10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2005

OR

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

For the transition period from                      to                     

Commission File Number 001-31625

WILLIAM LYON HOMES

(Exact name of registrant as specified in its charter)

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

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

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

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share	New York Stock Exchange
Guarantee of William Lyon Homes, Inc.	New York Stock Exchange
7 1/2% Senior Notes due 2014
Guarantee of William Lyon Homes, Inc.	New York Stock Exchange
10 3/4% Senior Notes due 2013

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

None

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨                        Accelerated filer  x                    Non-accelerated filer  ¨

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2005 was $412,592,358. (This calculation assumes that all officers and directors of the Company are affiliates.)

The number of shares of Common Stock outstanding as of February 28, 2006 was 8,652,067.

DOCUMENTS INCORPORATED BY REFERENCE

None

WILLIAM LYON HOMES

INDEX

		Page No.
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	21
Item 3.	Legal Proceedings	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 8.	Financial Statements and Supplementary Data	52
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	52
Item 9A.	Controls and Procedures	52
Item 9B.	Other Information	53
	PART III
Item 10.	Directors and Executive Officers of Registrant	54
Item 11.	Executive Compensation	59
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	63
Item 13.	Certain Relationships and Related Transactions	65
Item 14.	Principal Accountant Fees and Services	67
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	69
	Index to Financial Statements	75

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PART I

Item 1.    Business

General

William Lyon Homes, a Delaware corporation, and subsidiaries (the “Company”) are primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of the Company’s predecessor in 1956, the Company and its joint ventures have sold over 65,000 homes. The Company conducts its homebuilding operations through five geographic divisions (Southern California, Northern California, San Diego, California, Arizona and Nevada). For 2005, approximately 63% of the home closings of the Company and its joint ventures were derived from its California operations. For the year ended December 31, 2005, on a consolidated basis the Company had revenues from home sales of $1.745 billion and delivered 3,196 homes, which includes $406.9 million of revenue and 688 delivered homes from consolidated joint ventures (see Note 2 of “Notes to Consolidated Financial Statements”).

The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets, although it primarily emphasizes sales to the entry-level and move-up home buyer markets. At December 31, 2005, the Company marketed its homes through 44 sales locations in both its wholly-owned projects and projects being developed in consolidated joint ventures. In 2005, the average sales price for consolidated homes delivered was $546,000. Base sales prices for actively selling projects in 2005 ranged from $197,000 to $2,070,000.

As of December 31, 2005, the Company and its consolidated joint ventures owned approximately 11,518 lots and had options to purchase an additional 15,071, substantially all of which are entitled. As used in this Annual Report on Form 10-K, “entitled” land has a development agreement and/or vesting tentative map, or a final recorded plat or map from the appropriate county or city government. Development agreements and vesting tentative maps generally provide for the right to develop the land in accordance with the provisions of the development agreement or vesting tentative map unless an issue arises concerning health, safety or general welfare. The Company’s sources of developed lots for its homebuilding operations are (1) development of master-planned communities, primarily through both consolidated and unconsolidated joint ventures at the current time, and (2) purchase of smaller projects with shorter life cycles (merchant homebuilding). The Company estimates that its current inventory of lots owned and controlled is adequate to supply its homebuilding operations at current operating levels for approximately 6 years.

The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in “Recently Issued Accounting Standards”, in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”), certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements as of and for the years ended December 31, 2005 and 2004. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Income allocations and cash distributions to the Company from the unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners’ priority returns and returns of partners’ capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the joint ventures whose financial statements have been consolidated with the Company’s financial statements. See Note 5 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future

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development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.

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

The Company had total consolidated revenues from operations of $1.856 billion, $1.822 billion and $897.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. Homes closed by the Company, including its joint ventures, were 3,196, 3,471 and 2,804 for the years ended December 31, 2005, 2004 and 2003, respectively. Including its joint ventures, the Company’s dollar amount of backlog of homes sold but not closed as of December 31, 2005, was $691.6 million, a 11% increase over the $623.6 million as of December 31, 2004. The cancellation rate of buyers who contracted to buy a home but did not close escrow was approximately 16% during 2005 and 17% during 2004.

The Company’s operations are dependent to a significant extent on debt financing and on joint venture financing. The Company’s principal credit sources are its 7 ⁵/8% Senior Notes, 10 ³/4% Senior Notes, 7 ¹/2% Senior Notes, secured revolving credit facilities, seller-provided financing, and land banking transactions. At December 31, 2005, the outstanding principal amount of the 7 ⁵/8% Senior Notes was $150.0 million, the outstanding principal amount of the 10 ³/4% Senior Notes was $246.9 million and the outstanding principal amount of the 7 ¹/2% Senior Notes was $150.0 million. The secured revolving credit facilities are revolving lines of credit with a maximum commitment of $410.0 million at December 31, 2005. However, the credit facilities have limitations on the amounts that can be borrowed at any time based on assets which are included in the credit facilities and the specified borrowings permitted under borrowing base calculations. The secured revolving credit facilities are secured by substantially all of the Company’s assets. At December 31, 2005, the outstanding principal amount under the secured revolving credit facilities was $50.0 million. The Company’s mortgage subsidiary has two revolving credit facilities to fund its mortgage operations, of which an aggregate $47.8 million was outstanding at December 31, 2005. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity” and Note 6 of “Notes to Consolidated Financial Statements” for more information relating to the revolving credit facilities of the Company and its mortgage subsidiary.

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

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

The Company’s Markets

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

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

	Year Ended December 31,
	2005		2004		2003
	(in thousands)
Consolidated
Southern California(1)	$	574,330	$	485,654	$	304,190
Northern California(2)		531,390		669,529		181,062
San Diego(3)		276,714		292,927		170,264
Arizona(4)		267,949		132,823		67,402
Nevada(5)		206,000		240,914		165,395
	$	1,856,383	$	1,821,847	$	888,313
Unconsolidated joint ventures
Southern California(1)	$	—	$	—	$	103,020
Northern California(2)		—		—		103,776
San Diego(3)		—		—		118,753
Nevada(5)		26,091		—		—
	$	26,091	$	—	$	325,549

(1) The Southern California Division consists of operations in the counties of Orange, Los Angeles and Ventura and portions of Riverside and San Bernardino Counties.

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

(3) The San Diego Division consists of operations in San Diego County and portions of Riverside and San Bernardino Counties.

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

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

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

LAND ACQUISITION AND DEVELOPMENT

As of December 31, 2005, the Company and its consolidated joint ventures owned approximately 11,518 lots and had options to purchase an additional 15,071, substantially all of which are entitled.

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

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

• Completing due diligence prior to committing to acquire land;

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

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

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

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

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

• Employing centralized control of approval over all land transactions;

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

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

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

During the year ended December 31, 2003, the Company and two unaffiliated parties formed a series of limited liability companies for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. This unique acquisition is positioned to deliver homes in multiple product segments in what the Company believes is one of the highest demand and supply constrained markets in the country. As of December 31, 2005, the limited liability companies sold substantially all of the lots. The Company was required under certain specific conditions to purchase approximately one-half of the homesites and during the year ended December 31, 2005 the Company purchased 829 lots from the limited liability companies. Homebuilding activities began in 2005 and first deliveries will begin in 2006. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity” and Note 5 of “Notes to Consolidated Financial Statements” for more information relating to this transaction and related financing.

The Company and an unaffiliated party formed a limited liability company for the purpose of acquiring and developing 885 acres of land in Pahrump, Nevada into approximately 2,500 lots for residential homesites. The company has a 50% direct interest in the limited liability company and will purchase approximately one-half of the developed lots. The limited liability company began developing the lots in 2004 and sold approximately 678 lots during the year ended December 31, 2005, of which 488 lots were sold to the Company.

HOMEBUILDING AND MARKET STRATEGY

The Company currently has a wide variety of product lines which enables it to meet the specific needs of each of its markets. Although the Company primarily emphasizes sales to the entry-level and move-up home markets, it believes that this diversified product strategy enables it to best serve a wide range of buyers and adapt quickly to a variety of market conditions. In order to reduce exposure to local market conditions, the Company’s sales locations are geographically dispersed. At December 31, 2005, the Company and its joint ventures had 44 sales locations.

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Because the decision as to which product to develop is based on the Company’s assessment of market conditions and the restrictions imposed by government regulations, homestyles and sizes vary from project to project. The Company’s attached housing ranges in size from 1,061 to 3,050 square feet, and the detached housing ranges from 1,123 to 5,859 square feet.

Due to the Company’s product and geographic diversification strategy, the prices of the Company’s homes also vary substantially. Base sales prices for the Company’s attached housing range from approximately $230,000 to $995,000 and base sales prices for detached housing range from approximately $197,000 to $2,070,000. On a consolidated basis, the average sales price of homes closed for the year ended December 31, 2005 was $546,000.

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

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

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

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Description of Projects and Communities Under Development

The Company’s homebuilding projects usually take two to five years to develop. The following table presents project information relating to each of the Company’s homebuilding divisions as of December 31, 2005 and only includes projects with lots owned as of December 31, 2005, lots consolidated in accordance with Interpretation No. 46 as of December 31, 2005 or homes closed for the year ended December 31, 2005.

Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of December 31, 2005	Backlog at December 31, 2005(2)(3)	Lots Owned as of December 31, 2005(4)	Homes Closed for the Year Ended December 31, 2005	Sales Price Range(5)
SOUTHERN CALIFORNIA
Wholly-Owned:
Orange County
Mirador at Talega, San Clemente	2004	76	53	23	23	33	$	1,115,000 - 1,270,000
Walden Park, Ladera Ranch	2004	109	109	0	0	26	$	650,000 - 680,000
Ambridge at Quail Hill, Irvine	2004	128	120	8	8	59	$	500,000 - 570,000
Lombard Court, Irvine	2005	150	69	60	81	69	$	445,000 - 633,000
Garland Park, Irvine	2005	166	100	17	66	100	$	566,000 - 702,000
Altamura at Nellie Gail Ranch, Laguna Hills	2003	52	52	0	0	4	$	1,975,000 - 2,000,000
Seacove at the Waterfront, Huntington Beach	2004	106	98	8	8	73	$	802,000 - 995,000
Floralisa, San Juan Capistrano	2005	80	10	32	70	10	$	1,290,000 - 1,410,000
Estrella Rosa, San Juan Capistrano	2006	40	0	9	40	0	$	1,600,000 - 1,700,000
Amarante II, Ladera Ranch	2006	18	0	14	18	0	$	1,056,000 - 1,140,000
Bellataire II, Ladera Ranch	2006	23	0	22	23	0	$	1,195,000 - 1,230,000
Tamarisk, Irvine	2005	113	64	28	49	64	$	535,000 - 590,000
Columbus Grove, Irvine:
Lantana (6)	2006	102	0	14	102	0	$	900,000 - 1,015,000
Kensington	2006	63	0	0	63	0	$	735,000 - 870,000
Clarendon	2007	102	0	0	102	0	$	289,000 - 714,000
Astoria (6)	2007	98	0	0	98	0	$	1,015,000 - 1,185,000
Mirabella	2007	60	0	0	60	0	$	723,000 - 858,000
Cambridge Lane	2007	156	0	0	156	0	$	396,000 - 457,000
Ainsley Park	2007	84	0	0	84	0	$	644,000 - 719,000
Ciara (6)	2007	67	0	0	67	0	$	1,210,000 - 1,560,000
Verandas	2007	97	0	0	97	0	$	729,000 - 847,000
Los Angeles County
Meridian Hills, Moorpark:
Ashford	2006	113	0	0	113	0	$	806,000 - 1,015,000
Marquis	2006	135	0	0	135	0	$	895,000 - 1,129,000
Brighton (Affordable)	2007	17	0	0	17	0	$	105,000 - 272,000
Riverside County
Heartland, North Corona
Homestead	2005	109	44	38	65	44	$	590,000 - 650,000
Bounty II	2005	39	39	0	0	39	$	457,000 - 505,000
Almont	2006	91	0	47	91	0	$	487,000 - 555,000
Vander Stelt, Corona	2007	309	0	0	122	0	$	575,000 - 675,000
Kasbergen/Serafina, North Corona	2007	314	0	0	314	0	$	306,000 - 406,000
San Bernardino County
The Peaks at Citrus Heights, Fontana	2005	150	72	38	78	72	$	605,000 - 665,000
Adelina, Fontana (6)	2007	109	0	0	109	0	$	340,000 - 400,000
Total Wholly-Owned		3,276	830	358	2,259	593
Joint Ventures:
Orange County
Amarante, Ladera Ranch	2005	53	44	4	9	44	$	965,000 - 1,060,000
Bellataire, Ladera Ranch	2005	52	43	8	9	43	$	1,220,000 - 1,260,000
Los Angeles County
Oakmont at Westridge, Valencia	2003	87	87	0	0	2	$	1,030,000 - 1,140,000
Creekside, Valencia	2004	141	141	0	0	28	$	385,000 - 478,000
Riverside County
Discovery, North Corona	2004	172	172	0	0	53	$	417,000 - 464,000
Bounty, North Corona	2003	167	167	0	0	19	$	460,000 - 510,000
Total Joint Ventures		672	654	12	18	189
SOUTHERN CALIFORNIA REGION COMBINED TOTAL		3,948	1,484	370	2,277	782

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of December 31, 2005	Backlog at December 31, 2005(2)(3)	Lots Owned as of December 31, 2005(4)	Homes Closed for the Year Ended December 31, 2005	Sales Price Range(5)
NORTHERN CALIFORNIA
Wholly-Owned:
San Joaquin County
Ironwood II, Lathrop	2003	88	85	0	3	0	$	276,000 - 317,000
Ironwood III, Lathrop	2005	109	71	4	38	71	$	487,000 - 544,000
Seasons, Stockton	2005	145	83	33	62	83	$	553,000 - 613,000
Contra Costa County
Seagate at Bayside, Hercules	2005	96	28	23	68	28	$	594,000 - 727,000
Wavecrest at Bayside, Hercules	2005	76	38	27	38	38	$	724,000 - 776,000
Rivergate Laurels, Antioch	2005	72	69	17	3	69	$	548,000 - 658,000
Rivergate II, Antioch	2006	95	0	0	95	0	$	548,000 - 658,000
Placer County
Twin Oaks at Whitney Ranch Rocklin	2006	92	0	0	92	0	$	584,000 - 616,000
Sacramento County
Verona at Anatolia, Rancho Cordova	2005	79	9	13	70	9	$	460,000 - 505,000
Fair Oaks (6)	2007	189	0	0	189	0	$	399,000 - 417,000
Santa Clara County
Baton Rouge, San Jose	2005	91	45	13	46	45	$	589,000 - 654,000
The Ranch at Silver Creek, San Jose:
Provance	2003	95	95	0	0	28	$	1,400,000 - 1,560,000
Portofino	2003	42	42	0	0	2	$	1,245,000 - 1,395,000
Esperanza	2004	74	74	0	0	50	$	890,000 - 1,100,000
Montesa	2004	54	54	0	0	29	$	955,000 - 1,090,000
Hacienda	2004	34	34	0	0	25	$	1,785,000 - 2,070,000
Tesoro	2004	44	44	0	0	22	$	805,000 - 865,000
Stanislaus County
Sonterra at Walker Ranch, Patterson	2003	119	119	0	0	44	$	405,000 - 458,000
Falling Leaf, Modesto	2006	314	0	0	314	0	$	390,000 - 520,000
Total Wholly-Owned		1,908	890	130	1,018	543
Joint Ventures:
Contra Costa County
Heartland, Brentwood	2003	76	76	0	0	3	$	444,000 - 471,000
Gables, Brentwood	2003	99	99	0	0	19	$	440,000 - 499,000
Overlook, Hercules	2003	133	133	0	0	27	$	664,000 - 706,000
Alves Ranch, Pittsburgh	2006	533	0	0	533	0	$	326,000 - 691,000
El Dorado County
Lyon Prima, El Dorado Hills	2001	137	137	0	0	2	$	445,000 - 511,000
Placer County
Pinehurst at Morgan Creek	2003	117	117	0	0	57	$	619,000 - 711,000
Cypress at Morgan Creek	2003	73	73	0	0	17	$	521,000 - 581,000
Shady Lane at Whitney Ranch Rocklin	2006	96	0	3	96	0	$	438,000 - 448,000
Sacramento County
Big Horn, Elk Grove
Plaza Walk	2005	106	21	7	85	21	$	353,000 - 413,000
Gallery Walk	2005	149	28	20	121	28	$	230,000 - 355,000
Total Joint Ventures		1,519	684	30	835	174
NORTHERN CALIFORNIA REGION COMBINED TOTAL		3,427	1,574	160	1,853	717

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of December 31, 2005	Backlog at December 31, 2005(2)(3)	Lots Owned as of December 31, 2005(4)	Homes Closed for the Year Ended December 31, 2005	Sales Price Range(5)
SAN DIEGO
Wholly-Owned:
Riverside County
Bridle Creek, Corona	2003	274	172	2	102	88	$	648,000 - 740,000
Sedona, Murietta	2003	144	144	0	0	8	$	472,000 - 559,000
Sequoia at Wolf Creek, Temecula	2005	125	14	17	111	14	$	389,000 - 438,000
Savannah at Harveston Ranch, Temecula	2005	162	0	38	162	0	$	326,000 - 378,000
San Bernardino County
Chapman Heights, Yucaipa:
Braeburn	2005	113	19	17	39	19	$	559,000 - 599,000
Crofton	2005	140	20	35	90	20	$	427,000 - 461,000
Westland	2005	79	29	11	50	29	$	489,000 - 518,000
Vista Bella	2006	108	0	0	108	0	$	232,000 - 259,000
Redcort	2006	90	0	0	90	0	$	270,000 - 295,000
San Diego County
Promenade North, San Diego	2006	137	0	0	137	0	$	421,000 - 494,000
Sonora Ridge, Chula Vista	2003	172	172	0	0	1	$	453,000 - 493,000
Alcala at Del Sur, San Diego	2005	83	0	0	34	0	$	767,000 - 788,000
Maybeck, San Diego	2006	120	0	0	19	0	$	800,000 - 845,000
Sunset Cove, San Diego	2006	77	0	0	77	0	$	528,000 - 558,000
Total Wholly-Owned		1,824	570	120	1,019	179
Joint Ventures:
Riverside County
Cabrillo at Montecito Ranch, Corona	2004	83	83	0	0	1	$	597,000 - 629,000
San Diego County
Ravenna, San Diego	2005	199	48	57	151	48	$	480,000 - 524,000
Amante, San Diego	2005	127	65	7	62	65	$	568,000 - 644,000
Boardwalk, San Diego	2004	90	90	0	0	54	$	522,000 - 605,000
Treviso, San Diego	2005	186	35	13	151	35	$	391,000 - 526,000
Belleza at San Miguel Village, Chula Vista	2005	195	122	4	73	122	$	366,000 - 445,000
Total Joint Ventures		880	443	81	437	325
SAN DIEGO REGION COMBINED TOTAL		2,704	1,013	201	1,456	504
ARIZONA
Wholly-Owned:
Maricopa County
Mesquite Grove — Estates, Chandler	2001	93	93	0	0	2	$	301,000 - 338,000
Gateway Crossing, Gilbert
Oakcrest	2003	236	235	0	1	61	$	252,000 - 320,000
Woodridge	2003	165	164	0	1	72	$	292,000 - 355,000
Sonoran Foothills, Phoenix
Desert Crown	2004	124	85	30	39	83	$	441,000 - 544,000
Desert Sierra	2004	212	121	82	91	112	$	249,000 - 307,000
Copper Canyon Ranch, Surprise
Rancho Vistas	2004	212	193	14	19	81	$	490,000 - 600,000
Sunset Point	2004	282	131	113	151	122	$	282,000 - 379,000
El Sendero Hills	2004	188	102	74	86	95	$	377,000 - 470,000
Talavera, Phoenix	2006	134	0	0	134	0	$	254,000 - 318,000
Coldwater Ranch, Maricopa County	2007	368	0	0	368	0	$	209,000 - 277,000
Collin’s Creek, Phoenix	2007	126	0	0	126	0	$	237,000 - 245,000
Rancho Mercado — Inn Suites, Phoenix	2009	1,906	0	0	233	0	$	231,000 - 300,000
Lyon’s Gate, Gilbert:
Pride	2006	548	0	27	548	0	$	231,000 - 255,000
Savanna	2006	174	0	22	174	0	$	248,000 - 374,000
Sahara	2006	169	0	34	169	0	$	318,000 - 443,000
Triplex	2007	315	0	0	315	0	$	205,000 - 214,000
Acacia	2007	365	0	0	365	0	$	250,000 - 360,000
Hanger 190 (6)	2008	807	0	0	807	0	$	170,000 - 305,000
Total Wholly-Owned		6,424	1,124	396	3,627	628
Joint Ventures:
Maricopa County
Hastings Property, Queen Creek (6)	2007	822	0	0	822	0	$	250,000 - 300,000
Total Joint Ventures		822	0	0	822	0
ARIZONA REGION TOTAL		7,246	1,124	396	4,449	628

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of December 31, 2005	Backlog at December 31, 2005(2)(3)	Lots Owned as of December 31, 2005(4)	Homes Closed for the Year Ended December 31, 2005	Sales Price Range(5)
NEVADA
Wholly-Owned:
Clark County
Summerlin, Las Vegas
Vista Verde	2003	122	122	0	0	23	$410,000 - 473,000
Miraleste	2003	122	122	0	0	18	$551,000 - 594,000
Granada	2004	144	105	10	39	55	$444,000 - 509,000
The Lyon Collection	2005	60	33	18	27	33	$610,000 - 645,000
Kingwood	2006	100	0	0	43	0	$415,000 - 495,000
North Las Vegas
The Classics	2003	227	220	1	7	42	$290,000 - 315,000
The Springs	2003	209	209	0	0	62	$262,000 - 311,000
The Estates	2003	176	176	0	0	53	$318,000 - 352,000
The Cottages	2004	360	209	22	151	88	$229,000 - 259,000
La Tierra	2006	67	0	3	67	0	$305,000 - 335,000
Goldfield	2006	134	0	0	125	0	$301,000 - 326,000
Carson Ranch, Las Vegas
West Series I	2005	71	42	20	29	42	$395,000 - 430,000
West Series II	2005	59	1	3	58	1	$449,000 - 504,000
East Series I	2007	57	0	1	57	0	$395,000 - 430,000
East Series II	2006	104	0	0	104	0	$395,000 - 430,000
West Park, Las Vegas
Villas	2006	191	0	0	191	0	$363,000 - 405,000
Courtyards	2006	113	0	0	113	0	$395,000 - 445,000
Tropical & Jones, Las Vegas	2006	49	0	0	49	0	$395,000 - 430,000
1/2 Acre Assemblage, Las Vegas	2007	140	0	0	83	0	$593,000 - 661,000
Mountain Falls, Pahrump:
Cascata	2005	147	54	35	93	54	$197,000 - 219,000
Tramonto	2005	212	66	34	146	66	$248,000 - 283,000
Bella Sera	2005	129	28	17	101	28	$307,000 - 346,000
NEVADA REGION TOTAL		2,993	1,387	164	1,483	565
GRAND TOTALS:
Wholly-Owned		16,425	4,801	1,168	9,406	2,508
Joint Ventures		3,893	1,781	123	2,112	688
		20,318	6,582	1,291	11,518	3,196

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

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

(3) Of the total homes subject to pending sales contracts as of December 31, 2005, 1,195 represent homes completed or under construction and 96 represent homes not yet under construction.

(4) Lots owned as of December 31, 2005 include lots in backlog at December 31, 2005.

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

(6) All or a portion of the lots in this project are not owned as of December 31, 2005. The Company consolidated the purchase price of the lots in accordance with Interpretation No. 46, and considers the lots owned at December 31, 2005.

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Sales and Marketing

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

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

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

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

The Company’s homes are typically sold before or during construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain contingencies such as the buyer’s ability to qualify for financing. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company and its joint ventures’ projects was approximately 16% during 2005. Cancellation rates are subject to a variety of factors beyond the Company’s control such as adverse economic conditions and increases in mortgage interest rates. The Company’s and its joint ventures’ inventory of completed and unsold homes was 58 homes as of December 31, 2005.

Warranty

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

In connection with the limited warranty covering construction defects, the Company obtained an insurance policy which expires on December 31, 2006, unless renewed. The Company has been informed by the insurance carrier that this insurance policy will respond to construction defect claims on homes that close during each

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policy period for the duration of the Company’s legal liability and that the policy will respond to potential losses relating to construction, including soil subsidence. The insurance policy provides a single policy of insurance to the Company and the subcontractors enrolled in its insurance program. As a result, the Company is no longer required to obtain proof of insurance from these subcontractors nor be named as an additional insured under their individual insurance policies. The Company still requires that subcontractors not enrolled in the insurance program provide proof of insurance and name the Company as an additional insured under their insurance policy. Furthermore, the Company generally requires that its subcontractors provide the Company with an indemnity prior to receiving payment for their work.

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

Sale of Lots and Land

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

Customer Financing — William Lyon Financial Services

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

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

Information Systems and Controls

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

Regulation

The Company and its competitors are subject to various local, state and Federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation which imposes restrictive zoning and density requirements in order to limit the number of homes that can ultimately be built within the boundaries of a particular project. The Company and its competitors may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be implemented in the future in the states in which it operates. Because the Company usually purchases land with entitlements, the Company believes that the

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moratoriums would adversely affect the Company only if they arose from unforeseen health, safety and welfare issues such as insufficient water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. However, these are normally locked-in when the Company receives entitlements.

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

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

Duxford Title Reinsurance Company, a wholly-owned subsidiary of the Company, provides title reinsurance to unrelated title insurers directly issuing title policies on homes sold by the Company in California, Nevada and Arizona. In February 2005, Duxford Title Reinsurance Company was notified by its title insurers that as a result of current investigations by several state insurance regulators into the large number of captive reinsurance arrangements existing in the title insurance industry, the title insurers were suspending and/or terminating their current captive reinsurance agreements with Duxford Title Reinsurance company pending final determination from the appropriate regulatory bodies as to their permissibility or necessary modification to assure compliance with applicable law. In April 2005, in response to a subpoena issued by the California Insurance Commissioner, the Company testified in connection with the Commissioner’s investigation of captive reinsurance arrangements, including testimony that in many instances, the Company pays for the title insurance being issued. The Company has not had any further communication to date from the California Insurance Commissioner and does not believe that the resolution of this matter will have a material effect on the Company’s financial position, results of operations or cash flows. In November 2005, the Company was notified that the United States Department of Housing and Urban Development had instituted a formal Federal investigation of the Company in connection with its participation in captive title reinsurance arrangements. The Company intends to fully cooperate with the Department in its investigation and does not believe that the resolution of this matter will have a material effect on the Company’s financial position, results of operations or cash flows.

Competition

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

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Corporate Organization and Personnel

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

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

As of December 31, 2005, the Company employed 874 full-time and 103 part-time employees, including corporate staff, supervisory personnel of construction projects, maintenance crews to service completed projects, as well as persons engaged in administrative, finance and accounting, mortgage, engineering, land acquisition, golf course operations, sales and marketing activities.

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

Available Information

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

Item 1A.    Risk Factors

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

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

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

13

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

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

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

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

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

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

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

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

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

The Company presently conducts all of its business in five geographical areas: Southern California, Northern California, San Diego, California, Arizona and Nevada. Because the Company’s operations are concentrated in these geographic areas, a prolonged economic downturn in these markets could cause housing prices and sales to decline, which could have a material adverse effect on the Company’s business, results of operations, and financial condition.

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

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

The Company’s operating results are variable.

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

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

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

• product mix;

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

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

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

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

• costs of material and labor.

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

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

The homebuilding industry is capital intensive and requires significant up-front expenditures to acquire land and begin development. Land acquisition, development and construction activities may be adversely affected by any shortage or increased cost of financing or the unwillingness of third parties to engage in joint ventures. Any difficulty in obtaining sufficient capital for planned development expenditures could cause project delays and any such delay could result in cost increases and may adversely affect the Company’s sales and future results of operations and cash flows.

15

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

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

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

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

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

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

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

The Company is also subject to a variety of local, state, federal and other statutes, ordinances, rules and regulations concerning the environment. The particular environmental laws which apply to any given homebuilding site vary according to the site’s location, its environmental conditions and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas, which could negatively affect the

16

Company’s results of operations. Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties, may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs incurred by such parties in connection with the contamination. In addition, in those cases where an endangered species is involved, environmental rules and regulations can result in the elimination of development in identified environmentally sensitive areas.

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

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

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

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

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

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

An ownership change may have occurred with the result that the Company’s ability to use tax net operating loss carryforwards may have been severely limited and thus the Company may have liability for additional taxes.

On November 11, 1999, the Company implemented transfer restrictions with respect to shares of stock. In general, these transfer restrictions prohibited, without the prior approval of the Company’s board of directors, the direct or indirect sale, transfer, disposition, purchase or acquisition of any of the Company’s stock by or to any holder who beneficially owned directly or through attribution 5% or more of the Company’s stock; or who, upon the direct or indirect sale, transfer, disposition, purchase or acquisition of any of the Company’s stock, would beneficially own directly or through attribution 5% or more of the Company’s stock. These transfer restrictions were intended to help reduce, but not eliminate, the risk of unfavorable ownership changes which could have severely limited the Company’s use of tax benefits from tax net operating loss carryforwards for use in offsetting taxable income. (See Note 8 of “Notes to Consolidated Financial Statements” for more information on the Company’s income taxes). It is possible that the tax authorities could take the position that the transfer restrictions did not provide the intended effect or adequate remedies for tax purposes. Thus, transactions could

17

have occurred that would severely limit the Company’s ability to have used the tax benefits associated with the net operating loss carryforwards. In that case, the Internal Revenue Service or state taxing authorities may seek payment from the Company of taxes that would otherwise have been payable by the Company, as well as penalties and interest. If the Company was required to make such payments, the Company’s results of operations could be adversely affected. Pursuant to the Company’s certificate of incorporation, the transfer restrictions terminated on November 11, 2002.

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

The Company’s principal stockholders are General William Lyon and two trusts, of which William H. Lyon is the sole beneficiary.

General William Lyon and two trusts, of which William H. Lyon, General William Lyon’s son, is the sole beneficiary, beneficially own over 74% of the outstanding shares of the Company’s common stock. As a result of their stock ownership, General William Lyon and the trusts control the Company and have the power to elect all of the Company’s directors and approve or reject any action requiring the majority approval of the holders of the Company stock, including any merger transactions or any sale of all or substantially all of the Company’s assets. General William Lyon and the trusts may vote in their capacity as stockholders to approve strategic transactions which may pose significant risks, such as an acquisition that significantly increases the Company’s indebtedness.

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

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

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

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

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

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

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

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

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

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

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

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

Certain of the Company’s active joint ventures are organized as limited partnerships. The Company is the general partner in each of these and may serve as the general partner in future joint ventures. As a general partner, the Company may be liable for a joint venture’s liabilities and obligations should the joint venture fail or be unable to pay these liabilities or obligations. In addition, the Company has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. The Company has also provided a completion guarantee for a limited partnership under its credit facility. If the Company were required to satisfy such liabilities, obligations or completion guarantee, the results of operations could be adversely affected.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• incur additional indebtedness;

• pay dividends or make other distributions or repurchase or redeem the Company’s stock;

• make investments;

• sell assets;

• incur liens;

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

• enter into transactions with affiliates; and

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

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

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

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

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

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

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

Item 1B.    Unresolved Staff Comments

Not applicable.

Item 2.    Properties

Headquarters

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

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Item 3.    Legal Proceedings

Five purported class action lawsuits were filed in the Court of Chancery of the State of Delaware in and for New Castle County, purportedly on behalf of the public stockholders of the Company, challenging the proposal made by General William Lyon to acquire the outstanding publicly held minority interest in the Company’s common stock for $82 per share in cash (the “Proposed Transaction”) and challenging related actions of the Company and the directors of the Company. Eastside Investors, LLP v. William Lyon Homes, et al., Civil Action No. 1301-N was filed on April 27, 2005: Donald Lamuth v. William Lyon et al., Civil Action No. 1304-N and Stephen L. Brown v. William Lyon Homes, et al., Civil Action No. 1307-N were filed on April 28, 2005: Michael Crady v. William Lyon Homes, et al., Civil Action No. 1311-N was filed on May 2, 2005; and Anthony A. D’Amato v. William Lyon, et al., Civil Action No. 1323-N was filed on May 6, 2005 (collectively, the “Delaware Complaints”). The Delaware Complaints named the Company and the directors of the Company as defendants. These complaints alleged, among other things, that the defendants had breached their fiduciary duties owed to the plaintiffs in connection with the Proposed Transaction and other related corporate activities. The plaintiffs were seeking to enjoin the Proposed Transaction and, among other things, to obtain damages, attorneys’ fees and expenses related to the litigation. On May 9, 2005, the Delaware Complaints were consolidated into a single case entitled In re: William Lyon Homes Shareholder Litigation, Civil Action No. 1311-N (the “Consolidated Delaware Action”). On May 20, 2005, a class was certified in the Consolidated Delaware Action. On November 9, 2005, the Consolidated Delaware action was dismissed without prejudice.

Two purported class action lawsuits challenging the Proposed Transaction also were filed in the Superior Court of the State of California, County of Orange. On April 28, 2005, the complaints captioned Lewis Lester v. William Lyon Homes, et al., Case No. 05-CC-00092 (the “Lewis Complaint”), and Alaska Electrical Pension Fund v. William Lyons Homes, Inc., et al., Case No. 05-CC-00093 (the “Alaska Electrical Complaint” and, together with the Lewis Complaint, the “California Complaints”) were filed. The California Complaints named the Company and the directors of the Company as defendants and alleged, among other things, that the defendants had breached their fiduciary duties to the public stockholders. The California Complaints sought to enjoin the Proposed Transaction and also sought damages and attorneys’ fees and expenses related to the litigation. On May 26, 2005, the California Complaints were consolidated into a single case entitled In re: William Lyon Homes, Inc. Shareholder Litigation, Case No. 05-CC-00092 (the “Consolidated California Action”). On July 8, 2005, plaintiffs in the Consolidated California Action dismissed that lawsuit without prejudice.

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

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

(a) The Company’s Annual Meeting of Holders of Common Stock was held on November 9, 2005. 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 duly elected and qualified:

	Votes For	Votes Withheld
General William Lyon	6,606,928	743,412
Wade H. Cable	6,564,041	786,299
Richard E. Frankel	6,550,291	800,049
Harold H. Greene	7,101,718	248,622
Gary H. Hunt	6,531,329	819,011
Arthur B. Laffer	6,463,782	819,011
William H. Lyon	6,559,251	791,089
Alex Meruelo	6,453,652	896,688

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

	Votes For	Votes Against	Votes Abstaining (Including Broker Non-Votes)
Approval of the Company’s 2005 Senior Executive Bonus Plan	7,244,096	104,424	1,820

	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, 2005	7,345,691	3,939	710

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PART II

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

The following table sets forth the high and low sales prices for the Common Stock of the Company as reported on the New York Stock Exchange (stock ticker symbol: WLS) for the periods indicated.

	High		Low
2004
First Quarter	$	93.75	$	57.08
Second Quarter		93.75		78.60
Third Quarter		92.80		74.00
Fourth Quarter		89.66		61.80
2005
First Quarter	$	94.00	$	65.10
Second Quarter		99.92		71.80
Third Quarter		165.85		93.75
Fourth Quarter		158.55		100.29

As of February 28, 2006, the closing price for the Company’s Common Stock as reported on the NYSE was $85.10.

As of February 28, 2006, there were approximately 2,524 beneficial owners of the Company’s Common Stock.

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

See Items 11 and 12 for information regarding securities authorized for issuance under equity compensation plans.

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Item 6.    Selected Financial Data

The following table sets forth certain of the Company’s historical financial data. The selected historical consolidated financial data as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 have been derived from the Company’s audited consolidated financial statements and the related notes included elsewhere herein. The selected historical consolidated financial data as of December 31, 2003, 2002 and 2001 and for the years ended December 31, 2002 and 2001 have been derived from the Company’s audited financial statements for such years, which are not included herein. The selected historical consolidated financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical consolidated financial statements and accompanying notes included elsewhere herein.

	As of and for the Year Ended December 31,
	2005			2004			2003			2002			2001
	(dollars in thousands, except per share amounts)
	(note 4)
Statement of Income Data:
Operating revenue
Home sales	$	1,745,067		$	1,785,589		$	866,657		$	593,762		$	452,002
Lots, land and other sales		111,316			36,258			21,656			8,648			7,054
Management fees		—			—			9,490			10,892			9,127
		1,856,383			1,821,847			897,803			613,302			468,183
Operating costs
Cost of sales—homes		(1,307,027	)		(1,327,057	)		(714,385	)		(504,330	)		(382,608	)
Cost of sales—lots, land and other		(44,774	)		(23,173	)		(13,269	)		(9,404	)		(5,158	)
Sales and marketing		(59,422	)		(58,792	)		(31,252	)		(22,862	)		(18,149	)
General and administrative		(90,045	)		(80,784	)		(50,315	)		(39,366	)		(37,171	)
Other(1)		(7,050	)		(2,105	)		(1,834	)		(2,284	)		—
Amortization of goodwill(2)		—			—			—			—			(1,242	)
		(1,508,318	)		(1,491,911	)		(811,055	)		(578,246	)		(444,328	)
Equity in income (loss) of unconsolidated joint ventures		4,301			(699	)		31,236			27,748			22,384
Minority equity in income of consolidated entities		(37,571	)		(49,661	)		(429	)		—			—
Operating income		314,795			279,576			117,555			62,804			46,239
Interest expense, net of amounts capitalized		—			—			—			—			(227	)
Financial advisory expenses		(2,191	)		—			—			—			—
Other income, net		2,176			5,572			6,397			4,977			7,513
Income before provision for income taxes		314,780			285,148			123,952			67,781			53,525
Provision for income taxes		(124,149	)		(113,499	)		(51,815	)		(18,270	)		(5,847	)
Net income	$	190,631		$	171,649		$	72,137		$	49,511		$	47,678
Earnings per common share
Basic	$	22.09		$	17.69		$	7.37		$	4.85		$	4.50
Diluted	$	21.98		$	17.55		$	7.27		$	4.73		$	4.44
Balance Sheet Data:
Cash and cash equivalents	$	52,369		$	96,074		$	24,137		$	16,694		$	19,751
Real estate inventories(1)		1,419,248			1,059,173			698,047			491,952			307,335
Investments in and advances to unconsolidated joint ventures		397			17,911			45,613			65,404			66,753
Total assets		1,691,002			1,274,562			839,715			617,581			433,709
Total debt		672,536			595,219			326,737			266,065			221,470
Minority interest		227,178			142,096			142,496			80,647			784
Stockholders’ equity		542,894			347,109			252,040			181,676			150,617
Operating Data (including unconsolidated joint ventures) (unaudited):
Number of net new home orders		3,321			3,371			3,443			2,607			2,541
Number of homes closed		3,196			3,471			2,804			2,522			2,566
Average sales price of homes closed	$	546		$	514		$	422		$	379		$	299
Backlog at end of period, number of homes(3)		1,291			1,166			1,266			627			542
Backlog at end of period, aggregate sales value(3)	$	691,627		$	623,578		$	595,180		$	259,123		$	176,531

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

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

(2) The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill and, until January 1, 2002, was being amortized on a straight-line basis over seven years. Accumulated amortization was $2,793,000 as of December 31, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), effective for fiscal years beginning after December 15, 2001. Under the new rule, goodwill is no longer amortized but is subject to impairment tests in accordance with Statement No. 142. The Company performed its required annual impairment test of goodwill as of December 31, 2005 and determined that there have been no indicators of impairment. If Statement No. 142 had been adopted effective January 1, 2001, the pro forma impact of the non-amortization of goodwill on the results for the subsequent periods would have been as follows (in thousands except per share data):

	Year Ended December 31,
	2005		2004		2003		2002		2001
	(dollars in thousands)
Net income, as reported	$	190,631	$	171,649	$	72,137	$	49,511	$	47,678
Amortization of goodwill, net of tax		—		—		—		—		1,106
Net income, as adjusted	$	190,631	$	171,649	$	72,137	$	49,511	$	48,784
Earnings per common share, as adjusted:
Basic	$	22.09	$	17.69	$	7.37	$	4.85	$	4.61
Diluted	$	21.98	$	17.55	$	7.27	$	4.73	$	4.54

(3) Backlog consists of homes sold under pending sales contracts that have not yet closed, some of which are subject to contingencies, including mortgage loan approval and the sale of existing homes by customers. There can be no assurance that homes sold under pending sales contracts will close. Of the total homes sold subject to pending sales contracts as of December 31, 2005, 1,195 represent homes completed or under construction and 96 represent homes not yet under construction. Backlog as of all dates is unaudited.

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

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

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

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

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

The following discussion of results of operations and financial condition should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-K. As used herein, “on a combined basis” means the total of operations in wholly-owned projects, in consolidated joint venture projects and, for periods ending on or prior to December 31, 2003, unconsolidated joint venture projects.

The Company is primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of its predecessor in 1956, on a combined basis the Company has sold over 65,000 homes. The Company conducts its homebuilding operations through five geographic divisions: Southern California, Northern California, San Diego, California, Arizona and Nevada. For the year ended December 31, 2005, on a consolidated basis the Company had revenues from home sales of $1.745 billion and delivered 3,196 homes, which includes $406.9 million of revenue and 688 delivered homes from consolidated joint ventures. The Company believes that it is well positioned for long term growth in all of its markets. However, due to recent slow downs of new orders, increases in cancellation rates and increasing price competition, the Company anticipates a slight decline in deliveries and revenues in 2006 as compared to 2005. The Company presents information related to its unconsolidated joint ventures as such information represents an important aspect of the Company’s business as well as a substantial portion of its operating income.

