10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 

   SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

OR

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

    SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-18001

WILLIAM LYON HOMES

(Exact name of registrant as specified in its charter)

Delaware	33-0864902
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
4490 Von Karman Avenue	92660
Newport Beach, California	(Zip Code)
(Address of principal executive offices)

(949) 833-3600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  x                    NO  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES  x                    NO  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class of Common Stock	Outstanding at August 11, 2003
Common stock, par value $.01	9,887,341

WILLIAM LYON HOMES

INDEX

	Page No.
PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements:
Consolidated Balance Sheets — June 30, 2003 and December 31, 2002	3
Consolidated Statements of Income — Three and Six Months Ended June 30, 2003 and 2002	4
Consolidated Statement of Stockholders’ Equity — Six Months Ended June 30, 2003	5
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2003 and 2002	6
Notes to Consolidated Financial Statements	7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.    Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.    Controls and Procedures	53
PART II.    OTHER INFORMATION	54
Item 1.    Not Applicable	54
Item 2.    Not Applicable	54
Item 3.    Not Applicable	54
Item 4.    Submission of Matters to a Vote of Security Holders	54
Item 5.    Not Applicable	54
Item 6.    Exhibits and Reports on Form 8-K	54
SIGNATURES	55
EXHIBIT INDEX	56

2

PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements.

WILLIAM LYON HOMES

CONSOLIDATED BALANCE SHEETS

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

ASSETS
	June 30, 2003		December 31, 2002
	(unaudited)
Cash and cash equivalents	$	11,078	$	16,694
Receivables		16,184		28,734
Real estate inventories — Notes 2 and 3		688,274		491,952
Investments in and advances to unconsolidated joint ventures — Note 3		55,936		65,404
Property and equipment, less accumulated depreciation of $6,068  and $5,435 at June 30, 2003 and December 31, 2002, respectively		1,733		2,131
Deferred loan costs		9,174		1,341
Goodwill — Note 1		5,896		5,896
Other assets		7,341		5,429
	$	795,616	$	617,581
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	50,895	$	34,881
Accrued expenses		61,259		54,312
Notes payable		138,913		195,786
10 3/4% Senior Notes due April 1, 2013 — Note 4		246,295		—
12 1/2% Senior Notes due July 1, 2003 — Note 4		—		70,279
		497,362		355,258
Minority interest in consolidated joint ventures — Notes 2 and 3		96,512		80,647
Stockholders’ equity — Note 6
Common stock, par value $.01 per share; 30,000,000 shares authorized; 9,887,341 and 9,728,747 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively		99		97
Additional paid-in capital		109,982		108,592
Retained earnings		91,661		72,987
		201,742		181,676
	$	795,616	$	617,581

See accompanying notes.

3

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands except per common share amounts)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Operating revenue
Home sales	$	139,681		$	126,886		$	210,104		$	217,035
Lots, land and other sales		17,000			531			17,000			531
Management fees		2,053			2,038			4,091			3,554
		158,734			129,455			231,195			221,120
Operating costs
Cost of sales — homes		(115,444	)		(110,027	)		(173,817	)		(187,121	)
Cost of sales — lots, land and other		(10,779	)		(678	)		(10,802	)		(869	)
Sales and marketing		(6,222	)		(5,207	)		(10,298	)		(9,905	)
General and administrative		(11,327	)		(7,643	)		(21,166	)		(15,596	)
		(143,772	)		(123,555	)		(216,083	)		(213,491	)
Equity in income of unconsolidated joint ventures — Note 3		7,605			3,603			15,076			5,508
Operating income		22,567			9,503			30,188			13,137
Other income, net		757			355			1,397			511
Minority equity in income of consolidated joint ventures —Note 2		12			—			12			—
Income before provision for income taxes		23,336			9,858			31,597			13,648
Provision for income taxes — Note 1		(9,544	)		(2,826	)		(12,923	)		(3,503	)
Net income	$	13,792		$	7,032		$	18,674		$	10,145
Earnings per common share — Note 1
Basic	$	1.40		$	0.68		$	1.91		$	0.97
Diluted	$	1.38		$	0.66		$	1.87		$	0.95

See accompanying notes.

4

WILLIAM LYON HOMES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2003

(in thousands)

(unaudited)

	Common Stock			Additional Paid-In Capital		Retained Earnings		Total
	Shares	Amount
Balance — December 31, 2002	9,729	$	97	$	108,592	$	72,987	$	181,676
Issuance of common stock upon exercise of stock options — Note 6	158		2		1,390		—		1,392
Net income	—		—		—		18,674		18,674
Balance — June 30, 2003	9,887	$	99	$	109,982	$	91,661	$	201,742

See accompanying notes.

5

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2003			2002
Operating activities
Net income	$	18,674		$	10,145
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization		633			618
Equity in income of unconsolidated joint ventures		(15,076	)		(5,508	)
Minority equity in income of consolidated joint ventures		(12	)		—
Provision for income taxes		12,923			3,503
Net changes in operating assets and liabilities:
Receivables		(296	)		5,781
Real estate inventories		(196,260	)		(88,660	)
Deferred loan costs		(7,833	)		339
Other assets		(1,912	)		(1,795	)
Accounts payable		16,014			8,830
Accrued expenses		(5,976	)		(13,120	)
Net cash used in operating activities		(179,121	)		(79,867	)
Investing activities
Investments in and advances to unconsolidated joint ventures		(6,397	)		(7,145	)
Distributions of income from unconsolidated joint ventures		16,834			12,128
Distributions of capital from unconsolidated joint ventures		14,107			6,659
Mortgage notes receivable originations/issuances		(133,246	)		(117,902	)
Mortgage notes receivable sales/repayments		146,092			124,920
Purchases of property and equipment		(235	)		(881	)
Net cash provided by investing activities		37,155			17,779
Financing activities
Proceeds from borrowing on notes payable		398,447			396,170
Principal payments on notes payable		(455,320	)		(334,819	)
Repayment of 12 1/2% Senior Notes		(70,279	)		—
Issuance of 10 3/4% Senior Notes		246,233			—
Common stock issued for exercised options		1,392			1,059
Common stock purchased		—			(6,069	)
Minority interest contributions (distributions), net		15,877			—
Net cash provided by financing activities		136,350			56,341
Net decrease in cash and cash equivalents		(5,616	)		(5,747	)
Cash and cash equivalents — beginning of period		16,694			19,751
Cash and cash equivalents — end of period	$	11,078		$	14,004
Supplemental disclosures of cash flow information
Cash paid during the period for interest, net of amounts capitalized	$	(5,147	)	$	(1,620	)
Issuance of notes payable for land acquisitions	$	—		$	26,253

See accompanying notes.

6

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 — Basis of Presentation and Significant Accounting Policies

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.

The unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

The interim consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a presentation in accordance with accounting principles generally accepted in the United States have been included. Operating results for the three and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

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 June 30, 2003 and December 31, 2002 and revenues and expenses for the periods presented. Accordingly, actual results could differ materially from those estimates in the near-term.

The consolidated financial statements include the accounts of the Company and all majority-owned and controlled subsidiaries and joint ventures, and certain joint ventures created after January 31, 2003 which have been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). Investments in joint ventures in which the Company has a 50% or less voting or economic interest (and thus are not controlled by the Company) and which were created prior to February 1, 2003 and investments in joint ventures which have not been determined to be variable interest entities in which the Company is considered the primary beneficiary are accounted for using the equity method. The accounting policies of the joint ventures are substantially the same as those of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

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

The Company evaluates performance and allocates resources primarily based on the operating income of individual home building projects. Operating income is defined by the Company as operating revenue less operating costs plus equity in income of unconsolidated joint ventures. Accordingly, operating income excludes certain expenses included in the determination of net income. All other segment measurements are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

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

7

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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. As of June 30, 2003, the Company believes there have been no indicators of impairment related to the Company’s goodwill.

A provision for warranty costs relating to the Company’s limited warranty plans is included in cost of sales at the time the home sale 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 six months ended June 30 are as follows (in thousands):

	June 30,
	2003			2002
Warranty liability, beginning of period	$	4,287		$	2,598
Warranty provision during period		1,704			1,855
Warranty settlements during period		(2,733	)		(1,932	)
Warranty liability, end of period	$	3,258		$	2,521

As of December 31, 2002 and 2001, the Company had net operating loss carryforwards for Federal tax purposes of approximately $5,231,000 and $8,466,000 respectively, 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 $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 elimination during 2002 of the remaining valuation allowances for deferred tax assets reduced the Company’s estimated overall effective tax rate for the year ended December 31, 2002 from 39.3% to 27.0%. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited under certain circumstances.

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 three months ended June 30, 2003 are based on 9,823,507 and 10,026,746 weighted average shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the six months ended June 30, 2003 are based on 9,781,937 and 9,974,030 weighted average shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the three months ended June 30, 2002 are based on 10,306,910 and 10,606,034 weighted average shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the six months ended June 30, 2002 are based on 10,413,910 and 10,694,826 weighted average shares of common stock outstanding, respectively.

At June 30, 2003, the Company had stock plans, which are described more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. 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

8

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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):

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Net income, as reported	$	13,792		$	7,032		$	18,674		$	10,145
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(162	)		(235	)		(397	)		(469	)
Net income, as adjusted	$	13,630		$	6,797		$	18,277		$	9,676
Earnings per common share:
Basic — as reported	$	1.40		$	0.68		$	1.91		$	0.97
Basic — as adjusted	$	1.39		$	0.66		$	1.87		$	0.93
Diluted — as reported	$	1.38		$	0.66		$	1.87		$	0.95
Diluted — as adjusted	$	1.36		$	0.64		$	1.83		$	0.90

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“Interpretation No. 45”). The disclosure requirements of Interpretation No. 45 are effective as of December 31, 2002. The initial recognition and measurement requirements of Interpretation No. 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002. In the case of a guarantee issued as part of a transaction with multiple elements with an unrelated party, Interpretation No. 45 generally requires the recording at inception of the guarantee of a liability equal to the guarantee’s estimated fair value. In the absence of observable transactions for identical or similar guarantees, estimated fair value will likely be based on the 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 would have a corresponding effect on various of the Company’s financial ratios and other financial and operational indicators. The application of Interpretation No. 45 beginning on January 1, 2003 did not have a material impact on the Company’s financial statements with respect to any guarantees issued or modified by the Company after December 31, 2002. See Notes 3, 4 and 7 for additional information related to the Company’s guarantees.

Note 2 — Consolidation of Variable Interest Entities

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

9

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements (see Note 7) or (iii) enters into arrangements with a financial partner for the formation of joint ventures which engage in homebuilding and land development activities, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. The Company may be deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected losses if they occur. For each VIE created, the Company will compute expected losses and residual returns based on the probability of future cash flows as outlined in Interpretation No. 46. If the Company is determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE will be consolidated with the Company’s financial statements.

Based on the Company’s analysis of arrangements created after January 31, 2003, no VIEs have been created for the period from February 1, 2003 through June 30, 2003 with respect to option agreements or land banking arrangements as identified under clauses (i) and (ii) of the previous paragraph. At June 30, 2003, three joint ventures created after January 31, 2003 have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these three joint ventures have been consolidated with the Company’s financial statements as of June 30, 2003 and for the three months ended June 30, 2003. Supplemental consolidating financial information of the Company, specifically including information for the three joint ventures which have been determined to be VIEs under Interpretation No. 46 and for two joint ventures which were previously consolidated (see Note 3), is presented below to allow investors to determine the nature of assets held and the operations of the consolidated entities. Investments in consolidated joint ventures are presented using the equity method of accounting. Consolidated real estate inventories include land deposits under option agreements or land banking arrangements (see Note 7) of $33,271,000 and $37,443,000 at June 30, 2003 and December 31, 2002, respectively.

The three joint ventures which have been determined to be VIEs are each engaged in homebuilding and land development activities which will result in an estimated total of 265 homes at completion. The homes are expected to be constructed and sold in phases over a two-to-three year period with approximate base sales prices ranging from $390,000 to $473,000. No homes have closed as of June 30, 2003. These joint ventures have not obtained construction financing from outside lenders, but are financing their activities through equity contributions from each of the joint venture partners. Creditors of these VIE’s have no recourse against the general credit of the Company. Income allocations and cash distributions to the Company are based on predetermined formulas between the Company and the joint ventures as specified in the applicable partnership or operating agreements. The Company generally receives, after partners’ priority returns and return of partners’ capital, approximately 50% of the profits and cash flows from the joint ventures.

