraph 4 above must be sent via overnight courier as soon as reasonably practical after disbursement of the Mortgage Loan but in no event later than the first business day after the loan is disbursed. If for any reason you should be unable to provide those documents by the second business day after the date the loan is closed, or should you identify any problems with any of the documents, you should then immediately contact the Bank’s Vice President of Mortgage Warehouse Lending at (888) 297-0222 and inform such person of the delay, reasons therefor or problems identified,

Bank’s Address:	First Tennessee Bank	Mortgage Co.’s Address	Duxford Financial. Ins. and/or Bayport Mortgage, L.P.
	Mortgage Warehouse Lending		In Trust For First Tennessee Bank
	640 Poplar, Suite 210		1300 Dove Street, Suite 200
	Germantown, TN 38138		Newport Beach, CA 92660

CLOSING ATTORNEY OR TITLE COMPANY SIGNATURE

Receipt of these Supplemental Closing Instructions is hereby acknowledged.

Closing Attorney (if any) By                     Title Company (if any) By                

17

EXHIBIT B

MASTER PROMISSORY NOTE

$20,000,000.00	June 28, 2002
	Memphis, Tennessee

FOR VALUE RECEIVED, the undersigned (“Borrower”) (jointly and severally if more than one) promises to pay to the order of First Tennessee Bank, Memphis, Tennessee (“Bank”), or to the order of any subsequent holder hereof, in lawful money of the United States of America, the principal sum of the aggregate unpaid principal amount of all advances pursuant to that certain Mortgage Warehouse Loan Agreement of even date herewith (“Agreement”) between the undersigned and the Bank, together with interest thereon at the rate hereinafter specified from the Funding Date of each advance. The maximum aggregate unpaid principal amount of all advances pursuant to the Agreement shall be $20,000,000.00 unless the Bank, in its sole discretion, honors Borrower requests for aggregate advances in excess of $20,000,000.00.

Capitalized terms not defined herein shall have the meaning defined within the Agreement.

Subject to the limitations hereinafter set forth, the disbursed and unpaid principal balances of the indebtedness evidenced hereby shall bear interest prior to repayment at a variable rate per annum (“Warehouse Rate”) which shall, from day to day, be equal to the lesser of (a) the maximum effective variable contract rate of interest (“Maximum Rate”) which Bank may from time to time lawfully charge, or (b) a rate equal to the Mortgage Note Rate. However, if the Mortgage Note Rate is greater than One Month LIBOR + 2.75%, the Warehouse Rate shall be equal to One Month LIBOR + 2.75%, or if the Mortgage Note Rate is less than One Month LIBOR, the Warehouse Rate shall be equal to One Month LIBOR. It is agreed that interest shall be calculated on the basis of a 365 (366 in Leap year) day year unless calculation on that basis would result in Bank receiving interest at a rate in excess of the maximum rate of interest which Bank is permitted by law to contract for and charge, in which case such indebtedness shall bear interest at such maximum rate. The indebtedness shall also bear interest after maturity (whether by demand, acceleration or otherwise) at the maximum rate of interest which Bank is permitted by law to contract for and charge thereon.

Principal and interest as computed above shall be payable in the Following manner:

As to Principal and accrued interest, each advance hereunder, and interest accrued thereon shall be payable on the earlier of:

(i) Forty-five (45) days from the Advance Date of the Eligible Mortgage loan,

(ii) On the date of funding of the Purchase Price by any Qualified Investor for the Purchase of an Eligible Mortgage Loan which was funded by the advance, or

(iii) Termination of this Note,

Maturity. Notwithstanding the foregoing, the entire outstanding principal balance hereunder together with all accrued but unpaid interest shall be due and payable in full on 5/31/2003.

The Bank may, in its sole discretion, honor one or more advances requested hereunder by the Borrower after maturity, and any such advance shall be considered an extension of credit hereunder and governed by the terms of the Agreement. Any such advance shall be immediately due and payable.

Any unpaid principal and interest accrued thereon shall also bear interest, from the date of maturity as set forth above, (whether by demand, acceleration or otherwise) until the unpaid advance is fully satisfied, at the maximum rate of interest which Bank is permitted by law to contract for and charge on the date hereof or such maximum rate so permitted on the maturity date hereof, whichever is greater.