The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in “Recently Issued Accounting Standards”, in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”) certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements as of and for the years ended December 31, 2005 and 2004. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 did not affect the Company’s consolidated net income. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Income allocations and cash distributions to the Company from the unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners’ priority returns and returns of partners’ capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the joint ventures whose financial statements have been consolidated with the Company’s financial statements. See Note 5 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.

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Results of Operations

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

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

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

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	As of and for the year ended December 31, 2004
	Wholly- Owned			Joint Ventures			Consolidated Total
Selected Financial Information (dollars in thousands)
Homes closed		2,447			1,024			3,471
Home sales revenue	$	1,246,277		$	539,312		$	1,785,589
Cost of sales		(941,225	)		(385,832	)		(1,327,057	)
Gross margin	$	305,052		$	153,480		$	458,532
Gross margin percentage		24.5	%		28.5	%		25.7	%
Number of homes closed
California		1,312			1,024			2,336
Arizona		402			—			402
Nevada		733			—			733
Total		2,447			1,024			3,471
Average sales price
California	$	692,200		$	526,700		$	619,600
Arizona		241,800			—			241,800
Nevada		328,700			—			328,700
Total	$	509,300		$	526,700		$	514,400
Number of net new home orders
California		1,157			955			2,112
Arizona		677			—			677
Nevada		582			—			582
Total		2,416			955			3,371
Average number of sales locations during period
California		17			11			28
Arizona		6			—			6
Nevada		7			—			7
Total		30			11			41

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	As of and for the year ended December 31, 2004
	Wholly- Owned		Joint Ventures		Consolidated Total
Backlog of homes sold but not closed at end of period
California		357		245		602
Arizona		482		—		482
Nevada		82		—		82
Total		921		245		1,166
Dollar amount of backlog of homes sold but not closed at end of period (dollars in thousands)
California	$	292,298	$	160,280	$	452,578
Arizona		136,815		—		136,815
Nevada		34,185		—		34,185
Total	$	463,298	$	160,280	$	623,578
Lots controlled at end of year
Owned lots
California		2,702		1,445		4,147
Arizona		3,518		—		3,518
Nevada		1,193		—		1,193
Total		7,413		1,445		8,858
Optioned lots(1)
California						4,532
Arizona						3,960
Nevada						1,262
Total						9,754
Total lots controlled
California						8,679
Arizona						7,478
Nevada						2,455
Total						18,612

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

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

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

On a combined basis, the number of net new home orders for the year ended December 31, 2005 decreased 1.5% to 3,321 homes from 3,371 homes for the year ended December 31, 2004. The number of homes closed on a combined basis for the year ended December 31, 2005 decreased 7.9% to 3,196 homes from 3,471 homes for the year ended December 31, 2004. On a combined basis, the backlog of homes sold but not closed as of December 31, 2005 was 1,291 homes, up 10.7% from 1,166 homes as of December 31, 2004.

Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed on a combined basis as of December 31, 2005 was $691.6 million, up 10.9% from $623.6 million as of December 31, 2004. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 16% during 2005 and 17% during 2004. The inventory of completed and unsold homes was 58 homes as of December 31, 2005.

The Company’s average number of sales locations was unchanged at 41 for the years ended December 31, 2005 and 2004 and the Company’s number of new home orders per average sales location decreased from 82.2 for the year ended December 31, 2004 to 81.0 for the year ended December 31, 2005.

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

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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.

Comparisons of Years Ended December 31, 2005 and 2004

Consolidated operating revenue for the year ended December 31, 2005 was $1.856 billion, an increase of $34.5 million, or 1.9%, from consolidated operating revenue of $1.822 billion for the year ended December 31, 2004. Revenue from sales of wholly-owned homes increased $91.9 million, or 7.4%, to $1.338 billion in the 2005 period from $1.246 billion in the 2004 period. The increase was due to an increase in the average sales price of wholly-owned homes closed to $533,600 in the 2005 period from $509,300 in the 2004 period and an increase in the number of wholly-owned homes closed to 2,508 in 2005 from 2,447 in 2004. In addition, revenue from sales of homes from consolidated joint ventures decreased to $406.9 million in 2005 from $539.3 million in 2004, due to a decrease in the number of joint venture homes closed to 688 in 2005 from 1,024 in 2004, offset by an increase in the average sales price of joint venture homes to $591,400 in 2005 from $526,700 in 2004. Revenue from sales of lots, land and other increased to $111.3 million in 2005 from $36.3 million in 2004 due to the bulk sale of land of $66.0 million in Arizona and of $45.3 million in California during 2005. The increase in the average sales price of units closed in wholly-owned and consolidated joint venture projects was primarily due to (i) price appreciation in certain markets and (ii) a change in product mix.

Total operating income increased to $314.8 million in the 2005 period from $279.6 million in the 2004 period. The excess of revenue from sales of homes over the related cost of sales (gross margin) decreased by $20.5 million to $438.0 million in the 2005 period from $458.5 million in the 2004 period primarily due to (i) a decrease in the number of joint venture homes closed to 688 in 2005 from 1,024 in 2004, (ii) a decrease in joint venture gross margin percentage to 27.7% in 2005 from 28.5% in 2004, (iii) offset by an increase in the average sales price of joint venture homes to $591,400 in 2005 from $526,700 in 2004, (iv) an increase in the number of wholly-owned homes closed to 2,508 in 2005 from 2,447 in 2004 and (v) an increase in the average sales price of wholly-owned homes closed to $533,600 in 2005 from $509,200 in 2004. The excess of revenue from sales of lots, land and other over the related cost of sales (gross margin) increased by $53.4 million to $66.5 million in 2005 from $13.1 million in 2004 primarily due to the bulk sale of land in Arizona and California during 2005.

Sales and marketing expense increased slightly to $59.4 million in the 2005 period from $58.8 million in the 2004 period primarily due to an increase in marketing fees paid to land sellers in certain of the communities in which the Company builds to $7.2 million in 2005 from $6.7 million in 2004. General and administrative expenses increased $9.2 million in the 2005 period to $90.0 million from $80.8 million in the 2004 period primarily as a result of an increase in bonus expense to $58.5 million, or approximately 16% of pre-tax, pre-bonus income, in the 2005 period from $54.1 million, or approximately 16% of pre-tax, pre-bonus income, in the 2004 period due to higher levels of pre-tax, pre-bonus income and an increase in salaries and benefits to $24.5 million in the 2005 period from $20.8 million in the 2004 period. Other operating costs consist of operating losses realized by golf course operations in certain of the Company’s divisions which increased $5.0 million to $7.1 million in the 2005 period from $2.1 million in the 2004 period due to an impairment loss of $4.6 million at one of the golf courses in the San Diego Division described below in “Critical Accounting Policies”. Equity in income (loss) from unconsolidated joint ventures increased to $4.3 million in the 2005 period from $(0.7) million in the 2004 period, primarily due to certain bulk sales of land by the Company’s unconsolidated joint ventures. Minority equity in income of consolidated entities decreased to $37.6 million in the 2005 period from $49.7 million in the 2004 period, primarily due to a decrease in the number of joint venture homes closed to 688 in 2005 from 1,024 in 2004.

The Company incurred financial advisory expenses of $2.2 million in the 2005 period with no comparable amount in the 2004 period due to the proposed transaction described below in “Proposed Transaction”.

Total interest incurred increased to $73.2 million in the 2005 period from $59.0 million in the 2004 period, primarily as a result of an increase in the prime interest rate from an average of 6.19% during 2005 compared to

35

4.34% during 2004 and as a result of an increase in the average principal balance of debt outstanding in the 2005 period compared to the 2004 period.

The estimated overall effective tax rate for the year ending December 31, 2005 is 39.4%. During the year ended December 31, 2005, income tax benefits of $2.0 million related to stock option exercises were excluded from the results of operations and credited to additional paid-in capital. At December 31, 2005, the Company has unused recognized built-in losses in the amount of $23.3 million which are available to offset future taxable income and expire between 2009 and 2011. The utilization of these losses is limited to offset $3.9 million of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2011. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under certain circumstances.

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

As a result of the foregoing factors, net income increased to $190.6 million in the 2005 period from $171.6 million in the 2004 period.

Comparisons of Years Ended December 31, 2004 and 2003.

Consolidated operating revenue for the year ended December 31, 2004 was $1.822 billion, an increase of $924.2 million, or 103%, from consolidated operating revenue of $897.8 million for the year ended December 31, 2003. Revenue from sales of wholly-owned homes increased $379.6 million, or 43.8%, to $1.246 billion in the 2004 period from $866.7 million in the 2003 period. The increase was primarily due to an increase in the average sales price of wholly-owned homes closed to $509,300 in the 2004 period from $402,900 in the 2003 period and an increase in the number of wholly-owned homes closed to 2,447 in 2004 from 2,128 in 2003. In addition, consolidated operating revenue during the year ended December 31, 2004 includes revenue from sales of homes of $539.3 million from consolidated joint ventures as compared to $9.2 million included in consolidated operating revenue in the same period in 2003, due to the adoption of Interpretation No. 46 as described above. Revenue from sales of lots, land and other increased to $36.3 million in the 2004 period compared to $21.7 million in the 2003 period due to bulk sales of land in certain of the Company’s developments. Management fee income increased by $6.7 million to $16.2 million in the 2004 period from $9.5 million in the 2003 period, primarily due to the increase in the number of joint venture units closed to 1,024 in the 2004 period from 676 in the 2003 period; however, upon consolidation of the joint ventures in connection with Interpretation No. 46 described above, management fee income is eliminated with the related cost of sales. The increase in the average sales price of units closed in wholly-owned projects was due primarily to (i) price appreciation in certain projects and (ii) a change in product mix.

Total operating income increased to $279.6 million in the 2004 period from $117.6 million in the 2003 period. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $306.2 million to $458.5 million in the 2004 period from $152.3 million in the 2003 period primarily due to (i) an increase in the average sales price of wholly-owned homes closed to $509,300 in the 2004 period from $402,900 in the 2003 period, (ii) an increase in the number of wholly-owned homes closed to 2,447 in 2004 from 2,128 in 2003, (iii) an increase in the wholly-owned gross margin percentages to 24.5% in the 2004 period from 17.6% in the 2003 period and (iv) gross margin of $153.5 million from consolidated joint ventures in 2004 as compared to $1.3 million included in 2003, due to the adoption of Interpretation No. 46 as described above. The increase in period-over-period gross margin percentage reflects the impact of increased sales prices due to strong demand for housing in many of the Company’s markets. Sales and marketing expenses increased by $27.5

36

million to $58.8 million in the 2004 period from $31.3 million in the 2003 period primarily due to increases in direct selling expenses related to the increased sales volume and the consolidation of certain joint ventures due to the adoption of Interpretation No. 46 as described above.

General and administrative expenses increased by $30.5 million to $80.8 million in 2004 from $50.3 million in 2003, primarily as a result of an increase in bonus expense due to higher levels of pre-tax, pre-bonus income in 2004 as compared to 2003. Bonus expense was $54.1 million in 2004, or approximately 16% of pre-tax, pre-bonus income as compared to $27.2 million in 2003, or approximately 18% of pre-tax, pre-bonus income. Selling, general and administrative expense as a percentage of combined home sales revenue was 7.8% in 2004 as compared to 7.7% in 2003. Other operating costs consist of initial start-up and operating losses realized by golf course operations at certain of the Company’s projects which increased to $2.1 million in the 2004 period from $1.8 million in the 2003 period. Equity in (loss) income from unconsolidated joint ventures decreased to $(0.7) million in the 2004 period from $31.2 million in the comparable period for 2003, primarily as a result of the consolidation of certain joint ventures in 2004 due to the adoption of Interpretation No. 46 as described above. Minority equity in income of consolidated entities increased to $49.7 million in the 2004 period from $0.4 million in the 2003 period due to the adoption of Interpretation No. 46 as described above.

Total interest incurred increased to $59.0 million in the 2004 period from $47.2 million in the 2003 period as a result of an increase in the average principal balance of debt outstanding in the 2004 period compared to the 2003 period, including the issuance of the 7 ⁵/8% Senior Notes and 7 ¹/2% Senior Notes (see below) and the debt associated with the consolidation of certain entities due to the adoption of Interpretation No. 46 as described above. All interest incurred was capitalized in the 2004 and 2003 periods.

Other income, net decreased to $5.6 million in 2004 from $6.4 million in 2003 primarily as a result of decreases in mortgage company operations and other miscellaneous income.

Minority interest in income of consolidated entities of $49.7 million during the year ended December 31, 2004 is related to the consolidation of the outside partners’ equity in income of entities consolidated as defined in Interpretation No. 46. See Note 2 of “Notes to Consolidated Financial Statements”.

As a result of the foregoing factors, net income increased to $171.6 million in the 2004 period from $72.1 million in the 2003 period.

Financial Condition and Liquidity

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

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

37

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

7 ⁵/8% Senior Notes

On November 22, 2004, the Company’s 100% owned subsidiary, William Lyon Homes, Inc., a California corporation, (“California Lyon”) closed its offering of $150.0 million principal amount of 7 ⁵/8% Senior Notes due 2012 (the “7 ⁵/8% Senior Notes”). The notes were sold pursuant to Rule 144A. The notes were issued at par, resulting in net proceeds to the Company of approximately $148.5 million. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes having substantially identical terms. On January 12, 2005, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its outstanding $150.0 million aggregate principal amount of 7 ⁵/8% Senior Notes due 2012, which are not registered under the Securities Act of 1933, for a like amount of its new 7 ⁵/8% Senior Notes due 2012, which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated January 12, 2005. The exchange offer was completed for $146.5 million principal amount of the 7 ⁵/8% Senior Notes on February 18, 2005. The remaining $3.5 million principal amount of the old notes remains outstanding. The terms of the new notes are identical in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. Interest on the 7 ⁵/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount of the 7 ⁵/8% Senior Notes, the Company’s semi-annual interest payments are $5.7 million.

Except as set forth in the Indenture governing the 7 ⁵/8% Senior Notes (“7 ⁵/8% Senior Notes Indenture”), the 7 ⁵/8% Senior Notes are not redeemable prior to December 15, 2008. Thereafter, the 7 ⁵/8% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before December 15, 2007, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.625% of the principal amount, plus accrued and unpaid interest, if any.

As of December 31, 2005, the outstanding 7 ⁵/8% Senior Notes with a face value of $150.0 million had a fair value of approximately $132.4 million, based on quotes from industry sources.

10 ³/4% Senior Notes

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

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10 ³/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding principal amount of the 10 ³/4% Senior Notes, the Company’s semi-annual interest payments are $13.4 million.

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

As of December 31, 2005, the outstanding 10 ³/4% Senior Notes with a face value of $246.9 million had a fair value of approximately $258.1 million, based on quotes from industry sources.

7 ¹/2% Senior Notes

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

Except as set forth in the Indenture governing the 7 ¹/2% Senior Notes (“7 ¹/2% Senior Notes Indenture”), the 7 ¹/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 7 ¹/2% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before February 15, 2007, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.50% of the principal amount, plus accrued and unpaid interest, if any.

As of December 31, 2005, the outstanding 7 ¹/2% Senior Notes with a face value of $150.0 million had a fair value of $129.8 million, based on quotes from industry sources.

* * * * *

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

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

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

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

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

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

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

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

At December 31, 2005, the Company had approximately $109.5 million of secured indebtedness, (excluding approximately $16.2 million of secured indebtedness of consolidated entities) and approximately $316.7 million of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas.

Revolving Credit Facilities

As of December 31, 2005, the Company has four revolving credit facilities which have an aggregate maximum loan commitment of $410.0 million and mature at various dates through 2008. A $90.0 million revolving line of credit “expires” in October 2006. After that date the Company may borrow amounts, subject to applicable borrowing base and concentration limitations, under this facility solely to complete the construction of residences begun prior to such date in approved projects funded by disbursements under this facility. The final maturity date is the earlier of the date upon which the last residence, the construction of which was financed with proceeds of this loan, is sold or the date upon which such last residence is excluded from the borrowing base by the passage of time under this facility. However, as in the past the Company expects the maturity to be extended by the lender at each maturity date for an additional year. A $150.0 million revolving line of credit finally matures in September 2008, although after September 2006, advances under this facility may only be made to complete previously approved projects approved on or before such date. The maximum commitment of $150.0 million under this facility is reduced by the aggregate amount of loan commitments under separate project loans issued by the lender or its affiliates to the Company or its affiliates with respect to projects that are not cross-

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collateralized with the collateral under this credit facility. A $70.0 million revolving line of credit initially “matures” in September 2006. After that date: a) the maximum commitment under this facility reduces at a rate of $8.75 million per quarter beginning with the quarter ending December 31, 2006, with a final maturity date of September 2008, and b) advances may only be used to complete previously approved projects subject to the borrowing base as of the initial maturity date. A $100.0 million revolving line of credit matures in June 2008, although after June 2007, the lender is not required to make advances under this facility. Effective on March 8, 2006, the Company entered into an agreement with a lender for an additional revolving credit facility in the amount of $50.0 million. In addition, in March 2006 the Company agreed in principle to enter into an agreement with another lender for an additional revolving credit facility in the amount of $50.0 million. The facilities mature in February and March 2008, respectively. After giving effect to the two additional revolving credit facilities, the Company’s aggregate maximum loan commitment under the six revolving credit facilities will be $510.0 million.

Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration limitations further restrict availability under the credit facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Company’s investment in a project, with higher percentages of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real property and improvements thereon owned by the Company in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes financial covenants, which may limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2005, $50.0 million was outstanding under these credit facilities, with a weighted-average interest rate of 6.892%, and the undrawn availability was $316.7 million as limited by the borrowing base formulas. Interest on the revolving credit facilities is calculated on the average, outstanding daily balance and is paid following the end of each month. During the year ended December 31, 2005, the Company borrowed $1.113 billion and repaid $1.070 billion under these facilities. The maximum amount outstanding was $200.5 million and the weighted average borrowings were $113.6 million during the year ended December 31, 2005. Interest incurred on the revolving credit facilities for the year ended December 31, 2005 was $8.2 million. Delaware Lyon has guaranteed on an unsecured basis California Lyon’s obligations under certain of the revolving credit facilities and has provided an unsecured environmental indemnity in favor of the lender under the $125.0 million bank line of credit. The Company routinely makes borrowings under its revolving credit facilities in the ordinary course of business within the maximum aggregate loan commitment amounts to fund its operations, including its land acquisition and home building activities, and repays such borrowings, as required by the credit facilities, with the net proceeds from sales of the real property, including homes, which secure the applicable credit facility.

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

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

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

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

As of and for the year ending December 31, 2005, the Company is in compliance with these covenants.

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Construction Notes Payable

At December 31, 2005, the Company had construction notes payable on certain consolidated entities amounting to $16.2 million. The construction notes have various maturity dates through 2008 and bear interest at rates ranging from prime to prime plus 0.25% at December 31, 2005. Interest is calculated on the average daily balance and is paid following the end of each month.

Seller Financing

At December 31, 2005, the Company had $11.7 million of notes payable outstanding related to land acquisitions for which seller financing was provided. The seller financing notes are due at various dates through December 2007 and bear interest at rates ranging from 9.0% to 12.0% at December 31, 2005. Interest is calculated on the average principal balance outstanding and is accrued and paid when the financing is repaid.

Revolving Mortgage Warehouse Credit Facilities

The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has entered into two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in May 2006, provides for revolving loans of up to $30.0 million outstanding, $20.0 million of which is committed (lender obligated to lend if stated conditions are satisfied) and $10.0 million is not committed (lender advances are optional even if stated conditions are otherwise satisfied). In October 2005, the original credit facility was increased to $48.0 million for the period November 2005 through February 2006, $32 million of which is committed and $16 million is not committed, and will decrease to $30.0 million, $20.0 million of which is committed and $10.0 million of which is not committed, thereafter. The Company’s mortgage subsidiary and one of its unconsolidated joint ventures entered into an additional $20.0 million credit facility which matures in October 2006. In October 2005, the commitment amount of the additional credit facility was temporarily increased to $50.0 million for the period November 2005 through January 2006, and will decrease to $20.0 million, thereafter. The temporary increases in the credit facilities improved the ability of the Company’s mortgage subsidiary to fund the high volume of loans that were anticipated to occur during the period. The Company expects the maturity to be extended by the lender at each maturity date for an additional year. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. The facilities are secured by substantially all of the assets of each of the borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with respect to contractual obligations of third party investors to purchase such mortgage loans, and all proceeds of sale of such mortgage loans. The facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the borrowers to maintain minimum tangible net worth, leverage, profitability and liquidity. These facilities are non-recourse and are not guaranteed by the Company. At December 31, 2005 the outstanding balance under these facilities was $47.8 million.

Land Banking Arrangements

The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers the Company’s right in such purchase agreements to entities owned by third parties (“land banking arrangements”). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 20% of the total purchase price. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider, general housing market conditions and geographic preferences. As described in Note 2 of “Notes to Consolidated Financial Statements”, Interpretation No. 46,

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requires the consolidation of the assets, liabilities and operations of three of the Company’s land banking arrangements including, as of December 31, 2005, real estate inventories of $71.0 million. The Company participates in three land banking arrangements, which are not VIE’s in accordance with Interpretation No. 46, and are not consolidated as of December 31, 2005. The deposits and penalties related to the three unconsolidated land banking arrangements have been recorded in the accompanying consolidated balance sheet. Summary information with respect to the Company’s consolidated and unconsolidated land banking arrangements is as follows as of December 31, 2005 (dollars in thousands):

	Consolidated		Unconsolidated
Total number of land banking projects		3		3
Total number of lots		267		673
Total purchase price	$	84,085	$	116,821
Balance of lots still under option and not purchased:
Number of lots		243		175
Purchase price	$	70,986	$	47,282
Forfeited deposits and penalties if lots are not purchased	$	7,804	$	11,892

Joint Venture Financing

The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in “Recently Issued Accounting Standards”, in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”) certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements as of and for the years ended December 31, 2005 and 2004. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 did not affect the Company’s consolidated net income. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Income allocations and cash distributions to the Company from the unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners’ priority returns and returns of partners’ capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the joint ventures whose financial statements have been consolidated with the Company’s financial statements. See Note 5 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.

As of December 31, 2005, the Company’s investment in and advances to unconsolidated joint ventures was $0.4 million and the venture partners’ investment in such joint ventures was $0.2 million. As of December 31, 2005, these joint ventures had obtained financing from construction lenders which amounted to $32.4 million of outstanding indebtedness.

During the year ended December 31, 2002, one of the Company’s joint ventures (“Existing Venture”) was restructured such that the Company was required to purchase the 538 lots owned by the Existing Venture on a

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specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the outside partner of the Existing Venture. During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64.5 million, which included 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 was required to and did 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 was required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company controlled both ventures, the financial statements of both ventures have been consolidated with the Company’s financial statements. During the year ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for $19.8 million, which included a $4.0 million preferred return to the outside partner of the Existing Venture. The 44 lots were purchased through a land banking arrangement. During the year ended December 31, 2003, an additional 219 lots were purchased from the Existing Venture for $74.9 million, which included a $21.7 million preferred return to the outside partner of the Existing Venture. These purchases included (i) 172 lots which were purchased from the Existing Venture under a land banking arrangement for $56.6 million, which included a $16.4 million preferred return to the outside partner of the Existing Venture and (ii) 47 lots which were purchased by the New Venture from the Existing Venture for $18.3 million, which included a $5.3 million preferred return to the outside partner of the Existing Venture. During the year ended December 31, 2002, the Company purchased 15 lots from the New Venture for $5.1 million, all of which was paid to the outside partner as a return of capital. During the year ended December 31, 2003, the Company purchased 175 lots from the New Venture for $54.5 million, all of which was paid to the outside partner as a return of capital. During the year ended December 31, 2004, the Company purchased the remaining 99 lots from the New Venture for $34.3 million. The intercompany sales and related profits have been eliminated in consolidation.

During the year ended December 31, 2003, California Lyon and two unaffiliated parties formed a series of limited liability companies (“Development LLCs”) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. As of December 31, 2005, the Development LLCs sold substantially all of the lots. During the year ended December 31, 2005, California Lyon purchased 829 lots from the Development LLCs for a purchase price of $183.6 million, of which 267 lots were purchased through three land banking arrangements for a purchase price of $84.1 million (see Note 2 of “Notes to Consolidated Financial Statements” for additional information regarding the Company’s land banking arrangements). California Lyon has a 12 ¹/2% indirect, minority interest in the Development LLCs and during the year ended December 31, 2005 earned income of $9.8 million from the sale of lots by the Development LLCs, of which $5.2 million was deferred as a reduction to the cost basis of the lots purchased by California Lyon and will be recognized when homes are constructed on the lots and sold to third parties.

The Company is a member in an unconsolidated joint venture limited liability company formed for the purpose of acquiring and developing land in Pahrump, Nevada. At December 31, 2005, the unconsolidated joint venture had outstanding land acquisition and development debt of $32.4 million, of which the Company guaranteed $16.2 million.

Assessment District Bonds

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

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Cash Flows — Comparison of Years Ended December 31, 2005 and 2004

Net cash (used in) provided by operating activities changed from a source of $87.3 million in 2004 to a use of $44.5 million in 2005. The change was primarily as a result of (i) an increase in equity in income of unconsolidated joint ventures from a loss of $0.7 million in 2004 to income of $4.3 million in 2005, (ii) an increase in distributions of income from unconsolidated joint ventures from none in 2004 to $2.7 million in 2005, (iii) a decrease in net changes in receivables from an increase of $9.2 million in 2004 to a decrease of $104.2 million in 2005, due to approximately $95.7 million of escrow proceeds receivable as of December 31, 2005 compared to approximately $24.7 million as of December 31, 2004 and (iv) increased net expenditures in real estate inventories from $195.3 million in 2004 to $232.2 million in 2005. The successful issuance of the 10 ³/4% Senior Notes in 2003 and the 7 ¹/2% Senior Notes and 7 ⁵/8% Senior Notes in 2004, offset by the repayment of the 12 ¹/2% Senior Notes (as described in financing activities below), provided the Company with increased financial resources. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. Thus, the Company may have bought and developed land on which it cannot profitably build and sell homes. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, the Company may have to sell homes at significantly lower margins or at a loss.

Net cash provided by (used in) investing activities changed from a use of $17.1 million in 2004 to a source of $16.5 million in 2005. The change was primarily as a result of (i) a decrease in investments in and advances to unconsolidated joint ventures from $9.4 million in 2004 to $1.4 million in 2005, (ii) an increase in distributions of capital from unconsolidated joint ventures from $10.1 million in 2004 to $20.5 million in 2005 and (iii) a decrease in purchases of property and equipment from $17.8 million in 2004 to $2.6 million in 2005, due to the purchase of an aircraft in 2004.

Net cash (used in) provided by financing activities decreased from a source of $1.7 million in 2004 to a use of $15.7 million in 2005. The change was primarily as a result of (i) an increase in net borrowings on notes payable from net principal payments of $127.4 million in 2004 to net borrowings of $60.7 million in 2005, (ii) the issuance of the 7 ⁵/8% Senior Notes and the 7 ¹/2% Senior Notes in 2004 with no issuance of senior notes in 2005, (iii) a decrease in net minority interest distributions from $86.8 million in 2004 to $76.7 million in 2005 and (iv) the repurchase of shares of common stock of $81.0 million in 2004 with no comparable amount in 2005.

Cash Flows — Comparison of Years Ended December 31, 2004 and 2003

Net cash provided by (used in) operating activities changed from a use of $122.5 million in 2003 to a source of $87.3 million in 2004. The change was primarily a result of (i) an increase in operating income as a result of increased deliveries and operating revenues and (ii) a decrease in cash distributions of income from unconsolidated joint ventures from $37.5 million in 2004 to none in 2004 due to the consolidation of certain joint ventures due to the adoption of Interpretation No. 46 as described above. Net expenditures on real estate were relatively unchanged at $195.3 million in 2004 compared to $206.0 million in 2003. The successful issuance of the 10 ³/4% Senior Notes in 2003 and the 7 ¹/2% Senior Notes and 7 ⁵/8% Senior Notes in 2004, offset by the repayment of the 12 ¹/2% Senior Notes (as described in financing activities below), provided the Company with increased financial resources. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. Thus, the Company may have bought and developed land on which it cannot profitably build and sell homes. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, the Company may have to sell homes at significantly lower margins or at a loss.

Net cash (used in) provided by investing activities decreased to a use of $17.1 million in 2004 from a source of $13.0 million in 2003. The change was primarily a result of (i) a decrease in cash distributions from

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unconsolidated joint ventures to $10.1 million in 2004 from $22.0 million in 2003 and (ii) an increase in cash paid for property and equipment to $17.8 million in 2004 from $0.6 in 2003 due to the purchase of an aircraft.

Net cash provided by financing activities decreased to $1.7 million in 2004 from $117.0 million in 2003, primarily as a result of (i) the net proceeds of $148.5 million and $147.6 million from the issuance of the 7 ⁵/8% Senior Notes and 7 ¹/2% Senior Notes, respectively, in 2004 compared to the net proceeds of $246.2 million from the issuance of the 10 ³/4% Senior Notes and repayment of $70.3 million of the 12 ¹/2% Senor Notes in 2003, (ii) net minority interest distributions of $86.8 in 2004 compared to net minority interest contributions of $61.4 million in 2003 and (iii) the repurchase of shares of common stock of $81.0 million in 2004 compared to $7.2 million in 2003.

Off-Balance Sheet Arrangements

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

Contractual Obligations

The Company’s contractual obligations consisted of the following at December 31, 2005 (in thousands):

			Payments due by period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Revolving credit facilities	$	105,533	$	61,150	$	44,383	$	—	$	—
Construction notes payable		17,033		6,571		10,462		—		—
Seller financing		14,088		1,310		12,778		—		—
7 5/8% Senior Notes		230,063		11,438		22,875		22,875		172,875
10 3/4% Senior Notes		444,844		26,875		53,750		53,750		310,469
7 1/2% Senior Notes		241,406		11,250		22,500		22,500		185,156
Operating leases		11,482		3,261		5,377		2,280		564
Purchase obligations:
Land purchases and option commitments		944,701		344,056		299,106		77,384		224,155
Project commitments		361,111		295,656		49,091		16,364		—
Total	$	2,370,261	$	761,567	$	520,322	$	195,153	$	893,219

Inflation

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

Critical Accounting Policies

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and costs and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those which impact its most critical

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accounting policies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the following accounting policies are among the most important to a portrayal of the Company’s financial condition and results of operations and require among the most difficult, subjective or complex judgments:

Real Estate Inventories and Cost of Sales

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

Impairment of Real Estate Inventories

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

The results of operations for the year ended December 31, 2005 included a non-cash charge of $4.6 million to record an impairment loss related to a golf course in the Company’s San Diego Division. The impairment loss

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was primarily attributable to lower than expected cash flows and continued net operating losses since the golf course opened in 2002. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the assets carrying amount. Accordingly, the golf course asset was written-down to its estimated fair value. The non-cash charge is reflected in other operating costs in the accompanying consolidated statements of income.

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

Sales and Profit Recognition

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

Variable Interest Entities

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

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

Related Party Transactions

See Item 13 and Note 9 of the “Notes to Consolidated Financial Statements” for a description of the Company’s transactions with related parties.

Proposed Transaction

On April 26, 2005, General William Lyon announced that he was proposing to acquire the outstanding publicly held minority interest in the Company’s common stock for $82 per share in cash. General Lyon stated that this transaction would be contingent upon approval by the Board of Directors or a duly appointed special committee of the Board of Directors. The Board of Directors subsequently formed a special committee of independent directors to consider General Lyon’s proposal with the assistance of outside financial and legal advisors which the special committee retained. On June 20, 2005, the special committee announced that it had determined that the proposal by General Lyon was inadequate. On June 28, 2005, General Lyon announced that he was withdrawing his proposal. On July 25, 2005, the Company announced that its Board of Directors had disbanded the special committee. On July 25, 2005, General Lyon announced that he was discontinuing his efforts at that time to take the Company private. In connection with the special committee’s consideration of this proposed transaction, the Company has incurred approximately $2.2 million in financial advisory and legal expenses which are reflected as a charge in the Company’s results of operations for the year ended December 31, 2005.

Effective August 5, 2005, General James Dalton, William McFarland, Michael Meyer and Randolph Westerfield resigned from the Board of Directors of the Company. These directors were all independent directors of the Company who served on the Special Committee of the Board of Directors that had been created to evaluate the offer made by General Lyon. Additional information regarding the director resignations, including the effect of such resignations on the Company’s compliance with the listing requirements of the New York Stock Exchange (the “NYSE”), is contained in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2005.

On October 17, 2005, the Board of Directors of the Company appointed three new independent directors to the Board of Directors: Harold H. Greene, Gary H. Hunt and Arthur B. Laffer. At the Annual Meeting of Holders of Common Stock held on November 9, 2005, the stockholders elected eight directors to serve on the Board of Directors for the coming year (and until each director’s successor shall have been duly elected and qualified), including Messrs. Greene, Hunt and Laffer, as well as General William Lyon, Wade H. Cable, Richard E. Frankel and William H. Lyon. On January 17, 2006, the Board of Directors of the Company appointed Lawrence M. Higby as an additional independent director to the Board of Directors. As a result of these appointments and elections and the associated Board committee assignments, the Company has regained compliance with the listing requirements of the NYSE, including a majority of independent directors on the Board and the requisite composition of the Nominating and Corporate Governance Committee and the Audit Committee.

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

Recently Issued Accounting Standards

On June 29, 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-05”). The scope of EITF 04-05 is limited to limited partnerships or similar entities (such as limited liability companies that have governing

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provisions that are the functional equivalent of a limited partnership) that are not variable interest entities under Interpretation No. 46 and provides a new framework for addressing when a general partner in a limited partnership, or managing member in the case of a limited liability company, controls the entity. Under EITF 04-05, the Company may be required to consolidate certain investments in which the Company holds a general partner or managing member interest. EITF 04-05 is effective after June 29, 2005 for new entities formed after such date and for existing entities for which the agreements are subsequently modified and is effective for the Company’s fiscal year beginning January 1, 2006 for all other entities. The adoption of EITF 04-05 did not have any impact on the Company’s financial statements as of December 31, 2005. The Company has not yet determined the anticipated impact of adopting EITF 04-05 for arrangements existing at June 29, 2005. However, EITF 04-05 may require the consolidation of the assets, liabilities and operations of certain of the Company’s homebuilding and land development joint ventures. Since the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of EITF 04-05 will not impact the Company’s consolidated net income.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”), which addresses the consolidation of variable interest entities (“VIEs”). Under Interpretation No. 46, arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE. Interpretation No. 46 applies immediately to arrangements created after January 31, 2003 and, with respect to arrangements created before February 1, 2003, the interpretation was applied to the Company as of January 1, 2004.

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

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

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

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December 31, 2005, certain joint ventures, lot option agreements and land banking arrangements have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures, lot option agreements and land banking arrangements have been consolidated with the Company’s financial statements as of December 31, 2005, and for the year ended December 31, 2005.

Forward-Looking Statements

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

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

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk for changes in interest rates relates to the Company’s floating rate debt with a total outstanding balance at December 31, 2005 of $103.8 million where the interest rate is variable based upon certain bank reference or prime rates. If interest rates were to increase by 10%, the estimated impact on the Company’s consolidated financial statements would be no reduction to income before provision for income taxes based on amounts outstanding and rates in effect at December 31, 2005, but would increase capitalized interest by approximately $0.9 million which would be amortized to cost of sales as home closings occur.

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Item 8.    Financial Statements and Supplementary Data

The consolidated financial statements of William Lyon Homes and the reports of the independent registered public accounting firm, listed under Item 15, are submitted as a separate section of this report beginning on page 69 and are incorporated herein by reference.

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

None.

Item 9A.    Controls and Procedures

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

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

Management’s Annual Report on Internal Control Over Financial Reporting.    The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), and for its assessment of the effectiveness of internal control over financial reporting. Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Based on the Company’s evaluation under the framework in Internal Control — Integrated Framework, the Company’s management concluded that its internal control over financial reporting was effective as of December 31, 2005.

The assessment by the Company’s management of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report that is included herein.

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Attestation Report of Ernst & Young LLP, an independent registered public accounting firm.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

William Lyon Homes

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that William Lyon Homes maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The management of William Lyon Homes is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that William Lyon Homes maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, William Lyon Homes maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of William Lyon Homes as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005 and our report dated March 10, 2006 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Irvine, California

March 10, 2006

Item 9B.    Other Information

None.

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PART III

Item 10.    Directors and Executive Officers of Registrant

Information Regarding the Directors of William Lyon Homes

The following table lists the Directors of the Company and provides their respective ages and current positions with the Company as of February 28, 2006. Each director holds office until the Company’s next Annual Meeting and until his successor is duly elected and qualified. Except as described below, there are no family relationships between any director or executive officer and any other director or executive officer of William Lyon Homes. Biographical information for each Director is provided below.

Name	Age	Position
General William Lyon	82	Chairman of the Board of Directors and Chief Executive Officer
Wade H. Cable	57	Director, President and Chief Operating Officer
Richard E. Frankel	60	Director
Harold H. Greene (a, b, c)	66	Director
Lawrence M. Higby (a, b, c)	60	Director
Gary H. Hunt (a, b, c)	57	Director
Arthur B. Laffer (b, c)	65	Director
William H. Lyon	32	Director, Vice President and Chief Administrative Officer
Alex Meruelo (a, b, c)	43	Director

(a) Member of the Audit Committee

(b) Member of the Compensation Committee

(c) Member of the Nominating and Corporate Governance Committee

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

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

RICHARD E. FRANKEL has been associated with homebuilding entities for over 25 years, and joined the board of directors on January 25, 2000. From 1977 to 1997, he held key positions including Chief Financial Officer, Investment Division Manager, Vice Chairman and President of the former William Lyon Homes. Until December 31, 2005, he served as Chairman and Chief Executive Officer of William Lyon Financial Services, a wholly-owned subsidiary of the Company. He is also a director of Commercial Bank of California.

HAROLD H. GREENE joined the board of directors on October 17, 2005. Mr. Greene is a 40-year veteran of the commercial and residential real estate lending industry. He most recently served as the Managing Director for

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Bank of America’s California Commercial Real Estate Division from 1998 to 2001 where he was responsible for lending to commercial real estate developers in California and managed an investment portfolio of approximately $2.6 billion. From 1990 to 1998, Mr. Greene was the Executive Vice President of SeaFirst Bank in Seattle, Washington and prior to that he served as the Vice Chairman of MetroBank from 1989 to 1990 and in various positions, including Senior Vice President in charge of the Asset Based Finance Group, with Union Bank, where he worked for 27 years. Mr. Greene currently serves as a director of Gary’s and Company (men’s clothing retailer) and as a director and member of the audit committee of Paladin Realty Income Properties, Inc. (real estate investments).

LAWRENCE M. HIGBY was appointed to the Board of Directors on January 17, 2006 and has more than 30 years of corporate executive experience. As Chief Executive Officer of Apria Healthcare, the nation’s largest integrated home healthcare provider, Mr. Higby leads Apria’s strategic direction and oversees the company’s operations, marketing and sales strategies, government relations, clinical services, regulatory compliance, acquisitions, human resources, finance and information systems functions. In addition, Mr. Higby serves as a board member of the Automobile Club of Southern California, the Orange County Performing Arts Center, the South Coast Repertory, and the American Association for Homecare (AAHomecare) for which he is an active member of its executive committee. Prior to joining Apria Healthcare in 1997, Mr. Higby served as President and Chief Operating Officer of Unocal’s 76 Products Company and Group Vice President of Unocal Corporation from 1994 to 1997. From 1986 to 1994, Mr. Higby held various positions with The Times Mirror Company. From 1974 through 1985, he held executive management positions in sales and marketing at various divisions of New York-based PepsiCo.

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

ARTHUR B. LAFFER joined the board of directors on October 17, 2005. He is the Founder and has been Chairman and Chief Executive Officer of Laffer Associates, an economic research and financial consulting firm, in San Diego, California. Dr. Laffer has also been Chief Executive Officer of Laffer Advisers Inc., a broker-dealer, since 1981, and Chief Executive Officer of Laffer Investments, an investment money management firm, since 1999. Dr. Laffer has been a leader in the nation in providing economic research and global investment-research consulting services to real estate asset managers, pension funds, financial institutions, and top corporations. Commonly known as “The Father of Supply-Side Economics,” Dr. Laffer is a founding member of the U.S. Congressional Policy Advisory Board, served two terms as a member of President Reagan’s Economic Policy Advisory Board, and helped shape public policy with his involvement in California’s Proposition 13, the groundbreaking California initiative that drastically cut state property taxes in 1978. Dr. Laffer is a member of the board of directors and chairman of the audit and compensation committees of OXiGENE, Inc. (biopharmaceuticals); a member of the board of directors of Veolia Environment (environmental management); and a member of the board of directors and a member of the audit and compensation committees of MPS Group, Inc. (business services provider).