10

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)

	June 30, 2003
			Consolidated Joint Ventures
	Wholly- Owned		Under Interpretation No. 46		Previously Consolidated		Elimination Entries			Consolidated Total
ASSETS
Cash and cash equivalents	$	9,317	$	188	$	1,573	$	—		$	11,078
Receivables		16,143		41		—		—			16,184
Real estate inventories		569,303		38,861		80,110		—			688,274
Investments in and advances to unconsolidated joint ventures		55,936		—		—		—			55,936
Investments in consolidated joint ventures		28,474		—		—		(28,474	)		—
Other assets		24,144		—		—		—			24,144
Intercompany receivables		532		—		8,469		(9,001	)		—
	$	703,849	$	39,090	$	90,152	$	(37,475	)	$	795,616
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	108,430	$	248	$	3,476	$	—		$	112,154
Notes payable		138,913		—		—		—			138,913
10 3/4% Senior Notes due April 1, 2013		246,295		—		—		—			246,295
Intercompany payables		8,469		532		—		(9,001	)		—
Total liabilities		502,107		780		3,476		(9,001	)		497,362
Minority interest in consolidated joint ventures		—		—		—		96,512			96,512
Owners’ capital
William Lyon Homes		—		8,772		19,702		(28,474	)		—
Others		—		29,538		66,974		(96,512	)		—
Stockholders’ equity		201,742		—		—		—			201,742
	$	703,849	$	39,090	$	90,152	$	(37,475	)	$	795,616

11

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)

	December 31, 2002
			Consolidated Joint Ventures
	Wholly- Owned		Under Interpretation No. 46		Previously Consolidated		Elimination Entries			Consolidated Total
ASSETS
Cash and cash equivalents	$	14,404	$	—	$	2,290	$	—		$	16,694
Receivables		28,734		—		—		—			28,734
Real estate inventories		390,103		—		101,849		—			491,952
Investments in and advances to unconsolidated joint ventures		65,404		—		—		—			65,404
Investments in consolidated joint ventures		19,937		—		—		(19,937	)		—
Other assets		14,797		—		—		—			14,797
Intercompany receivables		—		—		951		(951	)		—
	$	533,379	$	—	$	105,090	$	(20,888	)	$	617,581
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	84,687	$	—	$	4,506	$	—		$	89,193
Notes payable		195,786		—		—		—			195,786
12 1/2% Senior Notes due July 1, 2003		70,279		—		—		—			70,279
Intercompany payables		951		—		—		(951	)		—
Total liabilities		351,703		—		4,506		(951	)		355,258
Minority interest in consolidated joint ventures		—		—		—		80,647			80,647
Owners’ capital
William Lyon Homes		—		—		19,937		(19,937	)		—
Others		—		—		80,647		(80,647	)		—
Stockholders’ equity		181,676		—		—		—			181,676
	$	533,379	$	—	$	105,090	$	(20,888	)	$	617,581

12

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)

	Three Months Ended June 30, 2003
				Consolidated Joint Ventures
	Wholly- Owned			Under Interpretation No. 46			Previously Consolidated			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	156,681		$	—		$	10,450		$	(10,450	)	$	156,681
Management fees		2,053			—			—			—			2,053
		158,734			—			10,450			(10,450	)		158,734
Operating costs
Cost of sales		(126,223	)		—			(10,450	)		10,450			(126,223	)
Sales and marketing		(6,028	)		(111	)		(83	)		—			(6,222	)
General and administrative		(11,327	)		—			—			—			(11,327	)
		(143,578	)		(111	)		(10,533	)		10,450			(143,772	)
Equity in income of unconsolidated joint ventures		7,605			—			—			—			7,605
Equity in income of consolidated joint ventures		(170	)		—			—			170			—
Operating income (loss)		22,591			(111	)		(83	)		170			22,567
Other income, net		745			6			6			—			757
Minority equity in income of consolidated joint ventures		—			12			—			—			12
Income (loss) before provision for income taxes		23,336			(93	)		(77	)		170			23,336
Provision for income taxes		(9,544	)		—			—			—			(9,544	)
Net income (loss)	$	13,792		$	(93	)	$	(77	)	$	170		$	13,792

13

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)

	Six Months Ended June 30, 2003
				Consolidated Joint Ventures
	Wholly- Owned			Under Interpretation No. 46			Previously Consolidated			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	227,104		$	—		$	23,242		$	(23,242	)	$	227,104
Management fees		4,091			—			—			—			4,091
		231,195			—			23,242			(23,242	)		231,195
Operating costs
Cost of sales		(184,619	)		—			(23,242	)		23,242			(184,619	)
Sales and marketing		(9,939	)		(111	)		(248	)		—			(10,298	)
General and administrative		(21,166	)		—			—			—			(21,166	)
		(215,724	)		(111	)		(23,490	)		23,242			(216,083	)
Equity in income of unconsolidated joint ventures		15,076			—			—			—			15,076
Equity in income of consolidated joint ventures		(328	)		—			—			328			—
Operating income (loss)		30,219			(111	)		(248	)		328			30,188
Other income, net		1,378			6			13			—			1,397
Minority equity in income of consolidated joint ventures		—			12			—			—			12
Income (loss) before provision for income taxes		31,597			(93	)		(235	)		328			31,597
Provision for income taxes		(12,923	)		—			—			—			(12,923	)
Net income (loss)	$	18,674		$	(93	)	$	(235	)	$	328		$	18,674

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

14

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

Note 3 — Investments in and Advances to Unconsolidated Joint Ventures

The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. The consolidated financial statements of the Company include the accounts of the Company and all majority-owned and controlled subsidiaries and joint ventures, and certain joint ventures created after January 31, 2003 which have been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). The financial statements of joint ventures in which the Company has a 50% or less voting or economic interest (and thus are not controlled by the Company) and which were created prior to February 1, 2003 and the financial statements of joint ventures which have not been determined to be variable interest entities in which the Company is considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method. Condensed combined financial information of these unconsolidated joint ventures as of June 30, 2003 and December 31, 2002 is summarized as follows:

CONDENSED COMBINED BALANCE SHEETS

(in thousands)

	June 30, 2003		December 31, 2002
	(unaudited)
ASSETS
Cash and cash equivalents	$	15,208	$	18,023
Receivables		5,257		13,017
Real estate inventories		238,158		234,896
Investment in unconsolidated joint venture		21,939		—
	$	280,562	$	265,936
LIABILITIES AND OWNERS’ CAPITAL
Accounts payable	$	17,879	$	14,640
Accrued expenses		2,970		4,535
Notes payable		132,437		90,086
Advances from William Lyon Homes		3,291		7,498
		156,577		116,759
Owners’ capital
William Lyon Homes		52,645		57,906
Others		71,340		91,271
		123,985		149,177
	$	280,562	$	265,936

15

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONDENSED COMBINED STATEMENTS OF INCOME

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Operating revenue
Home sales	$	69,978		$	67,353		$	139,339		$	117,311
Land sale		8,440			—			8,440			17,079
		78,418			67,353			147,779			134,390
Operating costs
Cost of sales — homes		(53,884	)		(57,005	)		(107,677	)		(99,981	)
Cost of sales — land		(8,132	)		—			(8,132	)		(13,542	)
Sales and marketing		(2,052	)		(2,300	)		(4,095	)		(4,731	)
Operating income		14,350			8,048			27,875			16,136
Other income (expense), net		(409	)		17			(200	)		(30	)
Net income	$	13,941		$	8,065		$	27,675		$	16,106
Allocation to owners
William Lyon Homes	$	7,605		$	3,603		$	15,076		$	5,508
Others		6,336			4,462			12,599			10,598
	$	13,941		$	8,065		$	27,675		$	16,106

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

Certain joint ventures have obtained financing from construction lenders which amounted to $132,437,000 at June 30, 2003. As common practice required by commercial lenders, all of the joint ventures that have obtained financing are obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at the time. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance. 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 for some of the limited partnerships under their credit facilities.

        During the three months ended June 30, 2003, one of the joint ventures in which the Company is a general partner completed a land sale to the Company for $8,440,000 resulting in no gain or loss to the joint venture. During the six months ended June 30, 2002, one of the joint ventures in which the Company is a general partner completed a land sale to the Company for $17,079,000 resulting in a profit of approximately $3,537,000, all of which was allocated to the Company’s outside partner as preferred return in accordance with the joint venture agreement.

16

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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 June 30, 2003, including real estate inventories of $80,110,000 and minority interest in consolidated joint ventures of $66,974,000. During the year ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for $19,765,000, which included a $3,953,000 preferred return to the outside partner of the Existing Venture. The 44 lots were purchased through a land banking arrangement (see Note 7 for additional information regarding the Company’s land banking arrangements). During the six months ended June 30, 2003, the Company purchased 74 lots from the New Venture for $23,242,000, all of which was paid to the outside partner as a return of capital. The intercompany sales and related profits have been eliminated in consolidation.

During the six months ended June 30, 2003, the Company’s wholly-owned subsidiary William Lyon Homes Inc., a California corporation, (“California Lyon”), and two unaffiliated parties formed a series of limited liability companies (“Development LLCs”) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. The development process is anticipated to be completed by mid 2004 at which time California Lyon will be required under certain specific conditions to purchase approximately one half in value of the lots. California Lyon has an indirect, minority interest in the Development LLCs, which are the borrowers under two secured lines of credit. Advances under the lines of credit are to be used to pay acquisition and development costs and expenses. The lines of credit are secured by deeds of trust on the real property and improvements thereon owned by the Development LLCs, as well as pledges of all net sale proceeds, related contracts and other ancillary property. The maximum commitment amounts under the lines of credit are limited by specified agreed loan-to-value ratios. The maximum commitment amount under the line of credit that closed in January 2003 (“First Line of Credit”) is $35,000,000. Subject to specified terms and conditions, California Lyon and the other direct and indirect members of the Development LLC that is the borrower under the First Line of Credit, including certain affiliates of such other members, each (i) have guaranteed to the bank the repayment of the Development LLC’s indebtedness under the First Line of Credit, completion of certain infrastructure improvements to the land, payment of necessary loan remargining obligations, and the Development LLC’s performance under its environmental indemnity and covenants, and (ii) have agreed to take all actions and pay all amounts to assure that the Development LLC is in compliance with financial covenants. The maximum commitment amount under the line of credit that closed in March 2003 (“Second Line of Credit”) is $105,000,000. Although the guarantee obligations of the other direct and indirect members of the Development LLC that is the borrower under the Second Line of Credit, and certain of their affiliates, are similar in nature to those under the First Line of Credit, California Lyon does not have any such guarantee obligations to the banks under the Second Line of Credit. However, California Lyon has posted letters of credit equal to approximately $24,600,000 to secure its obligations as well as the Development LLCs’ obligations to the banks under both lines of credit. Further, California Lyon and the other direct and indirect members of the Development LLCs,

17

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

including certain affiliates of such other members, have entered into reimbursement and indemnity agreements to allocate any liability arising from each line of credit, including the related guarantees and letters of credit. California Lyon’s parent company, William Lyon Homes, a Delaware corporation (“Delaware Lyon”) has entered into joinder agreements to be jointly and severally liable for California Lyon’s obligations under the reimbursement and indemnity agreements. While the reimbursement and indemnity agreements provide that liability is generally allocated in accordance with the members’ percentage interests in the Development LLCs’ distributions, Delaware Lyon and California Lyon may be liable for the full amount of the obligations guaranteed to the banks in certain specified circumstances, such as those involving the default, willful misconduct or gross negligence of California Lyon. As of June 30, 2003 the outstanding indebtedness under the First Line of Credit was $32,500,000 and the outstanding indebtedness under the Second Line of Credit was $98,400,000.

Note 4 — 10 ³/4% Senior Notes

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

The 10 ³/4% Senior Notes due 2013 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (“Delaware Lyon”), which is the parent company of California Lyon, and all of its existing and certain of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness. At June 30, 2003, the Company had approximately $133,184,000 of secured indebtedness and approximately $87,691,000 of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas. Interest on the 10 ³/4% Senior Notes is payable on April 1 and October 1 of each year, commencing October 1, 2003.

Except as set forth in the Indenture governing the 10 ³/4% Senior Notes (“Indenture”), the 10 ³/4% Senior Notes are not redeemable prior to April 1, 2008. Thereafter, the 10 ³/4% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before April 1, 2006, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 110.75% of the principal amount, plus accrued and unpaid interest, if any.

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

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

18

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

The foregoing summary is not a complete description of the terms of the 10 ³/4% Senior Notes and is qualified in its entirety by reference to the Indenture.

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

Repayment of revolving credit facilities	$	104,354
Repayment of 12 1/2% Senior Notes		70,279
Repayment of construction notes payable		28,000
Repayment of purchase money notes payable — land acquisitions		26,000
Repayment of unsecured line of credit		9,500
Underwriting discount		6,875
Offering costs		1,225
	$	246,233

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

19

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING BALANCE SHEET

June 30, 2003

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	5,475	$	3,244	$	2,359	$	—		$	11,078
Receivables		—		7,335		8,694		155		—			16,184
Real estate inventories		—		569,311		—		118,963		—			688,274
Investments in and advances to unconsolidated joint ventures		—		55,936		—		—		—			55,936
Property and equipment, net		—		970		763		—		—			1,733
Deferred loan costs		—		9,174		—		—		—			9,174
Goodwill		—		5,896		—		—		—			5,896
Other assets		—		6,471		870		—		—			7,341
Investments in subsidiaries		201,742		19,116		—		—		(220,858	)		—
	$	201,742	$	679,684	$	13,571	$	121,477	$	(220,858	)	$	795,616
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	46,926	$	245	$	3,724		—		$	50,895
Accrued expenses		—		56,567		4,502		190		—			61,259
Notes payable		—		133,184		5,729		—		—			138,913
10 3/4% Senior Notes		—		246,295		—		—		—			246,295
Total liabilities		—		482,972		10,476		3,914		—			497,362
Minority interest in consolidated joint ventures		—		—		—		96,512		—			96,512
Stockholders’ equity		201,742		196,712		3,095		21,051		(220,858	)		201,742
	$	201,742	$	679,684	$	13,571	$	121,477	$	(220,858	)	$	795,616

20

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING BALANCE SHEET

December 31, 2002

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	11,524	$	2,071	$	3,099	$	—		$	16,694
Receivables		—		8,657		19,941		136		—			28,734
Real estate inventories		—		390,057		47		101,848		—			491,952
Investments in and advances to unconsolidated joint ventures		—		65,209		195		—		—			65,404
Property and equipment, net		—		1,177		954		—		—			2,131
Deferred loan costs		586		755		—		—		—			1,341
Goodwill		—		5,896		—		—		—			5,896
Other assets		—		4,439		990		—		—			5,429
Investments in subsidiaries		180,033		15,818		—		—		(195,851	)		—
Intercompany receivables		79,308		7,972		—		—		(87,280	)		—
	$	259,927	$	511,504	$	24,198	$	105,083	$	(283,131	)	$	617,581
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	27,776	$	2,161	$	4,944	$	—		$	34,881
Accrued expenses		—		50,764		3,373		175		—			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		335,495		23,673		5,119		(87,280	)		355,258
Minority interest in consolidated joint ventures		—		—		—		80,647		—			80,647
Stockholders’ equity		181,676		176,009		525		19,317		(195,851	)		181,676
	$	259,927	$	511,504	$	24,198	$	105,083	$	(283,131	)	$	617,581

21

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF INCOME

Three Months Ended June 30, 2003

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	139,209		$	17,472		$	10,450		$	(10,450	)	$	156,681
Management fees		—		2,053			—			—			—			2,053
		—		141,262			17,472			10,450			(10,450	)		158,734
Operating costs
Cost of sales		—		(110,636	)		(15,587	)		(10,450	)		10,450			(126,223	)
Sales and marketing		—		(5,237	)		(799	)		(186	)		—			(6,222	)
General and administrative		—		(11,272	)		(55	)		—			—			(11,327	)
		—		(127,145	)		(16,441	)		(10,636	)		10,450			(143,772	)
Equity in income of unconsolidated joint ventures		—		7,605			—			—			—			7,605
Income from subsidiaries		13,792		494			—			—			(14,286	)		—
Operating income (loss)		13,792		22,216			1,031			(186	)		(14,286	)		22,567
Other income, net		—		142			496			119			—			757
Minority equity in income of consolidated joint ventures		—		—			—			12			—			12
Income (loss) before provision for income taxes		13,792		22,358			1,527			(55	)		(14,286	)		23,336
Provision for income taxes		—		(9,544	)		—			—			—			(9,544	)
Net income (loss)	$	13,792	$	12,814		$	1,527		$	(55	)	$	(14,286	)	$	13,792