The Base Rate is one of several interest rate indices employed by the Bank. The undersigned acknowledges that the Bank has made, and may hereafter make, loans bearing interest at rates which are higher or lower than the Base Rate.

Any renewal or extension of the debt evidenced hereby shall bear interest at the rate of interest set by Bank at that time, not to exceed the maximum rate which Bank is permitted by law to contract for and charge either on the date hereof or on the date of such renewal or extension, whichever is greater.

All installments, prepayments and payments of principal and interest shall be applied first to fees, then to interest, and the

balance to principal due hereunder and are payable at Bank, 165 Madison, Memphis, Tennessee 38103, or such other place or places as the holder hereof may from time to time designate in writing, in lawful money of the United States of America which shall be legal tender in payment of all debts and dues, public and private, at the time of payment. This note and the indebtedness evidenced hereby are secured by an assignment of all mortgages and deeds of trust together with an endorsement of all notes evidencing Eligible Mortgage Loans under the Agreement, Commitments from Qualified Investors to Purchase the Eligible Mortgage Loans, the proceeds of such Eligible Mortgage Loans, and any accounts maintained by Borrower at Bank.

The undersigned hereby agree(s) to pay all reasonable expenses directly related to the loan evidenced hereby incurred or to be incurred in its making, servicing or collection, including without limitation reasonable attorney’s fees. The undersigned further agree to pay to Bank upon demand all reasonable charges for services rendered or to be rendered, and reasonable expenses incurred or to be incurred, to or on behalf of the undersigned in connection with borrowing evidenced hereby including, but not limited to, fees of any Custodian, provided that charges for such services rendered by officers or employees of the Bank shall be limited to those rendered directly for the inspecting and verification of collateral prior to the loan being made, servicing and verifying the collateral securing said loan, and the collection of said loan.

It is contemplated that the original principal sum evidenced hereby shall be reduced from time to time, and that additional loans and advances may be made in the future, which additional loans and/or advances shall be evidenced by this Note and subject to its terms and conditions.

Upon the happening of any of the following events, all of the aforesaid liabilities shall, without notice except as provided under the terms of the Agreement, at the option of the Bank, become immediately due without demand for payment thereof: (a) the failure of any Obligor (which term shall include the undersigned makers, together with all endorsers, sureties and guarantors of this Note) to perform any agreement hereunder or related to the loan evidenced hereby (b) the filing of any action for the appointment of a receiver for, the making of a general assignment for the benefit of creditors by, or any other act of insolvency of any Obligor, however expressed or indicated (c) the entry of a materially adverse judgment against any Obligor (d) the filing of any materially adverse lien against any property of any obligor (e) the taking of possession of any substantial part of the property of any Obligor at the instance of any governmental authority (f) the dissolution, merger, consolidation or reorganization of change in control of any Obligor (g) the reasonable determination by the Bank that a material adverse change has occurred in the financial condition of any Obligor (h) the assignment by the undersigned of any equity or other right in any of the collateral without the written consent of the Bank (i) the Bank deeming itself to be insecure or (j) the occurrence of any event of default under the Agreement or the failure to make any payment or any other default on any other indebtedness owing by the undersigned to Bank.

The undersigned shall have the privilege, at any time and from time to time, of prepaying, in whole or in part, the then outstanding principal balance hereunder, together with accrued interest thereon, without penalty or premium.

If this Note is placed in the hands of an attorney for collection, by suit or otherwise, or to enforce its collection, or to protect the security for its payments, the undersigned will pay all reasonable costs of collection and litigation, together with a reasonable attorney’s fee.

The makers, endorsers, sureties and guarantors hereof waive presentment, demand, protest and notice or protest of demand and of dishonor and nonpayment and expressly agree that this Note, or any payment or installment hereunder, may be extended, modified or renewed from time to time, in whole or in part, without limit as to the number of such extensions or modifications or the period or periods thereof and without notice to them and without in any way affecting their liability, and further expressly agree that any present or future security for the indebtedness evidenced hereby or for any indebtedness due by the undersigned to the holder hereof may be released or, after default, liquidated from time to time, in whole or in part, without notice to them and without in anyway affecting their liability.

No delay on the part of the holder hereof in exercising any right shall operate as a waiver of any such right.