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

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

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

Information Regarding Executive Officers of William Lyon Homes

The executive officers of the Company are chosen annually by the Board of Directors and each holds office until his or her successor is chosen and qualified or until his or her death, resignation or removal. There are no family relationships between any director or executive officer and any other director or executive officer of the Company, except for William Lyon and William H. Lyon, who are father and son. The following table lists the Company’s executive officers and provides their respective ages as of February 28, 2006 and their current positions.

Name	Age	Position
General William Lyon	82	Chairman of the Board of Directors and Chief Executive Officer
Wade H. Cable	57	President and Chief Operating Officer
Douglas F. Bauer	44	Executive Vice President and Northern California Division President
Mary J. Connelly	54	Senior Vice President and Nevada Division President
W. Thomas Hickcox	53	Senior Vice President and Arizona Division President
Thomas J. Mitchell	45	Senior Vice President and Southern California Division President
Larry I. Smith	51	Senior Vice President and San Diego Division President
Michael D. Grubbs	47	Senior Vice President and Chief Financial Officer
Richard S. Robinson	59	Senior Vice President — Finance
Cynthia E. Hardgrave	57	Vice President — Tax and Internal Audit
W. Douglass Harris	62	Vice President, Corporate Controller and Corporate Secretary
William H. Lyon	32	Vice President and Chief Administrative Officer

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

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

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

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

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

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

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

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

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon a review of reports received by the Company during or with respect to the year ended December 31, 2005 pursuant to Rule 16a-3(e) of the Securities Exchange Act of 1934, all reports required during or with respect to the year ended December 31, 2005 on Form 3, Form 4 and Form 5 were timely filed by the Company’s directors, officers and 10% stockholders.

Code of Ethics

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

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

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Item 11.    Executive Compensation

Summary Compensation Table

The following table summarizes the annual and long-term compensation during 2005 of the Company’s Chief Executive Officer and the four additional most highly compensated executive officers whose annual salaries and bonuses exceeded $100,000 in total during the fiscal year ended December 31, 2005 (collectively, the “Named Officers”).

		Annual Compensation						Long-Term Compensation
								Awards
Name and Principal Position	Year	Salary($)(1)		Bonus Paid in   Specified Year But Earned in Earlier Years ($)(1),(2),(3),(4),(5)		Bonus Earned During Specified Year But Payable in Future Years($)(3),(4),(5)		Securities Underlying Options(#)	All Other Compensation ($)(6)
General William Lyon Chairman of the Board and Chief Executive Officer	2005 2004 2003	$	1,000,000 733,333 600,000	$	8,766,450 4,023,604 2,368,429	$	11,198,040 10,176,870 4,535,192	0 0 0	$	0 0 0
Wade H. Cable Director, President and Chief Operating Officer	2005 2004 2003		500,000 500,000 500,000		8,766,450 4,023,604 2,368,429		11,198,040 10,176,870 4,535,192	0 0 0		6,300 6,200 6,000
Douglas F. Bauer Executive Vice President and Northern California Division President	2005 2004 2003		250,000 225,000 225,000		2,652,134 717,018 483,619		3,779,580 3,273,060 789,357	0 0 0		6,300 6,200 6,000
Thomas J. Mitchell Senior Vice President and Southern California Division President	2005 2004 2003		225,000 225,000 225,000		2,405,595 1,481,180 968,315		2,800,920 2,667,000 1,621,379	0 0 0		6,300 6,200 6,000
W. Thomas Hickcox Senior Vice President and Arizona Division President	2005 2004 2003		200,000 200,000 200,000		582,733 194,625 178,500		2,467,980 710,300 200,000	0 0 0		6,300 6,200 6,000

(1) Includes amounts which the executive would have been entitled to be paid, but which at the election of the executive were deferred by payment into the Company’s 401(k) plan and deferred compensation plans. Does not include perquisites and other personal benefits, securities or property received by the executive unless the aggregate amount of such compensation is greater than the lesser of $50,000 or 10 percent of the total annual salary and bonus reported for the executive.

(2) Represents amounts paid in 2005, 2004 or 2003, respectively, under the Company’s then existing executive bonus plan or employment agreement with the executive, but which were earned prior to the year of payment.

(3) The 2005 Senior Executive Bonus Plan (the “Plan”) provides that the Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO) are each eligible to receive a bonus of 3% of the Company’s consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Division President is eligible to receive a bonus of 3% of the division’s pre-tax, pre-bonus income, determined after allocation to the division of its allocable portion of corporate general and administrative expenses. Awards under the Plan will be paid over two years, with 75% paid following the determination of the bonus awards, and 25% paid one year later. The amounts payable one year later are conditioned upon continued employment to the date of payment, except in the case of retirement, death or disability. All awards under the Plan will be prorated downward if the sum of all calculated awards under the Plan and the Company’s 2005 bonus plans for other

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officers and employees of the Company and its subsidiaries would exceed 20% of the Company’s consolidated pre-tax, pre-bonus income.

(4) The 2004 Cash Bonus Plan provides that the CEO, the COO and the Chief Financial Officer (“CFO”) are eligible to receive bonuses based upon specified percentages of pre-tax, pre-bonus income. Division presidents are eligible to receive bonuses based upon specified percentages of their respective division pre-tax, pre-bonus income. All other participants are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income. Awards are paid over two years, with 75% paid following the determination of bonus awards, and 25% paid one year later. The deferred amounts would be forfeited in the event of termination for any reason except retirement, death or disability.

(5) The 2003 Cash Bonus Plan provides that the CEO, COO and CFO are eligible to receive bonuses based upon specified percentages of pre-tax, pre-bonus income. Division presidents are eligible to receive bonuses based upon specified percentages of their respective division pre-tax, pre-bonus income. All other participants are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income. Awards are paid over two years, with 75% paid following the determination of bonus awards, and 25% paid one year later. The deferred amounts would be forfeited in the event of termination for any reason except retirement, death or disability.

(6) Represents matching contributions made by the Company into each executive’s 401(k) plan account in an amount equal to 3% of each executive’s eligible earnings, up to the maximum permitted.

At the Annual Meeting of Holders of Common Stock of the Company held on November 9, 2005, the stockholders approved the Company’s 2005 Senior Executive Bonus Plan (the “Plan”). The Plan provides that the Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO”) are each eligible to receive a bonus of 3% of the Company’s pre-tax, pre-bonus income. In addition, under the Plan, each Division President is eligible to receive a bonus of 3% of the division’s pre-tax, pre-bonus income, determined after allocation to the division of its allocable portion of corporate general and administrative expenses. In addition, the Company’s board of directors has approved a cash bonus plan applicable in 2005 for all of its full-time, salaried employees who are not included in the Company’s 2005 Senior Executive Bonus Plan. Under this cash bonus plan, the Chief Financial Officer is eligible to receive a bonus based upon a specified percentage of the Company’s pre-tax, pre-bonus income. All other participants under this cash bonus plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.

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

The Company has implemented deferred compensation plans that allow certain officers and employees to defer a portion of their total income (base salary and bonuses). The deferral amount can be up to 20% of total income with a minimum of $10,000 annually.

Options/SAR Grants in Fiscal Year Ended December 31, 2005

No options were granted during 2005 to any director or Named Officer.

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

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

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

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

Effective on May 9, 2000, the Company issued options under the Stock Incentive Plan to purchase a total of 627,500 shares of common stock at $8.6875 per share. During the year ended December 31, 2001, the Company issued additional options under the Stock Incentive Plan to purchase 32,500 shares of common stock at an average price of $11.50 per share. During the year ended December 31, 2005, options were exercised to purchase 35,831 shares of common stock at a price of $8.6875. During the year ended December 31, 2004, options were exercised to purchase 92,964 shares, 6,666 shares and 4,166 shares of common stock at a price of $8.6875, $13.00 and $9.10, respectively. During the year ended December 31, 2003, options were exercised to purchase 240,359 shares, 10,000 shares and 8,334 shares of common stock at a price of $8.6875, $13.00 and $9.10, respectively. As of December 31, 2005, 56,666 options have been forfeited and 50,000 options priced at $8.6875 remain unexercised. All unexercised options expire on the date that is ten years after the date of the grant of such option.

Aggregated Option Exercises and Fiscal Year-end Option Value Table

The following table sets forth the information noted for all exercises of stock options during the fiscal year ended December 31, 2005 by each of the Named Officers and the fiscal year end value of unexercised options.

	Shares Acquired On Exercise(#)(1)	Value         Realized($)(2)	Number of Securities Underlying Unexercised Options/SARs At Fiscal Year-End(#)(1)		Value of Unexercised In-The-Money Options/SARs At Fiscal Year-End($)(1)
			Exercisable	Unexercisable	Exercisable		Unexercisable
General William Lyon	—	—	—	—		—	—
Wade H. Cable	—	—	50,000	0	$	4,610,625	0
Douglas F. Bauer	—	—	0	0		0	0
Thomas J. Mitchell	—	—	0	0		0	0
W. Thomas Hickcox	—	—	0	0		0	0

(1) All exercised, exercisable and unexercisable options for each of the Named Officers were granted on May 9, 2000 under the Stock Incentive Plan. The options granted under the Stock Incentive Plan vested one-third on May 9, 2001, one-third on May 9, 2002 and one-third on May 9, 2003. The exercise price of these options is $8.6875. The value of unexercised in-the-money options is calculated by determining the difference between the closing price of the Company’s common stock on the New York Stock Exchange at December 31, 2005 ($100.90 per share) and the exercise price of the options.

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

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2005 with respect to compensation plans under which the Company’s Common Stock is authorized for issuance.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	50,000	$	8.6875	396,666
Equity compensation plans not approved by security holders	N/A		N/A	N/A
Total	50,000	$	8.6875	396,666

No compensation plan under which the Company’s Common Stock is authorized for issuance was adopted without the approval of the Company’s stockholders.

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

Employees, including executive officers, enter into annual employment agreements which provide that their employment is at-will. The employment agreements with each of General William Lyon, Wade H. Cable, Douglas F. Bauer, Thomas J. Mitchell and W. Thomas Hickcox provide for an annual salary effective January 1, 2006 of $1,000,000, $500,000, $275,000, $225,000 and $200,000 respectively. Each employment agreement also provides for a monthly automobile allowance of $400, except for General William Lyon.

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

Compensation Committee Interlocks and Insider Participation

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

Director Compensation

Effective in the fourth quarter of 2005, outside directors receive an annual fee of $60,000 per year, payable $15,000 per calendar quarter, and $2,500 for each board meeting attended in person and $1,500 for each meeting attended via teleconference. In addition, the chairperson of the Audit Committee of the Board of Directors receives a fee of $10,000 per year, payable $2,500 per calendar quarter, to serve in such capacity, the chairperson of each other committee of the Board of Directors receives a fee of $7,500 per year, payable $1,875 per calendar quarter, to serve in such capacity, and other committee members receive a fee of $2,000 per year, payable $500 per calendar quarter, per committee for service on committees of the Board of Directors.

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

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

No options were granted during 2005 to any director. On May 9, 2000, Mr. Cable was granted options to purchase 50,000 shares of common stock at a price of $8.6875 per share. These options vested in the following installments: one-third on May 9, 2001, one-third on May 9, 2002 and one-third on May 9, 2003. All of the options expire if unexercised on May 9, 2010. The grant of options to Mr. Cable is also discussed above. See “— Aggregated Option Exercises and Fiscal Year-end Option Value Table.” No options were granted to General William Lyon or William H. Lyon.

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

The following table sets forth certain information as to the number of shares of Common Stock beneficially owned as of February 28, 2006. The following table includes information for (a) each person or group that is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (b) each of the directors and nominees of the Company, (c) each executive officer named in the Summary Compensation Table, and (d) all directors and executive officers of the Company as a group.

	As of February 28, 2006
	Shares Beneficially Owned		Percentage of All Common Stock(1)
General William Lyon(2)	4,413,145	(3)(4)	50.71	%
The William Harwell Lyon 1987 Trust(5)	1,749,259	(6)	20.22	%
The William Harwell Lyon Separate Property Trust(5)	331,437		3.83	%
William H. Lyon(2)	0	(7)	0.00	%
Wade H. Cable(2)	297,708	(8)(9)	3.42	%
Richard E. Frankel(2)	0		0.00	%
Harold H. Greene(2)	0		0.00	%
Lawrence M. Higby(2)	0		0.00	%
Gary H. Hunt(2)	0		0.00	%
Arthur B. Laffer(2)	0		0.00	%
Alex Meruelo(2)	0		0.00	%
Douglas F. Bauer(2)	0		0.00	%
Thomas J. Mitchell(2)	0		0.00	%
W. Thomas Hickcox(2)	0		0.00	%
Barclays Global Investors N.A. and Barclays Global Fund Advisors(10)	453,395	(10)	5.24	%
All directors and executive officers as a group (18 persons)	4,413,145	(7)(11)	50.71	%

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(1) Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of February 28, 2006 are deemed to be outstanding and beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.

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

(3) Includes 247,708 shares held by the Cable Family Trust, Est. 7-11-88 and 50,000 shares subject to options held by Wade H. Cable that are currently exercisable or exercisable within 60 days of February 28, 2006. General William Lyon has the power to direct the vote of all of the shares beneficially owned by the Cable Family Trust and Mr. Cable pursuant to a voting agreement among William Lyon, Wade H. Cable and Susan M. Cable, Trustees of the Cable Family Trust and Wade H. Cable, individually, dated as of May 31, 2002 (as amended, the “Voting Agreement”). See note (9).

(4) Includes 117,000 shares which are subject to a variable prepaid forward contract entered into on September 15, 2005 by General William Lyon (the “Lyon Forward Contract”) and Lehman Brothers OTC Derivatives Inc. (“Lehman Brothers”). Pursuant to the Lyon Forward Contract, in exchange for a current payment from Lehman Brothers, General Lyon has an obligation to deliver up to 117,000 shares of common stock (subject to applicable adjustments) of the Company to Lehman Brothers on September 15, 2008 or may retain all or a portion of the shares subject to the Lyon Forward Contract and deliver the cash equivalent of such retained shares on such date.

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

(6) Includes 58,000 shares which are subject to a variable prepaid forward contract entered into on September 15, 2005 by The William Harwell Lyon 1987 Trust (the “Trust Forward Contract”) and Lehman Brothers OTC Derivatives Inc (“Lehman Brothers”). Pursuant to the Trust Forward Contract, in exchange for a current payment from Lehman Brothers, The William Harwell Lyon 1987 Trust has an obligation to deliver up to 58,000 shares of common stock (subject to applicable adjustments) of the Company to Lehman Brothers on September 15, 2008 or may retain all or a portion of the shares subject to the Trust Forward Contract and deliver the cash equivalent of such retained shares on such date.

(7) Does not include 1,749,259 shares of common stock held by The William Harwell Lyon 1987 Trust or 331,437 shares of common stock held by The William Harwell Lyon Separate Property Trust, of each of which William H. Lyon is the sole beneficiary. William H. Lyon does not have or share, directly or indirectly, the power to vote or to direct the vote of these shares, and thus, William H. Lyon disclaims beneficial ownership of these shares. See note (6).

(8) Includes 247,708 shares held by the Wade H. Cable & Susan M. Cable, Trustees of the Cable Family Trust, Est. 7-11-88 and 50,000 shares subject to options held by Wade H. Cable that are currently exercisable or exercisable within 60 days of February 28, 2006. These shares are subject to the Voting Agreement with General Lyon. See note (3). Does not include 1,203 shares directly owned by children of Mr. Cable, as to which shares Mr. Cable disclaims beneficial ownership.

(9) Includes 247,708 shares which are subject to a variable prepaid forward contract entered into on September 7, 2005 by and among Wade H. Cable and Susan M Cable, as trustees of the Cable Family Trust Est. 7-11-88 (the “Cable Trust”), (the “Cable Forward Contract”) and Credit Suisse First Boston Capital LLC (“CSFB Capital”). Pursuant to the Cable Forward Contract, in exchange for a current payment from CSFB Capital, the Cable Trust has an obligation to deliver up to 247,708 shares of common stock (subject to applicable adjustments) of the Company to CSFB Capital on September 8, 2008 or may retain all or a portion of such shares subject to the Cable Forward Contract and deliver the cash equivalent of such retained shares on such date.

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(10) Based solely on the Schedule 13G filed on February 6, 2006, stockholders are at the following mailing address: 45 Fremont Street, San Francisco, CA 94105. According to Item 6 of such Schedule 13G, the shares reported are held in trust accounts for the economic benefit of the beneficiaries of those accounts. Based solely on the Schedule 13G, no holder of shares is a beneficial owner of more than 5% of the Company’s common stock.

(11) Includes 50,000 shares subject to options held by directors and executive officers that are currently exercisable or exercisable within 60 days of February 28, 2006 and an aggregate of 364,708 shares which are subject to variable prepaid forward contracts. See notes (4) and (9).

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

Item 13.    Certain Relationships and Related Transactions

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

On October 26, 2000, the Company’s board of directors (with General William Lyon and William H. Lyon abstaining) approved the purchase of 579 lots for a total purchase price of $12,581,000 from an entity controlled by General William Lyon and William H. Lyon. The terms of the purchase agreement provide for an initial option payment of $1,000,000 and a rolling option takedown of the lots. In addition, one-half of the net profits in excess of six percent from the development are to be paid to the seller. Phase takedowns of approximately 20 lots each were anticipated to occur at two to three month intervals for each of several product types through September 2004. As of December 31, 2004, all lots were purchased under this agreement. During the years ended December 31, 2004 and 2003, the Company purchased 92 and 72 lots, respectively, under this agreement for a total purchase price of $1,984,000 and $2,507,000, respectively. During the years ended December 31, 2005, 2004 and 2003, the Company paid $1,949,000, $1,689,000 and $0, respectively, for one-half of the net profits in excess of six percent from the development. This land acquisition qualified as an affiliate transaction under the Company’s 12 ¹/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994 (“Indenture”). Pursuant to the terms of the Indenture, the Company determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to the Trustee under the Indenture a resolution of the Company’s Board of Directors set forth in an Officers’ Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition was approved by a majority of the disinterested members of the Company’s Board of Directors of the Company. Further, the Company delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.

Purchase of Land from Unconsolidated Joint Venture.

The Company purchased land for a total purchase price of $116,773,000, $33,655,000 and $8,440,000 during the years ended December 31, 2005, 2004 and 2003, respectively, from certain of the Company’s joint ventures.

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

For the years ended December 31, 2005, 2004 and 2003, the Company incurred reimbursable on-site labor costs of $146,000, $183,000 and $277,000, respectively, for providing customer service to real estate projects

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developed by entities controlled by General William Lyon and William H. Lyon, of which $32,000 and $26,000 was due to the Company at December 31, 2005 and 2004, respectively. In addition, the Company earned fees of $121,000, $110,000 and $109,000, respectively, for tax and accounting services performed for entities controlled by General William Lyon and William H. Lyon during the years ended December 31, 2005, 2004 and 2003, of which $92,000 was due to the Company at December 31, 2005. In January 2006, the Company received $69,000 of the amount due at December 31, 2005.

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

For the years ended December 31, 2005, 2004, and 2003, the Company incurred charges of $755,000, $755,000, and $753,000, respectively, related to rent on the Company’s corporate office, from a trust of which William H. Lyon is the sole beneficiary.

Charges Incurred Related to the Charter and Use of Aircraft.

During the years ended December 31, 2004 and 2003, the Company incurred charges of $172,000 and $250,000, respectively, related to the charter and use of aircraft owned by an affiliate of General William Lyon.

Effective September 1, 2004, the Company entered into an aircraft consulting and management agreement with an affiliate (the “Affiliate”) of William Lyon to operate and manage the Company’s aircraft which was placed in service effective as of September 1, 2004. The terms of the agreement provide that the Affiliate shall consult and render its advice and management services to the Company with respect to all functions necessary to the operation, maintenance and administration of the aircraft. The Company’s business plan for the aircraft includes (i) use by Company executives for traveling on Company business to the Company’s divisional offices and other destinations, (ii) charter service to outside third parties and (iii) charter service to General William Lyon personally. Charter services for outside third parties and General William Lyon personally are contracted for at market rates. As compensation to the Affiliate for its management and consulting services under the agreement, the Company pays the Affiliate a fee equal to (i) the amount equal to 107% of compensation paid by the Affiliate for the pilots supplied pursuant to the agreement, (ii) $50 per operating hour for the aircraft and (iii) $9,000 per month for hangar rent. In addition, all maintenance work, inspections and repairs performed by the Affiliate on the aircraft are charged to the Company at the Affiliate’s published rates for maintenance, inspection and repairs in effect at the time such work is completed. The total compensation paid to the Affiliate under the agreement amounted to $1,414,000 and $317,000 during the years ended December 31, 2005 and 2004, respectively.

Pursuant to the agreement above, the Company had earned revenue of $457,000 and $187,000 for charter services provided to General William Lyon personally, as of December 31, 2005 and 2004, respectively, of which $129,000 was due to the Company at December 31, 2005.

Mortgage Loans.

In 2005, the Company offered home mortgage loans to its employees and directors through its mortgage company subsidiary, William Lyon Financial Services (formerly Duxford Financial, Inc.). These loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. These loans did not involve more than the normal risk of collectability or present other unfavorable features and were sold to investors typically within 7 to 15 days.

Finder’s Fee Agreement.

The Company and Alex Meruelo are parties to an agreement pursuant to which Mr. Meruelo is eligible to receive a finder’s fee based upon the cash distributions received by a subsidiary of the Company from a joint venture development project relating to a portion of the Fort Ord military base in Monterey County, California.

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The joint venture development project resulted from Mr. Meruelo’s introduction of the Company to Woodman Development Company, LLC (“Woodman”) and the subsequent formation of East Garrison Partners I, LLC (“EGP”) as a joint venture between Woodman and Lyon East Garrison Company I, LLC (“EGC”). The finder’s fee will equal 5% of all net cash distributions distributed by EGP to EGC with respect to EGC’s existing 50% interest in EGP that are in excess of distributions with respect to certain deficit advances, deficit preferred returns, returns of capital and preferred returns on unreturned capital. The calculation of the finder’s fee will be based on net cash distributions received from EGP on land sales and will not be determined on the basis of any revenues, profits or distributions received from any affiliate of EGC for the construction and sale or leasing of residential or commercial buildings on such lots. Mr. Meruelo is not obligated to perform any services for EGC other than the introduction to Woodman.

Certain Family Relationships.

William H. Lyon, one of the Company’s directors and the Vice President and Chief Administrative Officer of the Company, is the son of General William Lyon. General William Lyon is the Company’s Chairman of the Board of Directors and the Chief Executive Officer. In 2005, William H. Lyon received a base salary of $115,000 and a monthly car allowance of $400 from the Company, and earned a bonus of $438,056 under the terms of the Company’s 2005 Cash Bonus Plan. The bonus earned by William H. Lyon in 2005 is consistent with bonuses earned by other Company employees with similar responsibilities.

Terry A. Connelly, who is Vice President and Director of Operations of the Company’s Nevada Division, is married to Mary J. Connelly, President of the Nevada Division. In 2005, Mr. Connelly received a base salary of $139,800 and a monthly car allowance of $400 from the Company, and earned a bonus of $661,535 under the terms of the Company’s 2005 Cash Bonus Plan. The bonus earned by Mr. Connelly in 2005 is consistent with the bonuses earned by other Company employees with similar responsibilities.

Jeffrey D. Frankel, who is a Project Manager in the Company’s Northern California Division, is the son of Richard E. Frankel, a director of the Company. In 2005, Mr. Frankel received a base salary of $95,000 and a monthly car allowance of $400 from the Company, and earned a bonus of $142,500 under the terms of the Company’s 2005 Cash Bonus Plan. The bonus earned by Mr. Frankel in 2005 is consistent with the bonuses earned by other Company employees with similar responsibilities.

Item 14.    Principal Accountant Fees and Services

The fees for professional services provided by Ernst & Young LLP in fiscal years 2005 and 2004 were:

Type of Fees	2005		2004
Audit Fees	$	1,027,000	$	1,362,000
Audit-Related Fees		202,000		178,000
Tax Fees		324,000		164,000
All Other Fees		—		—
Total Fees	$	1,553,000	$	1,704,000

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

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and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and includes fees for audits of separate financial statements of consolidated joint ventures. “All Other Fees” are fees for any services not included in the first three categories.

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

The Audit Committee considered the compatibility of the provision of other services by Ernst & Young LLP with the maintenance of Ernst & Young LLP’s independence. The Audit Committee approved all audit and non-audit services provided by Ernst & Young LLP in 2005.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)(1)  Financial Statements

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

	Page
William Lyon Homes
Report of Independent Registered Public Accounting Firm	76
Consolidated Balance Sheets	77
Consolidated Statements of Income	78
Consolidated Statements of Stockholders’ Equity	79
Consolidated Statements of Cash Flows	80
Notes to Consolidated Financial Statements	81

(2)  Financial Statement Schedules:

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

(3)  Listing of Exhibits:

Exhibit Number	Description
2.1(1)	Certificate of Ownership and Merger.
3.1(2)	Certificate of Incorporation of William Lyon Homes, a Delaware corporation.
3.2(2)	Bylaws of William Lyon Homes, a Delaware corporation.
4.1(2)	Specimen certificate of Common Stock.
4.2(23)	Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.3(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.4(24)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.5(3)	Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.6(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.7(24)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).

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Exhibit Number	Description
4.8(14)	Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.9(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.10(24)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
10.1(11)	Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware corporation.
10.2(4)	Master Loan Agreement dated as of August 31, 2000 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Federal Bank, F.S.B., a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.3(6)	Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.4(5)	Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.5(5)	Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.6(5)	Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.7(7)	Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.8(3)	Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.9(12)	Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, as
	borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.10(4)	Revolving Line of Credit Loan Agreement (Borrowing Base Loan) by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation, dated as of September 21, 2000.

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Exhibit Number	Description
10.11(25)	Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated as of October 14, 2005 by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.12(17)	Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.13(5)	Second Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of December 13, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.14(3)	Third Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of January 26, 2004, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.15(11)	Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.16(27)	First Amendment to Amended and Restated Revolving Line of Credit Loan Agreement, dated as of July 19, 2005, by and between William Lyon Homes, Inc. and California Bank & Trust.
10.17(7)	Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as Lender.
10.18(10)	Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2004 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as Lender.
10.19(8)	Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.20(3)	Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.21(15)	First Amendment to Credit Agreement dated as of August 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.22(13)	Amendment No. 2 to Credit Agreement dated as of November 15, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.23(9)	Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as borrower, and California Bank & Trust, a California banking corporation, and the other financial institutions named therein, as lenders.
10.24(9)	Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware corporation.
10.25(10)	Borrowing Base Revolving Line of Credit Agreement, dated as of June 28, 2004, by and between William Lyon Homes, Inc., a California corporation, and Bank One, NA, a national banking association.
10.26(15)	Modification Agreement, dated as of December 7, 2004, by and between William Lyon Homes, Inc., a California corporation, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA, a national banking association).
10.27(27)	Second Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, between William Lyon Homes, Inc. and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA).
10.28(18)	Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.
10.29(18)	Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective November 5, 1999.

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Exhibit Number	Description
10.30(18)	Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5, 1999.
10.31(4)	Option Agreement and Escrow Instructions between William Lyon Homes, Inc., a California corporation and Lathrop Investment, L.P., a California limited partnership, dated as of October 24, 2000.
10.32(19)	William Lyon Homes 2000 Stock Incentive Plan.
10.33(20)	Form of Stock Option Agreements.
10.34(20)	William Lyon Homes, Inc. 2000 Cash Bonus Plan.
10.35(26)	William Lyon Homes 2005 Senior Executive Bonus Plan.
10.36(28)	Description of 2005 Cash Bonus Plan.
10.37(29)	Adjustment of Salary of Douglas F. Bauer.
10.38(20)	Standard Industrial/Commercial Single-Tenant Lease – Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.
10.39(21)	William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.
10.40(22)	William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.
10.41(5)	The Presley Companies Non-Qualified Retirement Plan for Outside Directors.
10.42(16)	William Lyon Homes 2004 Executive Deferred Compensation Plan.
10.43(16)	William Lyon Homes 2004 Outside Directors Deferred Compensation Plan.
10.44(3)	Underwriting Agreement dated as of March 12, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Warburg, LLC and Salomon Smith Barney Inc., as Underwriters.
10.45(3)	Purchase Agreement dated as of January 28, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial Purchaser.
10.46(3)	Registration Rights Agreement dated as of February 6, 2004 by and among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial Purchaser.
10.47(13)	Purchase Agreement dated as of November 15, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein) and UBS Securities LLC, as Initial Purchaser.
10.48(14)	Registration Rights Agreement dated as of November 22, 2004 by and among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial Purchaser.
10.49(30)	Summary of Director Compensation.
10.50(30)	Borrowing Base Revolving Line of Credit Agreement, dated as of February 14, 2006, by and between William Lyon Homes, Inc., a California corporation, and Wachovia Financial Services, Inc, a North Carolina corporation, by and through its Agent, Wachovia Bank, National Association, a national banking association.
12.1(30)	Statement of computation of ratio of earnings to fixed charges.
21.1(30)	List of Subsidiaries of William Lyon Homes, a Delaware corporation.
23.1(30)	Consent of Independent Registered Public Accounting Firm.
31.1(30)	Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2(30)	Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1(30)	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2(30)	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(19) Previously filed as an exhibit to the Company’s Registration Statement on Form S-8 (SEC Registration No. 333-50232), and incorporated herein by this reference.

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

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

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

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

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

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

(26) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed November 9, 2005 and incorporated herein by this reference.

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

(28) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005.

(29) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005.

(30) Filed herewith.

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SIGNATURES

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

	WILLIAM LYON HOMES
March 10, 2006	By:	/s/    MICHAEL D. GRUBBS
		Michael D. Grubbs
		Senior Vice President,
		Chief Financial Officer and Treasurer

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

Name	Title	Date
/s/    WILLIAM LYON         William Lyon	Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)	March 10, 2006
/s/    WADE H. CABLE         Wade H. Cable	Director, President and Chief Operating Officer	March 10, 2006
/S/    RICHARD E. FRANKEL         Richard E. Frankel	Director	March 10, 2006
/S/    HAROLD H. GREENE         Harold H. Greene	Director	March 10, 2006
/S/    LAWRENCE M. HIGBY         Lawrence M. Higby	Director	March 10, 2006
/S/    GARY H. HUNT         Gary H. Hunt	Director	March 10, 2006
/S/    ARTHUR B. LAFFER         Arthur B. Laffer	Director	March 10, 2006
/s/    WILLIAM H. LYON         William H. Lyon	Director	March 10, 2006
/s/    ALEX MERUELO         Alex Meruelo	Director	March 10, 2006
/S/    MICHAEL D. GRUBBS         Michael D. Grubbs	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)	March 10, 2006
/s/    W. DOUGLASS HARRIS         W. Douglass Harris	Vice President, Corporate Controller and Corporate Secretary (Principal Accounting Officer)	March 10, 2006

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INDEX TO FINANCIAL STATEMENTS

	Page
William Lyon Homes
Report of Independent Registered Public Accounting Firm	76
Consolidated Balance Sheets	77
Consolidated Statements of Income	78
Consolidated Statements of Stockholders’ Equity	79
Consolidated Statements of Cash Flows	80
Notes to Consolidated Financial Statements	81

REQUIRED SCHEDULES

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

75

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

William Lyon Homes

We have audited the accompanying consolidated balance sheets of William Lyon Homes as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of William Lyon Homes at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”) effective January 31, 2003. During the years ended December 31, 2005, 2004 and 2003, the adoption of Interpretation No. 46 resulted in the Company consolidating the assets, liabilities and operations of variable interest entities in which the Company was determined to be the primary beneficiary.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of William Lyon Homes’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2006 expressed an unqualified opinion thereon.

/S/    ERNST & YOUNG LLP

Irvine, California

March 10, 2006

76

WILLIAM LYON HOMES

CONSOLIDATED BALANCE SHEETS

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

	December 31,
	2005		2004
ASSETS
Cash and cash equivalents	$	52,369	$	96,074
Receivables — Note 3		143,481		39,302
Real estate inventories — Notes 2 and 4		1,419,248		1,059,173
Investments in and advances to unconsolidated joint ventures — Note 5		397		17,911
Property and equipment, less accumulated depreciation of $9,936 and 7,844 at December 31, 2005 and 2004, respectively		18,553		18,066
Deferred loan costs		12,323		13,982
Goodwill — Note 1		5,896		5,896
Other assets — Note 2		38,735		24,158
	$	1,691,002	$	1,274,562
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	67,326	$	39,364
Accrued expenses		181,068		150,774
Notes payable — Note 6		125,619		48,571
7 5/8% Senior Notes due December 15, 2012 — Note 6		150,000		150,000
10 3/4% Senior Notes due April 1, 2013 — Note 6		246,917		246,648
7 1/2% Senior Notes due February 15, 2014 — Note 6		150,000		150,000
		920,930		785,357
Minority interest in consolidated entities — Note 2		227,178		142,096
Commitments and contingencies — Note 10
Stockholders’ equity — Note 7
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 8,652,067 and 8,616,236 shares issued and outstanding at December 31, 2005 and 2004, respectively; 1,275,000 shares issued and held in treasury at December 31, 2005 and 2004		86		86
Additional paid-in capital		35,404		30,250
Retained earnings		507,404		316,773
		542,894		347,109
	$	1,691,002	$	1,274,562

See accompanying notes.

77

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands except per common share amounts)

	Year Ended December 31,
	2005			2004			2003
Operating revenue
Home sales	$	1,745,067		$	1,785,589		$	866,657
Lots, land and other sales		111,316			36,258			21,656
Management fees — Note 1		—			—			9,490
		1,856,383			1,821,847			897,803
Operating costs
Cost of sales — homes		(1,307,027	)		(1,327,057	)		(714,385	)
Cost of sales — lots, land and other		(44,774	)		(23,173	)		(13,269	)
Sales and marketing		(59,422	)		(58,792	)		(31,252	)
General and administrative		(90,045	)		(80,784	)		(50,315	)
Other		(7,050	)		(2,105	)		(1,834	)
		(1,508,318	)		(1,491,911	)		(811,055	)
Equity in income (loss) of unconsolidated joint ventures — Note 5		4,301			(699	)		31,236
Minority equity in income of consolidated entities — Note 2		(37,571	)		(49,661	)		(429	)
Operating income		314,795			279,576			117,555
Financial advisory expenses — Note 11		(2,191	)		—			—
Other income, net		2,176			5,572			6,397
Income before provision for income taxes		314,780			285,148			123,952
Provision for income taxes — Note 8		(124,149	)		(113,499	)		(51,815	)
Net income	$	190,631		$	171,649		$	72,137
Earnings per common share — Note 1
Basic	$	22.09		$	17.69		$	7.37
Diluted	$	21.98		$	17.55		$	7.27

See accompanying notes.

78

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock					Additional Paid-In Capital			Retained Earnings
	Shares		Amount								Total
Balance — December 31, 2002	9,729		$	97		$	108,592		$	72,987	$	181,676
Issuance of common stock upon exercise of stock options and related income tax benefit — Notes 7 and 8	258			3			5,404			—		5,407
Purchase and retirement of common stock — Note 7	(200	)		(2	)		(7,178	)		—		(7,180	)
Net income for the year	—			—			—			72,137		72,137
Balance — December 31, 2003	9,787			98			106,818			145,124		252,040
Issuance of common stock upon exercise of stock options — Note 7	104			1			4,420			—		4,421
Purchase of common stock — Note 7	(1,275	)		(13	)		(80,988	)		—		(81,001	)
Net income for the year	—			—			—			171,649		171,649
Balance — December 31, 2004	8,616			86			30,250			316,773		347,109
Issuance of common stock upon exercise of stock options and related income tax benefit and other — Note 7	36			—			5,154			—		5,154
Net income	—			—			—			190,631		190,631
Balance — December 31, 2005	8,652		$	86		$	35,404		$	507,404	$	542,894

See accompanying notes.

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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2005			2004			2003
Operating activities
Net income	$	190,631		$	171,649		$	72,137
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		2,092			1,327			1,082
Equity in (income) loss of unconsolidated joint ventures		(4,301	)		699			(31,236	)
Distributions of income from unconsolidated joint ventures		2,708			—			37,501
Minority equity in income of consolidated entities		37,571			49,661			429
Impairment loss on real estate asset		4,600			—			—
State income tax refund credited to additional paid-in capital		1,845			—			—
Provision for income taxes		124,149			113,499			51,815
Net changes in operating assets and liabilities:
Receivables		(104,179	)		9,168			(17,477	)
Real estate inventories		(232,240	)		(195,340	)		(205,922	)
Deferred loan costs		1,659			(1,004	)		(7,700	)
Other assets		(6,173	)		(5,122	)		(3,716	)
Accounts payable		27,962			(2,612	)		816
Accrued expenses		(90,858	)		(54,632	)		(20,269	)
Net cash (used in) provided by operating activities		(44,534	)		87,293			(122,540	)
Investing activities
Investment in and advances to unconsolidated joint ventures		(1,379	)		(9,427	)		(8,493	)
Distributions of capital from unconsolidated joint ventures		20,486			10,126			22,019
Purchases of property and equipment		(2,579	)		(17,768	)		(576	)
Net cash provided by (used in) investing activities		16,528			(17,069	)		12,950
Financing activities
Proceeds from borrowings on notes payable		1,855,452			1,768,933			1,105,464
Principal payments on notes payable		(1,794,799	)		(1,896,365	)		(1,220,919	)
Issuance of 7 5/8% Senior Notes		—			148,500			—
Issuance of 10 3/4% Senior Notes		—			—			246,233
Repayment of 12 1/2% Senior Notes		—			—			(70,279	)
Issuance of 7 1/2% Senior Notes		—			147,563			—
Minority interest (distributions) contributions, net		(76,664	)		(86,849	)		61,420
Common stock issued for exercised options		312			932			2,294
Common stock purchased		—			(81,001	)		(7,180	)
Net cash (used in) provided by financing activities		(15,699	)		1,713			117,033
Net (decrease) increase in cash and cash equivalents		(43,705	)		71,937			7,443
Cash and cash equivalents — beginning of year		96,074			24,137			16,694
Cash and cash equivalents — end of year	$	52,369		$	96,074		$	24,137
Supplemental disclosures of cash flow and non-cash activities
Issuance of notes payable for land acquisitions	$	11,686		$	—		$	21,534
Issuance of note payable to secure land option agreement	$	4,709		$	5,420		$	—
Consolidation of real estate inventories and minority interest from variable interest entities	$	115,771		$	—		$	—
Consolidation of other assets and minority interest from variable interest entities	$	8,404		$	—		$	—
Income tax benefit credited to additional paid-in capital in connection with stock option exercises and other	$	2,997		$	3,489		$	3,113
Consolidation of real estate inventories of previously unconsolidated joint ventures	$	—		$	160,124		$	—
Consolidation of notes payable of previously unconsolidated joint ventures	$	—		$	90,252		$	—
Consolidation of other net assets of previously unconsolidated joint ventures	$	—		$	43,568		$	—

See accompanying notes.

80

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

Operations

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

Basis of Presentation

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

Segment Information

The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets. For internal reporting purposes, the Company is organized into five geographic home building regions and its mortgage origination operation. Because each of the Company’s geographic home building regions has similar economic characteristics, housing products and class of prospective buyers, the geographic home building regions have been aggregated into a single home building segment. The Company’s mortgage origination operations did not meet the materiality thresholds which would require disclosure for the years ended December 31, 2005, 2004 and 2003, and accordingly, are not separately reported.

The Company evaluates performance and allocates resources primarily based on the operating income of individual home building projects. Operating income is defined by the Company as operating revenue less operating costs plus equity in (loss) income of unconsolidated joint ventures less minority equity in income of consolidated entities. Accordingly, operating income excludes certain expenses included in the determination of net income. Operating income from home building operations totaled $314.8 million, $279.6 million and $117.6 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Substantially all revenues are from external customers. There were no customers that contributed 10% or more of the Company’s total revenues during the years ended December 31, 2005, 2004 or 2003.

Real Estate Inventories and Related Indebtedness

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

81

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

	December 31,
	2005			2004			2003
Warranty liability, beginning of year	$	14,308		$	7,267		$	4,287
Warranty liability from consolidated entities as of January 1, 2004 — Note 2		—			1,664			—
Warranty provision during year		22,205			17,955			9,279
Warranty settlements and adjustments during year		(16,294	)		(12,578	)		(6,299	)
Warranty liability, end of year	$	20,219		$	14,308		$	7,267

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

The Company accounts for its real estate inventories under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”). Statement No. 144 requires impairment losses to be recorded on real estate inventories when indicators of impairment are present and the undiscounted cash flows estimated to be generated by real estate inventories are less than the carrying amount of such assets. When an impairment loss is required for real estate inventories, the related assets are adjusted to their estimated fair value.

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

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

82

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Property and Equipment

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

Deferred Loan Costs

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

Goodwill

The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill and, until January 1, 2002 was being amortized on a straight-line basis over seven years. Accumulated amortization was $2,793,000 as of December 31, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), effective for fiscal years beginning after December 15, 2001. Under this rule, goodwill is no longer amortized but is subject to impairment tests in accordance with Statement No. 142. The Company performed its first required annual impairment test of goodwill as of January 1, 2002 and determined that goodwill was not impaired. As of December 31, 2005, there have been no indicators of impairment related to the Company’s goodwill.

Sales and Profit Recognition

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

Income Taxes

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

Financial Instruments

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash investments, receivables, and deposits. The Company typically places its cash investments in investment

83

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

grade short-term instruments. Deposits, included in other assets, are due from municipalities or utility companies and are generally collected from such entities through fees assessed to other developers.