22

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF INCOME

Three Months Ended June 30, 2002

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	106,001		$	21,416		$	—	$	—		$	127,417
Management fees		—		2,038			—			—		—			2,038
		—		108,039			21,416			—		—			129,455
Operating costs
Cost of sales		—		(92,521	)		(18,184	)		—		—			(110,705	)
Sales and marketing		—		(4,304	)		(903	)		—		—			(5,207	)
General and administrative		—		(7,589	)		(54	)		—		—			(7,643	)
		—		(104,414	)		(19,141	)		—		—			(123,555	)
Equity in income of unconsolidated joint ventures		—		3,603			—			—		—			3,603
Income from subsidiaries		7,032		1,825			—			—		(8,857	)		—
Operating income		7,032		9,053			2,275			—		(8,857	)		9,503
Other income (expense), net		—		(75	)		329			101		—			355
Income before provision for income taxes		7,032		8,978			2,604			101		(8,857	)		9,858
Provision for income taxes		—		(2,826	)		—			—		—			(2,826	)
Net income	$	7,032	$	6,152		$	2,604		$	101	$	(8,857	)	$	7,032

23

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF INCOME

Six Months Ended June 30, 2003

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	198,247		$	28,857		$	23,242		$	(23,242	)	$	227,104
Management fees		—		4,091			—			—			—			4,091
		—		202,338			28,857			23,242			(23,242	)		231,195
Operating costs
Cost of sales		—		(159,029	)		(25,590	)		(23,242	)		23,242			(184,619	)
Sales and marketing		—		(8,695	)		(1,244	)		(359	)		—			(10,298	)
General and administrative		—		(21,046	)		(120	)		—			—			(21,166	)
		—		(188,770	)		(26,954	)		(23,601	)		23,242			(216,083	)
Equity in income of unconsolidated joint ventures		—		15,076			—			—			—			15,076
Income from subsidiaries		18,674		866			—			—			(19,540	)		—
Operating income (loss)		18,674		29,510			1,903			(359	)		(19,540	)		30,188
Other income, net		—		949			244			204			—			1,397
Minority equity in income of consolidated joint ventures		—		—			—			12			—			12
Income (loss) before provision for income taxes		18,674		30,459			2,147			(143	)		(19,540	)		31,597
Provision for income taxes		—		(12,923	)		—			—			—			(12,923	)
Net income (loss)	$	18,674	$	17,536		$	2,147		$	(143	)	$	(19,540	)	$	18,674

24

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF INCOME

Six Months Ended June 30, 2002

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	175,764		$	41,802		$	—		$	—		$	217,566
Management fees		—		3,554			—			—			—			3,554
		—		179,318			41,802			—			—			221,120
Operating costs
Cost of sales		—		(152,051	)		(35,939	)		—			—			(187,990	)
Sales and marketing		—		(8,152	)		(1,753	)		—			—			(9,905	)
General and administrative		—		(15,443	)		(139	)		(14	)		—			(15,596	)
		—		(175,646	)		(37,831	)		(14	)		—			(213,491	)
Equity in income of unconsolidated joint ventures		—		5,508			—			—			—			5,508
Income from subsidiaries		10,145		3,189			—			—			(13,334	)		—
Operating income (loss)		10,145		12,369			3,971			(14	)		(13,334	)		13,137
Other income, net		—		28			302			181			—			511
Income before provision for income taxes		10,145		12,397			4,273			167			(13,334	)		13,648
Provision for income taxes		—		(3,503	)		—			—			—			(3,503	)
Net income	$	10,145	$	8,894		$	4,273		$	167		$	(13,334	)	$	10,145

25

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2003

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities
Net income (loss)	$ 18,674		$	17,536		$	2,147		$	(143	)	$	(19,540	)	$	18,674
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization	—			417			216			—			—			633
Equity in income of unconsolidated joint ventures	—			(15,076	)		—			—			—			(15,076	)
Minority equity in income of consolidated joint ventures	—			—			—			(12	)		—			(12	)
Equity in earnings of subsidiaries	(18,674	)		(866	)		—			—			19,540			—
Provision for income taxes	—			12,923			—			—			—			12,923
Net changes in operating assets and liabilities:
Receivables	—			886			(1,163	)		(19	)		—			(296	)
Intercompany receivables/payables	(586	)		586			—			—			—			—
Real estate inventories	—			(179,192	)		47			(17,115	)		—			(196,260	)
Deferred loan costs	586			(8,419	)		—			—			—			(7,833	)
Other assets	—			(2,032	)		120			—			—			(1,912	)
Accounts payable	—			19,150			(1,916	)		(1,220	)		—			16,014
Accrued expenses	—			(7,120	)		1,129			15			—			(5,976	)
Net cash (used in) provided by operating activities	—			(161,207	)		580			(18,494	)		—			(179,121	)
Investing activities
Net change in investment in unconsolidated joint ventures	—			24,349			195			—			—			24,544
Payments on (issuance of) notes receivable, net	—			436			12,410			—			—			12,846
Purchases of property and equipment	—			(210	)		(25	)		—			—			(235	)
Investment in subsidiaries	—			(2,432	)		—			—			2,432			—
Advances to affiliates	68,887			(68,755	)		—			—			(132	)		—
Net cash provided by (used in) investing activities	68,887			(46,612	)		12,580			—			2,300			37,155
Financing activities
Proceeds from borrowings on notes payable	—			266,426			132,021			—			—			398,447
Principal payments on notes payable	—			(310,889	)		(144,431	)		—			—			(455,320	)
Repayment of 12 1/2% Senior Notes	(70,279	)		—			—			—			—			(70,279	)
Issuance of 10 3/4% Senior Notes	—			246,233			—			—			—			246,233
Common stock issued for exercised options	1,392			—			—			—			—			1,392
Minority interest contributions (distributions), net	—			—			—			15,877			—			15,877
Advances to affiliates	—			—			423			1,877			(2,300	)		—
Net cash (used in) provided by financing activities	(68,887	)		201,770			(11,987	)		17,754			(2,300	)		136,350
Net (decrease) increase in cash and cash equivalents	—			(6,049	)		1,173			(740	)		—			(5,616	)
Cash and cash equivalents at beginning of period	—			11,524			2,071			3,099			—			16,694
Cash and cash equivalents at end of period	$      —		$	5,475		$	3,244		$	2,359		$	—		$	11,078

26

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2002

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities
Net income	$	10,145		$	8,894		$	4,273		$	167		$	(13,334	)	$	10,145
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			561			57			—			—			618
Equity in income of unconsolidated joint ventures		—			(5,508	)		—			—			—			(5,508	)
Equity in earnings of subsidiaries		(10,145	)		(3,189	)		—			—			13,334			—
Provision for income taxes		—			3,503			—			—			—			3,503
Net changes in operating assets and liabilities:
Receivables		—			5,344			324			113			—			5,781
Intercompany receivables/payables		(704	)		704			—			—			—			—
Real estate inventories		—			(91,405	)		3,547			(802	)		—			(88,660	)
Deferred loan costs		704			(365	)		—			—			—			339
Other assets		—			(1,781	)		(14	)		—			—			(1,795	)
Accounts payable		—			8,662			140			28			—			8,830
Accrued expenses		—			(13,015	)		5			(110	)		—			(13,120	)
Net cash (used in) provided by operating activities		—			(87,595	)		8,332			(604	)		—			(79,867	)
Investing activities
Net change in investment in unconsolidated joint ventures		—			(824	)		12,466			—			—			11,642
Payments on (issuance of) notes receivable, net		—			(14	)		7,032			—			—			7,018
Purchases of property and equipment		—			(52	)		(829	)		—			—			(881	)
Investment in subsidiaries		—			13,929			—			—			(13,929	)		—
Advances to affiliates		5,010			(3,251	)		—			—			(1,759	)		—
Net cash provided by investing activities		5,010			9,788			18,669			—			(15,688	)		17,779
Financing activities
Proceeds from borrowings on notes payable		—			278,282			117,888			—			—			396,170
Principal payments on notes payable		—			(209,899	)		(124,920	)		—			—			(334,819	)
Common stock issued for exercised options		1,059			—			—			—			—			1,059
Common stock purchased		(6,069	)		—			—			—			—			(6,069	)
Advances to affiliates		—			—			(16,460	)		772			15,688			—
Net cash (used in) provided by financing activities		(5,010	)		68,383			(23,492	)		772			15,688			56,341
Net (decrease) increase in cash and cash equivalents		—			(9,424	)		3,509			168			—			(5,747	)
Cash and cash equivalents at beginning of period		—			15,532			3,859			360			—			19,751
Cash and cash equivalents at end of period	$	—		$	6,108		$	7,368		$	528		$	—		$	14,004

27

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

Note 5 — Related Party Transactions

A portion of the net proceeds of the Company’s offering of 10 ³/4% Senior Notes (see Note 4) was used to repay all of the Company’s 12 ¹/2% Senior Notes, including $30,000,000 in principal amount held by General William Lyon, Chairman and Chief Executive Officer, and the trust of which his son, William H. Lyon, is the sole beneficiary, $2,323,000 held by Wade H. Cable, President and Chief Operating Officer, and $1,000,000 held by William H. McFarland, a director.

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, as defined, in excess of six percent from the development are to be paid to the seller, of which $2,073,000 has been paid through June 30, 2003. During the three and six months ended June 30, 2003, the Company did not purchase any lots under this agreement. During the six months ended June 30, 2002, the Company purchased 13 lots under this agreement for a total purchase price of $211,000. This land acquisition qualified as an affiliate transaction under the Company’s 12 ¹/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994, as amended (“Old Indenture”). Pursuant to the terms of the Old 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 delivered to the Trustee under the Old Indenture a resolution of the Board of Directors of the Company set forth in an Officers’ Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition has been approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.

On July 9, 2002, the Company’s Board of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 144 lots, through a land banking arrangement, for a total purchase price of $16,660,000 from an entity that purchased the lots from William Lyon. The terms of the purchase agreement provide for an initial deposit of $3,300,000 (paid on July 23, 2002) and monthly option payments of 11.5% on the seller’s outstanding investment. Such option payments entitle the Company to phase takedowns of approximately 14 lots each, which are anticipated to occur at one to two month intervals through December 2003. As of June 30, 2003, 58 lots have been purchased under this agreement for a purchase price of $4,861,000. Had the Company purchased the property directly, the acquisition would have qualified as an affiliate transaction under the Old 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 Old Indenture, the Company determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to the Trustee under the Old Indenture a resolution of the Board of Directors of the Company set forth in an Officers’ Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition had been approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company delivered to the Trustee under the Old Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.

28

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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 six months ended June 30, 2002, $1,770,000 was paid to the seller in accordance with the agreement.

The Company purchased land for a total purchase price of $17,079,000 during the six months ended June 30, 2002 from one of its unconsolidated joint ventures, resulting in a profit to the joint venture of approximately $3,537,000, all of which was allocated to the Company’s outside partner as preferred return in accordance with the joint venture agreement.

For the three months ended June 30, 2003 and 2002, the Company incurred reimbursable on-site labor costs of $73,000 and  $36,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon. For the six months ended June 30, 2003 and 2002, the Company incurred reimbursable on-site labor costs of $149,000 and $77,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon of which $15,000 was due to the Company at June 30, 2003.

For the three months ended June 30, 2003 and 2002, the Company incurred charges of $189,000 and $183,000, respectively, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary. For the six months ended June 30, 2003 and 2002, the Company incurred charges of $376,000 and  365,000, respectively, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.

During the three months ended June 30, 2003 and 2002, the Company incurred charges of $39,000 and $67,000, respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon. During the six months ended June 30, 2003 and 2002, the Company incurred charges of $171,000 and  $108,000, respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon.

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

Note 6 — Stockholders’ Equity

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 purposes or cancelled. As of June 30, 2003, 1,018,400 shares had been purchased and retired under this program in the amount of $19,570,000. No shares were purchased under this program during the six months ended June 30, 2003.

29

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

During the three and six months ended June 30, 2003, certain officers and directors exercised options to purchase 111,827 and 155,261 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 three months ended June 30, 2003, an officer exercised options to purchase 3,333 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.

During the three months ended June 30, 2002, certain officers and directors exercised options to purchase 59,465 shares of the Company’s common stock at a price of $8.6875 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan and 5,332 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.

During the six months ended June 30, 2002, certain officers and directors exercised options to purchase 95,671 shares of the Company’s common stock at a price of $8.6875 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan, 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, 13,912 shares of the Company’s common stock at a price of $5.00 per share in accordance with the Company’s 1991 Stock Option Plan, as amended, and 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.

Note 7 — Commitments and Contingencies

The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers its right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit equal to 20% or less of the total purchase price. Additionally, the Company may be subject to other penalties if lots are not acquired. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were 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 consolidated balance sheet. The financial statements of these entities are not consolidated with the Company’s consolidated financial statements. A recently adopted accounting interpretation could require the consolidation of the assets, liabilities and operations of certain of the Company’s joint venture and land banking arrangements (see Notes 2 and 3 ). 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 June 30, 2003 (dollars in thousands):

Total number of land banking projects		6
Total number of lots		1,149
Total purchase price	$	108,958
Balance of lots still under option and not purchased:
Number of lots		871
Purchase price	$	81,976
Forfeited deposits and penalties if lots were not purchased	$	20,298

30

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements. As a land owner benefited by these improvements, the Company is responsible for the assessments on its land. When properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. Assessment district bonds issued after May 21, 1992 are accounted for under the provisions of Statement 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 June 30, 2003, the Company had $35,242,000 of outstanding irrevocable standby letters of credit to guarantee the Company’s financial obligations under certain land banking arrangements, joint venture agreements and other contractual arrangements in the normal course of business. Letters of credit totaling $9,289,000 related to land banking arrangements are recorded on the accompanying consolidated balance sheet. The beneficiary may draw upon these letters of credit in the event of a contractual default by the Company relating to each respective obligation. These letters of credit have a stated term of 12 months and have varying maturities throughout 2004, at which time the Company may be required to renew the letters of credit 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 3 and 4 for additional information relating to the Company’s guarantee arrangements.

31

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

WILLIAM LYON HOMES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion of results of operations and financial condition should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1, as well as the information presented in the Annual Report on Form 10-K for the year ended December 31, 2002. As used herein, “on a combined basis” means the total of operations in wholly-owned projects and in unconsolidated joint ventures.