This document and associated documents will be governed by and construed in accordance with the laws of the State of Tennessee, except with respect to interest which shall be governed by applicable provisions of federal law.

EXHIBIT ONLY

By:    EXHIBIT ONLY

Its:    EXHIBIT ONLY

19

EXHIBIT C

BAILEE LETTER

Loan Name_______________

Loan Amount_____________

Dear Investor:

The mortgage notes and other documents enclosed herewith (“the Collateral”) have been assigned and pledged to First Tennessee Bank of Memphis, TN. (the “Bank”) to secure payment of all sums owing the Bank by Duxford Financial, Inc. and/or Bayport Mortgage. L.P. (“Borrower”) arising under that certain Mortgage Warehouse Loan and Security Agreement dated June 28, 2002, and certain related security agreements.

The Mortgage Note(s), and all other documents relating thereto, whether now or hereafter delivered to you, are to be held by you as a bailee in possession on behalf of and for the benefit of the Bank, for the purpose of perfecting the security interest of the Bank in such Mortgage Note(s), and subject to the Bank’s direction and control. It is our mutual understanding that the Mortgage Note(s) constitute collateral securing the obligations of the Borrower to the Bank and that all proceeds thereof should be promptly paid to the Bank for application to such obligation. The Mortgage Note(s) held by you hereunder for any period shall at all times be segregated from other property owned or held by you.

In addition to the foregoing, (1) if the Mortgage Note(s) is/are accepted for purchase by you, the applicable proceeds of such purchase are, within twenty-one (21) calendar days after the date of delivery of this letter to be wire transferred using the following WIRE TRANSFER INSTRUCTIONS:

First Tennessee Bank I Memphis. Tennessee

ABA #084000026

For Credit to:             FTB Warehouse Clearing Account

Account#100108253

For Final Credit to: BRKR0032 I Duxford Financial, Inc. and/or

Bayport Mortgage, L.P.

REF: (Loan(s) being purchased by you)

to the Bank in immediately available funds at the Bank for credit to the account of the Borrower, and (2) any Mortgage Note which is not accepted for purchase by you should be returned via overnight delivery, within twenty-one (21) days after the date of delivery of this letter, to:

FIRST TENNESSEE BANK

ATTN: MORTGAGE WAREHOUSE LENDING

7640 POPLAR AVE, SUITE 210

GERMANTOWN, TENNESSEE 38138

along with all other documents relating to such Mortgage Note(s), unless otherwise directed by the Bank. In no event should the Mortgage Notes) be delivered to any party other than the Bank, or otherwise dealt with by you, without the prior written consent of the Bank. The Mortgage Note(s) and related documents have not been assigned or transferred by the Bank to any other party. The Bank’s security interest in the Mortgage Note(s) shall be deemed to have been released only upon the receipt by the Bank of the full amount of cash proceeds from the purchase of such Mortgage Note(s). The Bank’s security interest in the Mortgage Note(s) shall then terminate and be canceled without further action upon Bank’s receipt of said proceeds. You are not to honor any requests or instructions from the Borrower relating to any Mortgage Note(s), or any other documents relating thereto, unless you have received the prior written consent of the Bank to such new or variant instructions, or until the Bank has received the applicable proceeds from the sale of such Mortgage Note(s). If you have any questions, please address your inquiries to the Bank’s Vice President of Mortgage Warehouse Lending, whose phone number is (888) 297-0222.

If the terms hereof are acceptable to you, please have an authorized officer of your institution execute the enclosed copy of this letter in the space provided below and promptly return such copy to the Bank at the above address.

Thank you for your cooperation with this matter.