For those instruments, as defined under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, for which it is practical to estimate fair value, management has determined that the carrying amounts of the Company’s financial instruments approximate their fair value at December 31, 2005, except for the 10 ³/4% Senior Notes, 7 ¹/2% Senior Notes and 7 ⁵/8% Senior Notes as described in Note 6.

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

Cash and Cash Equivalents

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

Management Fees

Management fees represent fees earned from unconsolidated joint ventures in accordance with joint venture and/or operating agreements. Effective January 1, 2004, upon consolidation of certain joint ventures in connection with interpretation No. 46 (See Note 2), management fees are eliminated with the related cost of sales.

Basic and Diluted Earnings Per Common Share

Earnings per share amounts for all periods presented conform to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic and diluted earnings per common share for the year ended December 31, 2005 are based on 8,628,901 and 8,674,749 shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the year ended December 31, 2004 are based on 9,701,386 and 9,777,810 shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the year ended December 31, 2003 are based on 9,782,928 and 9,928,733 shares of common stock outstanding, respectively.

84

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock-Based Compensation

At December 31, 2005, the Company had stock plans, which are described more fully in Note 7. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per common share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement No. 123”) to stock-based employee plans (in thousands, except per common share amounts):

	Year Ended December 31
	2005		2004			2003
Net income, as reported	$	190,631	$	171,649		$	72,137
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		—		(22	)		(380	)
Net income, as adjusted	$	190,631	$	171,627		$	71,757
Earnings per common share:
Basic — as reported	$	22.09	$	17.69		$	7.37
Basic — as adjusted	$	22.09	$	17.69		$	7.33
Diluted — as reported	$	21.98	$	17.55		$	7.27
Diluted — as adjusted	$	21.98	$	17.55		$	7.23

Use of Estimates

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 2005 and 2004 and revenues and expenses for each of the three years in the period ended December 31, 2005. Accordingly, actual results could differ from those estimates.

Impact of New Accounting Pronouncements

On June 29, 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-05”). The scope of EITF 04-05 is limited to limited partnerships or similar entities (such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership) that are not variable interest entities under Interpretation No. 46 and provides a new framework for addressing when a general partner in a limited partnership, or managing member in the case of a limited liability company, controls the entity. Under EITF 04-05, the Company may be required to consolidate certain investments in which the Company holds a general partner or managing member interest. EITF 04-05 is effective after June 29, 2005 for new entities formed after such date and for existing entities for which the agreements are subsequently modified and is effective for the Company’s fiscal year beginning January 1, 2006 for all other entities. The adoption of EITF 04-05 did not have any impact on the Company’s financial statements as of December 31, 2005. The Company has not yet

85

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

determined the anticipated impact of adopting EITF 04-05 for arrangements existing at June 29, 2005. However, EITF 04-05 may require the consolidation of the assets, liabilities and operations of certain of the Company’s homebuilding and land development joint ventures. Since the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of EITF 04-05 will not impact the Company’s consolidated net income.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”) which addresses the consolidation of variable interest entities (“VIEs”). Interpretation No. 46 applied immediately to arrangements created after January 31, 2003 and, with respect to arrangements created before February 1, 2003, the interpretation was applied to the Company as of January 1, 2004. As of December 31, 2005, the Company is considered to be the primary beneficiary in certain joint ventures, lot option agreements and land banking arrangements, which have been determined to be variable interest entities. Accordingly, the assets, liabilities and operations of these joint ventures and land banking arrangements have been consolidated with the Company’s financial statements as of December 31, 2005 and for the periods then ended. The consolidation of the assets, liabilities and operations of any joint venture, option agreements or land banking arrangements has a corresponding effect on various of the Company’s financial ratios and other financial and operational indicators. See Note 2 for information regarding variable interest entities. See Notes 5 and 10 for additional information regarding joint venture and land banking arrangements.

Reclassifications

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

Note 2 — Consolidation of Variable Interest Entities

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

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

Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements (see Note 10) or (iii) enters into arrangements with a financial partner for the formation of joint ventures which engage in homebuilding and land development activities, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. The Company may be deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected losses if they occur. For each VIE created, the Company has

86

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Based on the Company’s analysis of arrangements created after January 31, 2003, no VIEs have been created for the period from February 1, 2003 through December 31, 2003 with respect to option agreements as identified under clause (i) of the previous paragraph. At December 31, 2003, certain joint ventures and a land banking arrangement created after January 31, 2003 have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures and one land banking arrangement have been consolidated with the Company’s financial statements as of December 31, 2003 and for the period then ended. Effective January 1, 2004, certain additional joint ventures and land banking arrangements created prior to February 1, 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 all of these joint ventures and land banking arrangements have been consolidated with the Company’s financial statements as of January 1, 2004 and for the year ended December 31, 2004. At December 31, 2005, certain joint ventures, lot option agreements and land banking arrangements have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures, lot option agreements and land banking arrangements have been consolidated with the Company’s financial statements as of December 31, 2005, and for the year ended December 31, 2005. Supplemental consolidating financial information of the Company, specifically including information for the joint ventures, lot option arrangements and land banking arrangements consolidated under Interpretation No. 46, is presented below to allow investors to determine the nature of assets held and the operations of the consolidated entities. Investments in consolidated entities in the separate financial statements of wholly-owned entities are presented below using the equity method of accounting. Consolidated real estate inventories include land deposits under option agreements or land banking arrangements (see Note 10) of $77,956,000 and $38,023,000 at December 31, 2005 and 2004, respectively. As of December 31, 2005, the Company’s remaining total contractual obligations for land purchases and option commitments was approximately $944,701,000.

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

87

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)

	December 31, 2005
	Wholly- Owned		Variable Interest Entities Under Interpretation No. 46		Eliminating Entries			Consolidated Total
ASSETS
Cash and cash equivalents	$	26,271	$	26,098	$	—		$	52,369
Receivables		128,074		15,407		—			143,481
Real estate inventories		1,119,127		300,121		—			1,419,248
Investments in and advances to unconsolidated joint ventures		397		—		—			397
Investments in consolidated entities		88,197		—		(88,197	)		—
Other assets		67,103		8,404		—			75,507
Intercompany receivables		—		6,583		(6,583	)		—
	$	1,429,169	$	356,613	$	(94,780	)	$	1,691,002
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	223,306	$	25,088	$	—		$	248,394
Notes payable		109,469		16,150		—			125,619
7 5/8% Senior Notes due December 15, 2012		150,000		—		—			150,000
10 3/4% Senior Notes due April 1, 2013		246,917		—		—			246,917
7 1/2% Senior Notes due February 15, 2014		150,000		—		—			150,000
Intercompany payables		6,583		—		(6,583	)		—
Total liabilities		886,275		41,238		(6,583	)		920,930
Minority interest in consolidated entities		—		—		227,178			227,178
Owners’ capital
William Lyon Homes		—		88,197		(88,197	)		—
Others		—		227,178		(227,178	)		—
Stockholders’ equity		542,894		—		—			542,894
	$	1,429,169	$	356,613	$	(94,780	)	$	1,691,002

88

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)

	December 31, 2004
			Consolidated Entities
	Wholly- Owned		Variable Interest Entities Under Interpretation No. 46		Joint Ventures Previously Consolidated		Elimination Entries			Consolidated Total
ASSETS
Cash and cash equivalents	$	64,399	$	31,569	$	106	$	—		$	96,074
Receivables		34,147		5,155		—		—			39,302
Real estate inventories		824,243		234,930		—		—			1,059,173
Investments in and advances to unconsolidated joint ventures		17,911		—		—		—			17,911
Investments in consolidated entities		77,397		—		—		(77,397	)		—
Other assets		62,102		—		—		—			62,102
Intercompany receivables		—		—		4,426		(4,426	)		—
	$	1,080,199	$	271,654	$	4,532	$	(81,823	)	$	1,274,562
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	166,698	$	18,913	$	4,527	$	—		$	190,138
Notes payable		16,957		31,614		—		—			48,571
7 5/8% Senior Notes due December 15, 2012		150,000		—		—		—			150,000
10 3/4% Senior Notes due April 1, 2013		246,648		—		—		—			246,648
7 1/2% Senior Notes due February 15, 2014		150,000		—		—		—			150,000
Intercompany payables		2,787		1,639		—		(4,426	)		—
Total liabilities		733,090		52,166		4,527		(4,426	)		785,357
Minority interest in consolidated entities		—		—		—		142,096			142,096
Owners’ capital
William Lyon Homes		—		77,392		5		(77,397	)		—
Others		—		142,096		—		(142,096	)		—
Stockholders’ equity		347,109		—		—		—			347,109
	$	1,080,199	$	271,654	$	4,532	$	(81,823	)	$	1,274,562

89

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)

	Year Ended December 31, 2005
	Wholly-Owned			Variable Interest Entities Under Interpretation No. 46			Eliminating Entries			Consolidated Total
Operating revenue
Sales	$	1,449,524		$	406,859		$	—		$	1,856,383
Management fees		12,658			—			(12,658	)		—
		1,462,182			406,859			(12,658	)		1,856,383
Operating costs
Cost of sales		(1,057,535	)		(306,924	)		12,658			(1,351,801	)
Sales and marketing		(46,480	)		(12,942	)		—			(59,422	)
General and administrative		(90,045	)		—			—			(90,045	)
Other		(7,050	)		—			—			(7,050	)
		(1,201,110	)		(319,866	)		12,658			(1,508,318	)
Equity in income of unconsolidated joint ventures		4,301			—			—			4,301
Equity in income of consolidated entities		50,009			—			(50,009	)		—
Minority equity in income of consolidated entities		—			—			(37,571	)		(37,571	)
Operating income		315,382			86,993			(87,580	)		314,795
Financial advisory expenses		(2,191	)		—			—			(2,191	)
Other (expense) income, net		1,589			587			—			2,176
Income before provision for income taxes		314,780			87,580			(87,580	)		314,780
Provision for income taxes		(124,149	)		—			—			(124,149	)
Net income	$	190,631		$	87,580		$	(87,580	)	$	190,631

90

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)

	Year Ended December 31, 2004
				Consolidated Entities
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Joint Ventures Previously Consolidated			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	1,282,535		$	539,312		$	33,655		$	(33,655	)	$	1,821,847
Management fees		16,188			—			—			(16,188	)		—
		1,298,723			539,312			33,655			(49,843	)		1,821,847
Operating costs
Cost of sales		(964,398	)		(402,020	)		(33,655	)		49,843			(1,350,230	)
Sales and marketing		(41,381	)		(17,411	)		—			—			(58,792	)
General and administrative		(80,784	)		—			—			—			(80,784	)
Other		(2,105	)		—			—			—			(2,105	)
		(1,088,668	)		(419,431	)		(33,655	)		49,843			(1,491,911	)
Equity in income of unconsolidated joint ventures		(699	)		—			—			—			(699	)
Equity in income of consolidated entities		70,394			—			—			(70,394	)		—
Minority equity in income of consolidated entities		—			—			—			(49,661	)		(49,661	)
Operating income		279,750			119,881			—			(120,055	)		279,576
Other income, net		5,398			174			—			—			5,572
Income before provision for income taxes		285,148			120,055			—			(120,055	)		285,148
Provision for income taxes		(113,499	)		—			—			—			(113,499	)
Net income	$	171,649		$	120,055		$	—		$	(120,055	)	$	171,649

91

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)

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

92

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 — Receivables

Receivables consist of the following (in thousands):

	December 31,
	2005		2004
Notes receivable:
First trust deed mortgage notes receivable, pledged as collateral for revolving mortgage warehouse credit facility	$	47,816	$	9,305
Notes receivable from land sale		—		5,343
		47,816		14,648
Other receivables — primarily escrow proceeds		95,665		24,654
	$	143,481	$	39,302

Note 4 — Real Estate Inventories

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

	December 31, 2005
Division	Deposits		Land(1)		Construction in Progress		Completed Inventory, Including Models and Completed Lots Held for Sale		Total
Southern California	$	32,169	$	247,824	$	239,669	$	48,175	$	567,837
Northern California		950		123,209		97,882		19,897		241,938
San Diego		33,875		100,899		138,664		32,017		305,456
Arizona		8,222		56,545		53,836		10,001		128,604
Nevada		2,739		108,179		48,552		15,943		175,413
	$	77,956	$	636,656	$	578,603	$	126,033	$	1,419,248
	December 31, 2004
Division	Deposits		Land		Construction in Progress		Completed Inventory, Including Models and Completed Lots Held for Sale		Total
Southern California	$	4,411	$	158,393	$	135,115	$	36,178	$	334,097
Northern California		1,656		107,566		143,687		17,375		270,284
San Diego		22,604		119,361		76,900		7,280		226,145
Arizona		9,352		64,156		35,770		5,675		114,953
Nevada		—		66,049		37,053		10,592		113,694
	$	38,023	$	515,525	$	428,525	$	77,100	$	1,059,173

(1) Includes the consolidation of certain lot option arrangements and land banking arrangements determined to be VIEs under Interpretation No. 46 in which the company is considered the primary beneficiary (See Note 2 above).

93

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5 — Investments in and Advances to Unconsolidated Joint Ventures

The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. The consolidated financial statements of the Company include the accounts of the Company, all majority-owned and controlled subsidiaries and certain joint ventures which have been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). The financial statements of joint ventures which have not been determined to be variable interest entities in which the Company is considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Condensed combined financial information of these unconsolidated joint ventures as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005 are summarized as follows:

CONDENSED COMBINED BALANCE SHEETS

(In thousands)

	December 31,
	2005		2004
ASSETS
Cash and cash equivalents	$	2,580	$	1,132
Receivables		3,253		948
Real estate inventories		31,279		38,193
Investment in unconsolidated joint venture		—		25,799
Property and equipment		956		165
	$	38,068	$	66,237
LIABILITIES AND OWNERS’ CAPITAL
Accounts payable	$	5,127	$	2,313
Notes payable		32,377		28,580
Advances from William Lyon Homes		181		413
		37,685		31,306
Owners’ Capital
William Lyon Homes		216		17,498
Others		167		17,433
		383		34,931
	$	38,068	$	66,237

94

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED COMBINED STATEMENTS OF INCOME

(In thousands)

	Year Ended December 31,
	2005			2004			2003
Operating revenue
Home sales	$	—		$	—		$	317,109
Land sales		26,091			—			8,440
		26,091			—			325,549
Operating costs
Cost of sales — homes		—			—			(248,252	)
Cost of sales — land		(23,338	)		—			(8,132	)
Sales and marketing		(342	)		—			(9,431	)
General and administrative		(17	)		—			—
Other		(1,380	)		(694	)		—
		(25,077	)		(694	)		(265,815	)
Equity in income (loss) of unconsolidated joint ventures		19,687			(705	)		—
Operating income (loss)		20,701			(1,399	)		59,734
Other (loss), net		—			—			(1,327	)
Net income (loss)	$	20,701		$	(1,399	)	$	58,407
Allocation to owners
William Lyon Homes	$	10,350		$	(699	)	$	31,236
Others		10,351			(700	)		27,171
	$	20,701		$	(1,399	)	$	58,407

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 $32,377,000 at December 31, 2005. 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.

During the year ended December 31, 2002, one of the Company’s joint ventures (“Existing Venture”) was restructured such that the Company was required to purchase the 538 lots owned by the Existing Venture on a specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the outside partner of the Existing Venture. During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64,468,000, which includes a $12,493,000 preferred return to the outside partner of the Existing Venture. The 242 lots were purchased by a newly formed joint venture (“New Venture”) between the Company and an outside partner. The Company was required to and did purchase the 242 lots owned by the New Venture on a specified takedown

95

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

basis through May 15, 2004 at a purchase price equal to $74,210,000 plus a 13 ¹/2% preferred return on invested capital to the outside partner of the New Venture. Because the Company is required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company now controls both ventures, the financial statements of both ventures have been consolidated with the Company’s financial statements as of December 31, 2003, including real estate inventories of $28,095,000 and minority interest in consolidated joint ventures of $22,632,000. During the year ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for $19,765,000, which included a $3,953,000 preferred return to the outside partner of the Existing Venture. The 44 lots were purchased through a land banking arrangement (see Note 10 for additional information regarding the Company’s land banking arrangements). During the year ended December 31, 2003, an additional 219 lots were purchased from the Existing Venture for $74,896,000, which included a $21,743,000 preferred return to the outside partner of the Existing Venture. These purchases included (i) 172 lots which were purchased from the Existing Venture under a land banking arrangement (see Note 2) for $56,632,000, which included a $16,441,000 preferred return to the outside partner of the Existing Venture and (ii) 47 lots which were purchased by the New Venture from the Existing Venture for $18,264,000, which included a $5,302,000 preferred return to the outside partner of the Existing Venture. During the year ended December 31, 2002, the Company purchased 15 lots from the New Venture for $5,135,000, all of which was paid to the outside partner as a return of capital. During the year ended December 31, 2003, the Company purchased 175 lots from the New Venture for $54,543,000, all of which was paid to the outside partner as a return of capital. During the year ended December 31, 2004, the Company purchased the remaining 99 lots from the New Venture for $34,281,000. The intercompany sales and related profits have been eliminated in consolidation.

During the year ended December 31, 2003, the Company’s wholly-owned subsidiary William Lyon Homes, Inc., a California corporation, (“California Lyon”), and two unaffiliated parties formed a series of limited liability companies (“Development LLCs”) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. As of December 31, 2005, the Development LLCs sold substantially all of the lots. During the year ended December 31, 2005, California Lyon purchased 829 lots from the Development LLCs for a purchase price of $183,626,000, of which 267 lots were purchased through three land banking arrangements for a purchase price of $84,085,000 (see Note 2 for additional information regarding the Company’s land banking arrangements). California Lyon has a 12 ¹/2% indirect, minority interest in the Development LLCs and during the year ended December 31, 2005 earned income of $9,843,000 from the sale of lots by the Development LLCs, of which $5,159,000 of income was deferred as a reduction to the cost basis of the lots purchased by California Lyon and will be recognized when homes are constructed on the lots and sold to third parties.

The Company is a member in an unconsolidated joint venture limited liability company formed for the purpose of acquiring and developing land in Nevada. At December 31, 2005, the unconsolidated joint venture had outstanding land acquisition and development debt of $32,377,000, of which the Company guaranteed $16,188,500. During the year ended December 31, 2005, the Company purchased 488 lots for a purchase price of $15,900,000 from the unconsolidated joint venture. The Company deferred $890,000 of income from the transaction, which will be recognized when homes are constructed on the lots and sold to third parties.

During the year ended December 31, 2003, one of the joint ventures in which the Company is a general partner completed a land sale to the Company for $8,440,000 resulting in no gain or loss to the joint venture.

96

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6 — Notes Payable and Senior Notes

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

	December 31,
	2005		2004
Notes payable:
Revolving credit facilities	$	49,967	$	7,652
Construction notes payable		16,150		31,614
Seller financing		11,686		—
Collateralized mortgage obligations under revolving mortgage warehouse credit facilities, secured by first trust deed mortgage notes receivable		47,816		9,305
		125,619		48,571
Senior Notes:
7 5/8% Senior Notes due December 15, 2012		150,000		150,000
10 3/4% Senior Notes due April 1, 2013		246,917		246,648
7 1/2% Senior Notes due February 15, 2014		150,000		150,000
		546,917		546,648
	$	672,536	$	595,219

During the years ended December 31, 2005, 2004 and 2003, the Company incurred and capitalized interest relating to the above debt of $73,209,000, $59,024,000 and $47,188,000, respectively.

Maturities of the notes payable, 7 ⁵/8% Senior Notes due December 15, 2012, 10 ³/4% Senior Notes due April 1, 2013 and the 7 ¹/2% Senior Notes due February 15, 2014 are as follows as of December 31, 2005:

Year Ended December 31,	(in thousands)
2006	$	56,168
2007		55,545
2008		13,906
2009		—
2010		—
Thereafter		546,917
	$	672,536

7 ⁵/8% Senior Notes

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

97

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Except as set forth in the Indenture governing the 7 ⁵/8% Senior Notes (“7 ⁵/8% Senior Notes Indenture”), the 7 ⁵/8% Senior Notes are not redeemable prior to December 15, 2008. Thereafter, the 7 ⁵/8% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before December 15, 2007, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.625% of the principal amount, plus accrued and unpaid interest, if any.

As of December 31, 2005, the outstanding 7 ⁵/8% Senior Notes with a face value of $150,000,000 had a fair value of approximately $132,375,000 based on quotes from industry sources.

10 ³/4% Senior Notes

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

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

As of December 31, 2005, the outstanding 10 ³/4% Senior Notes with a face value of $246,917,000 had a fair value of approximately $258,125,000 based on quotes from industry sources.

7 ¹/2% Senior Notes

On February 6, 2004, California Lyon closed its offering of $150,000,000 principal amount of 7 ¹/2% Senior Notes due 2014 (the “7 ¹/2% Senior Notes”). The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. The notes were issued at par, resulting in net proceeds to the Company of approximately $147,600,000. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes

98

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

having substantially identical terms. On July 16, 2004, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its outstanding $150,000,000 aggregate principal amount of 7 ¹/2% Senior Notes due 2014, which are not registered under the Securities Act of 1933, for a like amount of its new 7 ¹/2% Senior Notes due 2014, which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated July 16, 2004. The exchange offer was completed for the full principal amount of the 7 ¹/2% Senior Notes on August 17, 2004. The terms of the new notes are identical in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. The new notes have been listed on the New York Stock Exchange. Interest on the 7 ¹/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal amount of 7 ¹/2% Senior Notes the Company’s semi-annual interest payments are $5,600,000.

Except as set forth in the Indenture governing the 7 ¹/2% Senior Notes (“7 ¹/2% Senior Notes Indenture”), the 7 ¹/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 7 ¹/2% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before February 15, 2007, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.50% of the principal amount, plus accrued and unpaid interest, if any.

As of December 31, 2005, the outstanding 7 ¹/2% Senior Notes with a face value of $150,000,000 had a fair value of approximately $129,750,000 based on quotes from industry sources.

* * * * *

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

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

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

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

99

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

At December 31, 2005, the Company had approximately $109,469,000 million of secured indebtedness, (excluding approximately $16,150,000 million of secured indebtedness of consolidated entities) and approximately $316,675,000 million of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas.

Supplemental consolidating financial information of the Company, specifically including information for California Lyon, the issuer of the 10 ³/4% Senior Notes, the 7 ¹/2% Senior Notes and the 7 ⁵/8% Senior Notes, and Delaware Lyon and the guarantor subsidiaries is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of California Lyon and the guarantor subsidiaries are not provided, as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of assets held and the operations of the combined groups.

100

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2005

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	18,934	$	6,687	$	26,748	$	—		$	52,369
Receivables		—		75,505		52,567		15,409		—			143,481
Real estate inventories		—		1,226,916		2,090		190,242		—			1,419,248
Investments in and advances to unconsolidated joint ventures		—		397		—		—		—			397
Property and equipment, net		—		2,128		16,425		—		—			18,553
Deferred loan costs		—		12,323		—		—		—			12,323
Goodwill		—		5,896		—		—		—			5,896
Other assets		—		36,472		2,263		—		—			38,735
Investments in subsidiaries		542,894		88,254		10,332		—		(641,480	)		—
Intercompany receivables		—		1,667		113,530		6,583		(121,780	)		—
	$	542,894	$	1,468,492	$	203,894	$	238,982	$	(763,260	)	$	1,691,002
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	46,184	$	756	$	20,386	$	—		$	67,326
Accrued expenses		—		169,884		6,250		4,934		—			181,068
Notes payable		—		61,653		47,816		16,150		—			125,619
7 5/8% Senior Notes		—		150,000		—		—		—			150,000
10 3/4% Senior Notes		—		246,917		—		—		—			246,917
7 1/2% Senior Notes		—		150,000		—		—		—			150,000
Intercompany payables		—		120,113		1,667		—		(121,780	)		—
Total liabilities		—		944,751		56,489		41,470		(121,780	)		920,930
Minority interest in consolidated entities		—		—		—		—		227,178			227,178
Stockholders’ equity		542,894		523,741		147,405		197,512		(868,658	)		542,894
	$	542,894	$	1,468,492	$	203,894	$	238,982	$	(763,260	)	$	1,691,002

101

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2004

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	57,420	$	6,170	$	32,484	$	—		$	96,074
Receivables		—		22,458		11,361		5,483		—			39,302
Real estate inventories		—		834,469		1,767		222,937		—			1,059,173
Investments in and advances to unconsolidated joint ventures		—		17,911		—		—		—			17,911
Property and equipment, net		—		1,093		16,973		—		—			18,066
Deferred loan costs		—		13,982		—		—		—			13,982
Goodwill		—		5,896		—		—		—			5,896
Other assets		—		22,656		1,502		—		—			24,158
Investments in subsidiaries		347,109		77,303		11,390		—		(435,802	)		—
Intercompany receivables		—		1,867		89,870		—		(91,737	)		—
	$	347,109	$	1,055,055	$	139,033	$	260,904	$	(527,539	)	$	1,274,562
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	29,146	$	380	$	9,838	$	—		$	39,364
Accrued expenses		—		137,199		3,971		9,604		—			150,774
Notes payable		—		13,072		9,305		26,194		—			48,571
7 5/8% Senior Notes		—		150,000		—		—		—			150,000
10 3/4% Senior Notes		—		246,648		—		—		—			246,648
7 1/2% Senior Notes		—		150,000		—		—		—			150,000
Intercompany payables		—		88,538		1,867		1,332		(91,737	)		—
Total liabilities		—		814,603		15,523		46,968		(91,737	)		785,357
Minority interest in consolidated entities		—		—		—		—		142,096			142,096
Stockholders’ equity		347,109		240,452		123,510		213,936		(577,898	)		347,109
	$	347,109	$	1,055,055	$	139,033	$	260,904	$	(527,539	)	$	1,274,562

102

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2005

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	1,246,082		$	203,442		$	406,859		$	—		$	1,856,383
Management fees		—		12,658			—			—			(12,658	)		—
		—		1,258,740			203,442			406,859			(12,658	)		1,856,383
Operating costs
Cost of sales		—		(908,897	)		(148,638	)		(306,924	)		12,658			(1,351,801	)
Sales and marketing		—		(38,333	)		(8,147	)		(12,942	)		—			(59,422	)
General and administrative		—		(89,977	)		(68	)		—			—			(90,045	)
Other		—		—			(7,050	)		—			—			(7,050	)
		—		(1,037,207	)		(163,903	)		(319,866	)		12,658			(1,508,318	)
Equity in income (loss) of unconsolidated joint ventures		—		4,991			(690	)		—			—			4,301
Income (loss) from subsidiaries		190,631		87,255			(217	)		—			(277,669	)		—
Minority equity in income of consolidated entities		—		—			—			—			(37,571	)		(37,571	)
Operating income		190,631		313,779			38,632			86,993			(315,240	)		314,795
Financial advisory expenses		—		(2,191	)		—			—			—			(2,191	)
Other (expense) income, net		—		488			1,052			636			—			2,176
Income before provision for income taxes		190,631		312,076			39,684			87,629			(315,240	)		314,780
Provision for income taxes		—		(124,132	)		—			(17	)		—			(124,149	)
Net income	$	190,631	$	187,944		$	39,684		$	87,612		$	(315,240	)	$	190,631

103

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2004

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	1,219,155		$	97,035		$	539,312		$	(33,655	)	$	1,821,847
Management fees		—		16,188			—			—			(16,188	)		—
		—		1,235,343			97,035			539,312			(49,843	)		1,821,847
Operating costs
Cost of sales		—		(933,472	)		(64,581	)		(402,020	)		49,843			(1,350,230	)
Sales and marketing		—		(36,850	)		(4,531	)		(17,411	)		—			(58,792	)
General and administrative		—		(80,570	)		(214	)		—			—			(80,784	)
Other		—		—			(2,105	)		—			—			(2,105	)
		—		(1,050,892	)		(71,431	)		(419,431	)		49,843			(1,491,911	)
Equity in loss of unconsolidated joint ventures		—		(352	)		(347	)		—			—			(699	)
Income from subsidiaries		171,649		90,478			6,048			—			(268,175	)		—
Minority equity in income of consolidated entities		—		—			—			—			(49,661	)		(49,661	)
Operating income		171,649		274,577			31,305			119,881			(317,836	)		279,576
Other income, net		—		270			3,497			1,805			—			5,572
Income before provision for income taxes		171,649		274,847			34,802			121,686			(317,836	)		285,148
Provision for income taxes		—		(112,919	)		—			(580	)		—			(113,499	)
Net income	$	171,649	$	161,928		$	34,802		$	121,106		$	(317,836	)	$	171,649

104

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2003

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	811,342		$	67,772		$	138,638		$	(129,439	)	$	888,313
Management fees		—		9,490			—			—			—			9,490
		—		820,832			67,772			138,638			(129,439	)		897,803
Operating costs
Cost of sales		—		(659,473	)		(60,277	)		(115,600	)		107,696			(727,654	)
Sales and marketing		—		(26,856	)		(3,052	)		(1,344	)		—			(31,252	)
General and administrative		—		(50,105	)		(210	)		—			—			(50,315	)
Other		—		—			(1,834	)		—			—			(1,834	)
		—		(736,434	)		(65,373	)		(116,944	)		107,696			(811,055	)
Equity in income of unconsolidated joint ventures		—		31,236			—			—			—			31,236
Income from subsidiaries		72,137		2,604			—			—			(74,741	)		—
Minority equity in income of consolidated entities		—		—			—			(22,172	)		21,743			(429	)
Operating income		72,137		118,238			2,399			(478	)		(74,741	)		117,555
Other income, net		—		1,041			4,358			998			—			6,397
Income before provision for income taxes		72,137		119,279			6,757			520			(74,741	)		123,952
Provision for income taxes		—		(51,475	)		—			(340	)		—			(51,815	)
Net income	$	72,137	$	67,804		$	6,757		$	180		$	(74,741	)	$	72,137

105

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2005

(in thousands)

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

106

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2004

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net income	$	171,649		$	161,928		$	34,802		$	121,106		$	(317,836	)	$	171,649
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			444			883			—			—			1,327
Equity in loss of unconsolidated joint ventures		—			352			347			—			—			699
Equity in earnings of subsidiaries		(171,649	)		(90,478	)		(6,048	)		—			268,175			—
Minority equity in income of consolidated entities		—			—			—			—			49,661			49,661
Provision for income taxes		—			112,919			—			580			—			113,499
Net changes in operating assets and liabilities:
Receivables		—			(243	)		9,852			(441	)		—			9,168
Intercompany receivables/payables		—			—			(20,040	)		1,332			18,708			—
Real estate inventories		—			(289,897	)		(673	)		95,230			—			(195,340	)
Deferred loan costs		—			(1,004	)		—			—			—			(1,004	)
Other assets		—			(4,790	)		(332	)		—			—			(5,122	)
Accounts payable		—			(1,489	)		(41	)		(1,082	)		—			(2,612	)
Accrued expenses		—			(60,010	)		62			5,316			—			(54,632	)
Net cash (used in) provided by operating activities		—			(172,268	)		18,812			222,041			18,708			87,293
Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			1,046			(347	)		—			—			699
Purchases of property and equipment		—			(737	)		(17,031	)		—			—			(17,768	)
Investment in subsidiaries		—			51,729			(5,342	)		—			(46,387	)		—
Advances from (to) affiliates		80,069			(32,304	)		—			(26,304	)		(21,461	)		—
Net cash provided by (used in) investing activities		80,069			19,734			(22,720	)		(26,304	)		(67,848	)		(17,069	)
Financing activities:
Proceeds from borrowings on notes payable		—			1,339,500			429,433			—			—			1,768,933
Principal payments on notes payable		—			(1,381,024	)		(429,749	)		(85,592	)		—			(1,896,365	)
Issuance of 7 5/8% Senior Notes		—			148,500			—			—			—			148,500
Issuance of 7 1/2% Senior Notes		—			147,563			—			—			—			147,563
Minority interest (distributions) contributions, net		—			(58,269	)		—			(28,580	)		—			(86,849	)
Common stock issued for exercised options		932			—			—			—			—			932
Common stock purchased		(81,001	)		—			—			—			—			(81,001	)
Advances from (to) affiliates		—			—			6,187			(55,327	)		49,140			—
Net cash (used in) provided by financing activities		(80,069	)		196,270			5,871			(169,499	)		49,140			1,713
Net increase in cash and cash equivalents		—			43,736			1,963			26,238			—			71,937
Cash and cash equivalents at beginning of year		—			13,684			4,207			6,246			—			24,137
Cash and cash equivalents at end of year	$	—		$	57,420		$	6,170		$	32,484		$	—		$	96,074

107

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2003

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net income	$	72,137		$	67,804		$	6,757		$	180		$	(74,741	)	$	72,137
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			668			414			—			—			1,082
Equity in income of unconsolidated joint ventures		—			(31,236	)		—			—			—			(31,236	)
Distributions of income from unconsolidated joint ventures		—			37,501			—			—			—			37,501
Equity in earnings of subsidiaries		(72,137	)		(2,604	)		—			—			74,741			—
Minority equity in income of consolidated joint ventures		—			—			—			22,172			(21,743	)		429
Provision for income taxes		—			51,475			—			340			—			51,815
Net changes in operating assets and liabilities:
Receivables		—			(13,558	)		(1,272	)		(2,647	)		—			(17,477	)
Intercompany receivables/payables		(586	)		586			7,457			—			(7,457	)		—
Real estate inventories		—			(171,261	)		—			(34,661	)		—			(205,922	)
Deferred loan costs		586			(8,286	)		—			—			—			(7,700	)
Other assets		—			(2,672	)		(1,044	)		—			—			(3,716	)
Accounts payable		—			2,272			(1,153	)		(303	)		—			816
Accrued expenses		—			(19,603	)		(1,098	)		432			—			(20,269	)
Net cash (used in) provided by operating activities		—			(88,914	)		10,061			(14,487	)		(29,200	)		(122,540	)
Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			12,662			864			—			—			13,526
Purchases of property and equipment		—			(291	)		(285	)		—			—			(576	)
Investment in subsidiaries		—			47,883			—			—			(47,883	)		—
Advances from (to) affiliates		75,165			(149,148	)		—			—			73,983			—
Net cash provided by (used in) investing activities		75,165			(88,894	)		579			—			26,100			12,950
Financing activities:
Proceeds from borrowings on notes payable		—			726,146			379,318			—			—			1,105,464
Principal payments on notes payable		—			(833,083	)		(387,836	)		—			—			(1,220,919	)
Repayment of 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		2,294			—			—			—			—			2,294
Common stock purchased		(7,180	)		—			—			—			—			(7,180	)
Minority interest distributions, net		—			40,672			—			20,748			—			61,420
Advances from affiliates		—			—			14			(3,114	)		3,100			—
Net cash (used in) provided by financing activities		(75,165	)		179,968			(8,504	)		17,634			3,100			117,033
Net increase in cash and cash equivalents		—			2,160			2,136			3,147			—			7,443
Cash and cash equivalents at beginning of year		—			11,524			2,071			3,099			—			16,694
Cash and cash equivalents at end of year	$	—		$	13,684		$	4,207		$	6,246		$	—		$	24,137

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revolving Credit Facilities

As of December 31, 2005, the Company has four revolving credit facilities which have an aggregate maximum loan commitment of $410,000,000 and mature at various dates through 2008. A $90,000,000 revolving line of credit “expires” in October 2006. After that date, the Company may borrow amounts, subject to applicable borrowing base and concentration limitations, under this facility solely to complete the construction of residences begun prior to such date in approved projects funded by disbursements under this facility. The final maturity date is the earlier of the date upon which the last residence, the construction of which was financed with proceeds of this loan, is sold or the date upon which such last residence is excluded from the borrowing base by the passage of time under this facility. However, as in the past, the Company expects the maturity to be extended by the lender at each maturity date for an additional year. A $150,000,000 revolving line of credit finally matures in September 2008, although after September 2006, advances under this facility may only be made to complete projects approved on or before such date. The maximum commitment of $150,000,000 under this facility is reduced by the aggregate amount of loan commitments under separate project loans issued by the lender or its affiliates to the Company or its affiliates with respect to projects that are not cross-collateralized with the collateral under this credit facility. A $70,000,000 bank revolving line of credit initially “matures” in September 2006. After that date: a) the maximum commitment under this facility reduces at a rate of $8,750,000 per quarter beginning with the quarter ending December 31, 2006, with a final maturity date of September 2008, and b) advances may only be used to complete previously approved projects subject to the borrowing base as of the initial maturity date. A $100,000,000 revolving line of credit matures in June 2008, although after June 2007, the lender is not required to make advances under this facility. Effective on March 8, 2006, the Company entered into an agreement with a lender for an additional revolving credit facility in the amount of $50,000,000. In addition, in March 2006 the Company agreed in principle to enter into an agreement with another lender for an additional revolving credit facility in the amount of $50,000,000. The facilities mature in February and March 2008, respectively. After giving effect to the two additional revolving credit facilities, the Company’s aggregate maximum loan commitment under the six revolving credit facilities will be $510,000,000.

Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration limitations further restrict availability under the credit facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Company’s investment in a project, with higher percentages of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real property and improvements thereon owned by the Company in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes financial covenants, which may limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2005, $49,967,000 was outstanding under these credit facilities, with a weighted-average interest rate of 6.892%, and the undrawn availability was $316,675,000 as limited by the Company’s borrowing base formulas. Interest on the revolving credit facilities is calculated on the average, outstanding daily balance and is paid following the end of each month. During the year ended December 31, 2005, the Company borrowed $1,112,663,000 and repaid $1,070,348,000 under these facilities. The maximum amount outstanding was $200,459,000 and the weighted average borrowings were $113,647,000 during the year ended December 31, 2005. Interest incurred on the revolving credit facilities for the year ended December 31, 2005 was $8,240,000. The Company has provided an unsecured environmental indemnity in favor of the lender under the $125,000,000 bank line of credit (see Note 10). The Company routinely makes borrowings under its revolving credit facilities in the ordinary course of

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business within the maximum aggregate loan commitment amounts to fund its operations, including its land acquisition and home building activities, and repays such borrowings, as required by the credit facilities, with the net proceeds from sales of the real property, including homes, which secure the applicable credit facility.

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

• A tangible net worth, as defined, of $120,000,000, adjusted upwards quarterly by 50% of Delaware Lyon’s quarterly net income after March 31, 2002,

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

• Minimum liquidity, as defined, of at least $10,000,000.

As of and for the period ending December 31, 2005, the Company is in compliance with these covenants.

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

As a common practice required by commercial lenders, the Company is obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at any time. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance. The entire revolving credit facilities balance is subject to these obligations as of December 31, 2005.

Construction Notes Payable

At December 31, 2005, the Company had construction notes payable on certain consolidated entities amounting to $16,150,000. The construction notes have various maturity dates through 2008 and bear interest at rates ranging from prime to prime plus 0.25% at December 31, 2005. Interest is calculated on the average daily balance and is paid following the end of each month.

Seller Financing

At December 31, 2005, the Company had $11,686,000 of notes payable outstanding related to land acquisitions for which seller financing was provided. The seller financing notes are due at various dates through December 2007 and bear interest at rates ranging from 9.0% to 12.0% at December 31, 2005. Interest is calculated on the average principal balance outstanding and is accrued and paid when the financing is repaid.

Revolving Mortgage Warehouse Credit Facilities

The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has entered into two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in May 2006, provides for revolving loans of up to $30,000,000 outstanding, $20,000,000 of which is committed (lender obligated to lend if stated conditions are satisfied) and $10,000,000 of which is not committed (lender advances are optional even if stated conditions are otherwise satisfied). In October 2005, the original credit facility was increased to $48,000,000 for the period November

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2005 through February 2006, $32,000,000 of which is committed and $16,000,000 is not committed, and will decrease to $20,000,000, thereafter. The Company’s mortgage subsidiary and one of its unconsolidated joint ventures entered into an additional $20,000,000 credit facility which matures in October 2006. In October 2005, the commitment amount of the additional credit facility was temporarily increased to $50,000,000 for the period November 2005 through January 2006, and will decrease to $30,000,000, $20,000,000 of which is committed and $10,000,000 is not committed, thereafter. The temporary increases in the credit facilities improved the ability of the Company’s mortgage subsidiary to fund the high volume of loans that were anticipated to occur during the period. The Company expects the maturity to be extended by the lender at each maturity date for an additional year. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. The facilities are secured by substantially all of the assets of each of the borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with respect to contractual obligations of third party investors to purchase such mortgage loans, and all proceeds of sale of such mortgage loans. The facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the borrowers to maintain minimum tangible net worth, leverage, profitability and liquidity. These facilities are non-recourse and are not guaranteed by the Company. At December 31, 2005 the outstanding balance under these facilities was $47,816,000.

Prime Interest Rates

The prime interest rates at December 31, 2005, 2004 and 2003 were 7.25%, 5.25% and 4.00%, respectively. The weighted-average prime interest rates for each of the three years ended December 31, 2005, 2004 and 2003 were 6.19%, 4.34% and 4.12%, respectively.