Results of Operations

Overview and Recent Results

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

	Three Months Ended June 30,
	2003									2002
	Consolidated			Unconsolidated Joint Ventures			Combined Total			Consolidated			Unconsolidated Joint Ventures			Combined Total
Selected Financial Information (dollars in thousands)
Homes closed		368			142			510			412			150			562
Home sales revenue	$	139,681		$	69,978		$	209,659		$	126,886		$	67,353		$	194,239
Cost of sales		(115,444	)		(53,884	)		(169,328	)		(110,027	)		(57,005	)		(167,032	)
Gross margin	$	24,237		$	16,094		$	40,331		$	16,859		$	10,348		$	27,207
Gross margin percentage		17.4	%		23.0	%		19.2	%		13.3	%		15.4	%		14.0	%
Number of homes closed
California		174			142			316			239			150			389
Arizona		76			—			76			63			—			63
Nevada		118			—			118			110			—			110
Total		368			142			510			412			150			562
Average sales price
California	$	494,900		$	492,800		$	493,900		$	362,100		$	449,000		$	395,600
Arizona		229,900			—			229,900			216,300			—			216,300
Nevada		305,900			—			305,900			242,900			—			242,900
Total	$	379,600		$	492,800		$	411,100		$	308,000		$	449,000		$	345,600
Number of net new home orders
California		469			189			658			326			290			616
Arizona		123			—			123			74			—			74
Nevada		167			—			167			78			—			78
Total		759			189			948			478			290			768
Average number of sales locations during period
California		18			8			26			15			11			26
Arizona		7			—			7			6			—			6
Nevada		6			—			6			4			—			4
Total		31			8			39			25			11			36

32

	As of June 30,
	2003						2002
	Consolidated		Unconsolidated Joint Ventures		Combined Total		Consolidated		Unconsolidated Joint Ventures		Combined Total
Backlog of homes sold but not closed at end of period
California		758		275		1,033		584		429		1,013
Arizona		234		—		234		151		—		151
Nevada		240		—		240		114		—		114
Total		1,232		275		1,507		849		429		1,278
Dollar amount of homes sold but not closed at end of period (dollars in thousands)
California	$	327,235	$	126,143	$	453,378	$	226,033	$	194,578	$	420,611
Arizona		45,884		—		45,884		32,423		—		32,423
Nevada		68,590		—		68,590		39,907		—		39,907
Total	$	441,709	$	126,143	$	567,852	$	298,363	$	194,578	$	492,941
Lots controlled at end of period
Owned lots
California		2,406		1,447		3,853		1,855		1,644		3,499
Arizona		988		—		988		852		—		852
Nevada		1,623		—		1,623		1,269		—		1,269
Total		5,017		1,447		6,464		3,976		1,644		5,620
Optioned lots(1)
California						4,060						2,201
Arizona						3,981						4,337
Nevada						26						66
Total						8,067						6,604
Total lots controlled
California						7,913						5,700
Arizona						4,969						5,189
Nevada						1,649						1,335
Total						14,531						12,224

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

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	Six Months Ended June 30,
	2003									2002
	Consolidated			Unconsolidated Joint Ventures			Combined Total			Consolidated			Unconsolidated Joint Ventures			Combined Total
Selected Financial Information (dollars in thousands)
Homes closed		552			273			825			713			254			967
Home sales revenue	$	210,104		$	139,339		$	349,443		$	217,035		$	117,311		$	334,346
Cost of sales		(173,817	)		(107,677	)		(281,494	)		(187,121	)		(99,981	)		(287,102	)
Gross margin	$	36,287		$	31,662		$	67,949		$	29,914		$	17,330		$	47,244
Gross margin percentage		17.3	%		22.7	%		19.4	%		13.8	%		14.8	%		14.1	%
Number of homes closed
California		247			273			520			392			254			646
Arizona		124			—			124			126			—			126
Nevada		181			—			181			195			—			195
Total		552			273			825			713			254			967
Average sales price
California	$	518,600		$	510,400		$	514,300		$	365,200		$	461,900		$	403,200
Arizona		229,700			—			229,700			202,600			—			202,600
Nevada		295,700			—			295,700			247,900			—			247,900
Total	$	380,600		$	510,400		$	423,600		$	304,400		$	461,900		$	345,800
Number of net new home orders
California		805			353			1,158			777			586			1,363
Arizona		221			—			221			159			—			159
Nevada		326			—			326			181			—			181
Total		1,352			353			1,705			1,117			586			1,703
Average number of sales locations during period
California		17			8			25			16			12			28
Arizona		6			—			6			7			—			7
Nevada		6			—			6			5			—			5
Total		29			8			37			28			12			40

On a combined basis, the number of net new home orders for the six months ended June 30, 2003 increased slightly to 1,705 homes from 1,703 homes for the six months ended June 30, 2002. The number of homes closed on a combined basis for the six months ended June 30, 2003, decreased 14.7% to 825 homes from 967 homes for the six months ended June 30, 2002. On a combined basis, the backlog of homes sold but not closed as of June 30, 2003 was 1,507, up 17.9% from 1,278 homes a year earlier, and up 41.0% from 1,069 homes at March 31, 2003.

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 June 30, 2003 was $567.9 million, up 15.2% from $492.9 million as of June 30, 2002 and up 37.4% from $413.4 million as of March 31, 2003. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 19% during 2002 and 16% during the six months ended June 30, 2003. The inventory of completed and unsold homes was 9 homes as of June 30, 2003.

While the Company experienced an 8% reduction in the average number of sales locations to 37 for the six months ended June 30, 2003 as compared to 40 for the six months ended June 30, 2002, the Company’s number of new home orders per average sales location increased to 46.1 for the six months ended June 30, 2003 as compared to 42.6 for the six months ended June 30, 2002. The reduction in the average number of sales

34

locations was caused primarily by (i) accelerated sales and close-outs at certain of the Company projects and (ii) delays in land acquisitions and development of certain projects in previous periods as a result of the tragic events of September 11, 2001 and the economic slow-down in the months thereafter. In many of the markets in which the Company operates, the demand for housing exceeds the current supply of housing. At June 30, 2003 the Company had 46 sales locations.

In general, housing demand is adversely affected by increases in interest rates and housing prices. Interest rates, the length of time that assets remain in inventory, and the proportion of inventory that is financed affect the Company’s interest cost. If the Company is unable to raise sales prices sufficiently to compensate for higher costs or if mortgage interest rates increase significantly, affecting prospective buyers’ ability to adequately finance home purchases, the Company’s sales, gross margins and operating results may be adversely impacted.

Comparison of Three Months Ended June 30, 2003 to Three Months Ended June 30, 2002

Operating revenue for the three months ended June 30, 2003 was $158.7 million, an increase of $29.2 million, or 22.5%, from operating revenue of $129.5 million for the three months ended June 30, 2002. Revenue from sales of homes increased $12.8 million, or 10.1%, to $139.7 million in the 2003 period from $126.9 million in the 2002 period. This increase was primarily due to an increase in the average sales price of consolidated homes to $379,600 in the 2003 period from $308,000 in the 2002 period, offset by a decrease in the number of consolidated homes closed to 368 in the 2003 period from 412 in the 2002 period. Revenue from sales of lots, land and other increased to $17.0 million in the 2003 period from $0.5 million in the 2002 period due to the bulk sale of land in one of the Company’s developments. Management fee income increased by $0.1 million to $2.1 million in the 2003 period from $2.0 million in the 2002 period primarily due to an increase in the average sales prices for homes closed in the unconsolidated joint ventures to $492,800 in the 2003 period from $449,000 in the 2002 period. The increase in the average sales price of homes closed both in consolidated projects and unconsolidated joint venture projects was due primarily to (i) price appreciation in certain projects and (ii) a change in product mix.

Total operating income increased to $22.6 million in the 2003 period from $9.5 million in the 2002 period. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $7.3 million to $24.2 million in the 2003 period from $16.9 million in the 2002 period primarily due to (i) an increase in the average sales prices of consolidated homes to $379,600 in the 2003 period from $308,000 in the 2002 period, and (ii) an increase in gross margin percentages to 17.4% in the 2003 period from 13.3% in the 2002 period, offset by a decrease in the number of consolidated homes closed to 368 homes in the 2003 period from 412 homes in the 2002 period. The increase in the period-over-period gross margin percentage reflects the impact of improved economic conditions experienced since the first quarter of 2002. The excess of revenue from the sales of lots, land and other over the related cost of sales (gross margin) increased by $6.4 million to $6.2 million in the 2003 period primarily due to the bulk sale of land in one of the Company’s developments. Sales and marketing expenses increased by $1.0 million to $6.2  million in the 2003 period from $5.2 million in the 2002 period primarily due to increases in advertising and sales commissions. General and administrative expenses increased by $3.7 million to $11.3 million in the 2003 period from $7.6 million in the 2002 period, primarily as a result of an increase in accrued bonuses related to higher earnings and increases in salaries and related employee benefits. Equity in income of unconsolidated joint ventures amounting to $7.6 million was recognized in the 2003 period, up from $3.6 million in the comparable period for 2002, primarily as a result of an increase in the average sales prices for homes closed in the unconsolidated joint ventures to $492,800 in the 2003 period from $449,000 in the 2002 period and an increase in the gross margin percentages to 23.0% in the 2003 period from 15.4% in the 2002 period, offset by a decrease in the number of homes closed to 142  in the 2003 period from 150 in the 2002 period. The increase in period-over-period gross margin percentage reflects the impact of improved economic conditions experienced since the first quarter of 2002.

Total interest incurred increased to $12.4  million in the 2003 period from $5.6 million in the 2002 period primarily as a result of an increase in the average principal balance of debt outstanding in the 2003 period

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compared to the 2002 period and an increase in the average balance outstanding under land banking arrangements in the 2003 period compared to the 2002 period. All interest incurred was capitalized in the 2003 and 2002 periods.

At December 31, 2002 and 2001, the Company had net operating loss carryforwards for federal tax purposes of approximately $5.2 million and $8.5 million, respectively, 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. The elimination during 2002 of the remaining valuation allowances for deferred tax assets reduced the Company’s estimated overall effective tax rate for the year ended December 31, 2002 from 39.3% to 27.0%. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited under certain circumstances.

As a result of the foregoing factors, the Company’s net income increased to $13.8  million in the 2003 period from $7.0 million in the 2002 period.

Comparison of Six Months Ended June 30, 2003 to Six Months Ended June 30, 2002

Operating revenue for the six months ended June 30, 2003 was $231.2 million, an increase of $10.1 million, or 4.6%, from operating revenue of $221.1 million for the six months ended June 30, 2002. Revenue from sales of homes decreased $6.9 million, or 3.2%, to $210.1 million in the 2003 period from $217.0 million in the 2002 period. This decrease was primarily due to an decrease in the number of consolidated homes closed to 552 in the 2003 period from 713 in the 2002 period, offset by an increase in the average sales price of consolidated homes to $380,600 in the 2003 period from $304,400 in the 2002 period. Revenues from sales of lots, land and other increased to $17.0 million in the 2003 period from $0.5 million in the 2002 period due to the bulk sale of land in one of the Company’s developments. Management fee income increased by $0.5 million to $4.1 million in the 2003 period from $3.6 million in the 2002 period primarily due to an increase in the number of unconsolidated joint venture homes closed to 273 in the 2003 period from 254 in the 2002 period, along with an increase in the average sales price for homes closed in the unconsolidated joint ventures to $510,400 in the 2003 period from $461,900 in the 2002 period. The increase in the average sales price of homes closed both in consolidated projects and joint venture projects was due primarily to (i) price appreciation in certain projects and (ii) a change in product mix.

Total operating income increased to $30.2 million in the 2003 period from $13.1 million in the 2002 period. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $6.4 million to $36.3 million in the 2003 period from $29.9 million in the 2002 period primarily due to (i) an increase in the average sales price of consolidated homes to $380,600 in the 2003 period from $304,400 in the 2002 period, and (ii) an increase in gross margin percentage to 17.3% in the 2003 period from 13.8% in the 2002 period, offset by a decrease in the number of consolidated homes closed to 552 in the 2003 period from 713 in the 2002 period. The increase in the period-over-period gross margin percentage reflects the impact of improved economic conditions experienced since the first quarter of 2002. The excess of revenue from the sales of lots, land and other over the related cost of sales (gross margin) increased by $6.5 million to $6.2 million in the 2003 period primarily due to the bulk sale of land in one of the Company’s projects. Sales and marketing expenses increased by $0.4 million to $10.3 million in the 2003 period from $9.9 million in the 2002 period primarily due to model operation costs. General and administrative expenses increased by $5.6 million to $21.2 million in the 2003 period from $15.6 million in the 2002 period, primarily as a result of an increase in accrued bonuses related to higher earnings and increases in salaries and related employee benefits. Equity in income of unconsolidated joint ventures amounting to $15.1 million was recognized in the 2003 period, up from $5.5 million in the comparable period for 2002, primarily as a result of an increase in the number of homes closed to 273 in the 2003 period from 254 in the 2002 period, an increase in the average sales price for homes closed in the unconsolidated joint ventures to $510,400 in the 2003 period from $461,900 in the 2002 period, and an increase in the gross margin percentage to 22.7% in the 2003 period from 14.8% in the 2002 period. The increase in period-over-period gross

36

margin percentage reflects the impact of improved economic conditions experienced since the first quarter of 2002. During the six months ended June 30, 2002, one of the unconsolidated joint ventures in which the Company is a member completed a land sale to the Company for $17.1 million resulting in a profit of approximately $3.5 million, all of which was allocated to the Company’s outside partner as preferred return in accordance with the joint venture agreement.

Total interest incurred increased to $22.2 million in the 2003 period from $11.2 million in the 2002 primarily as a result of an increase in the average principal balance of debt outstanding in the 2003 period compared to the 2002 period and an increase in the average balance outstanding under land banking arrangements in the 2003 period compared to the 2002 period. All interest incurred was capitalized in the 2003 and 2002 periods.

As discussed above, 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, 2002. 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 six months ended June 30, 2002 was approximately 25.7%.

As a result of the foregoing factors, the Company’s net income increased to $18.7 million in the 2003 period from $10.1 million in the 2002 period.

Financial Condition and Liquidity

The Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate, outside borrowings and by forming new joint ventures with venture partners that provide a substantial portion of the capital required for certain projects. The Company currently has outstanding 10 ³/4% Senior Notes (the “Senior Notes”) and maintains secured revolving credit facilities (“Revolving Credit Facilities”).