FIRST TENNESSEE BANK

By:_________________________________            

INVESTOR ACCEPTANCE:

ALL TERMS ACKNOWLEDGED, AGREED AND ACCEPTED THIS DATE:

By:_________________________________

Title:________________________________

20

EXHIBIT D

POWER OF ATTORNEY

Duxford Financial, Inc. and/or Bayport Mortgage, L.P. hereby irrevocably appoints Bank’s Vice President of Mortgage Warehouse Lending, Robert A, Garrett, as its attorney-in-fact with full power of substitution for, and on behalf of it, and in its name, to endorse or to cancel the endorsement of any Mortgage Notes, checks, instruments or other papers, including but not limited to depositing and withdrawing funds from depository account number 1002148008 maintained at First Tennessee Bank, Memphis, TN; to complete, execute, deliver and record any assignment, mortgage, financing statement or other instrument; to take all necessary and appropriate action its name with respect to any Mortgage Loans and any commitments for resale of the Mortgage Loan and the servicing of any Mortgages transferred to Bank pursuant to the Mortgage Warehouse and Security Agreement executed June 28, 2002 including but not limited to selling the Mortgage Loans to an investor, to commence, prosecute, settle, discontinue, defend or otherwise dispose of any claim relating to any Mortgage Note, commitment, Mortgage, and Loan, or any collateral hereunder and to sign Mortgage Company’s name wherever appropriate to any power granted by the Mortgage Warehouse and Security Agreement executed June 28, 2002. Any such use of this power need only be executed by one of the above named individuals.

By: EXHIBIT ONLY

Its: EXHIBIT ONLY

STATE OF

COUNTY OF

Personally appeared before me, the undersigned authority in and for the said county and state, on this          day of                     , 200    , within my jurisdiction, the within named                                  who acknowledged that (he)(she) is                                  of Duxford Financial, Inc. and/or Bayport Mortgage, L.P., a California Corporation, and that for and on behalf of the said Corporation, and as its act and deed (he)(she) executed the above and foregoing instrument, after first having been duly authorized by said Corporation so to do.

My Commission Expires: NOTARY PUBLIC

21

EXHIBIT E

QUALIFIED INVESTORS

(To be provided by Borrower

and subject to Bank’s approval.)

22

EXHIBIT F

Commitment Letter

Friday, June 28, 2002

Mark Carver

Duxford Financial, Inc. and/or Bayport Mortgage, L.P.

1300 Dove Street, Suite 200

Newport Beach, CA 92660

Re: Warehouse Facility Commitment Terms

Dear Mr. Carver,

First Tennessee Bank (“Bank”) is pleased to make a warehouse line of credit available to Duxford Financial, Inc. and/or Bayport Mortgage, L.P. (“Borrower”) based upon the following terms and in accordance with terms and conditions stated within the Mortgage Warehouse Loan and Security Agreement (“Agreement”) pertaining to this facility. All terms contained within this letter (“Commitment Letter”) shall be binding and shall be considered to be part of the Agreement upon mutual acceptance by all parties. This loan commitment shall expire 30 days from the date of this letter unless accepted and executed prior to that date. This commitment replaces all prior warehouse facility commitments made to Duxford Financial, Inc. and/or Bayport Mortgage, L.P. by the Bank and is not in addition to any such prior commitments.

The terms of this commitment are as follows:

Total Maximum Line Amount:	$20,000,000.00
Committed Line:	$15,000,000.00
Uncommitted Line:	$5,000,000.00
Purpose:	To fund Borrower’s origination of single family residential mortgage loans which meet all eligible collateral criteria, as may be amended by Bank from time to time.
Interest Rate:	Equal to the Mortgage Note Rate, but no less than the Rate Floor, and
	no more than the Rate Cap.
Rate Floor:	One Month LIBOR
Rate Cap:	One Month LIBOR + 2.75%
Fees:	$40.00 per check advance under the line, $125.00 per wire advance under the line. Each mortgage loan must be funded with a separate advance made payable to a title company or insured closing attorney.
	Fee may include spot flood certification.
Advance rate:	The lesser of:
	1.      100% of the net funding amount on the HUD-1, or,
	2.      The unpaid principal balance of the mortgage loan being originated.
	3.      99% of the Market Value of the mortgage loan being funded.
Maximum Dwell:	Forty-Five (45) days
Maximum Wet Period:	3 business days
Commitment Expiration:	5/31/2003