Note 7 — Stockholders’ Equity

Stock Repurchases

On November 12, 2004 the Company’s Board of Directors approved an increase in the size of the Company’s previously announced stock repurchase program to 3,000,000 shares of its common stock (including any shares previously repurchased by the Company under the program). Under the program, as originally adopted in September 2001, the Company could repurchase 20% of its then outstanding shares of common stock or approximately 2,000,000 shares. Under the plan, the stock will be purchased in the open market or privately negotiated transactions from time to time in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. The timing and amounts of any purchases will be as determined by the Company’s management from time to time or may be suspended at any time or from time to time without prior notice, depending on market conditions and other factors they deem relevant. The repurchased shares may be held as treasury stock and used for general corporate purchases or cancelled. As of December 31, 2005, 1,218,400 shares of common stock had been purchased for $26,750,000 and retired under this program and 1,275,000 shares of common stock had been purchased for $81,001,000 and held in treasury. No shares were purchased under this program during the year ended December 31, 2005.

Stock Option Plans

Effective on May 9, 2000, the Company’s Board of Directors approved the William Lyon Homes 2000 Stock Incentive Plan (the “Plan”) and authorized an initial 1,000,000 shares of common stock to be reserved for issuance under the Plan. Under the Plan, options may be granted from time to time to key employees, officers, directors, consultants and advisors of the Company. The Plan is administered by the Stock Option Committee of the Board of Directors (the “Committee”). The Committee is generally empowered to interpret the Plan, prescribe rules and regulations relating thereto, determine the terms of the option agreements, amend them with

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the consent of the optionee, determine the employees to whom options are to be granted, and determine the number of shares subject to each option and the exercise price thereof. The per share exercise price for options will not be less than 100% of the fair market value of a share of common stock on the date the option is granted. The options will be exercisable for a term determined by the Committee, not to exceed ten years from the date of grant, and vest as follows: one year from date of grant—33 ¹/3%; two years from date of grant—33 ¹/3%; and three years from date of grant—33 ¹/3%.

Effective on May 9, 2000, the Company issued options under the William Lyon Homes 2000 Stock Incentive Plan to purchase a total of 627,500 shares of common stock at $8.6875 per share. During the year ended December 31, 2001, the Company issued additional options under the William Lyon Homes 2000 Stock Incentive Plan to purchase 12,500 shares of common stock at $9.10 per share and 20,000 shares of common stock at a price of $13.00 per share. During the years ended December 31, 2005, 2004 and 2003, certain officers and directors exercised options to purchase 35,831, 92,964 and 240,359 shares, respectively, of the Company’s common stock at a price of $8.6875 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan. During the years ended December 31, 2004 and 2003, certain officers exercised options to purchase 6,666 and 10,000 shares, respectively, of the Company’s common stock at a price of $13.00 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan. During the years ended December 31, 2004 and 2003 an officer exercised options to purchase 4,166 and 8,334 shares of the Company’s common stock at a price of $9.10. As of December 31, 2005, 56,666 options have been forfeited and 50,000 options priced at $8.6875 remain unexercised. All unexercised options expire on May 9, 2010.

Pursuant to the provisions of Statement No. 123, issued in October 1995, the Company has elected to continue applying the methodology prescribed by APB No. 25 and related interpretations to account for outstanding stock options. Accordingly, no compensation cost has been recognized in the financial statements related to stock options awarded to officers, directors and employees under the Plan. As required by Statement No. 123, for disclosure purposes only, the Company has measured the amount of compensation cost which would have been recognized related to stock options had the fair value of the options at the date of grant been used for accounting purposes which is summarized in Note 1.

Incentive Compensation Plans

At the Annual Meeting of Holders of Common Stock of the Company held on November 9, 2005, the stockholders approved the Company’s 2005 Senior Executive Bonus Plan (the “Plan”). The Plan provides that the Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO”) are each eligible to receive a bonus of 3% of the Company’s pre-tax, pre-bonus income. In addition, under the Plan, each Division President is eligible to receive a bonus of 3% of the division’s pre-tax, pre-bonus income, determined after allocation to the division of its allocable portion of corporate general and administrative expenses. In addition, the Company’s board of directors has approved a cash bonus plan applicable in 2005 for all of its full-time, salaried employees who are not included in the Company’s 2005 Senior Executive Bonus Plan. Under this cash bonus plan, the Chief Financial Officer (the “CFO”) is eligible to receive a bonus based upon a specified percentage of the Company’s pre-tax, pre-bonus income. All other participants under this cash bonus plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.

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

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Executive Deferred Compensation Plans

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

Note 8 — Income Taxes

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

	Year Ended December 31,
	2005		2004			2003
Current
Federal	(103,314	)	$	(99,580	)	$	(45,123	)
State	(24,532	)		(22,391	)		(10,286	)
	(127,846	)		(121,971	)		(55,409	)
Deferred
Federal	3,141			7,589			2,985
State	556			883			609
	3,697			8,472			3,594
	(124,149	)	$	(113,499	)	$	(51,815	)

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

	Year Ended December 31,
	2005		2004			2003
Provision for Federal income taxes at the statutory rate	(110,173	)	$	(99,801	)	$	(43,420	)
Provision for state income taxes, net of Federal income tax benefits	(15,528	)		(14,011	)		(6,044	)
Other	1,552			313			(2,351	)
	(124,149	)	$	(113,499	)	$	(51,815	)

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

	December 31,
	2005		2004
Deferred tax assets
Reserves deducted for financial reporting purposes not allowable for tax purposes	10,415		$	5,386
Compensation deductible for tax purposes when paid	10,893			8,675
State income tax provisions deductible when paid for Federal tax purposes	7,299			6,608
Effect of book/tax differences for joint ventures	1,860			2,083
	30,467			22,752
Deferred tax liabilities
Effect of book/tax differences for joint ventures	(8,407	)		(4,389	)
	22,060		$	18,363

During the years ended December 31, 2005 and 2004, income tax benefits of $1,990,000 and $3,489,000, respectively, related to stock option exercises were excluded from the results of operations and credited to additional paid-in capital. In addition, for the year ending December 31, 2005, utilization of built-in losses associated with transactions prior to the quasi-reorganization, including a state tax refund received of $1,845,000, resulted in income tax benefits credited to additional paid-in capital of $1,007,000.

The estimated overall effective tax rate for the years ending December 31, 2005, 2004 and 2003 are 39.4%, 39.8% and 41.8%, respectively. At December 31, 2005 the Company has unused recognized built-in losses in the amount of $23,297,000 which are available to offset future income and expire between 2009 and 2011. The utilization of these losses is limited to offset $3,883,000 of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2011. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under certain circumstances.

Note 9 — Related Party Transactions

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. In addition, one-half of the net profits in excess of six percent from the development are to be paid to the seller. 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. As of December 31, 2004, all lots were purchased under this agreement. During the years ended December 31, 2004 and 2003, the Company purchased 92 and 72 lots, respectively, under this agreement for a total purchase price of $1,984,000 and $2,507,000, respectively. During the years ended December 31, 2005, 2004 and 2003, the Company paid $1,949,000, $1,689,000 and $0, respectively for one-half of the net profits in excess of six percent from the development. This land acquisition qualified as an affiliate transaction under the Company’s 12 ¹/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994, as amended (the “Old Indenture”). Pursuant to the terms of the Old Indenture, the Company determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to the Trustee under the Old Indenture a resolution of the Board of Directors of the Company set forth in an Officers’ Certificate certifying that the land acquisition

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is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company delivered to the Trustee under the Old Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.

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 were anticipated to occur at one to two month intervals through March 2004. As of December 31, 2004, all lots have been purchased under this agreement. During the years ended December 31, 2004, and 2003, 43 and 85 lots have been purchased under this agreement for a purchase price of $4,975,000 and $9,834,000, respectively. 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 chose 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 was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company has delivered to the Trustee under the Old Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.

The Company purchased land for a total purchase price of $116,773,000, $33,655,000 and $8,440,000 during the years ended December 31, 2005, 2004 and 2003, respectively, from certain of its joint ventures.

For the years ended December 31, 2005, 2004 and 2003, the Company incurred reimbursable on-site labor costs of $146,000, $183,000 and $277,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon, of which $32,000 and $26,000 was due to the Company at December 31, 2005 and 2004, respectively. In addition, the Company earned fees of $121,000, $110,000 and $109,000, respectively, for tax and accounting services performed for entities controlled by William Lyon and William H. Lyon during the years ended December 31, 2005, 2004 and 2003, of which $92,000 was due to the Company at December 31, 2005. In January 2006, the Company received $69,000 of the amount due at December 31, 2005.

For the years ended December 31, 2005, 2004 and 2003, the Company incurred charges of $755,000, $755,000 and $753,000, respectively, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.

During the years ended December 31, 2004 and 2003, the Company incurred charges of $172,000 and $250,000, respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon.

Effective September 1, 2004, the Company entered into an aircraft consulting and management agreement with an affiliate (the “Affiliate”) of William Lyon to operate and manage the Company’s aircraft which was placed in service effective as of September 1, 2004. The terms of the agreement provide that the Affiliate shall

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consult and render its advice and management services to the Company with respect to all functions necessary to the operation, maintenance and administration of the aircraft. The Company’s business plan for the aircraft includes (i) use by Company executives for traveling on Company business to the Company’s divisional offices and other destinations, (ii) charter service to outside third parties and (iii) charter service to William Lyon personally. Charter services for outside third parties and William Lyon personally are contracted for at market rates. As compensation to the Affiliate for its management and consulting services under the agreement, the Company pays the Affiliate a fee equal to (i) the amount equal to 107% of compensation paid by the Affiliate for the pilots supplied pursuant to the agreement, (ii) $50 per operating hour for the aircraft and (iii) $9,000 per month for hangar rent. In addition, all maintenance work, inspections and repairs performed by the Affiliate on the aircraft are charged to the Company at the Affiliate’s published rates for maintenance, inspection and repairs in effect at the time such work is completed. The total compensation paid to the Affiliate under the agreement amounted to $1,414,000 and $317,000 during the years ended December 31, 2005 and 2004, respectively.

Pursuant to the agreement above, the Company had earned revenue of $457,000 and $187,000 for charter services provided to William Lyon personally, during the years ended December 31, 2005 and 2004, respectively, of which $129,000 was due to the Company at December 31, 2005.

On May 28, 2004 and June 18, 2004, William Lyon and his wife, Willa Dean Lyon, purchased two of the Company’s homes for a total purchase price of approximately $877,000. The purchase prices were based on the prices offered to third parties and no discounts were given. The homes were purchased for use as residences by certain family members.

On October 28, 2004, one of the Company’s directors, Michael L. Meyer, purchased one of the Company’s homes for a total purchase price of approximately $835,000. The purchase price was based on the prices offered to third parties and no discounts were given.

The Company and one of the Company’s directors, Alex Meruelo, are parties to an agreement pursuant to which Mr. Meruelo is eligible to receive a finder’s fee based upon the cash distributions received by a subsidiary of the Company from a joint venture development project relating to a portion of the Fort Ord military base in Monterey County, California. The joint venture development project resulted from Mr. Meruelo’s introduction of the Company to Woodman Development Company, LLC (“Woodman”) and the subsequent formation of East Garrison Partners I, LLC (“EGP”) as a joint venture between Woodman and Lyon East Garrison Company I, LLC (“EGC”). The finder’s fee will equal 5% of all net cash distributions distributed by EGP to EGC with respect to EGC’s existing 50% interest in EGP that are in excess of distributions with respect to certain deficit advances, deficit preferred returns, returns of capital and preferred returns on unreturned capital. The calculation of the finder’s fee will be based on net cash distributions received from EGP on land sales and will not be determined on the basis of any revenues, profits or distributions received from any affiliate of EGC for the construction and sale or leasing of residential or commercial buildings on such lots. Mr. Meruelo is not obligated to perform any services for EGC other than the introduction to Woodman.

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.

116

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 10 — Commitments and Contingencies

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

Five purported class action lawsuits were filed in the Court of Chancery of the State of Delaware in and for New Castle County, purportedly on behalf of the public stockholders of the Company, challenging the proposal made by General William Lyon to acquire the outstanding publicly held minority interest in the Company’s common stock for $82 per share in cash (the “Proposed Transaction”), (See Note 11) and challenging related actions of the Company and the directors of the Company. Eastside Investors, LLP v. William Lyon Homes, et al., Civil Action No. 1301-N was filed on April 27, 2005; Donald Lamuth v. William Lyon et al., Civil Action No. 1304-N and Stephen L. Brown v. William Lyon Homes, et al., Civil Action No. 1307-N were filed on April 28, 2005; Michael Crady v. William Lyon Homes, et al., Civil Action No. 1311-N was filed on May 2, 2005; and Anthony A. D’Amato v. William Lyon, et al., Civil Action No. 1323-N was filed on May 6, 2005 (collectively, the “Delaware Complaints”). The Delaware Complaints named the Company and the directors of the Company as defendants. These complaints alleged, among other things, that the defendants had breached their fiduciary duties owed to the plaintiffs in connection with the Proposed Transaction and other related corporate activities. The plaintiffs were seeking to enjoin the Proposed Transaction and, among other things, to obtain damages, attorneys’ fees and expenses related to the litigation. On May 9, 2005, the Delaware Complaints were consolidated into a single case entitled In re: William Lyon Homes Shareholder Litigation, Civil Action No. 1311-N (the “Consolidated Delaware Action”). On May 20, 2005, a class was certified in the Consolidated Delaware Action. On November 9, 2005, the Consolidated Delaware Action was dismissed without prejudice.

Two purported class action lawsuits challenging the Proposed Transaction also were filed in the Superior Court of the State of California, County of Orange. On April 28, 2005, the complaints captioned Lewis Lester v. William Lyon Homes, et al., Case No. 05-CC-00092 (the “Lewis Complaint”), and Alaska Electrical Pension Fund v. William Lyon Homes, Inc. et al., Case No. 05-CC-00093 (the “Alaska Electrical Complaint” and, together with the Lewis Complaint, the “California Complaints”) were filed. The California Complaints named the Company and the directors of the Company as defendants and alleged, among other things, that the defendants had breached their fiduciary duties to the public stockholders. The California Complaints sought to enjoin the Proposed Transaction and also sought damages and attorneys’ fees and expenses related to the litigation. On May 26, 2005, the California Complaints were consolidated into a single case entitled In re: William Lyon Homes, Inc. Shareholder Litigation, Case No. 05-CC-00092 (the “Consolidated California Action”). On July 8, 2005, plaintiffs in the Consolidated California Action dismissed that lawsuit without prejudice.

Duxford Title Reinsurance Company, a wholly-owned subsidiary of the Company, provides title reinsurance to unrelated title insurers directly issuing title policies on homes sold by the Company in California, Nevada and Arizona. In February 2005, Duxford Title Reinsurance Company was notified by its title insurers that as a result of current investigations by several state insurance regulators into the large number of captive reinsurance arrangements existing in the title insurance industry, the title insurers were suspending and/or terminating their current captive reinsurance agreements with Duxford Title Reinsurance Company pending final determination from the appropriate regulatory bodies as to their permissibility or necessary modification to assure compliance with applicable law. In April 2005, in response to a subpoena issued by the California Insurance Commissioner, the Company testified in connection with the Commissioner’s investigation of captive reinsurance arrangements, including testimony that in many instances, the Company pays for the title insurance being issued. The Company has not had any further communication to date from the California Insurance Commissioner or any other state insurance regulator about this matter and does not believe that the resolution of this matter will have a material

117

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

effect on the Company’s financial position, results of operations or cash flows. In November 2005, the Company was notified that the United States Department of Housing and Urban Development had instituted a formal Federal investigation of the Company in connection with its participation in captive title reinsurance arrangements. The Company intends to fully cooperate with the Department in its investigation and does not believe that the resolution of this matter will have a material effect on the Company’s financial position, results of operations or cash flows.

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

Land Banking Arrangements

The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers the Company’s right in such purchase agreements to entities owned by third parties (“land banking arrangements”). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 20% of the total purchase price. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. As described in Note 2 of “Notes to Consolidated Financial Statements”, Interpretation No. 46, requires the consolidation of the assets, liabilities and operations of three of the Company’s land banking arrangements including, as of December 31, 2005, real estate inventories of $70,986,000. The Company participates in three land banking arrangements, which are not VIE’s in accordance with Interpretation No. 46, and are not consolidated as of December 31, 2005. The deposits and penalties related to the three unconsolidated land banking arrangements have been recorded in the accompanying consolidated balance sheet. Summary information with respect to the Company’s consolidated and unconsolidated land banking arrangements is as follows as of December 31, 2005 (dollars in thousands):

	Consolidated		Unconsolidated
Total number of land banking projects		3		3
Total number of lots		267		673
Total purchase price	$	84,085	$	116,821
Balance of lots still under option and not purchased:
Number of lots		243		175
Purchase price	$	70,986	$	47,282
Forfeited deposits and penalties if lots are not purchased	$	7,804	$	11,892

In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements. As a land owner benefited by these improvements, the Company is responsible for the assessments on its land. When properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. Assessment district bonds issued after May 21, 1992 are accounted for under the provisions of 91-10, “Accounting for

118

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Special Assessment and Tax Increment Financing Entities” issued by the Emerging Issues Task Force of the Financial Accounting Standards Board on May 21, 1992, and recorded as liabilities in the Company’s consolidated balance sheet, if the amounts are fixed and determinable.

As of December 31, 2005, the Company had $4,524,000 of outstanding irrevocable standby letters of credit to guarantee the Company’s financial obligations under certain land banking arrangements and other contractual arrangements in the normal course of business. 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 2006, at which time the Company may be required to renew to coincide with the term of the respective arrangement.

The Company also had outstanding performance and surety bonds of $293,716,000 at December 31, 2005 related principally to its obligations for site improvements at various projects. The Company does not believe that draws upon these bonds, if any, will have a material effect on the Company’s financial position, results of operations or cash flows.

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

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

Note 11 — Proposed Transaction

On April 26, 2005, General William Lyon announced that he was proposing to acquire the outstanding publicly held minority interest in the Company’s common stock for $82 per share in cash. General Lyon stated that this transaction would be contingent upon approval by the Board of Directors or a duly appointed special committee of the Board of Directors. The Board of Directors subsequently formed a special committee of independent directors to consider General Lyon’s proposal with the assistance of outside financial and legal advisors which the special committee retained. On June 20, 2005, the special committee announced that it had determined that the proposal by General Lyon was inadequate. On June 28, 2005, General Lyon announced that he was withdrawing his proposal. On July 25, 2005, the Company announced that its Board of Directors had disbanded the special committee. On July 25, 2005, General Lyon announced that he was discontinuing his efforts at that time to take the Company private. In connection with the special committee’s consideration of this proposed transaction, the Company has incurred approximately $2,176,000 in financial advisory and legal expenses which are reflected as a charge in the Company’s results of operations for the year ended December 31, 2005.

See Note 10 for information on certain lawsuits which were filed relating to General Lyon’s proposal.

119

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 12 — Unaudited Summarized Quarterly Financial Information

Summarized unaudited quarterly financial information for the years ended December 31, 2005, 2004 and 2003 is as follows (in thousands except per common share amounts):

	Three Months Ended
	March 31, 2005			June 30, 2005			September 30, 2005			December 31, 2005
Sales	$	246,682		$	407,489		$	376,331		$	825,881
Other income, costs and expenses, net		(212,809	)		(334,597	)		(313,384	)		(680,813	)
Income before provision for income taxes		33,873			72,892			62,947			145,068
Provision for income taxes		(13,380	)		(28,792	)		(24,864	)		(57,113	)
Net income	$	20,493		$	44,100		$	38,083		$	87,955
Basic earnings per common share	$	2.38		$	5.12		$	4.41		$	10.17
Diluted earnings per common share	$	2.36		$	5.07		$	4.39		$	10.11
	Three Months Ended
	March 31, 2004			June 30, 2004			September 30, 2004			December 31, 2004
Sales	$	254,548		$	384,483		$	474,950		$	707,866
Other income, costs and expenses, net		(228,797	)		(332,460	)		(400,740	)		(574,702	)
Income before provision for income taxes		25,751			52,023			74,210			133,164
Provision for income taxes		(10,342	)		(20,875	)		(29,273	)		(53,009	)
Net income	$	15,409		$	31,148		$	44,937		$	80,155
Basic earnings per common share	$	1.57		$	3.16		$	4.54		$	8.65
Diluted earnings per common share	$	1.55		$	3.14		$	4.51		$	8.58
	Three Months Ended
	March 31, 2003			June 30, 2003			September 30, 2003			December 31, 2003
Sales	$	70,423		$	156,681		$	212,598		$	448,611
Other income, costs and expenses, net		(62,162	)		(133,345	)		(188,197	)		(380,657	)
Income before provision for income taxes		8,261			23,336			24,401			67,954
Provision for income taxes		(3,379	)		(9,544	)		(9,534	)		(29,358	)
Net income	$	4,882		$	13,792		$	14,867		$	38,596
Basic earnings per common share	$	0.50		$	1.40		$	1.52		$	3.95
Diluted earnings per common share	$	0.49		$	1.38		$	1.49		$	3.89

120

EXHIBIT INDEX

Exhibit Number	Description
2.1(1)	Certificate of Ownership and Merger.
3.1(2)	Certificate of Incorporation of William Lyon Homes, a Delaware corporation.
3.2(2)	Bylaws of William Lyon Homes, a Delaware corporation.
4.1(2)	Specimen certificate of Common Stock.
4.2(23)	Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.3(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.4(24)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.5(3)	Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.6(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.7(24)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.8(14)	Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.9(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.10(24)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
10.1(11)	Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware corporation.
10.2(4)	Master Loan Agreement dated as of August 31, 2000 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Federal Bank, F.S.B., a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.3(6)	Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.

Exhibit Number	Description
10.4(5)	Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.5(5)	Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.6(5)	Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.7(7)	Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.8(3)	Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.9(12)	Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, as
	borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.10(4)	Revolving Line of Credit Loan Agreement (Borrowing Base Loan) by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation, dated as of September 21, 2000.
10.11(25)	Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated as of October 14, 2005 by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.12(17)	Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.13(5)	Second Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of December 13, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.14(3)	Third Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of January 26, 2004, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.15(11)	Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.16(27)	First Amendment to Amended and Restated Revolving Line of Credit Loan Agreement, dated as of July 19, 2005, by and between William Lyon Homes, Inc. and California Bank & Trust.
10.17(7)	Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as Lender.
10.18(10)	Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2004 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as Lender.
10.19(8)	Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.20(3)	Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.

Exhibit Number	Description
10.21(15)	First Amendment to Credit Agreement dated as of August 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.22(13)	Amendment No. 2 to Credit Agreement dated as of November 15, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.23(9)	Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as borrower, and California Bank & Trust, a California banking corporation, and the other financial institutions named therein, as lenders.
10.24(9)	Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware corporation.
10.25(10)	Borrowing Base Revolving Line of Credit Agreement, dated as of June 28, 2004, by and between William Lyon Homes, Inc., a California corporation, and Bank One, NA, a national banking association.
10.26(15)	Modification Agreement, dated as of December 7, 2004, by and between William Lyon Homes, Inc., a California corporation, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA, a national banking association).
10.27(27)	Second Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, between William Lyon Homes, Inc. and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA).
10.28(18)	Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.
10.29(18)	Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective November 5, 1999.
10.30(18)	Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5, 1999.
10.31(4)	Option Agreement and Escrow Instructions between William Lyon Homes, Inc., a California corporation and Lathrop Investment, L.P., a California limited partnership, dated as of October 24, 2000.
10.32(19)	William Lyon Homes 2000 Stock Incentive Plan.
10.33(20)	Form of Stock Option Agreements.
10.34(20)	William Lyon Homes, Inc. 2000 Cash Bonus Plan.
10.35(26)	William Lyon Homes 2005 Senior Executive Bonus Plan.
10.36(28)	Description of 2005 Cash Bonus Plan.
10.37(29)	Adjustment of Salary of Douglas F. Bauer.
10.38(20)	Standard Industrial/Commercial Single-Tenant Lease – Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.
10.39(21)	William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.
10.40(22)	William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.
10.41(5)	The Presley Companies Non-Qualified Retirement Plan for Outside Directors.
10.42(16)	William Lyon Homes 2004 Executive Deferred Compensation Plan.
10.43(16)	William Lyon Homes 2004 Outside Directors Deferred Compensation Plan.
10.44(3)	Underwriting Agreement dated as of March 12, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Warburg, LLC and Salomon Smith Barney Inc., as Underwriters.
10.45(3)	Purchase Agreement dated as of January 28, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial Purchaser.
10.46(3)	Registration Rights Agreement dated as of February 6, 2004 by and among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial Purchaser.
10.47(13)	Purchase Agreement dated as of November 15, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein) and UBS Securities LLC, as Initial Purchaser.

Exhibit Number	Description
10.48(14)	Registration Rights Agreement dated as of November 22, 2004 by and among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial Purchaser.
10.49(30)	Summary of Director Compensation.
10.50(30)	Borrowing Base Revolving Line of Credit Agreement, dated as of February 14, 2006, by and between William Lyon Homes, Inc., a California corporation, and Wachovia Financial Services, Inc, a North Carolina corporation, by and through its Agent, Wachovia Bank, National Association, a national banking association.
12.1(30)	Statement of computation of ratio of earnings to fixed charges.
21.1(30)	List of Subsidiaries of William Lyon Homes, a Delaware corporation.
23.1(30)	Consent of Independent Registered Public Accounting Firm.
31.1(30)	Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2(30)	Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1(30)	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2(30)	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(19) Previously filed as an exhibit to the Company’s Registration Statement on Form S-8 (SEC Registration No. 333-50232), and incorporated herein by this reference.

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

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

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

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

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

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

(26) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed November 9, 2005 and incorporated herein by this reference.

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

(28) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005.

(29) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005.

(30) Filed herewith.

EX-10.49

Exhibit 10.49

Description of Compensation Payable to Non-Employee Directors

The following summarizes the current compensation and benefits received by the Company’s non-employee directors. It is intended to be a summary of existing arrangements and is not intended to provide any additional rights to any director.

Each non-employee director of the Company will receive an annual fee of $60,000 per year, payable $15,000 per calendar quarter, and $2,500 for each board meeting attended in person and $1,500 for each meeting attended via teleconference. In addition, the chair of the Audit Committee of the Board of Directors will be paid a fee of $10,000 per year, payable $2,500 per calendar quarter, to serve in such capacity, the chair of each other committee of the Board of Directors will be paid a fee of $7,500 per year, payable $1,875 per calendar quarter, to serve in such capacity, and other committee members will be paid a fee of $2,000 per year, payable $500 per calendar quarter, per committee for service on committees of the Board of Directors.

EX-10.50

EXHIBIT 10.50

BORROWING BASE REVOLVING LINE

OF CREDIT AGREEMENT

by and among

WILLIAM LYON HOMES, INC.,

a California corporation

(together with any additional borrower which may be added as a co-borrower

pursuant to this Agreement, “Borrower”)

and

WACHOVIA FINANCIAL SERVICES, INC., a North Carolina corporation,

by and through its Agent, WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association

(collectively referred to as “Lender”)

Dated: February 14, 2006

TABLE OF CONTENTS

		Page
ARTICLE 1	DEFINITIONS	1
1.1	Definitions	1
1.2	Other Terms	23
1.3	Interpretation	24
ARTICLE 2	LOAN FACILITY	24
2.1	Loan Facility	24
2.2	Advances	27
2.3	Interest Rate Provisions	29
2.4	Payments.	31
2.5	Fees and Costs.	34
2.6	Security	35
2.7	Releases of Collateral	35
2.8	Condominium Provisions	37
2.9	[Intentionally Omitted]	38
2.10	Facility LCs.	38
ARTICLE 3	BORROWING BASE	41
3.1	Determination of Eligible Collateral/Borrowing Base	41
3.2	Lot Term Limits	41
3.3	Other Limitation of Lot Eligibility	42
3.4	Transfer of Lots for Unit Construction	43
3.5	Unit Term Limits; Reclassification of Units	43
3.6	Other Limitations on Unit Eligibility	44
3.7	Events Affecting Units and Lots; Exclusions from Eligible Collateral	45
3.8	Other Limitations on Borrowing Base	45
3.9	Other Events Affecting Collateral Value; Exclusions from Eligible Collateral	46
3.10	Effect of Borrowing Base Conditions; Limitations	46
3.11	Borrowing Base Report	46
3.12	Commencement and Completion of A&D Lot Improvements	48
3.13	Commencement and Completion of Units	48
3.14	General	49
3.15	Appraisals	49
ARTICLE 4	CONDITIONS PRECEDENT	50
4.1	Conditions Precedent to Effectiveness of this Agreement	50
4.2	Approval of Approved Subdivisions	51
4.3	Qualification of Pre-Development Land and A&D Lots as Eligible Collateral	55
4.4	Qualification of Units as Eligible Collateral	57
4.5	Additional Conditions Precedent to All Advances Against Eligible Collateral	59
4.6	Right to Waive	61

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		Page
ARTICLE 5	BORROWER REPRESENTATIONS AND WARRANTIES	61
5.1	Representations and Warranties - Borrower	61
5.2	Representations Regarding Approved Subdivisions	68
5.3	Representations and Warranties Upon Requests for Advances	69
5.4	Representations and Warranties Upon Delivery of Financial Statements, Documents, and Other Information	70
ARTICLE 6	AFFIRMATIVE COVENANTS	70
6.1	Existence	70
6.2	Books and Records; Access	70
6.3	Special Covenants Relating to Collateral	71
6.4	Information and Statements	73
6.5	Law; Judgments; Material Agreements; Approvals and Permits	75
6.6	Impositions and Other Indebtedness	76
6.7	Assets and Property	76
6.8	Insurance	76
6.9	ERISA	77
6.10	Special Covenants Relating to Lots and Units	77
6.11	Title Insurance; Title Insurance Claims	78
6.12	Rights of Inspection; Correction of Defects	79
6.13	Verification of Costs	80
6.14	Use of Proceeds of Advances	80
6.15	Further Assurances	80
6.16	Costs and Expenses of Borrower’s Performance of Covenants and Satisfaction of Conditions	80
6.17	Notices with Respect to any Approved Subdivision	80
6.18	Notification of Certain Matters	80
6.19	Maintain Business	81
6.20	Borrower Equity Requirement	81
ARTICLE 7	FINANCIAL COVENANTS	81
7.1	Minimum Tangible Net Worth Covenant	81
7.2	Leverage Ratio	82
7.3	Interest Coverage Ratio	82
7.4	Minimum Liquidity	82
7.5	Conformance to GAAP; Consolidation	82
ARTICLE 8	NEGATIVE COVENANTS	82
8.1	Fundamental Changes	82
8.2	Prohibition on Sales of Assets; Transfers	84
8.3	Prohibition on Amendments to Organizational Documents	84
8.4	Lines of Business	84
8.5	Distributions	84
8.6	Secondary Financing	85
8.7	Transactions with Affiliates	85

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		Page
ARTICLE 9	EVENTS OF DEFAULT	85
9.1	Events of Default	85
9.2	Remedies	89
9.3	Collateral Protection; Completion of Construction	90
9.4	Secured by Collateral and Security Instruments	90
9.5	Multiple Real and Personal Property Security	90
9.6	Right of the Lender to Take Certain Actions; Power of Attorney	91
9.7	Other Actions By Lender	92
9.8	Application of Payments After Default	93
9.9	No Lender Obligations	93
9.10	Cumulative Remedies	93
9.11	Preservation of Rights	93
ARTICLE 10	CONTRIBUTION BETWEEN BORROWERS	94
10.1	Transaction in Best Interests of Borrower; Consideration	94
10.2	No Fraudulent Intent	94
10.3	Solvency	94
10.4	Bankruptcy Filing	94
10.5	Joint and Several	95
ARTICLE 11	MISCELLANEOUS	95
11.1	Survival of Representations	95
11.2	Governmental Regulation	95
11.3	Headings	95
11.4	Entire Agreement	95
11.5	Lender Successors and Assigns; Participations	95
11.6	Expenses; Indemnification	96
11.7	[Reserved]	98
11.8	Accounting	98
11.9	Severability of Provisions	98
11.10	Nonliability of Lender	98
11.11	Confidentiality	98
11.12	Nonreliance	98
11.13	Disclosure	98
11.14	Authority to File Notices	98
11.15	Inconsistencies with the Loan Documents	99
11.16	Lender Determination of Facts	99
11.17	Incorporation of Preamble, Recitals and Exhibits	99
11.18	Third-Party Consultants	99
11.19	Disclaimer by the Lender	99
11.20	Waiver of Recovery	99
11.21	No Set-Off	100
11.22	Brokers	100
11.23	Disbursements in Excess of Commitment Amount	100

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		Page
11.24	Time is of the Essence	100
11.25	Signs	100
11.26	Interpretation	101
11.27	Actions by the Lender	101
11.28	Continuing Obligations	101
11.29	Notices	101
ARTICLE 12	RATABLE PAYMENTS	102
12.1	Setoff	102
12.2	Ratable Payments	102
ARTICLE 13	CHOICE OF LAW; CONSENT TO JURISDICTION; JURY WAIVER; WAIVER OF SPECIAL DAMAGES	102
13.1	CHOICE OF LAW	102
13.2	CONSENT TO JURISDICTION	102
13.3	JURY WAIVER	103
13.4	WAIVER OF SPECIAL DAMAGES	103
ARTICLE 14	PATRIOT ACT NOTIFICATION AND COMPLIANCE	103
14.1	Patriot Act Notification and Compliance	103
ARTICLE 15	COUNTERPARTS	104

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BORROWING BASE REVOLVING LINE

OF CREDIT AGREEMENT

This BORROWING BASE REVOLVING LINE OF CREDIT AGREEMENT is dated as of February 14, 2006 (together with any amendments or modifications hereto in effect from time to time, the “Agreement”), between WILLIAM LYON HOMES, INC., a California corporation (together with any additional borrower which may be added as a co-borrower pursuant to this Agreement, the “Borrower”) and WACHOVIA FINANCIAL SERVICES, INC., a North Carolina corporation, by and through its Agent, WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association (collectively referred to as “Lender”).

RECITALS:

WHEREAS, Borrower is engaged in the business of developing residential subdivisions and constructing and selling residential units in such subdivisions;

WHEREAS, Borrower has requested that Lender establish a borrowing base line of credit for Borrower pursuant to which Borrower may finance the development of subdivisions and construction of units therein by Borrower;

WHEREAS, Lender is willing to provide such a borrowing base line of credit upon the terms and conditions hereinafter set forth; and

THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

AGREEMENT:

ARTICLE 1

DEFINITIONS

1.1 Definitions. In this Agreement, the following capitalized terms have the following meanings:

“A&D Completed Lot” means an A&D Lot for which the A&D Lot Improvements have achieved a 90% A&D Lot Development Completion Percentage and is otherwise eligible for transfer to Unit construction pursuant to Section 3.4.

“A&D Lot” means a lot shown on an approved, vesting preliminary subdivision plat or tentative map for Entitled Land, which Entitled Land constitutes an Approved Subdivision which is not included in Eligible Collateral as Pre-Development Land or Units and with respect to which Borrower has satisfied the conditions precedent set forth in Section 4.2.

“A&D Lot Development Budget” means the budget for the construction of A&D Lot Improvements in connection with A&D Lots in an Approved Subdivision approved by Lender, as amended and modified from time to time, with any aggregate change in the total A&D Lot Development Budget for A&D Lots in an Approved Subdivision in excess of 5% of the total A&D Lot Development Budget for such A&D Lots to require advance approval of Lender.

“A&D Lot Development Completion Percentage” means the current percentage of completion of A&D Lot Improvements in the applicable Approved Subdivision as determined by Lender based on its review of the current Collateral Certificate and inspections of the Collateral made pursuant to this Agreement.

“A&D Lot Development Plans and Specifications” means the plans and specifications for the development of A&D Lot Improvements in an Approved Subdivision that have been prepared by an engineer, together with any amendments or modifications to those plans and specifications, all as approved by the Lender.

“A&D Lot Eligibility Date” means the date an A&D Lot is first included as such in a Borrowing Base Report.

“A&D Lot Improvement Construction Costs” means the aggregate “hard” and “soft” costs to plan, design, and construct the applicable A&D Lot Improvements as set forth in the applicable A&D Lot Development Budget (including, without limitation, fees payable to Governmental Authorities); provided, however, that the A&D Lot Improvement Construction Costs shall not exceed the amount of such costs actually incurred by Borrower to plan, design, and construct such A&D Lot Improvements.

“A&D Lot Improvements” means improvements which may exist or which are to be constructed (including, without limitation, curbs, grading, landscaping, sprinklers, storm and sanitary sewers, paving, sidewalks, and utilities) necessary to make an Approved Subdivision suitable for the construction of single family homes (including attached and detached Units) and any common area improvements which may exist or which are to be constructed, together with the associated fixtures and other tangible personal property located or used in or on land on which such improvements are constructed.

“Acquisition” shall mean any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which any Borrower (a) acquires any going business or all or substantially all of the assets of any firm, corporation or limited liability company, or division thereof, whether through purchase of assets, merger or otherwise or (b) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding ownership interests of a partnership or limited liability company.

“Acquisition Cost” means, with respect to any Subdivision (including any Land contained therein), the actual net purchase price paid by any Borrower to acquire such Subdivision, after deducting any write-downs in the acquisition cost of such Subdivision in accordance with GAAP and without including any step-ups in the value of such Subdivision, whether or not permitted under GAAP.

“Advance” means an advance of Loan proceeds by Lender to Borrower hereunder.

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Advance Request” means as defined in Section 2.2.

“Affiliate” of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise.

“Agreement” means this Borrowing Base Revolving Line of Credit Agreement, as it may be amended, modified, extended, renewed, restated, or supplemented from time to time.

“Appraisal” means an appraisal with respect to any of the Approved Subdivisions, Lots and/or Units thereon (i) ordered by Lender, (ii) prepared by an appraiser satisfactory to Lender, (iii) in compliance with all federal and state standards for appraisals and all MAI and FIRREA requirements, (iv) reviewed by Lender, and (v) in form and substance satisfactory to Lender in its sole discretion.

“Appraised Absorption” means, with respect to Units in each Approved Subdivision, the number of such Units estimated to be sold and released (in accordance with Section 2.7(a)) in calendar quarter, as determined by Lender at the time of Lender’s approval of such Approved Subdivision on the basis of the applicable Appraisal and thereafter each calendar quarter on a trailing basis.

“Appraised Value” means the market value “as if completed” of any Approved Subdivision, including without limitation any Entitled Land, Lot or Unit (excluding therefrom the value of any Land and Improvements that have been sold and transferred) as determined pursuant to this Agreement based on Appraisals or updated Appraisals, less, to the extent not otherwise included as a deduction in the determination of Appraised Value pursuant to the Appraisal or Updated Appraisal, (a) the aggregate unpaid amount of all Liens and Encumbrances adversely affecting the value such Approved Subdivision, Lot and Unit which are senior to the lien of the Deed of Trust, including without limitation, arising in connection with any improvement districts, “Mello-Roos” districts, community facilities districts, and similar assessment districts or bonds issued in connection therewith and (b) the reasonable and customary costs of sale related to the sale of each Approved Subdivision, Lot and Unit.

“Approvals and Permits” means each and all approvals, authorizations, bonds, consents, certificates, franchises, licenses, permits, registrations, qualifications, entitlements and other actions and rights granted by or filings with any Person necessary or appropriate for acquisition, entitlement, development and completion of the Lots and Improvements with respect to the Approved Subdivisions (and the Land contained therein), the infrastructure within such Approved Subdivision, and any common area improvements which may exist or which are to be constructed), for construction of Units and A&D Lot Improvements for the sale of Units and Lots for occupancy, and the ownership and use by Borrower and other Persons of Units and Lots or otherwise for the conduct of, or in connection with the business and operations of Borrower (including without limitation, satisfaction of Borrower’s obligations with respect to Purchase Agreements).

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“Approved Subdivision” means any Subdivision (and each of the Lots and Units contained therein) approved by Lender as of the Closing Date, and such other Subdivisions which may be approved by Lender from time to time after the Closing Date pursuant to Article 4.

“Approved Subdivision Closing Date” means that date upon which a Subdivision is approved by Lender as an Approved Subdivision pursuant to this Agreement, with such date being evidenced by the effective date of the Subdivision Loan Addendum between Borrower and Lender.

“Article” means an article of this Agreement unless another document is specifically referenced.

“Assignments” means those certain Loan Documents executed by any Person in favor of Lender, whereby such Person has assigned all of its right, title and interest in certain property as additional security with respect to the Loan, including without limitation, the Assignments of Plans and Specifications, Contracts and Permits and any development agreement assignments with respect to any Approved Subdivision, as may be requested by Lender from time to time.

“Attached A&D Lots” means A&D Lots on which Attached Units are or are to be constructed.

“Attached Units” means four (4) or more Units per building attached to each through common walls and which do not exceed two stories in height and are not otherwise High Density Units.

“Authorized Representative” means the authorized agent or designated Person of each Borrower certified by Borrower to Lender for the purpose of making certifications, including Advance Requests, required by this Agreement.

“Available Liquidity” means, with respect to any Person, that amount which is equal to the sum of (i) aggregate unpledged, unreserved and unrestricted cash; (ii) unpledged, unreserved and unrestricted Cash Equivalent Investments, and (iii) Undrawn Availability.

“Available Loan Commitment” means, at any time with respect to the Loan and the amount of Commitment available to Borrower, the result of subtracting the aggregate amount then outstanding under the Loan from the lesser of: (a) the Commitment Amount; or (b) the result of multiplying the aggregate Collateral Value of all Eligible Collateral in the Borrowing Base (as such Collateral Value may be adjusted from time to time pursuant to Article 3) by the applicable Maximum Allowed Advance Rate with respect to such Eligible Collateral.