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

Senior Notes

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

The 10 ³/4% Senior Notes due 2013 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (“Delaware Lyon”) and the parent company of California Lyon, and all of its existing and certain of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that

37

indebtedness. At June 30, 2003, the Company had approximately $133.2 million of secured indebtedness and approximately $87.7 million of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas. Interest on the 10 ³/4% Senior Notes is payable on April 1 and October 1 of each year, commencing October 1, 2003.

Except as set forth in the Indenture governing the 10 ³/4% Senior Notes (“Indenture”), the 10 ³/4% Senior Notes are not redeemable prior to April 1, 2008. Thereafter, the 10 ³/4% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before April 1, 2006, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 110.75% of the principal amount, plus accrued and unpaid interest, if any.

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

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

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

The foregoing summary is not a complete description of the terms of the 10 ³/4% Senior Notes and is qualified in its entirety by reference to the Indenture.

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

Repayment of revolving credit facilities	$	104,354
Repayment of 12 1/2% Senior Notes		70,279
Repayment of construction notes payable		28,000
Repayment of purchase money notes payable—land acquisitions		26,000
Repayment of unsecured line of credit		9,500
Underwriting discount		6,875
Offering costs		1,225
	$	246,233

Revolving Credit Facilities

As of June 30, 2003, the Company has three revolving credit facilities which have an aggregate maximum loan commitment of $275.0 million and mature at various dates. A $150.0 million revolving line of credit matures in September 2006, a $75.0 million bank revolving line of credit matures in June 2004 and a $50.0 million bank revolving line of credit initially “matures” in September 2004, after which the amounts available for borrowing begin to reduce. 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

38

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 loans for 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 June 30, 2003, $133.2 million was outstanding under these credit facilities, with a weighted-average interest rate of 4.212%, and the undrawn availability was $87.7 million as limited by the borrowing base formulas. Delaware Lyon has guaranteed on an unsecured basis California Lyon’s obligations under certain of the revolving credit facilities and has provided an unsecured environmental indemnity in favor of the lender under the $75.0 million bank line of credit. The Company is required to comply with a number of covenants under these revolving credit facilities.

Revolving Mortgage Warehouse Credit Facility

The Company, through its subsidiary and one of its unconsolidated joint ventures, has a $20.0 million revolving mortgage warehouse credit facility with a bank to fund its mortgage origination operations, $10.0 million of which is committed (lender obligated to lend if stated conditions are satisfied) and $10.0 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 June 30, 2003 the outstanding balance was $5.7 million. The facility, which has a current maturity date of May 31, 2004, also contains financial covenants requiring the borrowers to maintain 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 $1.5 million. This facility is non-recourse and is not guaranteed by the Company.

Land Banking Arrangements

The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers the Company’s right in such purchase agreements to entities owned by third parties (“land banking arrangements”). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit equal to 20% or less of the total purchase price. Additionally, the Company may be subject to other penalties if lots are not acquired. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. The deposits and penalties related to such land banking projects have been recorded in the accompanying consolidated balance sheet. The financial statements of these entities are not consolidated with the Company’s consolidated financial statements. A recently adopted accounting interpretation could require the consolidation of the assets, liabilities and operations of certain of the Company’s joint venture and land banking arrangements. See “Recently Issued Accounting Standards.” 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 June 30, 2003 (dollars in thousands):

39

Total number of land banking projects		6
Total number of lots		1,149
Total purchase price	$	108,958
Balance of lots still under option and not purchased:
Number of lots		871
Purchase price	$	81,976
Forfeited deposits and penalties if lots are not purchased	$	20,298

Joint Venture Financing

As of June 30, 2003, the Company and certain of its subsidiaries were general partners or members in 20 active joint ventures involved in the development and sale of residential projects. As described more fully in “Recently Issued Accounting Standards”, in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities (“Interpretation No. 46”) three joint ventures created after January 31, 2003 have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these three joint ventures have been consolidated with the Company’s financial statements as of June 30, 2003 and for the three months ended June 30, 2003. The Company has not yet determined the anticipated impact of adopting Interpretation No. 46 for arrangements existing as of January 31, 2003. However, such adoption may require the consolidation in the Company’s third quarter financial statements of the assets, liabilities and operations of certain existing homebuilding and land development joint ventures. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 will not affect the Company’s consolidated net income. The financial statements of joint ventures in which the Company has a 50% or less voting or economic interest (and thus are not controlled by the Company) and which were created prior to February 1, 2003, and the financial statements of joint ventures which have not been determined to be variable interest entities in which the Company is considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method. Income allocations and cash distributions to the Company from the unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners’ priority returns and returns of partners’ capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the three joint ventures whose financial statements have been consolidated with the Company’s financial statements. See Note 3 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.

The three joint ventures which have been determined to be VIEs are each engaged in homebuilding and land development activities which will result in an estimated total of 265 homes at completion. The homes are expected to be constructed and sold in phases over a two-to-three year period with approximate base sales prices ranging from $390,000 to $473,000. No homes have closed as of June 30, 2003. These joint ventures have not obtained construction financing from outside lenders, but are financing their activities through equity contributions from each of the joint venture partners. Creditors of these VIE’s have no recourse against the general credit of the Company.

As of June 30, 2003, the Company’s investment in and advances to the unconsolidated joint ventures was $55.9 million and the venture partners’ investment in such joint ventures was $71.3 million. Eleven of these joint ventures are in the form of limited partnerships of which the Company or one of its subsidiaries are general

40

partner. As of June 30, 2003, these joint ventures had obtained financing from construction lenders which amounted to $132.4 million of outstanding indebtedness. While historically all liabilities of these partnerships have been satisfied out of the assets of such partnerships and while the Company believes that this will continue in the future, the Company or one of its subsidiaries, as general partner, is potentially responsible for all liabilities and indebtedness of these partnerships. In addition, Delaware Lyon has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. Delaware Lyon has also provided completion guarantees for some of the limited partnerships under their credit facilities.

During the year ended December 31, 2002, one of the Company’s 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 $178.6 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 the Company and an outside partner. The Company is required to purchase the 242 lots owned by the New Venture on a specified takedown basis through May 15, 2004 at a purchase price equal to $74.2 million plus a 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 June 30, 2003, including real estate inventories of $80.1 million and minority interest in consolidated joint ventures of $67.0 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. During the six months ended June 30, 2003, the Company purchased 74 lots from the New Venture for $23.2 million, all of which was paid to the outside partner as a return of capital. The intercompany sales and related profits have been eliminated in consolidation.

During the six months ended June 30, 2003, California Lyon and two unaffiliated parties formed a series of limited liability companies (“Development LLCs”) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. The development process is anticipated to be completed by mid 2004 at which time California Lyon will be required under certain specific conditions to purchase approximately one half in value of the lots. California Lyon has an indirect, minority interest in the Development LLCs, which are the borrowers under two secured lines of credit. Advances under the lines of credit are to be used to pay acquisition and development costs and expenses. The lines of credit are secured by deeds of trust on the real property and improvements thereon owned by the Development LLCs, as well as pledges of all net sale proceeds, related contracts and other ancillary property. The maximum commitment amounts under the lines of credit are limited by specified agreed debt-to-value ratios. The maximum commitment amount under the line of credit that closed in January 2003 (“First Line of Credit”) is $35.0 million. Subject to specified terms and conditions, California Lyon and the other direct and indirect members of the Development LLC that is the borrower under the First Line of Credit, including certain affiliates of such other members, each (i) have guaranteed to the bank the repayment of the Development LLC’s indebtedness under the First Line of Credit, completion of certain infrastructure improvements to the land, payment of necessary loan remargining obligations, and the Development LLC’s performance under its environmental indemnity and covenants, and (ii) have agreed to take all actions and pay all amounts to assure that the Development LLC is in compliance with financial covenants. The maximum commitment amount under the line of credit that closed in March 2003 (“Second Line of Credit”) is $105.0 million. Although the guarantee obligations of the other direct and indirect members of the Development LLC that is the borrower under the Second Line of Credit, and certain of their affiliates, are similar in nature to those under the First Line of Credit, California Lyon does not have any such guarantee obligations to the banks under the Second Line of Credit. However, California Lyon has posted letters of credit equal to approximately $24.6 million to secure its obligations as well as the Development LLCs’

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obligations to the bank under both lines of credit. Further, California Lyon and the other direct and indirect members of the Development LLCs, including certain affiliates of such other members, have entered into reimbursement and indemnity agreements to allocate any liability arising from each line of credit, including the related guarantees and letters of credit. Delaware Lyon has entered into joinder agreements to be jointly and severally liable for California Lyon’s obligations under the reimbursement and indemnity agreements. While the reimbursement and indemnity agreements provide that liability is generally allocated in accordance with the members’ percentage interests in the Development LLCs’ distributions, Delaware Lyon and California Lyon may be liable for the full amount of the obligations guaranteed to the banks in certain specified circumstances, such as those involving the default, willful misconduct or gross negligence of California Lyon. As of June 30, 2003, the outstanding indebtedness under the First Line of Credit was $32.5 million and the outstanding indebtedness under the Second Line of Credit was $98.4 million.

Assessment District Bonds

In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable interest rates when compared to the Company’s other sources of funds and the fact that the bonds are sold, administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible for the assessments on its land. When the Company’s homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. See Note 6 of “Notes to Consolidated Financial Statements.”

Cash Flows — Comparison of Six Months Ended June 30, 2003 to Six Months Ended

June 30, 2002

Net cash used in operating activities increased to $179.1 million in the 2003 period from $79.9 million in the 2002 period. The change was primarily as a result of increased expenditures in real estate inventories in the 2003 period.

Net cash provided by investing activities increased to $37.2 million in the 2003 period from $17.8 million in the 2002 period. The change was primarily as a result of increased net cash received from unconsolidated joint ventures in the 2003 period.

Net cash provided by financing activities increased to $136.4 million in the 2003 period from $56.3 million in the 2002 period, primarily as a result of the issuance of senior notes offset by the repayment of secured debt during the 2003 period.

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Description of Projects

The Company’s homebuilding projects usually take two to five years to develop. The following table presents project information relating to each of the Company’s homebuilding divisions as of June 30, 2003 and only includes projects with lots owned at June 30, 2003 or homes closed for the six months ended June 30, 2003. Consolidated projects include projects in consolidated variable interest entities (see Note 2 of “Notes to Consolidated Financial Statements”).

Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of June 30, 2003	Backlog at June 30, 2003(2)(3)	Lots Owned as of June 30, 2003(4)	Homes Closed for the Six Months Ended June 30, 2003	Sales Price Range(5)
SOUTHERN CALIFORNIA
Consolidated:
Orange County
Terraza at Vista del Verde, Yorba Linda	2001	106	106	0	0	6	$565,000—615,000
Monticello, Irvine	2002	112	112	0	0	14	$330,000—390,000
Montellano at Talega, San Clemente	2002	61	42	18	19	14	$890,000—960,000
Mirador at Talega, San Clemente	2003	76	0	0	76	0	$805,000—885,000
Sterling Glen, Ladera Ranch	2002	102	102	0	0	11	$502,000—535,000
Davenport, Ladera Ranch	2003	163	0	71	163	0	$310,000—360,000
Walden Park, Ladera Ranch	2003	109	0	0	109	0	$455,000—485,000
Weatherhaven, Ladera Ranch	2002	71	21	48	50	18	$485,000—565,000
Laurel at Quail Hill, Irvine	2003	83	6	61	73	6	$545,000—601,000
Linden at Quail Hill, Irvine	2003	100	13	42	63	13	$576,000—656,000
Ambridge at Quail Hill, Irvine	2004	128	0	0	8	0	$375,000—435,000
Altamura @ Nellie Gail Ranch, Laguna Hills	2003	52	0	7	10	0	$1,365,000—1,550,000
Riverside County
Providence Ranch, Corona	2002	97	92	3	5	0	$255,000—365,000
Providence Ranch North, Corona	2002	83	83	0	0	2	$246,000—300,000
Providence Ranch III, Corona	2003	67	0	64	67	0	$290,000—365,000
San Bernardino County
Echo Glen—Chino(6)	2003	89	0	0	89	0	$390,000—445,000
Ventura County
Cantada, Oxnard	2002	113	113	0	0	1	$343,000—363,000
Total consolidated		1,612	690	314	732	85
Unconsolidated joint ventures:
Orange County
Beachside, Huntington Beach	2001	86	86	0	0	5	$620,000—640,000
Riverside County
Heartland 1, North Corona	2003	172	0	0	172	0	$265,000—290,000
Heartland 2, North Corona	2003	167	0	0	167	0	$275,000—310,000
Ventura County
Quintana, Thousand Oaks	2001	90	90	0	0	33	$555,000—650,000
Coronado, Oxnard	2002	110	96	13	14	22	$435,000—460,000
Cantabria, Oxnard	2002	87	87	0	0	13	$350,000—370,000
Los Angeles County
Toscana, Moorpark	2002	70	62	8	8	36	$518,000—553,000
Oakmont @ Westridge, Valencia	2003	87	0	17	87	0	$750,000—860,000
Creekside, Santa Clarita	2003	141	0	0	141	0	$270,000—315,000
Total unconsolidated joint ventures		1,010	421	38	589	109
SOUTHERN CALIFORNIA REGION TOTAL		2,622	1,111	352	1,321	194

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of June 30, 2003	Backlog at June 30, 2003(2)(3)	Lots Owned as of June 30, 2003(4)	Homes Closed for the Six Months Ended June 30, 2003	Sales Price Range(5)
NORTHERN CALIFORNIA
Consolidated:
San Joaquin County
Lyon Villas, Tracy	1999	135	129	0	6	0	$270,000—310,000
Lyon Estates, Tracy	1997	120	90	0	30	0	$291,000—327,000
Ironwood II, Lathrop	2003	88	6	54	82	6	$268,000—307,000
Lyon Estates at Stonebridge, Lathrop	2001	146	103	42	43	21	$284,000—324,000
Lyon Estates at Stonebridge (Unit 9), Lathrop	2003	72	0	6	0	0	$294,000—334,000
Contra Costa County
The Bluffs, Hercules	2003	80	13	32	67	13	$602,000—654,000
The Shores, Hercules	2003	110	16	47	94	16	$565,000—623,000
Sacramento County
Lyon Palazzo, Natomas	2001	100	100	0	0	9	$273,000—322,000
Santa Clara County
The Ranch at Silver Creek, San Jose
Provance	2003	94	0	13	94	0	$900,000—960,000
Portofino	2003	44	0	8	3	0	$1,125,000—1,230,000
Mariposa Duets	2003	78	0	9	78	0	$580,000—670,000
Siena	2003	61	0	10	61	0	$605,000—695,000
Casa Bella Townhomes	2003	56	0	6	56	0	$540,000—645,000
Esperanza	2004	74	0	0	74	0	$710,000—845,000
Montesa	2004	54	0	0	54	0	$775,000—900,000
Hacienda	2004	33	0	0	33	0	$1,250,000—1,339,000
Tesoro Duets C	2004	44	0	0	44	0	$657,000—699,000
		538	0	46	497	0
Stanislaus County
Lyon Seasons, Modesto	2002	71	59	10	12	14	$296,000—339,000
Walker Ranch, Patterson	2003	119	0	0	119	0	$285,000—345,000
Total consolidated		1,579	516	237	950	79