23

Eligible Collateral:	See Exhibit G of the Mortgage Warehouse Loan and Security Agreement.
Maximum Wan Size:	Loans in excess of $500,000.00 must be approved by Bank prior to funding.
Guarantor(s):	None
Financial Covenants:	1.      Borrower and William Lyon Homes, Inc. (parent company) agree to maintain a minimum          combined net worth of $1,500,000.00 as described within the Agreement.
	2.      Combined net worth of Borrower and Guarantor(s) to meet or exceed 5% of Borrower’s          outstanding liabilities at all times.
	3.      Borrowers Liquidity when combined with the Liquidity of all guarantors shall at all times          meet or exceed 5% of the Maximum Line amount.
Other Covenants:	1.      Borrower agrees to maintain fidelity and B&O coverage in force in an amount equal to at          least $300,000 per incident, with a maximum deductible of $15,000.
	2.      Borrower agrees to provide Bank audited financial statements prepared in accordance with          GAAP annually,
	3.      Borrower agrees to provide Bank unaudited financial statements prepared in accordance          with GAAP quarterly, Borrower agrees to provide Bank guarantors’ unaudited personal          financial statements on the Bank’s then-current form annually,
	4.      Borrower agrees to provide Bank guarantors’ unaudited personal financial statements on          the Bank’s then-current form annually,
	5.      Borrower agrees not to use or attempt to use this warehouse facility to repurchase any          mortgage loan,
	6.      Various other covenants, representations, and warranties as listed in the Mortgage          Warehouse Loan and Security Agreement.

Please indicate your acceptance of these terms by executing below.

If you have any questions or I may be of assistance in any way, please call.

Sincerely

Gaither Daugherty

Vice President—Warehouse Lending

Agreed to and accepted this ___________ day of _____________.

Duxford Financial, Inc. and/or Bayport Mortgage, L.P,

By: _____________________________            

Its: _____________________________        

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EXHIBIT G

ELIGIBLE MORTGAGE LOAN CRITERIA

Subject to change from time to time at the Bank’s sole discretion, the following loans will be considered eligible for warehousing under each Mortgage Warehouse Loan and Security Agreement:

To be warehoused, each loan must:

A. be secured by one-to-four family residential real property, AND

B. be ready for immediate occupancy, AND

C. be located within one of the 48 contiguous United States, AND

D. be no more than 30 days old on the Advance Date.

1. Loans which conform to FHA, VA, FNMA, or FHLMC guidelines and certain other loans covered by private mortgage insurance may always be warehoused, subject to each warehouse line’s maximum line of credit.

2. Conventional Non-conforming loans may also be warehoused, subject to each warehouse line’s maximum line of credit and subject to the following:

A. No more than 5% of a warehouse line: may be used to warehouse loans graded 5; AND

B. No more than 15% of a warehouse line may be used to warehouse the combined total of all loans graded 4 or 5; AND

C. No more than 35% of a warehouse line may be used to warehouse the combined total of all loans graded 3, 4 or 5; AND

D. No more than 85% of a warehouse line may be used to warehouse the combined total of all loans graded 2, 3, 4 or 5; AND

E. Up to 100% of a warehouse line may be used to warehouse the combined total of all loans graded 1, 2, 3, 4 or 5.

F. Loans which fall below the minimum grade 5 FICO criterion, or which fall above the maximum grade 5 CLTV criterion may not be warehoused.

3. All loans warehoused will be graded by the Bank in accordance with the following “Table of Mortgage Loan Grades”(Table on next page):

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TABLE OF MORTGAGE LOAN GRADES

FICO CredIt Score	Combined Loan to Value Ratio
	100% or Less	95% or Less	90% or Less	85% or Less	80% or Less	70% or Less	60% or Less	50% or Less
FHA, VA, FNMA, FHLMC, or. Loans covered by MI*	1	1	1	1	1	1	1	1
720 or above	2	2	2	1	1	1	1	1
700 to 719	3	2	2	2	2	2	1	1
670 to 699	3	3	2	2	2	2	2	2
640 to 669	4	3	3	3	3	3	3	3
620 to 639	5	4	3	3	3	3	3	3
600 to 619	5	5	4	4	4	4	4	4
550 to 599	5	5	5	5	4	4	4	4
500 to 549	5	5	5	5	5	5	4	4
Below 500	Not Allowed	Not Allowed	Not Allowed	Not Allowed	Not Allowed	Not Allowed	Not Allowed	Not Allowed

* Non-conforming loans are considered Grade I if covered to 75% or less by private mortgage insurance naming the lender as the insured. MI Coverage must be noted on the ARC and certificate must be faxed with the ARC to qualify for this special grading.