“Borrower” means as defined in the in the opening paragraph of this Agreement.

“Borrower Equity” means, as determined by Lender from time to time and at any time, that amount contributed by Borrower as capital with respect to any Approved Subdivision.

“Borrowing Base” consists of the Eligible Collateral as reflected in the most current Borrowing Base Report.

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“Borrowing Base Report” means a report prepared by Borrower and approved by Lender as provided in this Agreement setting forth the Eligible Collateral then constituting the Borrowing Base, the Collateral Value of the Borrowing Base, and certain other information, in the format prescribed by Lender from time to time.

“Budget” means, the A&D Lot Development Budget and the Unit Budgets, with respect to each Approved Subdivision, as approved by Lender and as may be amended and modified from time to time pursuant to the terms of this Agreement.

“Business Day” means, a day (other than a Saturday or Sunday) on which (a) Lender is generally open in North Carolina for the conduct of substantially all of its commercial lending activities and (b) with respect to the determination by Lender of the Interest Rate based on the LIBOR Rate, dealings in United States dollars are carried on in the London interbank market.

“CC&Rs” means and includes restrictive covenants, conditions, restrictions, easements, and other rights that exist or are contemplated with respect to an Approved Subdivision.

“Calendar Month” means any of the twelve (12) calendar months of the year.

“Cash Equivalent Investments” means (a) short-term obligations of, or fully guaranteed by, the United States of America, (b) commercial paper rated A-1 or better by S&P or P-1 or better by Moody’s, (c) demand deposit accounts maintained in the ordinary course of business, and (d) certificates of deposit issued by and time deposits with commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000; provided, in each case, that the same provides for payment of both principal and interest (and not principal alone or interest alone) and is not subject to any contingency regarding the payment of principal or interest.

“Certification of Non-Foreign Status” means an affidavit, signed under penalty of perjury by an Authorized Representative, stating (a) that Borrower is not a “foreign corporation,” “foreign partnership,” “foreign trust,” or “foreign estate,” as those terms are defined in the Code and the regulations promulgated thereunder, (b) Borrower’s U.S. employer identification number, and (c) the address of Borrower’s principal place of business. Such affidavit shall be consistent with the requirements of the regulations promulgated under Section 1445 of the Code, and shall otherwise be in form and substance acceptable to the Lender.

“Closing Date” means the earlier of the date of the disbursement of the first Advance or the recordation of the first Deed of Trust following satisfaction of the requirements in Section 4.2, as determined by the Lender.

“Code” means the United States Internal Revenue Code of 1986, as amended from time to time.

“Collateral” means all real and personal property with respect to each Approved Subdivision, as such real and personal property is described in each of the Deeds of Trust.

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“Collateral Certificate” means the certificate of Borrower, in form and substance satisfactory to Lender and containing such certifications as Lender may require, setting forth the information required by Section 3.11(b).

“Collateral Value” means, at the time the Collateral Value of the Borrowing Base is determined, the aggregate total of the Unit Collateral Values for all Units, the Lot Collateral Values for all Lots and Pre-Development Land Collateral Values for all Pre-Development Land.

“Commitment Amount” means FIFTY MILLION AND NO/100THS DOLLARS ($50,000,000.00) subject to such increases or decreases thereof pursuant to Section 2.1(d); provided, however, upon the occurrence of a Term Out Date pursuant to Section 2.1(h), the Commitment Amount shall be deemed to be that amount which is equal to the aggregate amount of Outstanding Loan Borrowings as of such Term Out Date.

“Compliance Certificate” shall have the meaning set forth in Section 6.4(g).

“Contingent Obligation” of a Person means any agreement, undertaking, arrangement or obligation, other than those expressly excluded from the definition of “Indebtedness”, by which such Person: (a) assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, or effectively guarantees, any obligation or liability of any other Person, in any manner, whether directly or indirectly; or (b) agrees to maintain the net worth, working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss; including, in either case (a) or (b) above, (i) any comfort letter, operating agreement, take-or-pay contract, agreement to indemnify or hold harmless, performance bond or other suretyship arrangement or any other form of assurance against loss (except for the endorsement of negotiable or other instruments for deposit or collection in the ordinary course of business) or (ii) the obligations of any such Person as the general partner of a partnership with respect to the liabilities of the partnership.

“Controlled Group” means all members of a controlled group of corporations or other business entities and all trades or businesses (whether or not incorporated) under common control which, together with Borrower, are treated as a single employer under Section 414 of the Code.

“Controlling Interest” means, with respect to any Person (other than an individual), (a) an Ownership Interest totaling in excess of fifty percent (50%) of the voting and ownership interests of such Person, and (b) control of the management and day-to-day operations of such Person.

“Deed of Trust” means as appropriate, one or more construction deeds of trust and fixture filing, with assignment of rents and security agreement executed by Borrower, as trustor, to a trustee selected by Lender (which trustee may be the applicable Title Company with respect to the applicable Approved Subdivision), for the benefit of the Lender, as beneficiary, creating a first lien on the Approved Subdivisions and all other Improvements now or hereafter owned or acquired by Borrower and situated thereon, and all rights and easements appurtenant thereto, securing the Obligations, as such deed of trust may currently exist and as may be amended, modified, supplemented, renewed or restated from time to time.

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“Default Rate” shall mean from and after the Maturity Date or at any time during the occurrence of an Event of Default, irrespective of any declaration of acceleration or maturity, all amounts remaining unpaid or thereafter accruing, shall, at Lender’s option, bear interest at a default rate equal to the sum of five percent (5%) per annum plus the Prime Based Rate (as defined under the definition of Interest Rate).

“Detached Lots” means Lots on which Detached Units are or are to be constructed.

“Detached Units” means Units consisting of four or less single-family dwellings on a Lot.

“Distributions” means any of the following:

(a) Any dividend, distribution or advance paid or declared by any Borrower to its respective members in respect of any Ownership Interest therein;

(b) Any purchase, redemption, retirement or other acquisition by any Borrower for value, of any of the respective Ownership Interests therein now or hereafter outstanding, or any interest therein;

(c) Any return of any capital of any Borrower to its respective members; and

(d) Any other distribution of the assets, properties, cash, rights, obligations or securities of any Borrower to its respective members.

“Dollar,” “U.S. Dollar” and the symbol $ means lawful money of the United States of America.

“EBITDA” means, with respect to any Person, such Person’s Net Income plus, to the extent deducted from revenues in determining Net Income, (i) Interest Expenses, (ii) expenses for taxes paid or accrued, (iii) depreciation, (iv) amortization and (v) extraordinary losses incurred other than in the ordinary course of business, minus, to the extent included in Net Income, extraordinary gains realized other than in the ordinary course of business, all as determined in accordance with GAAP.

“Effective Date” means the date set forth in the opening paragraph of this Agreement.

“Eligible Collateral” means any Pre-Development Land, A&D Lots, and any Units in each of the Approved Subdivisions that meet the requirements of this Agreement for inclusion as Eligible Collateral in the Borrowing Base and that are included in the current Borrowing Base Report.

“Entitled Land” means Lots and other real property with respect to which the following is correct: (a) such Lots are in a zoning classification that is consistent with Borrower’s actual and proposed use of such real property; and (b) (i) a preliminary subdivision plat or tentative map has been completed and has been approved by all applicable Governmental Authorities and is not subject to further discretionary approvals or conditions and, as applicable, (ii) final discretionary approval has been obtained, such as site plan, conditional use permit, site development permit, or other similar discretionary permit required by the local jurisdiction prior to issuance of building

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permits; and (iii) the project has obtained the appropriate permits or authorizations required pursuant to the Federal Clean Water Act, the Federal Endangered Species Act, and any equivalent State Law permit or authorization.

“Environmental Agreement” means, individually and collectively, each environmental indemnity agreement executed by Borrower for the benefit of Lender with respect to each Approved Subdivision, as such agreements may be amended, modified, extended, renewed, restated, or supplemented from time to time.

“Environmental Laws” means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to (i) the protection of the environment, (ii) the effect of the environment on human health, (iii) emissions, discharges or releases of pollutants, contaminants, hazardous substances or wastes into surface water, ground water or land, or (iv) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, hazardous substances or wastes or the clean-up or other remediation thereof.

“ERISA” means the Employee Retirement Income Security Act of 1974 and the regulations and published interpretations thereunder, as in effect from time to time.

“Event of Default” means as defined in Section 9.1.

“Exhibit” refers to an exhibit to this Agreement, unless another document is specifically referenced.

“Facility Anniversary Date” means each annual anniversary of the Effective Date beginning February 14, 2006.

“Facility Increase” means as defined in Section 2.1(d)(i).

“Facility LC” is defined in Section 2.10(a).

“Facility LC Application” is defined in Section 2.10(b).

“Facility LC Collateral Account” is defined in Section 2.10(i).

“Facility LC Sublimit” means the amount of Fifteen Million Dollars ($15,000,000).

“Financial Covenants” means the covenants set forth in Article 7.

“Financing Statements” means such UCC financing statements perfecting Lender’s security interest in the Collateral now owned or hereafter acquired by any Borrower.

“Fund” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

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“GAAP” means generally accepted accounting principles consistently applied.

“Governmental Authority” or “Governmental Authorities” means any and all governments or courts and/or any and all agencies, authorities, bodies, bureaus, departments, or instrumentalities of any government having jurisdiction over the Collateral, any Subdivision, any agreement with respect thereto, any Borrower.

“Guarantor” means WLH, or any other Person who may execute a Guaranty as a condition precedent to the effectiveness of this Agreement or in connection with the addition of a New Borrower as an additional Borrower under this Agreement.

“Guarantor Senior Credit Facility” means any loan agreement, note, indenture, credit agreement or similar agreement or agreements evidencing a loan or loans to Guarantor, as borrower, pursuant to which Guarantor has granted to such lender or lenders a lien against any assets of Guarantor.

“Guaranty” means any guaranty, including without limitation, any payment or completion guaranty, executed by any Guarantor in favor of Lender as of the effective date of this Agreement and as a condition precedent thereto, or executed by a Guarantor in connection with the addition of a New Borrower as an additional Borrower under this Agreement, as such guaranty or guaranties may be amended, modified, restated, renewed and supplemented from time to time.

“Hard Costs” means all costs incurred for labor performed in the construction of the Improvements and for the materials incorporated into the Improvements.

“High Density Lots” means Lots on which High Density Units are to be constructed.

“High Density Units” means Attached Units of at least three (3), but not greater than five (5) stories, constructed or to be constructed with wood framing and which include podium parking.

“High-End Lot” means a Lot offered or to be offered for sale by Borrower to the general public for a price equal to at least $600,000, but not greater than $1,500,000.

“High-End Unit” means a Detached Unit offered or to be offered for sale by Borrower to the general public for a price equal to at least $1,200,000, but not greater than $2,500.000.

“Impositions” means any and all of the following:

(a) Real property taxes and assessments (general and special) assessed against or imposed upon or in respect of any of the Collateral or the Obligations;

(b) Personal property taxes assessed against or imposed upon or in respect of any of the Collateral or the Obligations;

(c) Other taxes and assessments of any kind or nature that are assessed or imposed upon or in respect of the Collateral or the Obligations or that may result in a

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Lien or Encumbrance upon any of the Collateral (including, without limitation, non-governmental assessments, levies, maintenance and other charges whether resulting from covenants, conditions, and restrictions or otherwise, water and sewer rents and charges, assessments on any water stock, utility charges and assessments, and owner association dues, fees, and levies);

(d) Taxes or assessments on any of the Collateral in lieu of or in addition to any of the foregoing;

(e) Taxes on income, revenues, rents, issues, and profits, and franchise taxes;

(f) Costs, expenses, and fees arising from or related to any of the Approvals and Permits or the Requirements; and

(g) Assessment, documentary, indebtedness, license, stamp, and revenue charges, fees, and taxes and any other fees or taxes imposed on Lender and measured by or based in whole or in part upon ownership of any Deed of Trust, interest in Collateral, or any promissory note, guaranty, or indebtedness secured by any Deed of Trust or upon the nature or amount of the Obligations, excluding, however, from all of the foregoing any estate, excess profits, franchise, income, inheritance, or similar tax levied on Lender.

“Improvements” means the improvements to be constructed with respect to each Approved Subdivision, including without limitation, infrastructure construction and grading necessary to improve each Lot in the Approved Subdivision to A&D Completed Lot condition and any Units thereon.

“Indebtedness” means, without duplication, (i) principal and interest and all other sums payable under the Note and all other indebtedness of any Borrower to Lender arising under or in connection with the Note, this Agreement and other Loan Documents, and (ii) as to any Person at any time, any and all indebtedness, obligations or liabilities (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, or joint or several) of such Person for or in respect of: (a) borrowed money; (b) amounts raised under or liabilities in respect of any note purchase or acceptance credit facility; (c) reimbursement obligations under any letter of credit, Rate Management Obligations, currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate management device; (d) any other transaction (including forward sale or purchase agreements, capitalized leases and conditional sales agreements) having the commercial effect of a borrowing of money entered into by such Person to finance its operations or capital requirements (but not including trade payables and accrued expenses incurred in the ordinary course of business which are not represented by a promissory note or other evidence of indebtedness and which are not more than thirty (30) days past due); (e) any other obligation which in accordance with GAAP would be shown as a liability on the consolidated balance sheet of such Person; (f) all Contingent Obligations; (g) all liabilities and obligations in connection with any Rate Management Transaction; and (h) all liabilities and obligations in connection with sale and leaseback transactions, synthetic leases and other forms of “off-balance sheet” financing; provided, however, in determining Borrower or Guarantor’s compliance with the financing covenants set forth in Article 7, Indebtedness will not include liabilities with respect to surety bonds, completion or performance bonds and other similar Contingent Obligations to the extent such Contingent Obligations are not accruable as liabilities on the balance sheet of either Borrower pursuant to GAAP.

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“Intangible Assets” means, with respect to any Person, all intangible assets of such Person under GAAP, determined on a consolidated basis, including, without limitation, copyrights, franchises, goodwill, licenses, non-competition covenants, organization or formation expenses, patents, service marks, service names, trademarks, trade names, write-up in the book value of any asset in excess of the acquisition cost of the asset, any amount, however designated on the balance sheet, representing the excess of the purchase price paid for assets or stock acquired over the value assigned thereto on the books of such Person, loans and advances to partners and officers, employees, or directors of such Person (or members of their immediate families), unamortized leasehold improvement expense not recoverable at the end of the lease term, unamortized debt discount, and deferred discount.

“Interest Expense” means, for any period, the sum of all interest expensed by a Person on a consolidated basis during such period, including amounts previously capitalized and amortized through costs of sale for the current period, all as determined in accordance with GAAP.

“Interest Incurred” means, for any period, interest incurred by a Person on a consolidated basis during such period, including without limitation, capitalized interest, all as determined in accordance with GAAP.

“Interest Period” means (a) for the initial Interest Period, that period of time commencing on the Closing Date and ending on (and including) the last day of the calendar month in which the Closing Date occurred and (b) for each Interest Period thereafter (commencing on the first (1st) day of the first full calendar month after the Closing Date), that period of time commencing on the first (1st) calendar day of each calendar month and ending on (and including) the last day of each such calendar month; provided that (y) whenever the last day of an Interest Period would otherwise occur on a day other than a Business Day, the last day of the Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that if the extension would cause the last day of the Interest Period to occur in the next following calendar month, the last day of the Interest Period shall occur on the next preceding Business Day; and (z) no Interest Period shall extend beyond the Maturity Date.

“Interest Rate” means, at the election of Borrower in connection with any Advance Request pursuant to Section 2.2(a) (and otherwise subject to the provisions of Section 2.3), either:

(a) The LIBOR Rate plus 225 basis points (i.e., 2.25%), which combined figure shall be rounded upwards to the nearest one-eighth percent (.125%), with such interest rate being adjusted from time to time as of each Interest Rate Adjustment Date (“LIBOR Based Rate”); or

(b) The Prime Rate (rounded upwards to the nearest one-eighth percent (.125%)), with such interest rate being adjusted from time to time as and when the Prime Rate is adjusted “Prime Based Rate”).

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Borrower may not elect to convert or otherwise change the Interest Rate except in connection with an Advance Request. Interest shall accrue on the entire outstanding balance of the Loan at the Interest Rate selected by Borrower until such time as Borrower elects to convert such Interest Rate to the other available Interest Rate (i.e., LIBOR Based Rate or Prime Based Rate); provided that the applicable Interest Rate shall be the Default Rate at any time an Event of Default has occurred and is continuing. In the event no such Interest Rate election is made by Borrower, the Interest Rate shall be deemed to be the LIBOR Based Rate.

“Interest Rate Adjustment Date” means, with respect to each Interest Period, the date that is two (2) Business Days prior to the first day of each Interest Period; provided, however, that Lender shall have the right to change the Interest Rate Adjustment Date to any other day upon notice to Borrower (in which event such change shall then be deemed effective) and, if requested by Lender, Borrower shall promptly execute an amendment to this Agreement to evidence such change.

“Involuntary Lien” means any Lien or Encumbrance securing the payment of money or the performance of any other obligation created involuntarily under any law, ordinance, regulation, rule, or otherwise and any claim of any such Lien or Encumbrance. For purposes of this Agreement and the other Loan Documents, and the rights and remedies with respect thereto, “stop notices” or similar notices and demands from Persons performing work or supplying materials with respect to any Collateral and who are asserting lien rights, shall be considered as Involuntary Liens.

“Land” means any land within an Approved Subdivision, including without limitation, Entitled Land.

“Land Under Development” means, with respect to any Approved Subdivision and any Lot identified therein, Land which constitutes Pre-Development Land upon which construction of the Improvements has commenced and is continuing, or is to commence within nine (9) months after the inclusion of such Approved Subdivision in the Borrowing Base, all as determined by Lender based upon a physical inspection of such Approved Subdivision (and the subject Land therein.

“LC Fee” is defined in Section 2.10(c).

“LC Obligations” means, at any time, the sum, without duplication, of (i) the aggregate undrawn stated amount under all Facility LCs outstanding at such time plus (ii) the aggregate unpaid amount at such time of all Reimbursement Obligations.

“LC Payment Date” is defined in Section 2.10(d).

“Lender” means as defined in the opening paragraph of this Agreement, together with any successors and assigns.

“LIBOR Rate” means, with respect to each Interest Period, the average of London Interbank Offered Rates (in U.S. dollar deposits) for a term of one month determined solely by Lender as of each Interest Rate Adjustment Date. On each Interest Rate Adjustment Date, Lender will obtain the close-of-business LIBOR Rate from “Page 3750” on the Telerate Service.

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If Telerate Service ceases publication or ceases to publish the LIBOR Rate, Lender shall select a comparable publication to determine the LIBOR Rate and provide notice thereof to Borrower. The LIBOR Rate may or may not be the lowest rate based upon the market for U.S. dollar deposits in the London Interbank Eurodollar Market at which Lender prices loans on the date on which the LIBOR Rate is determined by Lender as set forth above.

“Lien or Encumbrance” and “Liens and Encumbrances” mean, respectively, each and all of the following:

(a) Any lease or other right to use;

(b) Any assignment as security, conditional sale, grant in trust, lien, mortgage, pledge, security interest, title retention arrangement, other encumbrance, or other interest or right securing the payment of money or the performance of any other liability or obligation, whether voluntarily or involuntarily created (including, without limitation, Involuntary Liens) and whether arising by agreement, document, or instrument, under any law, ordinance, regulation, or rule (federal, state, or local), or otherwise; and

(c) Any option, right of first refusal, or other interest or right.

“Loan” means, individually and collectively, all Loans made by the Lender pursuant to Article 2.

“Loan Documents” means this Agreement, the Note, any Guaranty, the Security Instruments, the Environmental Agreement, the Assignments, and any guaranties, agreements, assignments, documents, or instruments now or hereafter evidencing, guarantying or securing the Loan and any and all Advances of the Loan made hereunder (but expressly excluding any Rate Management Transactions), as any of the same may presently exist or as may be amended, modified, extended, renewed, restated, or supplemented from time to time.

“Lot” means an individual lot designated as such on a subdivision plat or map (whether preliminary or final, provided that any preliminary plat must not be conditioned on any discretionary approvals that would prevent the filing of a final plat). Unless the context otherwise requires, the term “Lot” refers to the lot prior to a transfer of the lot for Unit construction and inclusion of the Lot in Eligible Collateral as a Unit.

“Lot Allocation” means, (i) with respect to each Lot included as Eligible Collateral in the Borrowing Base, the Maximum Allowed Advance for the Lot reduced by that amount which is equal to the result obtained by multiplying the A&D Lot Improvement Construction Costs as set forth in the applicable A&D Lot Development Budget by the applicable Maximum Allowed Advance for that Lot and (ii) with respect to each Unit included as Eligible Collateral in the Borrowing Base, the Maximum Allowed Advance for the Unit reduced by that amount which is equal to the result obtained by multiplying the “hard” and “soft” costs of constructing the Unit as set forth in the applicable Unit Budget by the Maximum Allowed Advance for such Unit.

“Lot Collateral Value” means, for a particular Lot which constitutes Eligible Collateral, the sum of (i) the Lot Allocation for such Lot and (ii) the result (but not less than zero) obtained by subtracting the Lot Allocation for such Lot from the Maximum Allowed Advance for such Lot and then multiplying the difference by the A&D Lot Development Completion Percentage.

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“Lot Eligibility Date” means, with respect to any each Lot (and including any Land Under Development), the date such Lot (or Land Under Development) is first included as such in a Borrowing Base Report.

“Material Adverse Change” means any change in the assets, liabilities, financial condition, or results of operations of Borrower, Guarantor, or the members or partners of Borrower, any other event or condition with respect to Borrower, Guarantor, such members or partners, or any change in sales of Units, development of Lots and Units, costs and expenses with respect to such development of Lots and Units with respect to an Approved Subdivision that materially and adversely affects any of the following: (i) the likelihood of performance by Borrower, Guarantor, such members or partners of any of their respective Obligations or the ability of Borrower, Guarantor or such members or partners to perform such Obligations, (ii) the likelihood of performance by any such members or partners of any of their material obligations to Borrower (including, without limitation, the obligation to make capital contributions to Borrower), (iii) the likelihood that the costs and expenses of developing the Lots and Units within each of the Approved Subdivisions will be within the budgets approved by Lender, (iv) the legality, validity or binding nature of any of the Obligations of Borrower, Guarantor, or such members or partners (including, without limitation, the obligation to make capital contributions to Borrower), (v) any Lien or Encumbrance securing any of such Obligations, or (vi) the priority of any Lien or Encumbrance securing any of such Obligations.

“Maturity Date” means February 14, 2008, as such date may be extended from time to time pursuant to Sections 2.1(g) or 2.1(h). In the event the term out provisions of Section 2.1(h) are implemented, the Maturity Date shall be extended to, and have the same meaning as, the Term Out Maturity Date.

“Maximum Allowed Advance” means the maximum advance rate with respect to any Pre-Development, Land, Lot or Unit, with such rate being equal to the following:

(a) With respect to Pre-Development Land, the Lesser of (i) 60% of the Appraised Value of the Pre-Development Land, or (ii) 60% of the Pre-Development Land Acquisition Cost.

(b) With respect to Land Under Development:

(i) which constitutes Detached Lots, the lesser of (A) 75% of the Appraised Value of the Land Under Development, or (B) 80% of the A&D Lot Development Budget Costs for such Land Under Development;

(ii) which constitutes Attached Lots (but excluding any High Density Lots), the lesser of (A) 70% of the Appraised Value of the Land Under Development, or (B) 75% of the A&D Lot Development Budget Costs for such Land Under Developments;

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(iii) which constitutes High End Lots (but excluding any High Density Lots), the lesser of (A) 65% of the Appraised Value of the Land Under Development, or (B) 70% of the A&D Lot Development Budget Costs for such Land Under Development; and

(iv) with respect to any Land Under Development which constitutes High Density Lots, the Maximum Allowed Advance shall be determined by Lender as a condition precedent to the inclusion of the applicable Subdivision as an Approved Subdivision.

(c) With respect to A&D Completed Lots:

(i) which constitute Detached Lots, the lesser of (A) 75% of the Appraised Value of the A&D Completed Lot, or (B) 85% of the Total Lot Cost for the A&D Completed Lot;

(ii) which constitute Attached Lots (but excluding High Density Lots), the lesser of (A) 75% of the Appraised Value of the A&D Completed Lot, or (B) 80% of the Total Lot Cost for the A&D Completed Lot;

(iii) which constitute High End Lots (but excluding High Density Lots), the lesser of (A) 70% of the Appraised Value of the A&D Completed Lot, or (B) 75% of the Total Lot Cost for the A&D Completed Lot; and

(iv) which constitute High Density Lots, the Maximum Allowed Advance shall be determined by Lender as a condition precedent to the inclusion of the applicable Subdivision as an Approved Subdivision.

(d) With respect to each Detached Unit:

(i) For each Presold Unit, the lesser of (A) 80% of the lower of the Appraised Value for that Unit or the estimated Net Sales Proceeds to be received with respect to that Unit pursuant to the applicable Purchase Contract, or (B) 100% of the Unit Cost for that Unit;

(ii) For each Spec Unit, the lesser of (A) 80% of the Appraised Value for that Unit or (B) 95% of the Unit Cost for that Unit; and

(iii) For each Model Unit, the lesser of (A) 80% of the Appraised Value for that Unit or (B) 90% of the Unit Cost for that Unit.

(e) With respect to each Attached Unit:

(i) For each Presold Unit, the lesser of (A) 80% of the lower of the Appraised Value for that Unit or the estimated Net Sales Proceeds to be received with respect to that Unit pursuant to the applicable Purchase Contract of the Appraised Value for that Unit, or (B) 90% of the Unit Cost for that Unit;

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(ii) For each Spec Unit, the lesser of (A) 75% of the Appraised Value for that Unit or (B) 85% of the Unit Cost for that Unit; and

(iii) For each Model Unit, the lesser of (A) 75% of the Appraised Value for that Unit or (B) 75% of the Unit Cost for that Unit.

Provided, however, notwithstanding the foregoing in clauses (d) and (e), (i) with respect to each High End Unit, the foregoing Maximum Allowed Advance Rates with respect to such High End Unit, whether constituting an Attached Unit or a Detached Unit, shall be reduced by 5%; and (ii) with respect to any High Density Units, the Maximum Allowed Advance shall be determined by Lender as a condition precedent to the inclusion of the applicable Subdivision (which contains such High Density Units) as an Approved Subdivision.

“Model Unit” means a Unit which is open to the general public for viewing purposes and which is not available for sale until all of its corresponding plan type in the applicable Subdivision have been sold.

“Net Income” means, with respect to any Person, the net income (or loss) of such Person for the applicable period, as such net income is determined in accordance with GAAP.

“Net Sales Proceeds” means in the case of a Unit or Lot, the gross sales price of the Unit (including, without limitation, all options and upgrades) set forth in the Purchase Contract for such Lot or Unit, less (i) customary tax and assessment prorations; (ii) reasonable and customary warranty costs and closing costs, including without limitation, sales commissions (provided that such costs shall not, in the aggregate, exceed 6% with respect to any Unit or Lot) and (iii) such other costs which may be approved by Lender in writing.

“New Borrower” means as defined in Section 8.1.

“Note” or “Notes” means, individually and collectively, the note of Wachovia as Lender and such other promissory notes of even date herewith, executed by Borrower and payable to Lender, and the additional promissory notes executed after the date hereof, in each case evidencing Borrower’s indebtedness hereunder, as the same may be amended, modified, extended, renewed or supplemented from time to time.

“Obligations” means (i) the obligations of Borrower under this Agreement and the applicable Loan Documents; (ii) the obligations of any Borrower under any International Swap Dealers Association Master Agreement entered into by and between Borrower and Lender with respect to the Loan, or any other party and any similar agreement, including any Rate Management Transaction with respect to any “Transaction” (as defined in such master agreement) entered into pursuant thereto, whether such amounts are due and payable on the date(s) scheduled therefor, on the occurrence of an “Early Termination” (as defined in such master agreement), or otherwise and (iii) the obligations of each member and partner under the applicable Loan Documents, including, without limitation, any Assignment of Ownership Interests.

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“Organizational Documents” means, with respect to any Person: (a) if such Person is a limited liability company, such Person’s articles of organization, operating agreement, limited liability company agreement and other documents governing the management and operation of such Person; (b) if such Person is a general or limited partnership, such Person’s certificate of limited partnership, partnership agreement and other documents governing the management and operation of such Person; (c) if such Person is a corporation, such Person’s articles of incorporation, bylaws and the other documents and instruments governing the management and operation of such Person; (d) if such Person is a trust, such Person’s certificate of trust, trust agreement and the other documents and instruments governing the management and operation of such Person; and (e) if such Person is another type of entity, the documents and instruments pursuant to which such Person is formed, managed and operated; in each case, certified by (i) the applicable Secretary of State (for any Organizational Documents that have been filed with any Secretary of State) or (ii) an Authorized Representative (for any Organizational Documents that have not been filed with any Secretary of State).

“Other Amounts” means all amounts, other than principal and interest, payable by Borrower under this Agreement and any of the other Loan Documents to or for the benefit of the Lender, including, without limitation, fees, costs and expenses pursuant to Section 2.5.

“Outstanding Loan Borrowings” means from time to time and at any time, the aggregate amount of then outstanding Advances with respect to the Loan.

“Ownership Interest” means any and all shares, rights to purchase, warrants or options (whether or not currently exercisable), participations, or other equivalents of or interests in (however designated) the equity (which includes, but is not limited to, common stock, preferred stock and partnership, joint venture and limited liability company interests) of a designated Person (excluding any debt securities that are convertible into, or exchangeable for, such equity).

“Payment Date” means the fifth (5^th) day of each Calendar Month, with the first Payment Date being the Fifth (5^th) day of the first full Calendar Month after the Effective Date.

“PBGC” means the Pension Benefit Guaranty Corporation, or any successor thereto.

“Permitted Exceptions” means:

(a) Involuntary Liens for Impositions that are not yet delinquent;

(b) Involuntary Liens (other than for Impositions) with respect to which Borrower satisfies each of the following requirements: (i) Borrower contests the validity of such Involuntary Lien in good faith by appropriate legal proceedings; (ii) Borrower gives written notice to Lender of Borrower’s intent to contest or object to the same; (iii) Borrower demonstrates to Lender’s satisfaction that the procedures will conclusively operate to prevent the sale of any part of the Collateral to satisfy the Involuntary Lien prior to final determination of such proceedings; (iv) the amount of any such Involuntary Liens (individually or in the aggregate) does not exceed five percent (5%) of the Collateral Value of the Eligible Collateral within that Approved Subdivision unless otherwise approved by Lender; and (v) Borrower takes any and all other actions (including, without limitation, obtaining bonds, title insurance endorsements, or other security) as Lender may deem necessary or appropriate in order to

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prevent the sale of any Collateral to satisfy the Involuntary Lien and prevent any impairment of any such Collateral or, if such Collateral is Eligible Collateral, Borrower removes the affected Collateral from the Eligible Collateral.

(c) All items, except Impositions, in Schedule B to any Title Policy that have been approved by Lender; and

(d) Any other Liens and Encumbrances consented to by Lender in advance in writing from time to time.

“Permitted Transfer” means each of the following:

(a) Transfers of any Ownership Interests (whether direct or indirect) in Borrower which, in the aggregate over the term of the Loan (i) do not exceed forty-nine percent (49%) of the Ownership Interests in Borrower and (ii) do not result in a change in the Controlling Interest of Borrower;

(b) Transfers with respect to any Person whose stocks or certificates are traded on a nationally recognized stock exchange;

(c) Permitted Exceptions; and

(d) All Transfers of worn out or obsolete furnishings, fixtures or equipment that are promptly replaced with property of equivalent value and functionality.

“Person” means a natural person, a partnership, a joint venture, an unincorporated association, a limited liability company, a corporation, a trust, any other legal entity, any Governmental Authority, or any other entity, whether acting in an individual capacity, fiduciary capacity or other capacity.

“Plan” means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which any Borrower or any member of the Controlled Group may have any liability.

“Plans and Specifications” means the plans and specifications with respect to the Improvements within any Approved Subdivision as approved by all applicable Governmental Authorities, as such plans and specifications may be modified from time to time upon the prior review and approval of Lender to the extent requested by Lender, which approval shall not be unreasonably withheld, delayed or conditioned.

“Pre-Development Land” means any Entitled Land in any Approved Subdivision designated for the development of detached single family Units and/or attached single family dwellings where (i) a preliminary subdivision plat or map has been approved by all applicable governmental authorities to the extent necessary to permit the development of such Entitled Land, (ii) all governmental permits, consents and approvals have been obtained to permit the commencement and grading of such Entitled Land as necessary to improve such Entitled Land to an A&D Completed Lot, (iii) all fees required in connection with such licenses, permits, approvals and grading have been paid, and (iv) no material impediments exist to the issuance of all further permits, licenses or approvals necessary or appropriate in connection with the development of utilities, infrastructure and other physical site improvements on such Lots.

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“Presold Unit” means a Unit that is subject to a Purchase Contract.

“Prime Rate” means a rate per annum equal to the prime rate of interest announced from time to time by Lender (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes.

“Product Line” means a group of Units which, in the ordinary course of Borrower’s business, are marketed together under a common plan or plans based upon the type of Unit constructed and the price of such Units.

“Project Cost” means, with respect to any Approved Subdivision (or any Lot or Unit contained therein), the total of the following amounts: (a) the Acquisition Cost, (b) the amounts set forth on the Budget (as adjusted from time to time pursuant to this Agreement) to commence, construct and complete all of the Improvements, including without limitation, both Hard and Soft Costs and (c) the amounts, whether or not reflected on the Budget, determined by the Lender from time to time to be necessary to complete the Improvements and maintain the subject property, including without limitation, cost overruns, contingency reserves (including without limitation, interest reserves), taxes, assessments, insurance costs and all other operating expenses.

“Protective Advances” means all sums expended by the Lender: (a) to protect the priority, validity and enforceability of the lien of the Deeds of Trust and any and all other Loan Documents encumbering any of the Collateral; (b) to protect the value or the security of any of the Collateral, including any amounts expended in accordance with this Agreement or any other Loan Document; and (c) if any Approved Subdivision is acquired by Lender or some other entity on behalf of Lender, amounts expended to complete any Improvements on the Approved Subdivisions.

“Purchase Contract” means a bona fide written agreement between Borrower and a purchaser who is not an Affiliate of Borrower entered into in the ordinary course of Borrower’s business and pursuant to which such purchaser has agreed to purchase a Unit, which agreement (i) shall be accompanied by a non-refundable cash earnest money deposit or down payment of at least $5,000.00; (ii) shall be with a buyer who has been prequalified for a purchase money loan for the Lot and Unit by Borrower or a mortgage broker, mortgage banker or other residential lending institution; (iii) not subject to any contingency related to the sale of the buyer’s existing residence; and (iv) any closing contingencies, including any financing contingency, being required to be removed no later than 60 days prior to closing.

“Rate Management Transaction” means any transaction (including an agreement with respect thereto) now existing or hereafter entered into between Borrower and Lender which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other

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similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures.

“Reclassification Adjustment” means, for any Unit reclassified as a Spec Unit or Presold Unit pursuant to any provision of this Agreement, a change in the Maximum Allowed Advance for such Unit to the Maximum Allowed Advance applicable to the type of Unit as so reclassified.

“Reimbursement Obligations” means, at any time, the aggregate of all obligations of Borrower then outstanding under Section 2.10 to reimburse Lender for amounts paid by Bank on account of any one or more drawings under Facility LCs.

“Reportable Event” means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code.

“Requirements” means any and all obligations, other terms and conditions, requirements, and restrictions in effect now or in the future by which any Borrower or any or all of the Collateral are bound, or which are otherwise applicable to any or all of the Collateral, construction of any Units or A&D Lot Improvements, until this Agreement has terminated or expired, the Loan has been paid in full, and all other Obligations are paid and performed in full and all obligations of Lender arising under the Loan Documents have terminated, the development or construction of any of the Approved Subdivisions, or occupancy, operation, ownership, or use of Collateral, Lots, Units, or A&D Lot Improvements, including, without limitation, any obligations, terms, conditions, restrictions, or requirements imposed by any law, ordinance, regulation, or rule (federal, state, or local); any Approvals and Permits; any Permitted Exceptions; any condition, covenant, restriction, easement, right-of-way, or reservation applicable to such Collateral; any insurance policies; any other agreement, document, or instrument to which any Borrower is a party or by which any Borrower, or any of the Collateral or the business or operations of Borrower is bound; or any judgment, order, or decree of any arbitrator, other private adjudicator, or Governmental Authority to which any Borrower is a party or by which any Borrower or any of the Collateral is bound.

“S&P” means Standard and Poor’s Ratings Services, a division of The McGraw Hill Companies, Inc.

“Security Instruments” means, collectively and individually, the Deeds of Trust, the Assignments, the Financing Statements, and any other documents pursuant to which Borrower or any other Person assigns, pledges or otherwise grants Lender or its assignee a security interest in the Collateral, as any of the same may currently exist or as may be amended, modified, supplemented, extended, restated, or renewed from time to time.

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“Soft Costs” means all costs designated as “Soft Costs” on the Budget and which are not otherwise identified as Hard Costs.

“Spec Unit” means a Unit constructed for the purpose of addition to Borrower’s inventory of Units and which is not subject to a Purchase Contract and is not a Model Unit.

“Subdivision” means a group of Lots upon which Units are intended to be constructed, marketed and sold as a single Product Line or otherwise marketed and sold together regardless of whether Units in such group of Lots are to be constructed at the same time or in phases. If required by Bank, subdivisions located in the same area and similar in product and market segment shall be treated as a single subdivision in this Borrowing Base Loan and no subdivision will exceed the limitations set forth in Article 3 of this Agreement, whether such Lots are purchased pursuant to an option agreement over time or purchased in bulk.

“Subdivision Documents” means a tentative and/or final plat map or similar document covering a Subdivision and dividing the Subdivision into lots in accordance with the Requirements of the applicable Governmental Authorities.

“Survey” means a current ALTA survey of any Approved Subdivision prepared by a surveyor registered or licensed in the state where the Approved Subdivision is located, which survey shall be in form and substance acceptable to Lender.

Tangible Net Worth means as defined by or otherwise determined in conformity with GAAP; provided, however, in determining such Tangible Net Worth, the following shall be excluded with respect to such determination: (a) Intangible Assets, (b) any notes or obligations receivable from Affiliates except to the extent such notes or obligations receivable are on terms which are fair, reasonable and equivalent of an arm’s length transaction with an unrelated third Person, (c) any “step-up” in value of assets that results from a transaction with an Affiliate or between Affiliates, or recognition of a gain or profit from a sale or contribution of an asset to an Affiliate or a transaction between Affiliates except to the extent such transactions are on terms which are fair, reasonable and equivalent of an arm’s length transaction with an unrelated third Person, and (e) any subordinated debt (other than as may be specifically approved by Lender in writing) shall be excluded, all determined on a consolidation basis.

“Term Out Commencement Period Date” means as defined in Section 2.1(h).

“Term Out Date” means as defined in Section 2.1(h)(i).

“Term Out Maturity Date” means as defined in Section 2.1(h)(ii).

“Title Company” means any title insurance company approved by Lender to issue a Title Policy in connection with Lender’s Deeds of Trust; unless otherwise permitted by Lender, Borrower shall be required to use the same Title Company for all Approved Subdivisions.

“Title Policy” and “Title Policies” mean, respectively, each and all title insurance policies and endorsements thereto issued pursuant to the requirements of this Agreement and any reinsurance or co-insurance agreements and endorsements as Lender may require, including without limitation, reinsurance for any title policy amount of $100,000,000 or greater pursuant to a reinsurance agreement (utilizing the ALTA Facultative Reinsurance Agreement (9-24-94) form) with another Title Company acceptable to Lender.

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“Total Lot Cost” means with respect to each Lot in each Approved Subdivision, the sum of the Acquisition Cost and the aggregate of “hard” and “soft” costs to plan, design, and construct applicable improvements such as curbs, grading, landscaping, sprinklers, storm and sanitary sewers, paving, sidewalks and utilities, as are necessary to make an Approved Subdivision suitable for the construction of single family homes (including Attached and Detached Units) on the applicable underlying Lots, together with any common area improvements which may exist, allocated on a per Lot basis.

“Transfer” means:

(a) any sale, transfer, conveyance, assignment, hypothecation, encumbrance, lease or vesting of any Approved Subdivision or any part thereof or interest therein to or in any Person, whether voluntary, involuntary, by operation of law, or otherwise, except the Permitted Exceptions; and

(b) any sale, transfer, conveyance, assignment, hypothecation, or encumbrance of any ownership interest of any Borrower or in the managing member or manager of any Borrower, whether direct or indirect; provided, however, a sale, transfer or assignment of any membership interest in any Borrower or in the managing member or manager of any Borrower (whether direct or indirect), shall be permitted so long as the requirements of Section 6.17 continue to be satisfied at all times;

(c) any merger or consolidation of any Borrower and/or Guarantor; provided, however, a merger or consolidation shall be permitted so long as the requirements of Section 8.1 continue to be satisfied at all times; or

(d) the execution of any agreements to do any of the foregoing.

“Undrawn Availability” means the sum of (a) that portion of the Available Loan Commitment which is available for Advance (including satisfaction of all conditions precedent thereto except for a request for such Advance) but has not yet been disbursed pursuant to the terms and conditions of this Agreement and (b) that portion of any line of credit facility held by Borrower with any financial institution which is available for immediate disbursement (including satisfaction of all conditions precedent thereto except for a request for such disbursement) to Borrower pursuant to that credit facility’s loan terms but has not yet been disbursed.