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of June 30, 2003	Backlog at June 30, 2003(2)(3)	Lots Owned as of June 30, 2003(4)	Homes Closed for the Six Months Ended June 30, 2003	Sales Price Range(5)
NORTHERN CALIFORNIA (continued)
Unconsolidated joint ventures:
Contra Costa County
Lyon Dorado, San Ramon	2001	54	54	0	0	1	$788,000—1,003,000
Olde Ivy, Brentwood	2003	77	0	16	77	0	$308,000—348,000
Heartland, Brentwood	2003	76	0	14	76	0	$314,000—348,000
Gables, Brentwood	2003	99	0	8	99	0	$317,000—384,000
Overlook, Hercules	2003	133	0	19	133	0	$508,000—553,000
Solano County
Cascade/Paradise Valley, Fairfield	2003	9	2	4	7	2	$586,000—626,000
Brook, Fairfield	2001	121	121	0	0	7	$312,000—359,000
El Dorado County
Lyon Casina, El Dorado Hills	2001	123	66	45	57	26	$365,000—405,000
Lyon Prima, El Dorado Hills	2001	137	50	29	87	11	$405,000—441,000
Placer County
Pinehurst at Morgan Creek	2003	117	0	5	117	0	$486,000—578,000
Cypress at Morgan Creek	2003	73	0	0	73	0	$451,000—511,000
Total unconsolidated joint ventures		1,019	293	140	726	47
NORTHERN CALIFORNIA REGION TOTAL		2,598	809	377	1,676	126

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of June 30, 2003	Backlog at June 30, 2003(2)(3)	Lots Owned as of June 30, 2003(4)	Homes Closed for the Six Months Ended June 30, 2003	Sales Price Range(5)
SAN DIEGO
Consolidated:
Riverside County
Horsethief Canyon Ranch Series “400”, Corona	1995	554	554	0	0	1	$280,000—307,000
Sycamore Ranch, Fallbrook	1997	195	167	24	28	9	$509,000—690,000
Bridle Creek, Corona	2003	274	0	0	96	0	$413,000—475,000
Willow Glen, Temecula	2003	74	8	28	66	8	$321,000—347,000
Tessera, Beaumont	2003	168	16	47	61	16	$198,000—222,000
Sedona, Murietta	2003	138	0	14	64	0	$348,000—418,000
Montecito Ranch, Corona(6)	2003	83	0	0	83	0	$413,000—432,000
San Diego County
The Groves, Escondido	2001	92	92	0	0	25	$367,000—382,000
The Orchards, Escondido	2002	79	39	30	40	17	$413,000—432,000
Vineyards, Escondido	2002	73	7	7	66	7	$461,000—499,000
Meadows, Escondido	2003	44	0	0	44	0	$378,000—428,000
Sonora Ridge, Chula Vista	2003	168	0	57	86	0	$378,000—428,000
Boardwalk-Spectrum 90, San Diego(6)	2004	90	0	0	90	0	$430,000—473,000
Total consolidated		2,032	883	207	724	83
Unconsolidated joint ventures:
San Diego County
Providence, San Diego	2001	123	120	3	3	46	$587,000—627,000
Tanglewood, San Diego	2002	161	74	62	87	45	$396,000—445,000
Summerwood, San Diego	2002	95	53	32	42	26	$430,000—473,000
Total unconsolidated joint ventures.		379	247	97	132	117
SAN DIEGO REGION TOTAL		2,411	1,130	304	856	200

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of June 30, 2003	Backlog at June 30, 2003(2)(3)	Lots Owned as of June 30, 2003(4)	Homes Closed for the Six Months Ended June 30, 2003	Sales Price Range(5)
ARIZONA
Consolidated:
Maricopa County
Sage Creek—Arcadia, Avondale	2000	167	167	0	0	1	$137,000—160,000
Mesquite Grove—Parada, Chandler	2001	112	71	35	41	33	$187,000—231,000
Mesquite Grove—Estates, Chandler	2001	93	50	24	43	18	$291,000—327,000
Power Ranch, Gilbert	2001	103	72	22	31	21	$177,000—235,000
Tramonto, Phoenix	2001	76	54	19	22	22	$191,000—254,000
Country Place, Tolleson	2001	115	58	57	57	29	$118,000—140,000
Gateway Crossing I, Gilbert	2003	236	0	52	74	0	$127,000—164,000
Gateway Crossing II, Gilbert	2003	165	0	2	38	0	$166,000—182,000
Mountaingate, Surprise	2004	682	0	23	682	0	$244,000—326,000
ARIZONA REGION TOTAL		1,749	472	234	988	124

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of June 30, 2003	Backlog at June 30, 2003(2)(3)	Lots Owned as of June 30, 2003(4)	Homes Closed for the Six Months Ended June 30, 2003	Sales Price Range(5)
NEVADA
Consolidated:
Clark County
Topaz Ridge at Summerlin, Las Vegas	2002	89	56	18	33	17	$562,000—620,000
Annendale, North Las Vegas	2001	194	129	37	65	43	$178,000—201,000
Santalina at Summerlin, Las Vegas	2002	74	39	35	35	38	$265,000—291,000
Encanto at Summerlin, Las Vegas	2003	79	33	31	46	33	$350,000—373,000
Calimesa, North Las Vegas	2003	90	44	45	46	44	$165,000—181,000
Iron Mountain, Las Vegas	2003	70	6	23	64	6	$332,000—387,000
Vista Verde, Las Vegas	2003	122	0	6	122	0	$275,000—317,000
Miraleste, Las Vegas	2003	122	0	0	122	0	$350,000—385,000
The Classics, North Las Vegas	2003	227	0	33	227	0	$167,000—189,000
The Springs, North Las Vegas	2003	209	0	5	209	0	$158,000—188,000
The Estates, North Las Vegas	2003	176	0	7	150	0	$185,000—209,000
The Cottages, North Las Vegas	2003	360	0	0	360	0	$132,000—149,000
Granada at Summerlin, Las Vegas	2004	144	0	0	144	0	$241,000—287,000
NEVADA REGION TOTAL		1,956	307	240	1,623	181
GRAND TOTALS:
Consolidated		8,928	2,868	1,232	5,017	552
Unconsolidated joint ventures		2,408	961	275	1,447	273
		11,336	3,829	1,507	6,464	825

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

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

(3) Of the total homes subject to pending sales contracts as of June 30, 2003, 1,374 represent homes completed or under construction and 133 represent homes not yet under construction.

(4) Lots owned as of June 30, 2003 include lots in backlog at June 30, 2003.

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

(6) Project is in a consolidated variable interest entity (See Note 2 of “Notes to Consolidated Financial Statements”).

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Net Operating Loss Carryforwards

At December 31, 2002 and 2001, the Company had net operating loss carryforwards for Federal tax purposes of approximately $5.2 million and $8.5 million, respectively, 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 unused losses in any year may be carried forward for utilization in future years through 2011. The elimination during 2002 of the remaining valuation allowances for deferred tax assets reduced the Company’s estimated overall effective tax rate for the year ended December 31, 2002 from 39.3% to 27.0%. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited under certain circumstances.

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

Inflation

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

Related Party Transactions

See Note 5 of the Notes to Consolidated Financial Statements for a description of the Company’s transactions with related parties.

Critical Accounting Polices

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and costs and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those which impact its most critical accounting policies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, the Company’s most critical accounting policies are real estate inventories and cost of sales; impairment of real estate inventories; and sales and profit recognition. Since December 31, 2002, there have been no changes in the Company’s most critical accounting policies, except as described in the following paragraph, and no material changes in the assumptions and estimates used by management.

Variable Interest Entities

Certain land purchase contracts and lot option contracts are accounted for in accordance with Financial Accounting Standards Board Interpretation No. 46 “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51 (“Interpretation No. 46”). In addition, all joint ventures are reviewed and analyzed under

49

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

Recently Issued Accounting Standards

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 from being 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 have been 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. In the case of a guarantee issued as part of a transaction with multiple elements with an unrelated party, Interpretation No. 45 generally requires the recording at inception of the guarantee of a liability equal to the guarantee’s estimated fair value. In the absence of observable transactions for identical or similar guarantees, estimated fair value will likely be based on the expected present value which is the sum of the estimated probability-weighted range of contingent payments under the guarantee arrangement. The recording of a liability could have a corresponding effect on various of the Company’s financial ratios and other financial and operational indicators. The application of Interpretation No. 45 beginning on January 1, 2003 did not result in the recording of a liability with respect to any guarantees issued or modified by the Company after December 31, 2002. See Notes 3, 4 and 7 of “Notes to Consolidated Financial Statements” for additional information related to the Company’s 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

50

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 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 the Company 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 addresses the consolidation of variable interest entities (“VIEs”). Under Interpretation No. 46, arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE. Interpretation No. 46 applies immediately to arrangements created after January 31, 2003 and, with respect to arrangements created before February 1, 2003, the interpretation will apply to the Company beginning on July 1, 2003. Arrangements entered into subsequent to January 31, 2003 have been evaluated under Interpretation No. 46 and, if applicable, accounted for in accordance with Interpretation No. 46.

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

Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements (see Note 7) or (iii) enters into arrangements with a financial partner for the formation of joint ventures which engage in homebuilding and land development activities, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. The Company may be deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected losses if they occur. For each VIE created, the Company will compute expected losses and residual returns based on the probability of future cash flows as outlined in Interpretation No. 46. If the Company is determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE will be consolidated with the Company’s financial statements.

Based on the Company’s analysis of arrangements created after January 31, 2003, no VIEs have been created for the period from February 1, 2003 through June 30, 2003 with respect to option agreements or land banking arrangements as identified under clauses (i) and (ii) of the previous paragraph. At June 30, 2003, three joint ventures created after January 31, 2003 have been determined to be VIEs in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these three joint ventures have been consolidated with the Company’s financial statements as of June 30, 2003 and for the three months ended June 30, 2003. Creditors of these VIEs have no recourse against the Company. Supplemental consolidating financial information of the Company, specifically including information for the three joint ventures which have been deemed to be VIEs and for two joint ventures which were previously consolidated, is included in Note 2 of “Notes to Consolidated Financial Statements” to allow investors to determine the nature of assets held and the operations of the combined entities.

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

The consolidation of the assets, liabilities and operations of any 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. 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 3 and 7 of “Notes to Consolidated Financial Statements” for additional information regarding joint venture and land banking arrangements.

Forward Looking Statements

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

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The principal factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in general economic conditions either nationally or in regions in which the Company operates (including, but not limited to changes directly or indirectly related to the tragic events of September 11, 2001 and thereafter), terrorism or other hostilities involving the United States, whether an ownership change occurs which could, under certain circumstances, result in the further limitation of the Company’s ability to utilize the tax benefits associated with its net operating loss carryforward, changes in home mortgage interest rates, changes in generally accepted accounting principles or interpretations of those principles, changes in prices of homebuilding materials, labor shortages, adverse weather conditions, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements, changes in governmental laws and regulations, whether the Company is able to refinance the outstanding balances of its debt obligation at their maturity, the timing of receipt of regulatory approvals and the opening of projects and the availability and cost of land for future growth. While it is impossible to identify all such factors, additional factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those factors or conditions described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the Company’s other filings with the Securities and Exchange Commission. The Company’s past performance or past or present economic conditions in the Company’s housing markets are not indicative of future performance or conditions. Investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to projections over time unless required by federal securities law.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Company’s Annual Report on Form 10-K for the year ended December 31, 2002 includes detailed disclosure about quantitative and qualitative disclosures about market risk. Quantitative and qualitative disclosures about market risk have not materially changed since December 31, 2002.

Item 4.    Controls and Procedures

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

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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WILLIAM LYON HOMES

PART II.    OTHER INFORMATION

Items 1, 2, 3 and 5.

Not applicable.

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

(a)  The Company’s Annual Meeting of Holders of Common Stock was held on May 8, 2003. At this meeting of the Holders of Common Stock the following directors were elected to serve on the Company’s Board of Directors until the next Annual Meeting and until their respective successors are elected and qualified:

	Votes for	Votes Withheld
General William Lyon	9,310,935	348,816
Wade H. Cable	9,310,935	348,816
General James E. Dalton	9,647,509	12,242
Richard E. Frankel	9,310,835	348,916
William H. Lyon	9,310,835	348,916
William H. McFarland	9,647,539	12,212
Michael L. Meyer	9,647,409	12,342
Raymond A. Watt	9,647,509	12,242
Randolph W. Westerfield	9,647,439	12,312

In addition, the holders of Common Stock approved the following:

	Votes For	Votes Against	Votes Abstaining (Including Broker Non-Votes)
Ratification of the selection of Ernst & Young LLP as Independent Auditors of the Company for the fiscal year ending December 31, 2003	9,656,453	1,950	1,348

Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits

Exhibit No.	Description
10.1	Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.2	Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003, by and between Duxford Financial, Inc., and/or Bayport Mortgage, L.P., a California Corporation (“Borrower”) and First Tennessee Bank (“Bank”).
31.1	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

(b)  Reports on Form 8-K

May 8, 2003. A Current Report on Form 8-K was furnished by the Company in reference to a press release announcing the Company’s financial results for the fiscal quarter ended March 31, 2003.

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WILLIAM LYON HOMES

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	WILLIAM LYON HOMES Registrant
Date:  August 13, 2003	By:	/s/    MICHAEL D. GRUBBS
		MICHAEL D. GRUBBS Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)
Date:  August 13, 2003	By:	/s/    W. DOUGLASS HARRIS
		W. DOUGLASS HARRIS Vice President, Corporate Controller (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
10.1	Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.2	Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003, by and between Duxford Financial, Inc., and/or Bayport Mortgage, L.P., a California Corporation (“Borrower”) and First Tennessee Bank (“Bank”).
31.1	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

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EX-10.1

EXHIBIT 10.1

William Lyon Homes, Inc.