Mortgage loans which have been previously warehoused or which have been repurchased by the warehouse borrower are specifically not eligible for warehousing.

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EX-23.2

Exhibit 23.2

Consent of Independent Auditors

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated February 10, 2003 with respect to the financial statements of William Lyon Homes, in the Registration Statement (Form S-3) and related Prospectus of William Lyon Homes.

We also consent to the incorporation by reference therein of our report dated February 15, 2002 with respect to the financial statements of the Significant Subsidiaries of William Lyon Homes included in the Annual Report (Form 10-K) for 2002 filed with the Securities and Exchange Commission.

Irvine, California

March 10, 2003

EX-25.2

Exhibit 25.2

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 1

TO

FORM T-1

STATEMENT OF ELIGIBILITY UNDER

THE TRUST INDENTURE ACT OF 1939 OF A

CORPORATION DESIGNATED TO ACT AS TRUSTEE

Check if an Application to Determine Eligibility of

a Trustee Pursuant to Section 305(b)(2)                    

U.S. BANK NATIONAL ASSOCIATION

(Exact name of Trustee as specified in its charter)

31-0841368

I.R.S. Employer Identification No.

180 East Fifth Street St. Paul, Minnesota	55101
(Address of principal executive offices)	(Zip Code)

Frank Leslie

U.S. Bank National Association

180 East Fifth Street

St. Paul, MN 55101

(651) 244-8677

(Name, address and telephone number of agent for service)

William Lyon Homes

William Lyon Homes, Inc.

[See Table of Additional Issuers on Following Page]

(Issuer with respect to the Securities)

Delaware California	33-0864902 33-0253855
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4490 Von Karman Avenue Newport Beach, California	92660
(Address of Principal Executive Offices)	(Zip Code)

% Senior Notes due 2013

(Title of the Indenture Securities)

NOTE

The answers to this statement insofar as such answers relate to what persons have been underwriters for any securities of the obligors within three years prior to the date of filing this statement, or what persons are owners of 10% or more of the voting securities of the obligors, or affiliates, are based upon information furnished to the Trustee by the obligors. While the Trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor.

SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the Trustee, U.S. BANK NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of St. Paul, State of Minnesota on the 11th day of March, 2003.

U.S. BANK NATIONAL ASSOCIATION
By:	/s/    FRANK P. LESLIE III
	FRANK P. LESLIE III Vice President

By:	/s/    LORI-ANNE ROSENBERG
	Lori-Anne Rosenberg Assistant Vice President

Exhibit 6

CONSENT

In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, U.S. BANK NATIONAL ASSOCIATION hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor.

Dated: March 11, 2003

U.S. BANK NATIONAL ASSOCIATION
By:	/s/    FRANK P. LESLIE III
	FRANK P. LESLIE III Vice President

By:	/s/    LORI-ANNE ROSENBERG
	Lori-Anne Rosenberg Assistant Vice President

Exhibit 7

U.S. Bank National Association

Statement of Financial Condition

As of 9/30/2002

($000’s)

	9/30/2002
Assets
Cash and Due From Depository Institutions	$	8,809,794
Federal Reserve Stock		0
Securities		28,156,313
Federal Funds		975,986
Loans & Lease Financing Receivables		111,491,144
Fixed Assets		1,357,049
Intangible Assets		8,242,263
Other Assets		7,510,862
Total Assets	$	166,543,411
Liabilities
Deposits	$	112,901,360
Fed Funds		2,319,887
Treasury Demand Notes		0
Trading Liabilities		285,504
Other Borrowed Money		20,829,386
Acceptances		137,242
Subordinated Notes and Debentures		5,696,195
Other Liabilities		5,198,418
Total Liabilities	$	147,367,992
Equity
Minority Interest in Subsidiaries	$	990,010
Common and Preferred Stock		18,200
Surplus		11,312,077
Undivided Profits		6,855,132
Total Equity Capital	$	19,175,419
Total Liabilities and Equity Capital	$	166,543,411

To the best of the undersigned’s determination, as of the date hereof, the above financial information is true and correct.

U.S. BANK NATIONAL ASSOCIATION
By:	/s/    FRANK P. LESLIE III
	FRANK P. LESLIE III Vice President

Date: March 11, 2003