“Unit” means a residential dwelling constructed or to be constructed on a Lot, together with the associated Lot.

“Unit Budget” means a budget setting forth the Unit Construction Costs with respect to each Unit. Each Unit Budget will be subject to review and approval by Lender.

“Unit Collateral Value” means a valuation of each Unit based upon the Unit’s stage of construction. The Unit Collateral Value for a particular Unit equals the sum of (a) the Lot Allocation and Lender approved Up Front Costs for the Unit and (b) the result obtained by

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subtracting the Lot Allocation and Lender approved Up Front Costs for the Unit from the Maximum Allowed Advance (taking into account any applicable Reclassification Adjustment) for the Unit and then multiplying the difference by the Unit Completion Percentage.

“Unit Completion Percentage” means for any Unit, the current percentage of construction completed as reflected in each Borrowing Base Report in increments of 5% each, based upon the stages of construction set forth in Exhibit ”A”.

“Unit Construction Cost” as set forth in the Unit Budget approved by Lender in its sole discretion, means, with respect to each Unit, the sum of (i) the “hard costs” associated with the construction of the Unit, (ii) the “soft costs” associated with the construction of the Unit, including property taxes, appraisal costs, architects and engineers fees, entitlement costs, project supervision costs and review and inspection fees, (iii) Up Front Costs, specifically approved by Lender, in it’s sole discretion and (iv) an amount approved by Lender representing the allocated financing costs with respect to such Unit.

“Unit Construction Threshold” means, with respect to a Unit, a Unit Completion Percentage of at least 5%.

“Unit Cost” for a particular Unit means the sum of (i) the Unit Lot Cost for the Unit and (ii) the Unit Construction Cost for the Unit.

“Unit Eligibility Date” means, with respect to each Unit, the date on which that Unit is first included in Eligible Collateral as a Unit pursuant to this Agreement, as reflected on the Borrowing Base Report, and regardless of whether periods exist during which such Unit is not included as Eligible Collateral.

“Unit Lot Cost” means, with respect to each Unit included in Eligible Collateral, the cost of the Lot as determined by Lender in connection with the approval of each Approved Subdivision, based upon one or more of the following: (i) the Total Lot Cost of the Lots in such Approved Subdivision divided by the number of such Lots; or (ii) the book value of such Lots as determined in accordance with GAAP or based on the applicable Appraised Value if Lender determines such valuation is reasonable and the Lot is not subject to any other Liens and Encumbrances securing Indebtedness of Borrower (whether junior or senior in priority to the applicable Deed of Trust).

“Unmatured Event of Default” means any condition or event that with notice, passage of time, or both, would be an Event of Default.

“Up Front Costs” includes only those fees and costs specifically identified and approved by Lender, in Lender’s sole discretion. Such fees and costs, may but shall not necessarily include, without limitation, building permit fees, tap fees and fees of Governmental Authorities which are required to be paid prior to the start of the construction of the Unit.

“WLH” means WILLIAM LYON HOMES, a Delaware corporation.

1.2 Other Terms. Other terms defined herein shall have the meaning ascribed to them herein.

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1.3 Interpretation. Unless the context of this Agreement otherwise clearly requires, the following rules of construction shall apply to this Agreement and each of the other Loan Documents:

(a) Number; Inclusion. References to the plural include the singular, the plural, the part and the whole; “or” has the inclusive meaning represented by the phrase “and/or”; and “including” has the meaning represented by the phrase “including without limitation.”

(b) Documents Taken as a Whole. The words “hereof,” “herein,” “hereunder,” “hereto” and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document as a whole and not to any particular provision of this Agreement or such other Loan Document.

(c) Headings. The section and other headings contained in this Agreement or the other Loan Documents and the Table of Contents (if any) preceding this Agreement or the other Loan Documents are for reference purposes only and shall not control or affect the construction of this Agreement or the other Loan Documents or the interpretation thereof in any respect.

(d) Implied References to This Agreement. Article, section, subsection, clause, schedule and exhibit references are to this Agreement unless otherwise specified.

(e) Persons. Reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement or the other Loan Documents, as the case may be.

(f) Modifications to Documents. Reference to any agreement (including this Agreement and any other Loan Document together with the schedules and exhibits hereto or thereto), document or instrument means such agreement, document or instrument as amended, modified, replaced, substituted for, superseded or restated.

(g) Accounting Terms. For purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP.

ARTICLE 2

LOAN FACILITY

2.1 Loan Facility.

(a) The Loan. In reliance upon the representations and warranties of Borrower, and subject to the terms and conditions of this Agreement and the Loan Documents, Lender hereby agrees to lend to or for the benefit of Borrower of the Loan, and Borrower agrees to pay all outstanding Indebtedness evidenced and secured by the Loan Documents, in the manner and upon the terms and conditions expressed in the Loan Documents.

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(b) Revolving Nature of Loan. Subject to the limitations described in this Agreement, the Loan shall constitute a revolving line of credit and advances repaid may be reborrowed on a revolving basis through the Maturity Date. Although the outstanding principal of the Loan may be zero from time to time, the Loan Documents will remain in full force and effect until all obligations of Lender pursuant to this Agreement and the Loan Documents expire and all Obligations have been paid and performed in full. Upon the occurrence of an Unmatured Event of Default, Lender, may cause or declare any commitment of the Lender to make Advances to be suspended, whereupon any obligation to make further Advances will immediately be suspended. Upon the occurrence of an Event of Default, Lender, may cause or declare any commitment of the Lender to make Advances to be suspended or terminated, whereupon any obligation to make further Advances will immediately be suspended or terminated

(c) Evidence of Loan. The Loan is and shall be evidenced by the Note and shall bear interest calculated and payable as provided in this Article 2. Lender will maintain in accordance with its usual practice an account or account evidencing the Outstanding Loan Borrowings and other Obligations due Lender with respect to the Loan, including without limitation, as a result of Advances made from time to time pursuant to this Agreement and any payments of principal and interest by Borrower from time to time. Such accounting and records shall be deemed conclusive of the amounts due and owing Lender and shall be binding upon Borrower absent manifest error.

(d) Increase In Commitment Amount.

(i) Request for Increase. Provided that no Event of Default or Unmatured Event of Default has occurred and is continuing, Borrower may, at any time and from time to time, request, by notice to Lender, Lender’s approval of an increase of the Commitment Amount (a “Facility Increase”) within the limitations hereafter described, which request shall set forth the amount of each such requested Facility Increase. Within twenty (20) days of such request, Lender shall advise Borrower of its approval or disapproval of such request, and failure to so advise Borrower shall constitute disapproval. If Lender approves of any such Facility Increase, then the Commitment Amount may be so increased up to the amount of such approved Facility Increase.

(ii) Requirements. Any Facility Increase shall be subject to the following requirements, limitations and conditions: (A) any increase in the Commitment Amount shall not be less than $10,000,000 (and shall be in integral multiples of $10,000,000 if in excess thereof); (B) after giving effect to the Facility Increase and all prior Facility Increases, the Commitment Amount shall not exceed Eighty Million Dollars ($80,000,000); (C) Borrower shall have executed and delivered to Lender such Note or Notes as Lender shall require to reflect such Facility Increase; (D) Borrower shall have delivered to Lender appropriate opinions of counsel as to such matters as Lender may request; (E) any other Person who has executed any Loan Documents, shall have consented in writing to the Facility Increases and shall have agreed that their obligations under such Loan Documents continue in full force and effect; and (F) Borrower, and

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Lender shall otherwise have executed and delivered such other instruments and documents as Lender shall have reasonably requested in connection with such Facility Increase. The form and substance of the documents required under clauses (C) through (F) above shall be fully acceptable to Lender.

(e) Reduction of Commitment Amount. From and after the first Facility Anniversary Date, so long as no Unmatured Event of Default or Event of Default has occurred and is continuing, Borrower may permanently reduce the Commitment Amount in whole or in part; provided, however, (i) each such request shall be in writing and delivered to Lender at least thirty (30) days’ prior to such requested reduction and shall specify the date and amount of any such reduction, (ii) each such reduction shall be in the minimum amount of $10,000,000.00 (and in multiples of $10,000,000.00 if in excess thereof); (iii) Borrower shall have executed and delivered to Lender any documents, instruments or certificates that Lender may reasonably request in connection with such reduction, and (iv) Borrower shall have paid all of Lender’s fees and costs incurred in connection with such reduction, including without limitation, reasonable attorneys’ fees and costs. Any reduction in the Commitment Amount pursuant to this section shall likewise reduce the amount by which the Commitment Amount may be subsequently increased pursuant to Section 2.1(d) above.

(f) Maturity Date. Notwithstanding any other provision of this Agreement or any Loan Documents to the contrary, all Outstanding Loan Borrowings, accrued but unpaid interest, Other Amounts, and any other amounts which may be due pursuant to this Agreement or any other Loan Document, shall be due and payable in full on the Maturity Date.

(g) Extension of Maturity Date. On or before each Facility Anniversary Date, upon any written request by Borrower delivered to Lender no earlier than ninety (90) days prior to such Facility Anniversary Date but no later than thirty (30) days prior to such Facility Anniversary Date, Lender, may extend the Maturity Date then in effect for an additional twelve (12) month period; provided, however in no event shall any extension of the Maturity Date be considered or granted if any Unmatured Event of Default or Event of Default has occurred and is continuing, any of the representations and warranties set forth in this Agreement or any other Loan Document shall be determined to be, and remains, untrue or incorrect in any material respect, or any Material Adverse Change has occurred and is continuing. Borrower hereby acknowledges and agrees that Lender has not made any commitment to extend the Maturity Date and that Lender is not under any obligation to extend such Maturity Date or to consider any request for any such extension.

(h) Term Out Provisions. In the event the Maturity Date is not extended on any such Facility Anniversary Date pursuant to Section 2.1(g) above (such date being a “Term Out Commencement Period Date”), the Loan shall be “termed out” as follows:

(i) The then existing Maturity Date (i.e., that date which is twelve (12) Calendar Months after the Term Out Commencement Period Date) shall constitute the “Term Out Date”.

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(ii) The Maturity Date shall be extended to a date which is twelve (12) Calendar Months from the Term Out Date (the “Term Out Maturity Date”).

(iii) For the period between the Term Out Commencement Period Date and the Term Out Date, the Loan shall continue to be a revolving line of credit Loan for the period of time from and after the Term Out Commencement Period Date until the Term Out Date; provided, however, during such period (A) Borrower shall only be entitled, subject to the terms and conditions set forth in this Agreement, to Advances with respect to Eligible Collateral existing at any time that was prior to the day immediately preceding the Term Out Period Commencement Date (and Lender shall have no obligation to review and consider any requests by Borrower for the addition of any Subdivision as an Approved Subdivision or any Collateral which is not Eligible Collateral as of the Term Out Commencement Date), (B) no New Borrower may be admitted as a Borrower under this Agreement; and (C) Borrower shall be not entitled to request any increase in the Commitment Amount pursuant to Section 2.1(d) or otherwise (and Lender shall have no obligation to review and consider such request).

(iv) From and after the Term Out Date until the Term Out Maturity Date: (A) the terms, conditions and restrictions set forth in clause (h)(iii) immediately above shall continue to apply and (B) the Commitment Amount shall be deemed to be equal to the aggregate amount of Outstanding Loan Borrowings as of the Term Out Date (the “Term Out Loan Balance”) and, without further notice, shall thereafter be automatically reduced on the last day of each three month period after the Term Out Date (with the last day being the Term Out Maturity Date) with each such Commitment Amount reduction being equal to one quarter of the Term Out Loan Balance; and (C) in addition to any and all other payment Obligations of Borrower under this Agreement and the other Loan Documents, Borrower shall pay to Lender that amount necessary to reduce the Outstanding Loan Borrowings to no greater than the Commitment Amount as reduced from time to time pursuant this Section, with such payments being due on the last day of each three month period after the Term Out Date, such that the Loan is paid in full as of the Term Out Maturity Date.

(v) Notwithstanding any other provision of this Agreement or any Loan Documents to the contrary, all Outstanding Loan Borrowings, accrued but unpaid interest, Other Amounts, and any other amounts which may be due pursuant to this Agreement or any other Loan Document, shall be due and payable in full on the Term Out Maturity Date.

2.2 Advances.

(a) Advance Request. Subject to the terms and conditions set forth in this Agreement, including continued satisfaction of the applicable conditions precedent set forth in Article 4, and so long as no Event of Default has occurred and is continuing, Borrower may request such Advances in writing from time to time and at any time prior to the Maturity Date (each request being an “Advance Request”). Each such Advance Request (and corresponding Advance) shall be subject to following conditions and restrictions:

(i) Frequency of Advances. Borrower may submit Advance Requests no more frequently than once each Business Day.

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(ii) Request for Advance. Borrower shall make an Advance Request by giving Lender irrevocable notice by not later than 2 p.m. (Eastern time) at least one (1) Business Day before the requested date of such Advance. Each such Advance Request shall: (A) specify the amount of the requested Advance; (B) if Borrower elects to change the applicable Interest Rate, the applicable Interest Rate; (C) the date for the requested Advance to be disbursed to Borrower; and (D) at the request of Lender, include such invoices, cost summaries, comparisons of actual costs to budgeted costs, and any other information, statements, documents as Lender may reasonably request, together with all necessary documents and information required to satisfy the conditions precedent to an Advance set forth in Section 4.5. Each Advance Request submitted to Lender pursuant to this Section shall be certified by an Authorized Representative of Borrower to Lender as being complete, true and accurate in all material respects. Any Advance Request shall be made by an Authorized Representative or such other Person or Persons designated in writing by Borrower from time to time to Lender in form and substance acceptable to Lender; provided, however, Lender shall have acknowledged receipt of any changes in the Person or Persons designated by Borrower, and such Person or Persons designated by Borrower will have executed a new signature authorization form.

(iii) Electronic Transmission of Advance Request. Lender, in its sole and absolute discretion, may elect to permit Borrower to transmit Advance Requests electronically through an Internet website or other electronic system developed and maintained by Lender and any transmission using such system shall be considered a “writing” in satisfaction of the requirement under this Agreement for a written Advance Request for any Advance. Lender reserves the right to deny Borrower access to such system, or withdraw its permission for Borrower to furnish Advance Requests through such system at any time, for any reason, without notice.

(b) Minimum Amount of Advances. In addition to the other terms and conditions set forth in this Agreement, any request for a subsequent Advance shall be in a minimum amount of $100,000.00.

(c) Use of Advances. Advances may be used to pay or reimburse Borrower for Project Costs incurred and paid (or to be paid from the requested Advance) by Borrower with respect to any Eligible Collateral to the extent included in the Budget for any Approved Subdivision, to pay for Borrower’s operating and overhead expenses and to make such distributions as deemed appropriate by Borrower so long as the terms and conditions of this Agreement continue to be satisfied, including without limitation, Section 8.5 ; provided, however, nothing contained in this Section shall prohibit or

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otherwise restrict Lender from making Protective Advances or from making Advances as otherwise permitted by this Agreement or any other Loan Document. Notwithstanding the foregoing, at the sole option of Lender, Advances may be paid in the joint names of Borrower and the contractor, engineer, subcontractor(s), or supplier(s) in payment of sums due under any applicable construction or similar contract to which Borrower is a party. All Advances shall be disbursed, at Lender’s option: (i) directly to Borrower; (ii) directly to such Person who has performed the work, is requesting payment, and is identified in the Advance Request; (iii) jointly to Borrower and such Person; (iv) directly to Persons supplying labor, materials and/or services in connection with the work, (v) jointly to Borrower and such Persons, or (vi) any combination of the foregoing. Borrower appoints Lender as its attorney-in-fact to make such payments. This power shall be deemed to be coupled with an interest, shall be irrevocable, and shall survive an Event of Default under this Agreement.

(d) Warranty. Each request for Advance shall constitute, without the necessity of specifically containing a written statement, a representation and warranty by Borrower that all of the representations and warranties in the Loan Documents are true and correct in all material respects, no Material Adverse Change, no Unmatured Event of Default and no Event of Default has occurred and is continuing.

(e) Funding Indemnification. Each request for an Advance shall be irrevocable and binding on Borrower. Borrower shall indemnify Lender against any loss or expense incurred by Lender as a result of any failure of Borrower to fulfill, on or before the date specified for such Advance, the applicable conditions precedent to such Advance as set forth in this Agreement.

2.3 Interest Rate Provisions.

(a) Interest Rate and Interest Rate Adjustment Date. Interest shall accrue on the outstanding principal at the Interest Rate, calculated based on a 360-day year and paid for the actual number of days elapsed for any whole or partial month in which interest is being calculated.

(b) LIBOR Unascertainable. Any obligation of Lender to maintain interest based on the LIBOR Rate shall be suspended and the Interest Rate shall be based on the Prime Rate upon Lender’s determination, in good faith, that adequate and reasonable means do not exist for ascertaining the LIBOR Rate or that a contingency has occurred which materially and adversely affects the London Interbank Eurodollar Market at which Lender may price loans (which determination by Lender shall be conclusive and binding on Borrower in the absence of manifest error). Computation of the Interest Rate based on the Prime Rate shall continue until Lender determines that the circumstances giving rise to Lender’s substitution of the Prime Rate for the LIBOR Rate no longer exist, in which event the Interest Rate shall be the LIBOR Rate commencing with the first day of the Interest Period next following such determination unless Borrower has elected to maintain interest at the Prime Rate in connection with the most recent Advance Request. Lender shall promptly notify Borrower of each such determination.

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(c) Adjustment Due to Calculation Errors. If, at any time, Lender determines that it has miscalculated the Interest Rate (whether because of a miscalculation of the LIBOR Rate or otherwise), Lender shall notify Borrower of the necessary correction. If the corrected Interest Rate represents an increase in the applicable monthly payment, Borrower shall, within ten (10) days thereafter, pay to Lender the corrected amount. If the corrected Interest Rate represents an overpayment by Borrower to Lender and no Event of Default then exists, Lender shall refund the overpayment to Borrower or, at Lender’s option, credit such amounts against Borrower’s payment next due hereunder.

(d) Adjustment for Impositions on Loan Payment. All payments made by Borrower hereunder shall be made free and clear of, and without reduction for, or on account of, any income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings hereafter imposed, levied, collected, withheld or assessed by any government or taxing authority (other than taxes on the overall net income or overall gross receipts of Lender imposed as a result of a present or former connection between Lender and the jurisdiction of the government or taxing authority imposing such that this exclusion shall not apply to a connection arising solely from Lender’s having executed, delivered, performed its obligations under, received a payment under, or enforced this Loan Agreement or any other Loan Document). If any such amounts are required to be withheld from amounts payable to Lender, the amounts payable to Lender under these Loan Documents shall be increased to the extent necessary to yield to Lender, after payment of such amounts, interest or any such other amounts payable at the rates or in the amounts specified herein. If any such amounts are payable by Borrower, Borrower shall pay all such amounts by their due date and promptly send Lender a certified copy of an original official receipt showing payment thereof. If Borrower fails to pay such amounts when due or to deliver the required receipt to Lender, Borrower shall indemnify Lender for any incremental taxes, interest or penalties that may become payable by Lender as a result of any such failure.

(e) Increased Costs of Maintaining Interest. If Lender determines that the adoption of any law, regulation, rule or guideline (including, without limitation, any change regarding the imposition or increase in reserve requirements), whether or not having the force of law, does or will have the effect of reducing Lender’s rate of return on the Loan or results in an increase in the cost to Lender in making, funding or maintaining interest on the Loan at the rate herein provided, then, from time to time, within five (5) business days after written demand by Lender, Borrower shall pay Lender such additional amount as will compensate Lender for its reduction or increased costs. Borrower agrees to indemnify Lender and hold Lender harmless from any loss or expenses (other than consequential and punitive damages) which Lender may sustain or incur arising from any interest or fees payable by Lender to lenders of funds obtained by it in order to maintain the LIBOR Rate.

(f) Default Rate. If the Loan is not paid in full on or before the Maturity Date (subject to any extension thereto properly exercised by Borrower in accordance with this Agreement), any other payment due hereunder (including, without limitation, late charges and fees for legal counsel) is not received by Lender on or before the date on which such payment originally was due without regard to any notice or cure periods provided for

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herein or in the other Loan Documents or following any other Event of Default and during the continuance thereof, the interest rate payable on the Loan shall immediately increased to the Default Rate and interest shall continue to accrue at the Default Rate until full payment is received or such Event of Default is cured, as applicable. Interest at the Default Rate also shall accrue on any judgment obtained by Lender in connection with collection of the Loan or enforcement of any obligations due under the other Loan Documents until such judgment amount is paid in full.

(g) Usury Savings Clause. All agreements herein are expressly limited so that in no contingency or event whatsoever, whether by reason of the disbursement of Loan proceeds, the acceleration of the maturity of the unpaid principal balance of the Loan, or otherwise, shall the amount paid or agreed to be paid to the Lender for the use, forbearance or detention of the money to be advanced under the Loan exceed the highest lawful rate permissible under any usury laws which may be applicable to this Loan. If, from any circumstances whatsoever, the fulfillment of any provision of this Agreement or any of the other Loan Documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable to the Loan, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if, from any circumstance, the Lender shall never receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of Lender’s portion of the unpaid principal balance due on the Loan and not to the payment of interest.

2.4 Payments.

(a) Interest Payments. All accrued interest shall be payable on each Payment Date, commencing with the first such Payment Date to occur after the date hereof, and shall otherwise be payable on any other date on which such Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 2:00 p.m. (Eastern Time) at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. In no event shall Borrower’s obligation to pay interest be excused, delayed or diminished notwithstanding that there are insufficient funds in any interest reserve to pay the full amount of the interest then due.

(b) Principal Payments.

(i) Payment of Net Sales Proceeds. Borrower will cause to be paid to Lender all payments which may be payable or otherwise received by Borrower upon or pursuant to (i) the closing of a sale of a Unit, or, (ii) the closing of any other transaction in which Borrower is required to pay a release price to Lender pursuant to Section 2.7. If any such amounts are held by any Title Company, escrow agent, or any other Person, including without limitation, any purchaser or

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optionee, Borrower will direct such Title Company, escrow agent or other Person to pay all such amounts directly to Lender, and to take all other action required by Lender to cause such amounts to be paid directly to Lender from such Title Company, escrow agent or other Person. If Borrower collects or receives any such amounts in violation of this Section, Borrower will forthwith, upon receipt, transmit and deliver to Lender, in the form received, all cash, checks, drafts, chattel paper, and other instruments or writings for the payment of money (endorsed without recourse, where required, so that such items may be collected by Lender). Any such items which may be so received by Borrower shall be delivered by Borrower to Lender within three (3) Business Days of receipt and, pending such delivery, shall not be commingled with any other of Borrower’s funds or property, but will be held separate and apart from Borrower’s own funds or property and in express trust for Lender.

(ii) Remargining Principal Payments. Notwithstanding anything to the contrary set forth elsewhere in any Loan Document, at no time shall the aggregate Outstanding Loan Borrowings exceed the Available Loan Commitment. If, at any time, the aggregate Outstanding Loan Borrowings exceed the Available Loan Commitment, (including, without limitation, by reason of Commitment Amount reductions, changes in Appraised Values, exclusion of Eligible Collateral, adjustments to the Borrowing Base or Collateral Value, or otherwise), Borrower shall be obligated to make a payment to Lender in an amount equal to that amount by which the Outstanding Loan Borrowings exceed the Available Loan Commitment (a “Remargining Payment”). Any such Remargining Payment will be due no later than 2:00 p.m. (Eastern Time) on the fifth (5th) day after the day upon which Lender notifies Borrower (which notice may be given telephonically, by facsimile or in writing to the chief financial officer, corporate controller, or treasurer of Borrower) that such Remargining Payment is required.

(iii) Other Principal Payments. Any other principal payments which may become due and owing pursuant to this Agreement or any other Loan Document shall be paid as and when due pursuant to the terms and conditions of this Agreement or such other Loan Document.

(c) Payment at Maturity. All accrued and unpaid interest, together with all other sums owed to the Lender pursuant to any of the Loan Documents, including without limitation, any outstanding principal amounts, fees, costs and other charges, shall be paid in full on the Maturity Date.

(d) Prepayments. In addition to any principal payments required pursuant to this Section 2.3(d) and (e), Borrower may from time to time pay, without penalty or premium, all or any portion of outstanding principal balance of the Loan upon three (3) Business Days’ prior written notice to Lender; provided, however, such prepayment shall be in a minimum amount of $1,000,000.00; and Borrower shall be required to pay to Lender (i) all accrued and unpaid interest on the principal so prepaid, (ii) pay any and all funding indemnification amounts required by Section 2.3(d) and (e); and (iii) on demand, reimburse Lender for, and hold Lender harmless from, all losses and expenses actually

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incurred by Lender as a result of such prepayment, including, any losses and expenses actually arising from the liquidation or redeployment of deposits acquired to fund or maintain the principal amount prepaid.

(e) Making Payments. Borrower will make each payment hereunder and under the Note, whether on account of principal, interest, fees or otherwise, not later than 2:00 p.m. (Eastern Time) addressed to: Attention: Commercial Loan Payment Center, P.O. Box 7405021, Atlanta, GA 30374-0502, unless otherwise directed in writing, on the day when due. Payments received after the required time on a Business Day will be deemed to have been received on the next succeeding Business Day and will bear interest accordingly. All payments shall be made, without setoff, deduction, or counterclaim, in immediately available funds to Lender.

(f) Late Charges. If any payment required under this Agreement or any other Loan Document is not paid within ten (10) days after such payment is due, then, at the option of Lender, and in addition to the remedies conferred upon Lender pursuant to this Agreement and the other Loan Documents (including, without limitation, the right to charge the Default Rate), a late charge of five percent (5%) of the amount of the regularly scheduled payment or $25.00, whichever is greater, to compensate Lender for administrative expenses and other costs related to such delinquent payment. This late charge may be assessed without notice, shall be immediately due and payable and shall be in addition to all other rights and remedies available to Lender.

(g) Application of Payments. All payments received by Lender pursuant to this Section 2.4 will be applied to interest, principal and Other Amounts in such order and priority as Lender may determine from time to time subject to the terms and conditions set forth in this Agreement and, with respect to the application of such payments to the Obligations due Lender pursuant to this Agreement, in accordance with the Pro Rata Share of each Lender.

(h) Business Days. Whenever any payment hereunder or with respect to the Loan is due on a day other than a Business Day, such payment will be made on the next succeeding Business Day, and such extension of time will in such case be included in the computation of interest or fees, as the case may be.

(i) Payment of Interest and Other Amounts by Advance. Borrower hereby authorizes the Lender to utilize Advances to pay interest accrued on any Note, and to pay taxes, insurance premiums and other Protective Advances, notwithstanding that Borrower may not have requested a disbursement of such amount. Lender, to the extent it has received sufficient funds from the Lender, may make such disbursements notwithstanding the existence of any Unmatured Default or a Event of Default. Such disbursements shall be added to the outstanding principal balance of the Loan. The authorization hereby granted shall be irrevocable and no further direction or authorization from Borrower shall be necessary for the Lender to make such disbursements. However, the provisions of this Section 2.4(i) shall not prevent Borrower from paying or otherwise release Borrower from its obligation to pay, any amounts due pursuant to this Loan Agreement or any other Loan Document from its own funds.

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2.5 Fees and Costs.

(a) Fees. On the Closing Date (and as a condition of closing of the Loan), and on each Facility Anniversary Date thereafter, Borrower agrees to pay Lender a facility fee equal to 0.35% of the Commitment Amount then in effect. As additional consideration for the Commitment, Borrower agrees to pay to Lender any other fees which may be due under this Agreement or any other Loan Document, including without limitation those fees identified in any separate agreement by and between Lender and Borrower. All such fees being deemed earned in full on the date or dates such fees are due and payable and non-refundable to Borrowers, regardless of any subsequent reduction in the Commitment Amount, any prepayment of the Loan, any termination of the Commitment or otherwise.

(b) Costs and Expenses - Generally. Borrower agrees to pay on demand all reasonable costs, expenses, and fees of Lender arising in connection with (i) this Agreement, the other Loan Documents and the Loan (including, without limitation, reasonable fees and expenses for outside attorneys, consultants, inspectors and other professional advisers, paralegals, document clerks and specialists, and costs and expenses of market studies, absorption studies, appraisals, appraisal review, title review, title insurance, surveys, environmental assessments, environmental testing, environmental cleanup, other inspection, processing, title, filing, and recording costs, expenses, fees and Protective Advances); (ii) the negotiation, execution, delivery, administration and modification of this Agreement and the other Loan Documents; (iii) inspecting the Collateral; and (iv) as otherwise provided herein or in the other Loan Documents.

(c) Costs and Expenses - After Default. In addition, after the occurrence and during the continuation of an Event of Default or an Unmatured Event of Default, Borrower agrees to pay on demand, all costs, expenses, and fees of Lender arising in connection with (i) this Agreement, the other Loan Documents and the Loan (including, without limitation, fees and reasonable expenses for outside attorneys, consultants, inspectors and other professional advisors, paralegals, documents clerks and specialists, and costs and expenses of market studies, absorption studies, appraisals, appraisal review, title review, title insurance, surveys, environmental assessments, environmental testing, environmental clean-up, other inspection, processing, title, filing and recording costs, expenses, fees and Protective Advances); (ii) the enforcement of this Agreement and the other Loan Documents and exercise of the rights and remedies of the Lender; (iii) the defense of the legality, validity, binding nature, and enforceability of this Agreement and the other Loan Documents and the perfection and priority of the Liens and Encumbrances granted in the other Loan Documents; (iv) gaining possession of, holding, repairing, maintaining, preserving, and protecting any Collateral; (v) selling or otherwise disposing of the Collateral; (vi) as otherwise related to this Agreement, the Loan Documents, such Collateral, or the rights and remedies of the Lender with respect thereto; and (vii) preparing for the foregoing, whether or not any legal proceeding is brought or other action is taken. Such costs, expenses, and fees will include, without limitation, all such costs, expenses, and fees incurred in connection with any court proceedings (whether at the trial or appellate level).

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(d) Failure to Pay. If any costs, expenses and fees or any other costs, expenses and fees from time to time due under the Loan Documents are not paid upon demand by Lender, Borrower agrees to pay interest on such costs, expenses, and fees at the Interest Rate from the date incurred until five (5) days after such demand and at the Default Rate thereafter until such amounts are paid in full. In addition, if such costs, expenses and fees are not paid within such five (5) day period, Lender may cause Advances to be made to pay such costs, expenses and fees, whether or not such Advance has been requested and whether or not the conditions precedent to an Advance have been satisfied.

2.6 Security. Payment of the Loan, all indebtedness and liabilities of Borrower to Lender and the performance of all Obligations, whether due or to become due, shall be secured by the Collateral, the Security Documents, and such other and further assignments and security interests as may be required or granted pursuant to the terms of the Loan Documents.

2.7 Releases of Collateral.

(a) Releases of Units and Lots. Borrower may request releases of Lots and Units from the lien and encumbrance of the applicable Deed of Trust from time to time; provided, however, Lender has no obligation to release any Collateral unless each of the following conditions precedent is satisfied:

(i) Generally. With respect to all releases:

(A) Notification to Lender. Borrower or the closing agent handling the sale shall have notified Lender in writing of the requested release.

(B) Release Price. Borrower shall have paid at or prior to closing, the greater of the Maximum Allowed Advance with respect to such Lot or Unit requested to be released or the Net Sales Proceeds to be received by Borrower in connection with such sale or transfer.

(C) No Default; Material Adverse Change. No Event of Default, Unmatured Event of Default nor any Material Adverse Change shall have occurred and be continuing.

(D) Remargining Payments. Lender shall have determined that, after giving effect to such release, no Remargining Payment would be required to be paid pursuant to Section 2.4(b)(ii).

(E) Endorsements. Borrower shall provide Lender with such endorsements to the Title Policy as Lender may reasonably request in connection with such release.

(F) Escrow Arrangements. Each release shall be made by Lender by delivery of the release documents to a title company or other escrow agent satisfactory to Lender on such conditions as shall assure Lender that all conditions precedent to such release have been fully satisfied and the applicable transaction will be completed.

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(G) Payment of Costs and Expenses. Borrower shall have paid to Lender at closing and directly from escrow, an amount equal to all costs and expenses incurred by Lender in connection with such release.

(H) Legal Parcel. The Lot (or group of Lots) to be released constitute a legally subdivided interest in real property, and the release of such Lot will not impair access to the remaining Collateral or otherwise violate any requirements of any document of record covering the Approved Subdivision or any applicable law regarding subdivisions, parcel maps, lots or parcels and/or the sale of real property.

(ii) Releases of Units. In addition to the requirements of Section 2.7(a)(i), Unit releases shall satisfy the following:

(A) Releases in the Ordinary Course of Business. With respect to any release of Units, the requested release shall be for the purpose of sale in the ordinary course of Borrower’s business pursuant to a Purchase Contract;

(B) Payment of Release Price. Borrower shall have paid to Lender the greater of (i) the Net Sales Proceeds for such Units, or (ii) the mandatory release price established for such Unit upon the Lender’s approval of the Approved Subdivision, which release amount shall in no event be less than the Maximum Allowed Advance for such Unit; and

(C) Restrictions on Release of Model Units. In addition to the conditions set forth in this Section 2.8, Any release of a Model Unit is subject to Section 6.3(i).

(iii) Releases for Dedications and Similar Purposes. Upon written request of Borrower and so long as clauses A, C, D, and G of Section 2.7(a)(i) have been satisfied Lender may consent to the release of such portions of the Collateral as Borrower (A) is required to convey to a Governmental Authority or a bona fide public utility in connection with the development of an Approved Subdivision (such as roads, drainage easements, and utility easements) and for which Borrower receives no monetary compensation; or (B) proposes to convey to a homeowners’ association or similar Person in connection with the development of an Approved Subdivision (such as common areas) and for which Borrower receives no monetary compensation. Releases that satisfy the requirements of this Section do not require the payment of any release price; provided, however, such releases shall be made by Lender by delivery of the release documents to a title company or other escrow agent reasonably satisfactory to Lender on such conditions as shall assure Lender that all conditions precedent to such release have been satisfied and that the applicable transaction will be completed and Borrower shall provide Lender with such endorsements to the Title Policy as Lender may reasonably request in connection with each such release.

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(iv) Other Releases. Collateral not eligible to be released pursuant to Section 2.7(a) or no longer Eligible Collateral pursuant to Article 3 of the Agreement will be released only with the prior written consent of Lender upon no less than thirty (30) days written request to Lender, and only upon such terms and conditions acceptable to Lender, including without limitation, no Unmatured Event of Default, Event of Default or Material Adverse Change has occurred and is continuing. Notwithstanding anything to the contrary set forth elsewhere herein, Lender shall have no obligation to consider or approve any request for the release of Collateral if the requested release does not satisfy the applicable release requirements set forth in Section 2.7(a).

(v) Adjustment to Borrowing Base Upon Release. Any Collateral released shall no longer be Eligible Collateral and the Collateral Value of Eligible Collateral shall be immediately and automatically adjusted to reflect such release.

2.8 Condominium Provisions. The Loan shall be subject to the following additional terms relating to the condominium nature of any Approved Subdivision:

(a) Lender’s security for the Loan shall extend to and include all of Borrower’s right, title, and interest in and to any and all Units, common elements, development rights, and special declarant rights created pursuant to any condominium declaration or plan recorded against the applicable Approved Subdivision in accordance with applicable law.

(b) Borrower shall not record any condominium declaration, plat, plan, or survey on applicable Approved Subdivision or make any amendment thereto or file, amend, or adopt any articles of incorporation, bylaws, or rules and regulations for any condominium owner’s association for the Approved Subdivision without Lender’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed. To the extent such documentation includes portions of the Approved Subdivision not included in phases currently under development with residential Units, Borrower shall (i) ensure that the documentation allows the property that is to be developed in subsequent phases to be withdrawn from the condominium project in separately conveyable parcels should declarant or its successors elect not to proceed with development of such phases and (ii) reserve such easements and other rights as may be necessary for the development of the withdrawn parcel.

(c) Borrower shall make such representations, warranties, appointments and agreements with regard to the condominium that Borrower anticipates creating in connection with the Approved Subdivision as are set forth in the applicable Deed of Trust and all other applicable Loan Documents.

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(d) Prior to completion of construction or, in the case of a project comprised of more than one building or phase, prior to completion of construction of the first building to be developed on the Approved Subdivision, Borrower shall provide Lender with condominium documentation for the Approved Subdivision satisfactory to Lender, in its reasonable discretion, including the condominium declaration for the Approved Subdivision and the related plat or survey, the articles of incorporation, bylaws, or rules and regulations for the condominium owner’s association for the Approved Subdivision, a proposed budget for the condominium association, and evidence of all required approvals of the same and all opinion letters submitted by Borrower in connection therewith, together with evidence reasonably satisfactory to Lender of the availability of financing for the purchase of individual Units on the Approved Subdivision, and shall make all necessary amendments thereto in a form reasonably satisfactory to Lender prior to the completion of any subsequent phases of the development of the Approved Subdivision.

2.9 [Intentionally Omitted]

2.10 Facility LCs.

(a) Issuance. Lender hereby agrees, on the terms and conditions set forth in this Agreement, to issue standby letters of credit (each, a “Facility LC”) and to renew, extend, increase, decrease or otherwise modify each Facility LC (“Modify,” and each such action a “Modification”), from time to time from and including the date of this Agreement and prior to the Term Out Date upon the request of Borrower; provided that immediately after each such Facility LC is issued or Modified, (i) the_. Sum of all outstanding LC Obligations shall not exceed the Facility LC Sublimit and (ii) the Outstanding Loan Borrowings shall not exceed the Available Commitment. No Facility LC shall have an expiry date later than the earlier of (x) the fourteenth (14^th) Business Day prior to the Maturity Date and (y) one (1) year after its issuance; provided that any Facility LC may provide for renewal for additional one (1) year periods so long as in no event shall the expiry extend beyond the date specified in clause (x) of this Section or if such expiry is extended beyond such date Borrower shall have provided Lender with readily available funds to secure such Facility LC at the time of issuance. Each Facility LC shall be issued in connection with obligations incurred by Borrower in the ordinary course of the Borrower’s business with respect to the acquisition and development of the Subdivisions.

(b) Notice. Borrower shall give Lender notice prior to 2:00 p.m. Eastern Time) at least five (5) Business Days prior to the proposed date of issuance or Modification of each Facility LC, specifying the beneficiary, the proposed date of issuance (or Modification) and the expiry date of such Facility LC, and describing the proposed terms of such Facility LC and the nature of the transactions proposed to be supported thereby. The issuance or Modification of any Facility LC shall, in addition to the conditions precedent set forth in Article 4, be subject to the conditions precedent that such Facility LC shall be satisfactory to Lender and that Borrower shall have (i) specified in writing to Lender the nature and purpose of the proposed Facility LC and (ii) executed and delivered such application agreement and/or such other instruments and agreements

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relating to such Facility LC as Lender shall have reasonably requested (each, a “Facility LC Application”). In the event of any conflict between the terms of this Agreement and the terms of any Facility LC Application, the terms of this Agreement shall control.

(c) LC Fees. Borrower shall pay to Lender, with respect to each standby Facility LC, a letter of credit fee at a per annum rate of one and a quarter percent (1.25%) on the average daily undrawn stated amount under such standby Facility LC, such fee to be payable in arrears on the first day of each January, April, July and October (each such fee described in this sentence an “LC Fee”). Borrower shall pay to Lender any documentary and processing charges in connection with the issuance or Modification of and draws under Facility LCs in accordance with Lender’s standard schedule for such charges as in effect from time to time.

(d) Administration. Upon receipt from the beneficiary of any Facility LC of any demand for payment under such Facility LC, Lender shall notify Borrower as to the amount to be paid by Lender as a result of such demand and the proposed payment date (the “LC Payment Date”). The responsibility of Lender to Borrower shall be only to determine that the documents (including each demand for payment) delivered under each Facility LC in connection with such presentment shall be in conformity in all material respects with such Facility LC.

(e) Reimbursement by Borrower. Borrower shall be irrevocably and unconditionally obligated to reimburse Bank on or before the applicable LC Payment Date for any amounts to be paid by Bank upon any drawing under any Facility LC, without presentment, demand, protest or other formalities of any kind; provided that Borrower shall not be precluded from asserting any claim for direct (but not consequential) damages suffered by Borrower to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of Bank in determining whether a request presented under any Facility LC issued by it complied with the terms of such Facility LC or (ii) Bank’s failure to pay under any Facility LC issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. All such amounts paid by Bank and remaining unpaid by Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to (x) the applicable Interest Rate for such day if such day falls on or before the applicable LC Payment Date or (y) the sum of 3% plus the applicable Interest Rate for such day if such day falls after such LC Payment Date.

(f) Obligations Absolute. Borrower’s obligations under this Section 2.11 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which Borrower may have or have had against Bank or any beneficiary of a Facility LC. Borrower further agrees with Bank that Bank shall not be responsible for, and the Borrower’s Reimbursement Obligation in respect of any Facility LC shall not be affected by, among other things, the validity or genuineness^’ of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among Borrower, any of its Affiliates, the beneficiary of any Facility LC or any financing institution or other party to whom any Facility LC may be transferred or any claims or

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defenses whatsoever of Borrower or of any of its Affiliates against the beneficiary of any Facility LC or any such transferee. Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Facility LC. Borrower agrees that any action taken or omitted by under or in connection with each Facility LC and the related drafts and documents, if done without gross negligence or willful misconduct, shall be binding upon Borrower and shall not put Bank under any liability to Borrower. Nothing in this Section 2.10(f) is intended to limit the right of Borrower to make a claim against for damages as contemplated by the proviso to the first sentence of Section 2.10(e).