Loan No. 906-0100

AGREEMENT FOR FIFTH MODIFICATION OF DEEDS OF TRUST AND OTHER LOAN INSTRUMENTS

This Agreement for Fifth Modification of Deeds of Trust and Other Loan Instruments (this “Fifth Modification”) is made as of June 6, 2003 by and between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”) and GUARANTY BANK, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”) (“Lender”), with reference to the following facts:

A.    Borrower and Lender entered into a Master Loan Agreement (the “Loan Agreement”) dated August 31, 2000, which provides for a loan of FIFTY-FIVE MILLION DOLLARS ($55,000,000.00) (the “Original Loan Amount”) to Borrower on the terms and conditions specified therein. The Loan is evidenced and secured by a revolving promissory note and other loan instruments (collectively, the “Loan Instruments”). The Loan Instruments, each executed by Lender and Borrower, were modified by:

(i)    that certain Agreement for First Modification of Deeds of Trust and Other Loan Instruments dated June 8, 2001 (“First Modification”);

(ii)    that certain Agreement For Second Modification of Deeds of Trust and Other Loan Instruments dated July 23, 2001 (“Second Modification”);

(iii)    that certain Agreement for Third Modification of Deeds of Trust and Other Loan Instruments dated December 19, 2001, (“Third Modification”); and

(iv)    that certain Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments dated May 29, 2002 (“Fourth Modification”).

Pursuant to the terms and provisions of the First Modification, the Original Loan Amount was increased, as evidenced by a certain Amended and Restated Revolving Promissory Note executed by Borrower for the benefit of lender and dated June 8, 2001 to the maximum principal amount of SIXTY-FIVE MILLION DOLLARS ($65,000,000.00). Pursuant to the terms and provisions of the Fourth Modification, the Loan was increased, as evidenced by a certain Amended and Restated Revolving Promissory Note executed by Borrower for the benefit of Lender and dated May 29, 2002 to the maximum principal amount of SEVENTY-FIVE MILLION DOLLARS ($75,000,000.00) (the “Loan”). Upon full execution, this Fifth Modification shall constitute one of the Loan Instruments. All defined terms used in this Fifth Modification shall have the meanings ascribed to them in the Loan Agreement unless the context requires otherwise.

B.    At Borrower’s request, Lender has agreed to modify one or more of the Loan Instruments, as herein provided.

NOW, THEREFORE, in consideration of the premises and mutual agreements herein, the parties hereby agree as follows:

1.    Modifications.    The Loan Instruments specified in Exhibit “A” attached hereto and incorporated herein by this reference are modified as set forth therein, effective upon timely satisfaction of the conditions set forth in Section 2 below. As used in this Fifth Modification and the attached Exhibit “A,” the term “Deeds of Trust” refers to the Construction Deeds of Trust (With Security Agreement, Fixture Filing and Assignment of Rents and Leases) (“Deed of Trust”), each executed by Borrower for the benefit of Lender:

(1)    (1026) a certain Deed of Trust dated November 7, 2000 and recorded in the Official Records of Maricopa County, Arizona on November 13, 2000, as Instrument No. 2000-0869149;

each as modified by the First Modification and evidenced by the Memorandums of First Modification of Deeds of Trust and Other Loan Instruments dated June 8, 2001 and recorded in the Official Records of:

(a)  Orange County, California on July 20, 2001, as Instrument No. 2001-0492777;

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(b) San Diego County, California on July 20, 2001, as Instrument No. 2001-0505154;

(c) San Joaquin County, California on July 24, 2001, as Instrument No. 2001-01116593;

(d) Riverside County, California on August 6, 2001 as Instrument No. 368935;

(e) San Bernardino County, California on October 16, 2001 as Instrument No. 2001-0470256; and

(f) Maricopa County, California on July 20, 2001, as Instrument No. 2001-0652927;

                as modified by the Second Modification and evidenced by the Memorandums of Second Modification of Deeds of Trust and Other Loan Instruments dated July 23, 2001 and recorded in the Official Records of:

(g) Orange County, California on August 31, 2001, as Instrument No. 2001-0614957;

(h) San Diego County, California on August 31, 2001, as Instrument No. 2001-0626061;

(i) San Joaquin County, California on August 31, 2001, as Instrument No. 2001-01144060;

(j) Riverside County, California on August 31, 2001 as Instrument No. 426142;

(k) San Bernardino County, California on August 31, 2001 as Instrument No. 2001-401382; and

(l) Maricopa County, California on August 31, 2001, as Instrument No. 2001-0810003;

        (2)    (1060) a certain Deed of Trust dated September 10, 2001 and recorded in the Official Records of Stanislaus County, California on October 12, 2001, as Instrument No. 2001-0121877-00;;

        (3)    (1061) a certain Deed of Trust dated October 10, 2001 and recorded in the Official Records of Clark County, Nevada on October 19, 2001 as Instrument No. 1893-20011019;;

        (4)    (1081) a certain Deed of Trust dated March 25, 2002 and recorded in the Official Records of Clark County, Nevada on April 5, 2002, as Instrument No. 2444-20020405;

        (5)    (1082) a certain Deed of Trust dated May 10, 2002 and recorded in the Official Records of Clark County, Nevada on August 28, 2002 as Instrument No. 00678-20020828;

                each as modified by the Third Modification dated December 19, 2001;

                as modified by the Fourth Modification and evidenced by the Memorandums of Fourth Modification of Deeds of Trust and Other Loan Instruments dated May 29, 2002 and recorded in the Official Records of:

(m) Orange County, California on June 19, 2002, as Instrument No. 2002-0512402;

(n) San Diego County, California on June 9, 2002, as Instrument No. 2002-0516959;

(o) San Joaquin County, California on June 19, 2002 as Instrument No.2002-104493;

(p) Maricopa County, Arizona on June 19, 2002 as Instrument No. 2002-0622784;

(q) Stanislaus County, California on June 19, 2002 as Instrument No. 2002-0078803; and

(r) Clark County, Nevada on June 19, 2002 as Instrument No.00696 – Book L0020619;

        (6)    (1083) a certain Deed of Trust dated June 7, 2002 and recorded in the Official Records of Orange County, California on June 20, 2002 as Instrument No. 2002-0519877;

        (7)    (1085) a certain Deed of Trust dated September 9, 2002 and recorded in the Official Records of Orange County, California on September 26, 2002 as Instrument No. 2002-0824940;

        (8)    (1084) a certain Deed of Trust dated October 16, 2002 and recorded in the Official Records of Contra Costa County, California on October 29, 2002 as Instrument No. 2002-0395911-00;

        (9)    (2151) a certain Deed of Trust dated November 22, 2002 and recorded in the Official Records of Santa Clara County, California on January 17, 2003 as Instrument No. 2003-16756674;

        (10)    (2146) a certain Deed of Trust dated December 2, 2002 and recorded in the Official Records of Riverside County, California on December 20, 2002 as Instrument No. 2002-763759;

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        (11)     (1087 & 2150) a certain Deed of Trust dated December 2, 2002 and recorded in the Official Records of San Joaquin County, California on December 16, 2002 as Instrument No. 2002-225771;

        (12)     (1086) a certain Deed of Trust dated December 2, 2002 and recorded in the Official Records of San Joaquin County, California on December 16, 2002 as Instrument No. 2002-225770;

        (13)     (2161) a certain Deed of Trust dated December 6, 2002 and recorded in the Official Records of Maricopa County, Arizona on December 13, 2002 as Instrument No. 2002-1342236;

        (14)     (2156) a certain Deed of Trust dated December 6, 2002 and recorded in the Official Records of San Diego County, California on December 13, 2002 as Instrument No. 2002-1136706;

        (15)     (1088) a certain Deed of Trust dated December 13, 2002 and recorded in the Official Records of Orange County, California on December 19, 2002 as Instrument No. 2002-001166163;

        (16)     (1091) a certain Deed of Trust dated December 11, 2002 and recorded in the Official Records of Santa Clara County, California on January 17, 2003 as Instrument No. 2003-16756672;

        (17)     (1089 & 1090) a certain Deed of Trust dated January 3, 2003 and recorded in the Official Records of Contra Costa County, California on January 7, 2003 as Instrument No. 2003-0008162-00;

        (18)     (2162) a certain Deed of Trust dated January 9, 2003 and recorded in the Official Records of Maricopa County, Arizona on January 15, 2003 as Instrument No. 2003-0052171;

        (19)     (2170) a certain Deed of Trust dated February 11, 2003 and recorded in the Official Records of Riverside County, California on February 18, 2003 as Instrument No. 2003-110833;

        (20)     (1092) a certain Deed of Trust dated February 12, 2003 and recorded in the Official Records of Maricopa County, Arizona on February 28, 2003 as Instrument No. 2003-0243533.

        (21)     (2169) a certain Deed of Trust dated March 5, 2003 and recorded in the Official Records of Orange County, California on April 3, 2003 as Instrument No. 2003-000369460;

        (22)     (1093) a certain Deed of Trust dated March 10, 2003 and recorded in the Official Records of Orange County, California on March 20, 2003 as Instrument No. 2003-000302730;

        (23)     (2171) a certain Deed of Trust dated March 10, 2003 and recorded in the Official Records of Riverside County, California on April 30, 2003 as Instrument No. 2003-308054;

        (24)     (1094 & 1095) a certain Deed of Trust dated March 21, 2003 and recorded in the Official Records of Maricopa County, Arizona on March 31, 2003 as Instrument No. 2003-0397979;

        (25)     (2179) a certain Deed of Trust dated April 3, 2003 and recorded in the Official Records of San Diego County, California on April 7, 2003 as Instrument No. 2003-0385270;

        (26)     (2177) a certain Deed of Trust dated April 7, 2003 and recorded in the Official Records of Santa Clara County, California on April 15, 2003 as Instrument No. 2003-16965809;

        (27)     (2178) a certain Deed of Trust dated April 7, 2003 and recorded in the Official Records of Santa Clara County, California on April 15, 2003 as Instrument No. 2003-16965811;

        (28)     (1096 & 1097) a certain Deed of Trust dated April 21, 2003 and recorded in the Official Records of Maricopa County, Arizona on April 30, 2003 as Instrument No. 2003-0544753;

        (29)     (2182) a certain Deed of Trust dated May 19, 2003 and recorded in the Official Records of Riverside County, California on June 2, 2003 as Instrument No. 2003-            ; and

        (30)     (1099 & 1100) a certain Deed of Trust dated May 23, 2003 and recorded in the Official Records of Maricopa County, Arizona on May 30, 2003 as Instrument No. 2003-0690830.

2.    Conditions.    The modifications of Section 1 above shall take effect only upon Borrower’s satisfaction, at its expense, of all of the following conditions not later than the date of this Fifth Modification:

        (a)  if required by Lender, delivery to Lender of one or more endorsements to the Title Policy (whether one or more) insuring the lien of the Deeds of Trust as may be required by Lender, all in form and of content acceptable to Lender, insuring that, except as set forth in this Fifth Modification, the priority of such lien is unaffected by the modifications set forth herein and that the Title Policy insuring the Deeds of Trust remains in full force and effect in the full amount of the Loan;

        (b)  if required by Lender, delivery to Lender of one or more duly executed recordable memorandums of this Fifth Modification (collectively, the “Fifth Memorandum”);

        (c)  satisfaction of such other conditions as may be set forth on Exhibit “B” attached hereto and incorporated herein by this reference, if any; and

        (d)  if the Loan has been guarantied (or indemnities given) or if there are junior liens encumbering the property which is encumbered by the Deeds of Trust, delivery to Lender of duly executed consents to the modifications set forth in this Fifth Modification by the guarantor(s) and/or junior lienors, as

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applicable, as may be set forth in Exhibit “C” attached hereto or as may be attached to the Fifth Memorandum, each incorporated herein by this reference.

3.    Representations and Warranties.    Borrower hereby represents and warrants that no default, event of default, breach or failure of condition has occurred, or would exist with notice or the lapse of time or both, under any of the Loan Instruments; and all representations and warranties herein and in the other Loan Instruments are true and correct, which representations and warranties shall survive execution of this Fifth Modification. All parties who execute this Fifth Modification and any other documents required hereunder on behalf of Borrower represent and warrant that they have full power and authority to execute and deliver such documents, and that all such documents are enforceable in accordance with their terms. As of the date of this Fifth Modification, Borrower hereby acknowledges and agrees that it has no defenses, offsets or claims against Lender or the enforcement of the Loan Instruments and that Lender has not waived any of its rights or remedies under any such documents.

4.    No Impairment.    Except as expressly provided herein, nothing in this Fifth Modification shall alter or affect any provision, condition or covenant contained in the Loan Instruments or affect or impair any of Lender’s rights, powers or remedies thereunder. It is the intent of the parties hereto that the provisions of the Loan Instruments shall continue in full force and effect except as expressly modified hereby.

5.    Miscellaneous.    This Fifth Modification and the other Loan Instruments shall be governed by and interpreted in accordance with the laws of the State of California, except as they may be preempted by federal law. In any action brought or arising out of this Fifth Modification or the Loan Instruments, Borrower, and, if applicable, the general partners, members and joint venturers of Borrower, hereby consent to the jurisdiction of any federal or state court having proper venue within the State of California and also consent to the service of process by any means authorized by California or federal law. The headings used in this Fifth Modification are for convenience only and shall be disregarded in interpreting the substantive provisions of this Fifth Modification. Time is of the essence of each term of the Loan Instruments, including this Fifth Modification. If any provision of this Fifth Modification or any of the other Loan Instruments shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that portion shall be deemed severed therefrom and the remaining parts shall remain in full force as though the invalid, illegal, or unenforceable portion had never been a part thereof. This Fifth Modification may be executed in one or more counterparts, all of which, taken together, shall constitute one and the same Fifth Modification.

6.    Integration; Interpretation.    The Loan Instruments, including this Fifth Modification, contain or expressly incorporate by reference the entire agreement of the parties with respect to the matters contemplated herein and supersede all prior negotiations. The Loan Instruments shall not be modified except by written instrument executed by all parties. Any reference to the Loan Instruments in any of the Loan Instruments includes this Fifth Modification and any amendments, renewals or extensions approved by Lender hereunder.

(Remainder of page left blank intentionally)

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IN WITNESS WHEREOF, this Agreement for Fifth Modification of Deeds of Trust and Other Loan Instruments is executed as of the date first hereinabove written.

LENDER:	GUARANTY BANK, a federal savings bank organized and existing under the laws of the United States
	By:	/s/    Jon M. Larson
	Name: Title:	Jon M. Larson Senior Vice President

BORROWER:	WILLIAM LYON HOMES, INC., a California corporation
	By:	/s/    W. Douglass Harris
	Name: Title:	W. Douglass Harris Vice President

By:	/s/    Richard S. Robinson
Name: Title:	Richard S. Robinson Senior Vice President

5

William Lyon Homes, Inc.

Loan No. 906-0100

EXHIBIT “A”

AGREEMENT FOR FIFTH MODIFICATION OF DEEDS OF TRUST AND OTHER LOAN INSTRUMENTS

(Modifications)

Loan Instrument Modified		Modification
1.    Revolving Promissory Note	(i)	The Facility Expiration Date referenced in the Note is hereby amended to refer to June 11, 2004.
2.    Exhibit “A” to Master Loan Agreement	(i)	Paragraph 15 – Additional Defaults. Paragraph 15(C) is hereby amended and restated to read as follows:
		C.	There shall occur any default or breach, beyond applicable cure periods, under (i) that certain Indenture dated as of March 17, 2003 among Borrower, Guarantor and U.S. Bank National Association, as Trustee (the “Indenture”) with respect to certain indebtedness of Borrower in the original principal amount of TWO HUNDRED FIFTY MILLION DOLLARS ($250,000,000.00); (ii) any instruments or undertakings evidencing other indebtedness owed by Borrower to any other lender, other than with respect to indebtedness constituting non-recourse debt owed to vendors of land; or (iii) any instruments or undertakings entered into by Borrower with respect to any party subordinating a lien securing Borrower’s obligations under such instruments or with respect to such undertakings, to the lien of any Mortgage.
	(ii)	Paragraph 16 – Additional Loan Covenants. The initial sentence of Paragraph 16 is amended and restated to read as follows:
		16.	“Borrower shall fully perform and satisfy, and shall cause Guarantor to fully perform and satisfy, the following “Additional Loan Covenants”.”

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William Lyon Homes, Inc.

Loan No. 906-0100

EXHIBIT “B”

AGREEMENT FOR FIFTH MODIFICATION OF DEEDS OF TRUST AND OTHER LOAN INSTRUMENTS

(Other Conditions to Modifications)

1. Legal Fees.    Borrower shall pay all legal fees and costs incurred by Lender in connection with the preparation and negotiation of this Fifth Modification.

2. Title Endorsements/Recording Fees.    Borrower shall pay all title charges and recording fees and costs incurred by Lender in connection with the requirements of Paragraphs 2(a) and 2(b) of this Fifth Modification.

3. Consent of Guarantor(s).    Guarantors of the Loan shall execute and deliver the attached Consent of Guarantor to Lender and the attached Consent to the Fifth Memorandum hereof described in Paragraph 2(b) of this Fifth Modification (suitable for recording).

4. Consent of Junior Lienholder(s).    If indicated on the attached Exhibit “C” or otherwise required by Lender, Junior Lienholders shall execute and deliver the attached Consent of Junior Lienholder and the attached Consent to the Fifth Memorandum hereof described in Paragraph 2(b) of this Fifth Modification (suitable for recording).

5. Extension Fee.    Borrower shall pay to Lender a non-refundable extension fee equal to THREE HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($375,000.00) as a condition precedent to the effectiveness of this Fifth Modification, which fee shall not be applicable to payment of principal or interest due under the Note, or otherwise, and shall be retained by Lender in all events.

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William Lyon Homes, Inc.

Loan No. 906-0100

EXHIBIT “C”

AGREEMENT FOR FIFTH MODIFICATION OF DEEDS OF TRUST AND OTHER LOAN INSTRUMENTS

(Consents to Modifications)

CONSENT OF GUARANTOR

The undersigned Guarantor confirms its guaranties of Borrower’s obligations to, and indemnities in favor of, Lender under the Loan Agreement and the other Loan Instruments referenced in, and as modified by the foregoing Fifth Modification and Fifth Memorandum described therein, and consents to and accepts the foregoing modifications.

GUARANTOR:	WILLIAM LYON HOMES a Delaware corporation
	By:
	Name:	W. Douglass Harris
	Title:	Vice President
	By:
	Name:	Richard S. Robinson
	Title:	Senior Vice President

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William Lyon Homes, Inc.

Loan No. 906-0100

EXHIBIT “C”

AGREEMENT FOR FIFTH MODIFICATION OF DEEDS OF TRUST AND OTHER LOAN INSTRUMENTS

(Consents to Modifications)

CONSENT OF JUNIOR LIENHOLDER

The undersigned is the holder of an obligation secured by a lien (the “Junior Lienholder”) against the same property, which secures, in a senior priority position, Borrower’s obligations to Lender under the Loan Agreement and the other Loan Instruments. The undersigned consents to and accepts the modifications set forth in the foregoing Fifth Memorandum and the Fifth Modification described therein, and agrees that, notwithstanding such modifications, the undersigned’s lien shall be and remain junior and subordinate to the lien of Lender to secure Borrower’s obligations, as modified herein, to the extent provided in and subject to all of the terms of the following Subordination Agreements, which Agreements remain in effect:

A)  Monticello @ Irvine Ranch:  i) (1085) dated September 9, 2002 and recorded in the Official Records of Orange County, California on September 26, 2002 as Instrument No. 2002-0824940.

B)  Linden @ Quail Hill:  i) (1083) dated June 7, 2002 and recorded in the Official Records of Orange County, California on June 20, 2002, as Instrument No. 2002-0519877; ii) (1088) dated December 13, 2002 and recorded in the Official Records of Orange County, California on December 19, 2002 as Instrument No. 2002-001166163; and iii) (1093) dated March 10, 2003 and recorded in the Official Records of Orange County, California on March 20, 2003 as Instrument No. 2003-000302730.

IRVINE COMMUNITY DEVELOPMENT COMPANY LLC, a Delaware limited liability company
By:
Name: Title:	Daniel C. Hedigan Senior Vice President
By:
Name: Title:	Mary K. Westbrook Vice President

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William Lyon Homes, Inc.

Loan No. 906-0100

EXHIBIT “C”

AGREEMENT FOR FIFTH MODIFICATION OF DEEDS OF TRUST AND OTHER LOAN INSTRUMENTS

(Consents to Modifications)

CONSENT OF JUNIOR LIENHOLDER

The undersigned is the holder of an obligation secured by a lien (the “Junior Lienholder”) against the same property, which secures, in a senior priority position, Borrower’s obligations to Lender under the Loan Agreement and the other Loan Instruments. The undersigned consents to and accepts the modifications set forth in the foregoing Fifth Memorandum and the Fifth Modification described therein, and agrees that, notwithstanding such modifications, the undersigned’s lien shall be and remain junior and subordinate to the lien of Lender to secure Borrower’s obligations, as modified herein, to the extent provided in and subject to all of the terms of the following Subordination Agreements, which Agreements remain in effect:

A)    The Shores at Victoria By the Bay:    i)  (1084) dated October 16, 2002 and recorded in the Official Records of Contra Costa County, California on October 29, 2002, as Instrument No. 2002-0395911-00; and

B)    The Bluffs at Victoria By the Bay:      i)  (1089-1090) dated January 3, 2003 and recorded in the Official Records of Contra Costa County, California on January 7, 2003 as Instrument No. 2003-0008162-00.

HERCULES VICTORIA, LLC,
a Delaware limited liability company
By:	CATELLUS RESIDENTIAL GROUP, INC.,
	a California corporation
Its:	Manager
	By:
	Name:       Tom Marshall
	Its:             Senior Vice President

10

EX-10.2

EXHIBIT 10.2

MORTGAGE WAREHOUSE LOAN AND SECURITY AGREEMENT

THIS AGREEMENT entered into effective as of this day, June 1, 2003, 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.

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“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 all 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 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 $10,000,000.00 of the Maximum Line of Credit shall be offered by the Bank on a committed basis, and that $10,000,000.00 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, all 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 all 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

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Collateral hereunder, to 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 right of action 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 with right of action.

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 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, 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 satisfied that Borrower can meet the requirements of each such Lock, and (iii) that notice has been given to the

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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

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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 Loan 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

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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 23rd day of June, 2003.

First Tennessee Bank		Duxford Financial, Inc.
By:	/s/    GAITHER DAUGHERTY	By:	/s/     RICHARD E. FRANKEL
Its:	Vice President	Its:	Chairman
		By:	/s/     MARK CARVER
		Its:	President
		Bayport Mortgage L.P.
		By:	/s/     RICHARD E. FRANKEL
		Its:	Chairman
		By:	/s/     MARK CARVER
		Its:	President

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EXHIBIT A

ADVANCE REQUEST and

SUPPLEMENTAL CLOSING INSTRUCTIONS

Duxford Financial, Inc. and/or Bayport Mortgage, L. P.

I. ADVANCE REQUEST
A. Borrower & Property Address	B. Mortgage Loan description:			Loan Number:
	Loan Type: FHA/VA	Jumbo	Conventional Conforming		Conventional Non-Conforming
Last Name                    First Initial	Amt of Note: $			For Conventional Non-Conforming Only:
	Date of Note:			Lien Position:            1st            2nd
Address	Interest Rate:			FICO Score:
	Pymt. Term (Months)			Loan to Value Ratio:
				Debt Ratios:                /
City                     ST             Zip	Investor:
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 on 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 superceding 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 I.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.

6. 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 these 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, Inc. and/or Bayport Mortgage, L.P.
	Mortgage Warehouse Lending 7640 Poplar, Suite 210 Germantown, TN 38138		In Trust For First Tennessee Bank 1300 Dove Street, Suite 200 Newport Beach, CA 92660

CLOSING ATTORNEY OR TITLE COMPANY SIGNATURE

Receipt of these Supplemental Closing Instructions is hereby acknowledged.

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Closing Attorney (if any) By Title Company (if any) By

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EXHIBIT B

MASTER PROMISSORY NOTE

$20,000,000.00	June 1, 2003
	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 May 31, 2004.

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 payaple.

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

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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 any way 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

Loan Agreement - Duxford Financial, Inc. and/or Bayport Mortgage, L. P. (32) - June 1, 2003 Page 17 of 24

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 1, 2003, 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 / Memphis, Tennessee

ABA #084000026

For Credit to: FTB Warehouse Clearing Account

    Account #100108253

    For Final Credit to:    BRKR0032 / 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 Note(s) 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:

Loan Agreement - Duxford Financial, Inc. and/or Bayport Mortgage, L. P. (32) - June 1, 2003 Page 18 of 24

EXHIBIT D

POWER OF ATTORNEY

Duxford Financial, Inc. and/or Bayport Mortgage, L. P. hereby irrevocably appoints 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, to complete, execute, deliver and record any assignment, mortgage, financing statement or other instrument; to take all necessary and appropriate action in its name with respect to any mortgage loan and any commitment for sale of the mortgage loan and the servicing of any mortgage loan transferred to Bank pursuant to the Mortgage Warehouse and Security Agreement (the “Agreement”) executed June 1, 2003 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 under the Agreement and to sign the name of Duxford Financial, Inc. and/or Bayport Mortgage, L. P. wherever appropriate to any power granted by the Mortgage Warehouse and Security Agreement executed June 1, 2003.

By:

Its:

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.

NOTARY PUBLIC

My Commission Expires:

Loan Agreement - Duxford Financial, Inc. and/or Bayport Mortgage, L. P. (32) - June 1, 2003 Page 19 of 24

EXHIBIT E

QUALIFIED INVESTORS

(To be provided by Borrower

and subject to Bank’s approval.)

Loan Agreement - Duxford Financial, Inc. and/or Bayport Mortgage, L. P. (32) - June 1, 2003 Page 20 of 24

EXHIBIT F

Commitment Letter

Wednesday, August 06, 2003

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:	$10,000,000.00
Uncommitted Line:	$10,000,000.00
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:	Bank Base Rate minus 3.00%
Rate Cap:	Bank Base Rate plus 2.00%
Fees:	$40.00 per 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:	May 31, 2004
Eligible Collateral:	See Exhibit G of the Mortgage Warehouse Loan and Security

Loan Agreement - Duxford Financial, Inc. and/or Bayport Mortgage, L. P. (32) - June 1, 2003 Page 21 of 24

	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.	$250,000.00 minimum net worth in Borrower at all times,
	2.	Borrower and Guarantor(s) agree to maintain a minimum combined net worth of $1,500,000.00 as described within the Agreement,
	3.	Combined net worth of Borrower and Guarantor(s) to meet or exceed 5% of Borrower’s outstanding liabilities at all times.
	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.
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 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

Robert A. Garrett

Vice President – Warehouse Lending

Agreed to and accepted this              day of                                         ,             .

Duxford Financial, Inc. and/or Bayport Mortgage, L. P.

By:

Its:

Loan Agreement - Duxford Financial, Inc. and/or Bayport Mortgage, L. P. (32) - June 1, 2003 Page 22 of 24

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):

Loan Agreement - Duxford Financial, Inc. and/or Bayport Mortgage, L. P. (32) - June 1, 2003 Page 23 of 24

TABLE OF MORTGAGE LOAN GRADES

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
F I C O C r e d i t S c o r e	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 1 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.

4. Mortgage Loans which have been previously warehoused or which have been re-purchased by the warehouse borrower are specifically not eligible for warehousing.

Loan Agreement - Duxford Financial, Inc. and/or Bayport Mortgage, L. P. (32) - June 1, 2003 Page 24 of 24

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, William Lyon, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of William Lyon Homes;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 13, 2003

By:	/s/    WILLIAM LYON
	William Lyon Chairman and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Michael D. Grubbs, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of William Lyon Homes;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 13, 2003

By:	/s/    MICHAEL D. GRUBBS
	Michael D. Grubbs Senior Vice President, Chief Financial Officer and Treasurer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of William Lyon Homes (the Company) on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, William Lyon, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/    William Lyon

William Lyon

Chairman and Chief Executive Officer

August 13, 2003

A signed original of this written statement required by Section 906 has been provided to William Lyon Homes and will be retained by William Lyon Homes and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of William Lyon Homes (the Company) on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Michael D. Grubbs, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/    Michael D. Grubbs

Michael D. Grubbs

Senior Vice President, Chief Financial

Officer and Treasurer

August 13, 2003

A signed original of this written statement required by Section 906 has been provided to William Lyon Homes and will be retained by William Lyon Homes and furnished to the Securities and Exchange Commission or its staff upon request.