(g) Actions of Lender. Lender shall be entitled to rely, and shall be fully protected in relying, upon any Facility LC, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by Lender.

(h) Indemnification. Borrower hereby agrees to indemnify and hold harmless Lender, and its directors, officers, agents and employees from and against any and all claims and damages, losses, liabilities, costs or expenses which Lender may incur (or which may be claimed against Lender by any Person whatsoever) by reason of or in connection with the issuance, execution and delivery or transfer of or payment or failure to pay under any Facility LC or any actual or proposed use of any Facility LC, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which Lender may incur by reason of or on account of Lender issuing any Facility LC which specifies that the term “Beneficiary” included therein includes any successor by operation of law of the named Beneficiary, but which Facility LC does not require that any drawing by any such successor Beneficiary be accompanied by a copy of a legal document, satisfactory to Lender, evidencing the appointment of such successor Beneficiary; provided, that Borrower shall not be required to indemnify Lender for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of Lender in determining whether a request presented under any Facility LC complied with the terms of such Facility LC or (y) Lender’s failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. Nothing in this Section 2.10(h) (i) is intended to limit the obligations of Borrower under any other provision of this Agreement or (ii) is intended to limit the rights of Borrower to make claims as described in the proviso in the first sentence of Section 2.10(e).

(i) Facility LC Collateral Account. Borrower agrees that it will, upon the request of Lender after the breach of Borrower’s obligations under this Section 2.10, after the expiration of all applicable notice and cure periods, the occurrence of an Event of Default or if otherwise required by this Agreement and until the final expiration date of any Facility LC and thereafter as long as any amount is payable to Lender in respect of any Facility LC, maintain a special collateral account pursuant to arrangements satisfactory to Lender (the “Facility LC Collateral Account”) at

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Lender’s office at the address specified in Section 2.4, in the name of Borrower but under the sole dominion and control of Lender, and in which Borrower shall have no interest. Borrower hereby pledges, assigns and grants to Lender a security interest in all of Borrower’s right, title and interest in and to all funds which may from time to time be on deposit in the Facility LC Collateral Account to secure the prompt and complete payment and performance of the Obligations. Lender will invest any funds on deposit from time to time in the Facility LC Collateral Account in certificates of deposit of Lender One having a maturity not exceeding thirty (30) days. Nothing in this Section 2.10(i) shall either obligate Lender to require Borrower to deposit any funds in the Facility LC Collateral Account or limit the right of Lender to release any funds held in the Facility LC Collateral Account.

ARTICLE 3

BORROWING BASE

3.1 Determination of Eligible Collateral/Borrowing Base. Eligible Collateral in the Borrowing Base will be determined by Lender from time to time as set forth in this Article 3. The Borrowing Base will consist of the Collateral Values of the Eligible Collateral in the Borrowing Base as determined from time to time in accordance with this Agreement and subject to the limitations set forth in this Article 3.

3.2 Lot Term Limits.

(a) Pre-Development Land. Pre-Development Land in each Approved Subdivision may be included in the Borrowing Base as Eligible Collateral for a period of not more than twelve (12) Calendar Months after the applicable Approved Subdivision Closing Date, subject to the Maximum Allowed Advance limitations for the aggregate amount of the Commitment Amount applicable to the Pre-Development Land for such Approved Subdivision.

(b) Land Under Development. Land Under Development in each Approved Subdivision may be included in the Borrowing Base as Eligible Collateral for a period of not more than: (A) with respect to any Attached Lots or High Density Lots within an Approved Subdivision (Subject to Lender’s right to adjust such High Density Lot eligibility term, either by increasing or decreasing same, in connection with Lender’s approval of the applicable Subdivision as an Approved Subdivision), twenty-four (24) Calendar Months after the first applicable Lot Eligibility Date for such Attached Lots or High Density Lots, or (B) with respect to Detached Lots, thirty (30) Calendar Months after the first applicable Lot Eligibility Date for such Land Under Development, subject to the Maximum Allowed Advance limitations for the aggregate amount of the Commitment Amount applicable to the Land Under Development for such Approved Subdivision. The foregoing eligibility periods for Land Under Development may be extended for an additional six (6) Calendar Months upon written notice to the Lender no earlier than 90 days and no later than thirty (30) days prior to the expiration of such original time period and provided no Material Adverse Change, no Unmatured Event of Default nor any Event of Default has occurred and is continuing.

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(c) A&D Completed Lots. A&D Completed Lots in each Approved Subdivision may be included in the Borrowing Base as Eligible Collateral for a period of not more than eighteen (18) Calendar Months after the first applicable Lot Eligibility Date for such A&D Completed Lots, subject to the Maximum Allowed Advance limitations for the aggregate amount of the Commitment Amount applicable to the A&D Completed Lots for such Approved Subdivision.

(d) Expiration of Lot Term. Any Land (and any Lots therein), including without limitation, any Pre-Development Land, Land Under Development or any A&D Completed Lots, that have been included as Eligible Collateral for the maximum term determined in accordance with the provisions of this Section 3.2 will no longer be considered Eligible Collateral upon expiration of such term and shall be excluded from any determination of the Collateral Value of the Borrowing Base. Notwithstanding that such Land (and any Lots therein) is no longer Eligible Collateral, such Land (together with any Lots therein and any Improvements thereon) will nevertheless remain part of the Collateral until released as permitted by this Agreement.

3.3 Other Limitation of Lot Eligibility.

(a) Land Under Development Commencement Date. Borrower shall commence development of any Land Under Development within nine (9) Calendar Months of the first Lot Eligibility Date with respect to such Land Under Development and shall, thereafter, prosecute such development in good faith and due diligence until completion thereof. In the event Borrower fails to commence such development within that nine (9) Calendar Month Period, or otherwise fails to continue with such development at all times thereafter, such Land Under Development shall be excluded from Eligible Collateral. Notwithstanding such ineligibility, however, such ineligible Land Under Development may later qualify as Eligible Collateral as A&D Completed Lots and/or as Units, subject to the terms, conditions and limitations with respect thereto as set forth in this Agreement.

(b) Aggregate Lot Concentration Limitation. Commencing as of the 271st day following the Effective Date and continuing at all time thereafter, in no event shall the aggregate Collateral Value with respect to all Pre-Development Land, Land Under Development and A&D Finished Lots exceed 40% of the aggregate Collateral Value with respect to all Eligible Collateral within the Borrowing Base. Further, with respect to each Project, at no time shall the aggregate amount of the Project Costs for all Land Under Development for that Project exceed $30,000,000 unless consented to by Lender in writing as an additional condition precedent to the addition of such Project as an Approved Subdivision under the Borrowing Base.

(c) High End Lot Concentration Limitation. Commencing as of the 271st day following the Effective Date and continuing at all time thereafter, in no event shall the aggregate Collateral Value with respect to all High End Lots exceed 25% of the aggregate Collateral Value with respect to all Eligible Collateral within the Borrowing Base.

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(d) Attached Lots and High Density Lot Concentration Limitation. Commencing as of the 271st day following the Effective Date and continuing at all time thereafter, in no event shall the aggregate Collateral Value with respect to all Attached Lots and High Density Lots exceed 30% of the aggregate Collateral Value with respect to all Eligible Collateral within the Borrowing Base.

(e) Lots to Be Excluded From Eligible Collateral. In the event the limitations set forth in this Section 3.3 have been exceeded, the last applicable Lots added to the Borrowing Base will be the first excluded as Eligible Collateral until such time as such limitations are no longer exceeded. The limitations set forth in this Section 3.3 shall be tested on a monthly basis by Lender and as a condition precedent to the approval of any Subdivision as an Approved Subdivision.

3.4 Transfer of Lots for Unit Construction. Borrower may transfer a Lot for Unit construction upon inclusion of the Lot in the Unit Cost component of a Borrowing Base Report, identifying the specific Lot that is being converted, with such converted Lot thereafter to be classified as a Model Unit, Spec Unit, or a Presold Unit as appropriate and to be subject to the provisions of this Agreement relating to Units; provided, however, that before any Lot is included in Eligible Collateral as a Unit, the conditions precedent set forth in Section 4.4 must have been satisfied with respect to such Lot, including, without limitation, the provisions of Section 4.4(n) imposing the requirement that the Unit Construction Threshold must be met. Effective upon such a transfer of the classification of a Lot to a Unit, the Lot’s Collateral Value is automatically replaced on the Borrowing Base Report by the Unit Collateral Value with respect to such Lot.

3.5 Unit Term Limits; Reclassification of Units.

(a) Presold Units. Each Presold Unit may be included in Eligible Collateral for not more than twelve (12) Calendar Months from the Unit Eligibility Date for such Unit. A Presold Unit no longer subject to a Purchase Contract will be deemed to be a Spec Unit as of the date the Unit is no longer subject to a Purchase Contract; subject, however, to the provisions of Section 3.5(e). A Unit will not be considered to be a Presold Unit unless and until a final public report (if a public report is required by applicable Requirements) has been obtained by Borrower and delivered to the purchaser of such Unit and all cancellation periods in favor of such purchaser with respect to such public report have expired.

(b) Spec Units. Each Spec Unit may be included in Eligible Collateral for not more than twelve (12) Calendar Months from the original Unit Eligibility Date for such Unit.

(c) Model Units. Each Model Unit that is a Detached Unit may be included in Eligible Collateral for a period of not more than thirty- six (36) Calendar Months from the original Unit Eligibility Date for such Unit as determined by Lender in connection with any approval of the applicable Subdivision as an Approved Subdivision. Each Model Unit that is an Attached Unit may be included in Eligible Collateral for a period of not more than twenty-four (24) Calendar Months from the original Unit Eligibility Date

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for such Unit as determined by Lender in connection with any approval of the applicable Subdivision as an Approved Subdivision. After the expiration of such approved period, the Model Units will not be considered Eligible Collateral but shall continue to be included as Collateral unless and until reclassified as Presold Units and sold and released pursuant to Section 2.7.

(d) Conversion of Presold Units. If a Presold Unit is reclassified as a Spec Unit, such Spec Unit may be included in Eligible Collateral for not more than twelve (12) Calendar Months from the Unit’s original Unit Eligibility Date as a Unit and, on reclassification, such Spec Unit will be subject to a Reclassification Adjustment; provided, however, that no such Spec Unit will be entitled to be included in Eligible Collateral if the effect of inclusion would be to cause the limitations of Section 3.6 to be exceeded.

(e) Conversion of Spec Units. If a Spec Unit is reclassified as a Presold Unit (by reason of the execution and delivery of a Purchase Contract), such Unit may be included in Eligible Collateral as a Presold Unit for not more than twelve (12) Calendar Months from the original Unit Eligibility Date of such Unit and, on reclassification, such Presold Unit will be subject to a Reclassification Adjustment.

(f) Classification and Reclassification of Units; Adjustment of Borrowing Base. Lender may classify or reclassify Units as to type from time to time, or change Borrower’s proposed classification of any and all Units, provided that such reclassification shall be based upon the definitions of Spec Units, Presold Units and Model Units set forth herein and each such reclassified Unit shall meet the requirements set forth herein for that type of Unit. Effective as of the date that a Unit is reclassified as to type, such reclassification will give rise to a Reclassification Adjustment.

(g) Expiration of Unit Term. In no event may any Unit be included as Eligible Collateral beyond the applicable Unit term as set forth in this Section 3.5. Units that are sold, that have been included as Eligible Collateral for the maximum term determined in accordance with the provisions of this Section 3.5 or that are otherwise not eligible to be Eligible Collateral pursuant to any provision of this Agreement will no longer be Eligible Collateral upon sale and release in compliance with the provisions of this Agreement, upon expiration of such term, or upon such Units becoming ineligible, as the case may be. However, a Unit that is no longer Eligible Collateral because of expiration of the term during which such Unit was entitled to be Eligible Collateral or because of its becoming ineligible pursuant to any provision of this Agreement will nevertheless remain part of the Collateral until released as permitted by this Agreement.

3.6 Other Limitations on Unit Eligibility.

(a) Concentration Limitation on Spec and Model Units. Commencing as of the 271st day following the Effective Date and continuing at all time thereafter, in no event shall the aggregate Collateral Value with respect to all Spec Units and Model Units included in Eligible Collateral exceed 30% of the aggregate Collateral Value with respect to all Eligible Collateral within the Borrowing Base.

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(b) Concentration Limitation on High-End Units. Commencing as of the 271st day following the Effective Date and continuing at all time thereafter, in no event shall the aggregate Collateral Value with respect to all High End Units included in Eligible Collateral exceed 25% of the aggregate Collateral Value with respect to all Eligible Collateral within the Borrowing Base.

(c) Concentration Limitation on Attached Units and High Density Units. Commencing as of the 271st day following the Effective Date and continuing at all time thereafter, in no event shall the aggregate Collateral Value with respect to all Attached Units and High Density Units included in Eligible Collateral exceed 30% of the aggregate Collateral Value with respect to all Eligible Collateral within the Borrowing Base.

(d) Limitation on Number of Spec Units and Model Units. At no time shall the aggregate number of Spec Units and Model Units exceed thirty (30) Units with respect to any Approved Subdivision.

(e) Units to be Excluded From Eligible Collateral. In the event any of the limitations set forth in this Section 3.6 have been exceeded, the last applicable Units added to the Borrowing Base will be the first to be excluded as Eligible Collateral until such time as such limitations are no longer exceeded. The limitations set forth in this Section 3.6 shall be tested on a monthly basis by Lender and as a condition precedent to the approval of any Subdivision as an Approved Subdivision.

3.7 Events Affecting Units and Lots; Exclusions from Eligible Collateral.

(a) If (i) any Unit or Lot included in Eligible Collateral is materially damaged, destroyed, or becomes subject to any condemnation proceeding, (ii) Borrower violates any provisions of, or breaches any representations and warranties in, the Loan Documents (including, without limitation, any Environmental Agreement) with respect to such Lot or Unit or (iii) Lender makes or is entitled to make any claim under any title insurance policy with respect to such Lot or Unit, such item, at Lender’s sole option, may be declared by Lender to no longer be Eligible Collateral or Lender may adjust its Collateral Value.

(b) If any such item does not continue to meet all the requirements applicable to Eligible Collateral, such item will no longer constitute Eligible Collateral. Any determination by Lender as to whether Units or Lots constitute Eligible Collateral will be final, conclusive, binding and effective immediately.

3.8 Other Limitations on Borrowing Base.

(a) General Limitations. The portion of any A&D Lot Development Budget and Unit Budget attributable to “soft costs” and “hard costs” line items will be limited to the lesser of (i) the actual costs, expenses, and fees incurred by Borrower; and (ii) the amounts allocated for such costs, expenses, and fees in the line items in the A&D Lot Development Budget or each Subdivision’s Unit Budgets. Lender may make adjustments in the A&D Lot Development Budgets and Unit Budgets to reflect the foregoing limitations.

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(b) Overall Term Limitation on Eligible Collateral. Unless otherwise approved by Lender, in no event shall any Eligible Collateral remain in the Borrowing Base beyond thirty-six (36) Calendar Months from the date such Collateral was first included in the Borrowing Base as Eligible Collateral.

(c) Required Absorption Limitation. In the event the sale of Units within an Approved Subdivision do not equal or exceed at least 60% of the Appraised Absorption rate for such Approved Subdivision, Lender may in its sole discretion, adjust the Collateral Value of the Units within that Approved Subdivision.

3.9 Other Events Affecting Collateral Value; Exclusions from Eligible Collateral.

(a) Damage to Collateral. If (i) any Eligible Collateral is materially damaged, destroyed, or becomes subject to any condemnation proceeding, (ii) Borrower violates any provisions of, or breaches any representations and warranties in, the Loan Documents (including, without limitation, any Environmental Agreement) with respect to such Lot, or (iii) Lender makes or is entitled to make any claim under any title insurance policy with respect to such Lot, Lender may reduce the Collateral Value of such Eligible Collateral or exclude such Land from Eligible Collateral. Any such determination by Lender will be final, conclusive, binding and effective immediately.

(b) Failure of Conditions Precedent. If any Collateral does not continue to meet all the requirements applicable to Eligible Collateral, including without limitation, satisfaction of the conditions precedent set forth in Article 4, such Collateral will no longer constitute Eligible Collateral. Any such determination by Lender will be final, conclusive, binding and effective immediately.

3.10 Effect of Borrowing Base Conditions; Limitations. If any of the conditions or limitations on Eligible Collateral, Collateral Value, Outstanding Loan Borrowings, or outstanding Advances set forth in this Article 3 or elsewhere in this Agreement are exceeded, remain unsatisfied or are otherwise violated, Lender may at its option either exclude such Collateral from Eligible Collateral or adjust the Collateral Value of such Eligible Collateral until such time as such conditions and or limitations are met or otherwise complied with. To the extent any such adjustment or exclusion results in the aggregate Outstanding Loan Borrowings exceeding the Available Loan Commitment, then Borrower shall be required to make a Remargining Payment in accordance with Section 2.4(b)(ii).

3.11 Borrowing Base Report.

(a) Proposed Borrowing Base Report. At least once in each Calendar Month but no more than twice in each Calendar Month at such intervals as Lender may approve or require, Borrower will separately prepare and submit to Lender a proposed Borrowing Base Report for all of the Collateral for the Loan, including for each Lot and Unit in Eligible Collateral, among other things that Lender may require from time to time, the following: (i) the name of the Approved Subdivision; (ii) the total number of Lots within

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the Approved Subdivision; (iii) the Lot number as indicated on the recorded plat of the Approved Subdivision; (iv) the Unit plan type; (v) whether the Unit is a Presold Unit, a Spec Unit, a Model Unit, or ineligible collateral; (vi) the Unit Lot Cost; (vii) the Unit Budget; (viii) the A&D Lot Development Completion Percentage; (ix) the Unit Completion Percentage; (x) the Unit Appraised Value; (xi) the listing price of the Unit or the amount of the Purchase Contract, as applicable; (xii) the date of the first Advance against the Unit in Eligible Collateral and the applicable Unit Eligibility Date for each Unit; and (xiii) the Unit Collateral Value and the Maximum Allowed Advance for the Unit. With respect to Lots, from time to time, Lender may also require information concerning construction of the A&D Lot Improvements, including, without limitation, the status of construction of the A&D Lot Improvements in Approved Subdivisions, a detailed breakdown of the costs of the various phases of construction of the A&D Lot Improvements showing the amounts expended to date for such construction, the Maximum Allowed Advance for the Lots, and an itemized estimate of the amount necessary to complete construction of the A&D Lot Improvements in their entirety.

(b) Collateral Certificate. Each proposed Borrowing Base Report will be accompanied by a Collateral Certificate certified as true and correct and executed by an authorized signer of Borrower. As Lender may from time to time request, each proposed Borrowing Base Report shall also be accompanied by such additional certificates, “check runs” and other evidence as Lender may require to assist Lender in verifying the information therein. Units and Lots may be added as Eligible Collateral only upon receipt and approval by Lender of the proposed Borrowing Base Report and Collateral Certificate which include such Unit or Lot and upon satisfaction of all other provisions of this Agreement. Each Collateral Certificate prepared separately shall be in form and substance satisfactory to Lender, shall contain such certifications and information as Lender may require, including, without limitation, the following:

(i) The information required to be included on the Borrowing Base Report;

(ii) The total number, and a description of, the Presold Units, Spec Units, Model Units, and Lots that constitute Eligible Collateral;

(iii) The Collateral Value for each Unit and Lot that constitutes Eligible Collateral;

(iv) The total Collateral Value for the Borrowing Base;

(v) The calculated amount of Collateral Value and usage for all types of Eligible Collateral and a calculation of all applicable limitations;

(vi) The amount of Loan proceeds that are available for Advances against each item of Eligible Collateral based on the terms of this Agreement;

(vii) A statement that Borrower is in compliance with the terms and conditions of the Loan Documents; and

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(c) Form of Report and Certificate. The proposed Borrowing Base Report and the Collateral Certificate will be in written form and on computer disk formatted to Lender’s specifications.

(d) Approval of Borrowing Base Report. Each proposed Borrowing Base Report shall be subject to approval and adjustment by Lender based upon (i) Lender’s review of such report; (ii) Lender’s inspections made pursuant to Section 6.12 (as such inspections may result in any adjustments to reflect any variance between the Borrowing Base Report and the results of such inspections by Lender); and (iii) such other information as Lender may reasonably require in order to verify the Borrowing Base, Eligible Collateral, the Collateral Value of the Borrowing Base, and all Other Amounts, information and items relating thereto. The Borrowing Base Report will also take into account the sale of Units and all other adjustments and limitations permitted or required by this Agreement. Each determination by Lender of the Borrowing Base, Eligible Collateral, the Collateral Value of the Borrowing Base, and the amount of each Advance (and all Other Amounts and items entering into such determinations), will be final, conclusive and binding upon Borrower.

3.12 Commencement and Completion of A&D Lot Improvements. With respect to any Lot, including any Pre-Development Land, Land Under Development or any A&D Completed Lot, Borrower shall commence and thereafter diligently and in good faith prosecute development of the A&D Lot Improvements in a manner consistent with and within the applicable term periods and time lines for set forth in Sections 3.2 and 3.3. For purposes of this Agreement, development of the A&D Lot Improvements shall be deemed to have commenced upon completion of all staking and rough grading. If requested by Lender, Borrower will obtain the issuance of a letter of acceptance or other equivalent document from each applicable Governmental Authority regarding completion of the A&D Lot Improvements and deliver a copy thereof to Lender within a reasonable time after the completion date. Borrower will cause all A&D Lot Improvements to be constructed (i) in a good and workmanlike manner; (ii) in compliance with all applicable Requirements; and (iii) unless otherwise consented to by Lender in advance in writing in the absolute and sole discretion of Lender, in accordance with the A&D Lot Development Plans and Specifications without material deviation and within the limitations of the A&D Lot Development Budget as modified from time to time. Upon demand by Lender, Borrower will correct any defect in the A&D Lot Improvements or any material departure from any applicable Requirements or, to the extent not theretofore approved in writing by Lender, the A&D Lot Development Plans and Specifications.

3.13 Commencement and Completion of Units. With respect to any Unit, including any Model Unit, Spec Unit or Presold Unit, Borrower shall commence construction of such Unit within ten (10) days of reclassification of that Unit from a Lot to a Unit and, thereafter, diligently and in good faith prosecute construction of such Unit in a manner consistent with and within the applicable term periods and time lines for set forth in Sections 3.5 and 3.6. Borrower shall construct such Units in a good and workmanlike manner; in compliance with all applicable Requirements; and, unless otherwise consented to by Lender in advance in writing in the absolute and sole discretion of Lender, in substantial accordance with the respective Unit Plans and Specifications. Upon demand by Lender, Borrower will correct any defect in its respective Units or any material departure from any applicable Requirements or, to the extent not

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theretofore approved in writing by Lender, the respective Unit Plans and Specifications. If requested by Lender, Borrower will obtain the issuance of a certificate of occupancy or other equivalent document from each applicable Governmental Authority regarding completion of the Unit and deliver a copy thereof to Lender within a reasonable time after the completion date of such Unit.

3.14 General. Anything in this Article 3 or the Loan Documents to the contrary notwithstanding, Borrower agrees that (i) no limitation on any Advances required or permitted pursuant to this Agreement, will limit or otherwise change Borrower’s obligations and liabilities under the Loan Documents, (ii) Borrower will remain obligated to pay all costs, expenses, and fees required to be paid by Borrower pursuant to this Agreement and the other Loan Documents, and (iii) Borrower will remain obligated to pay all costs, expenses, and fees now or hereafter arising in connection with acquisition, development, maintenance, occupancy, operation, and use of the Collateral for the Loan to which Borrower is a party.

3.15 Appraisals.

(a) Appraisal Requirements. The form and substance of each Appraisal must be satisfactory to Lender in Lender’s sole discretion, provided that in reviewing Appraisals, Lender shall apply the policies and procedures generally used by Lender in its real estate lending activities. Each Appraisal of Lots shall be based upon the “bulk finished appraised value” of such Lots. Each Unit Appraisal will be at least a “FNMA plan type appraisal”. Each Appraisal must include, without limitation, the following information: (i) a narrative economic and demographic feasibility analysis of the market, including a supply and demand comparison; (ii) a narrative comparison of each subject Subdivision to competing subdivisions in the same metropolitan area; (iii) a base plan type value for each type of Unit in each Approved Subdivision; and (iv) if requested by Lender, a market and absorption study for each Approved Subdivision. All Appraisals must comply with the appraisal policies and procedures of Lender and with all applicable laws, rules, and regulations, including, without limitation, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as amended.

(b) Appraiser Engagement. Each Appraisal must be prepared by an appraiser selected and engaged by Lender. Borrower will notify the Lender in writing that Borrower desires to obtain approval of a Subdivision or include a Unit or a Lot in Eligible Collateral for which no Appraisal then exists and will provide to Lender all information (including Lot premiums and upgrades) necessary to allow an Appraisal to be ordered by Lender. Lender will engage an appraiser to perform an Appraisal only when it receives all information deemed necessary by the Lender and the appraiser for preparation of such Appraisal. Lender will not have any liability to Borrower or any other Person with respect to delays in the Appraisal process. Borrower and its Affiliates will not employ any appraiser that prepares an Appraisal for any of the Collateral unless specifically requested to do so by Lender. Lender may employ a staff appraiser or a fee appraiser and Borrower will reimburse Lender at Lender’s reasonable cost therefor.

(c) Appraisal Evaluation. Upon receipt of an Appraisal, Lender will review the Appraisal in accordance with the appraisal policies and procedures of Lender and

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establish an Appraised Value. Lender will notify Borrower of such Appraised Value. Based on each such Appraised Value, Lender may adjust the Maximum Allowed Advances with respect to Units and Lots.

(d) Additional Appraisals. Notwithstanding anything in this Section 3.16 to the contrary, Lender may order updated Appraisals at Borrower’s sole cost and expense; provided, however, Borrower shall only be required to pay for one Appraisal per Approved Subdivision in any twelve (12) Calendar Month period unless (i) if such Appraisals are required by any laws, rules, regulations, or generally applicable appraisal policies and lending procedures of Lender at any time and from time to time; (ii) if any Material Adverse Change with respect to the Project exists or any Event of Default or Unmatured Event of Default exists; or (iii) more than 5% of the subject Approved Subdivision is subject to condemnation by any Governmental Authorities.

(e) Expenses. Subject to Section 3.16(d), Borrower will reimburse Lender for all costs and expenses incurred in the appraisal process and in establishing and monitoring Appraised Values. All reimbursements by Borrower to Lender required by this Section 3.16 will be paid to Lender within fifteen (15) days after notice from Lender to Borrower.

ARTICLE 4

CONDITIONS PRECEDENT

4.1 Conditions Precedent to Effectiveness of this Agreement. This Agreement will become effective only upon satisfaction of the following conditions precedent on or before the Effective Date, in each case as determined by Lender. If the conditions precedent are not satisfied (or waived pursuant to Section 4.6) on or before such deadline, Lender may cancel this Agreement upon written notice to Borrower. The conditions precedent to be satisfied are as follows:

(a) Representations and Warranties Accurate; Compliance with Covenants. The representations and warranties by and with respect to Borrower and Guarantor as set forth in this Agreement and the other Loan Documents are, and continue to be true and correct and Borrower and Guarantors are in compliance with each of the terms, conditions and covenants set forth in this Agreement and in any other Loan Document.

(b) No Defaults. No Event of Default or Unmatured Event of Default shall have occurred and be continuing, and Borrower shall be in compliance with the Financial Covenants set forth in this Agreement.

(c) Financial Condition. Lender shall be satisfied: (i) with the financial condition of Borrower and (ii) that the Financial Covenants of Borrower or Guarantor set forth in this Agreement or in other Loan Document continue to be satisfied.

(d) No Material Adverse Change. Lender shall have determined that no Material Adverse Change has occurred since the most recent audited financial statements and reports provided to Lender.

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(e) Documents. Lender shall have received the following agreements, documents, and instruments, each duly executed by the parties thereto and in form and substance satisfactory to Lender and its legal counsel:

(i) Loan Documents. This Agreement and the other Loan Documents, together with any additional Loan Documents required with respect to the addition of any Approved Subdivisions as of the Effective Date.

(ii) Formation Documents. With respect to each Borrower and Guarantor, the respective managing member(s) or manager(s) thereof, and such other entities as may be requested by Lender in order to confirm that each such Person is authorized to execute, deliver, and perform their respective obligations under such Loan Documents: (A) the certificate of formation, organization, or partnership or the articles of incorporation (as applicable), (B) the operating agreement, partnership agreement or bylaws (as applicable), (C) good standing certificates, (D) certified copies of resolutions of each Borrower’s board of directors, members or partners (as applicable) authorizing each Borrower (as applicable) to execute, deliver, and perform its obligations under the Loan Documents and any other documents to be executed and delivered by any Borrower or any other Person in connection herewith and certifying the names and signatures of the officers authorized to execute the Loan Documents; and (E) such other formation documents, certificates and resolutions as may be reasonably requested by Lender.

(iii) Each Borrower shall have executed and delivered to Lender, and Lender shall have approved, a contribution agreement whereby each Borrower agrees to contribute to the other to the extent necessary with respect to the Obligations

(iv) Lender shall have received and approved a legal opinion satisfactory to Lender from counsel for Borrower.

(f) Other Items or Actions. Lender will have received and approved such other information, agreements, documents, certificates (including, if required by Lender, bring-down certificates), and instruments, and each Borrower will have performed such other actions, as Lender may reasonably require.

(g) Payment of Costs, Expenses and Fees. All costs, expenses and fees to be paid by Borrower under the Loan Documents on or before the Effective Date will have been paid in full as of the Effective Date, including, without limitation, the applicable fees set forth or referenced in Sections 2.5 and 12.2.

(h) Borrower shall have selected, and Lender shall have approved, a Title Company for use in connection with all applicable transactions pursuant to this Agreement and the Loan Documents.

4.2 Approval of Approved Subdivisions. From and after the Closing Date and prior to the occurrence of any Term Out Date, Borrower may add Subdivisions to the Borrowing Base

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as an Approved Subdivision. As a condition precedent to the approval of any Approved Subdivision (and the inclusion of any Pre-Development Land, A&D Lots or Units contained therein becoming Eligible Collateral), Lender shall have determined that each of the following conditions and requirements have been, and continue to be, satisfied:

(a) Continued Satisfaction of Conditions Precedent. The conditions precedent set forth in Section 4.1 shall continue to be satisfied.

(b) Continued Satisfaction of Borrowing Base and Availability Limitations. After giving effect to the inclusion of such Subdivision as an Approved Subdivision (and the inclusion of any Land contained therein as Eligible Collateral): (a) All of the conditions, limitations and requirements set forth in Article 3 shall continue to be satisfied and no violation or breach thereof shall result from the inclusion of such Subdivision as an Approved Subdivision.

(c) Ownership. Subject to the admission of a New Borrower pursuant to Section 8.1, WLH shall be the sole owner of the Approved Subdivision, either directly or indirectly through a wholly-owned subsidiary of WLH, the structure of which shall have been approved by Lender

(d) Proposed Development, Documents and Reports. Borrower shall have submitted to Lender such budgets (including the A&D Budget and Unit Budgets for such Subdivision), feasibility studies, market studies, environmental and engineering reports and studies, proforma financial statements, income projections, development schedules, construction schedules, project cost analysis, entitlement status and other information as Lender may require to review Borrower’s plan for such Subdivision, including without limitation, Acquisition, development of Lots, construction of Units, and the estimated costs, expenses and profits in connection therewith.

(e) Plans and Specifications. If requested by Lender, Borrower shall have provided Lender and Lender shall have approved the final plans and specifications with any improvements in connection with the Approved Subdivision.

(f) Market Information. If requested by Lender, Borrower shall have provided Lender with market information with respect to the Lots to be developed in the Subdivision.

(g) Appraised Value. Lender shall have received and approved Appraisals with respect to each Approved Subdivision.

(h) Inspection. Lender shall have completed and approved a physical inspection of the Subdivision.

(i) Plat. Borrower shall have delivered to Lender a preliminary parcel map, preliminary plat, recorded plat or survey of the Subdivision.

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(j) Entitlement; Zoning Approvals. The Land comprising the Subdivision shall be Entitled Land and Borrower shall have provided to Lender evidence that the Subdivision is subject to approved zoning consistent with its proposed uses.

(k) Permits. If requested by Lender, Borrower shall have provided evidence that Borrower has obtained all Approvals and Permits necessary to permit the development of the Subdivision and the construction of any improvements thereon or with respect thereto as may be required by any Governmental Authority; provided that Borrower may not have obtained all of the Approvals and Permits necessary for such development and construction to the extent such Approvals and Permits are not yet required.

(l) Preliminary Title Commitment. Borrower shall have provided to Lender a preliminary title commitment for the Subdivision, prepared by the Title Company, together with a legible copy of each Schedule B item.

(m) Environmental Assessment. Borrower shall have delivered to Lender a report of an environmental assessment for the Subdivision addressed to Lender by an environmental engineer acceptable to Lender containing such information, results, and certifications as Lender may require and dated not earlier than twelve (12) months before Borrower’s request for approval, unless otherwise approved by Lender, together with updates to such assessment as requested by Lender. Depending upon the results of the environmental assessment, Borrower shall also provide such follow up testing, reports, and other actions as may be required by Lender. The contents of the environmental assessment report and any follow up must be satisfactory to Lender. If such reports are not addressed to Lender, Borrower will cause a reliance letter, in form and substance satisfactory to Lender, to be provided to Lender.

(n) Soils Tests. Borrower shall have provided Lender and Lender shall have approved a soils test report for the Subdivision prepared by a licensed soils engineer satisfactory to Lender showing the locations of, and containing boring logs for, all borings.

(o) Land Purchase and Project Documents. To the extent requested by Lender, Borrower shall have provided copies of those documents related to Borrower’s acquisition of the Subdivision and its ownership, maintenance, use and development, including without limitation, the purchase agreement, settlement statement and other documentation relating to Borrower’s purchase of the Land for such Subdivision.

(p) Drainage; Flood Zone. Borrower shall have provided to Lender, but only if requested by Lender, a drainage report for the Subdivision by a licensed engineer acceptable to Lender containing such information, results and certifications as Lender may reasonably require. If requested by Lender, Borrower will have provided to Lender evidence satisfactory to Lender, as to whether (i) the Subdivision is located in an area designated by the United States Department of Housing and Urban Development as having special flood or mudslide hazards, and (ii) the community in which the Subdivision is located is participating in the National Flood Insurance Program.

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(q) Impositions, Assessments, and Charges. If requested by Lender, Borrower shall have provided Lender with evidence that all Impositions and water, sewer, and other charges assessed against the Subdivision have been paid in the amount required prior to any such imposition or assessment becoming delinquent.

(r) Final Subdivision Map or Plat. If not previously provided, Borrower shall have delivered to Lender the final Subdivision Documents, maps and plats for the Approved Subdivision and such final Subdivision Documents shall have been recorded or filed with the appropriate Governmental Authorities. Each map or plat must contain a legal description of the Approved Subdivision covered by the map, must describe and show all boundaries of and Lot lines within such Approved Subdivision, all streets and other dedications, and all easements affecting such Approved Subdivision. In connection with the approval of plat and/or subdivision maps pursuant to this subsection, Borrower will also deliver to Lender such title endorsements insuring the continued priority of the Deed of Trust after recording of the plat and/or subdivision maps as Lender may reasonably require. Borrower agrees to take such steps as Lender may require including (i) either re-recording the Deed of Trust or amending the Deed of Trust to reflect the new legal description, and (ii) obtaining an endorsement to the Title Policy to amend the legal description thereof. Notwithstanding anything contained herein to the contrary, Lender may include an Approved Subdivision as Eligible Collateral based upon Lender’s review of such Approved Subdivision’s tentative tract or parcel map and the conditions to final approval thereof; provided that such conditions to final approval of such maps are non-discretionary.

(s) Distressed Improvement Districts. Any improvement or assessment district in which the Approved Subdivision is located shall not be insolvent under applicable law or subject to any bankruptcy or similar proceedings if such situation, in the reasonable opinion of Lender, would have a material adverse impact on development of the Approved Subdivision directly or indirectly cause the Approved Subdivision to be subject to any suspension, disqualification, or disapproval by FHA, FNMA, VA, FHLMC, or any similar governmental or quasi-governmental agency that originates, purchases, insures or guarantees home mortgage loans, if the Approved Subdivision has been qualified with any such agency and Lots in the Approved Subdivision are proposed to be sold with the benefits of such qualification.

(t) Restrictive Covenants. Borrower shall have provided, and Lender shall have approved the CC&Rs for the Subdivision.

(u) Utilities. If requested by Lender, Borrower shall have delivered to Lender evidence that (i) telephone service, electric power, storm sewer (if applicable), sanitary sewer (if applicable) and water facilities will be available to each Lot in the Subdivision and (ii) such utilities will be adequate to serve the Lots in the Subdivision.

(v) Borrower Equity Requirement. Lender shall have received evidence satisfactory to Lender that Borrower has contributed sufficient Borrower’s Equity as of the Approved Subdivision Closing Date and that there will be sufficient Borrower’s Equity contributed to the Subdivision subsequent to that Approved Subdivision Closing Date so that the requirements set forth in Section 3.14 are reasonably likely to be satisfied at all times that such Subdivision is within the Borrowing Base.

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(w) Borrowing Base Certificate. Borrower shall have provided, and Lender shall have approved, a Borrowing Base Certificate.

(x) Loan Documents; Deed of Trust/Title Policy.

(i) Borrower shall have executed and delivered to Lender an Environmental Indemnity, Completion and such other Loan Documents, consents, approvals and other instruments as Lender may reasonably require with respect to the addition of such Borrower as a Borrower hereunder and the Subdivision as an Approved Subdivision, including without limitation, a Subdivision Loan Addendum to be executed by Borrower and Lender for the benefit of Lender setting forth the terms, conditions and covenants specific to such Approved Subdivision, including without limitation, the aggregate Maximum Allowed Advance with respect to such Approved Subdivision, any sub-limits thereof, Spec Unit and Model Unit limitations, any Maximum Allowed Advance Rate adjustments or reductions and any other terms and conditions specific to such Approved Subdivision.

(ii) Borrower shall have provided to Lender (i) a first lien Deed of Trust on the Subdivision securing the full Commitment Amount, subject only to Permitted Exceptions, duly executed by Borrower, acknowledged, delivered and recorded; and (ii) either an American Land Title Association loan policy of title insurance (1970 form or 1992 form with the creditor’s rights exception and arbitration provisions deleted and with a revolving credit endorsement and such other endorsements as Lender may require) or an endorsement to an existing Title Policy issued by the Title Company, providing coverage (including, without limitation, mechanic’s lien coverage) and insuring Lender’s interest (as set forth in the definition of Deed of Trust) under the applicable Deed of Trust as a valid first lien on the property encumbered by the Deed of Trust, subject only to Permitted Exception. Each Title Policy or endorsement shall be in a form and substance reasonably satisfactory to Lender, and unless approved by Lender, the policy amount shall equal the Commitment Amount subject to appropriate tie-in endorsements with the other existing Title Policies for the Approved Subdivisions.

(y) Other. Borrower shall have performed such other actions, and shall have provided to Lender such other agreements, documents, and instruments, as Lender may reasonably require.

4.3 Qualification of Pre-Development Land and A&D Lots as Eligible Collateral. Borrower may include and maintain Pre-Development Land and A&D Lots as Eligible Collateral only if the following conditions precedent are satisfied, at all times that such Pre-Development Land and A&D Lots are included in Eligible Collateral (each of which items must be satisfactory to Lender in its sole and absolute discretion and each of which conditions precedent must be satisfied, as determined by Lender in its sole and absolute discretion):

(a) No Defaults. No Event of Default or Unmatured Event of Default shall have occurred and be continuing.

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(b) Limitations. After giving effect to the addition of such Pre-Development Land or A&D Lots to Eligible Collateral, the provisions of Article 3 are not violated.

(c) Subdivision Conditions. The applicable conditions of Section 4.2 shall have been satisfied.

(d) Commencement. Borrower shall have commenced staking and rough grading of the Approved Subdivision and shall have certified to Lender that such staking and rough grading will be completed within thirty (30) days at which time Borrower will proceed with the construction of other A&D Lot Improvements.

(e) Construction Contracts. If requested by Lender, Borrower shall have provided Lender an executed contract for construction of the A&D Lot Improvements between Borrower and the licensed contractor(s) retained by Borrower to construct the A&D Lot Improvements. Also, if requested by Lender, Borrower shall have provided to Lender a copy of each construction subcontract, architectural agreement, engineering agreement, and other agreements, documents, and instruments relating to construction of the A&D Lot Improvements together with assignments of such contracts and agreements to the extent required by Lender. The contract price in each such agreement, document, and instrument must be within the budgeted amount in the applicable A&D Lot Development Budget. Such contracts and agreements shall be in form and content reasonably satisfactory to Lender.

(f) Plans and Specifications. If requested by Lender, Borrower shall have provided Lender the final A&D Lot Development Plans and Specifications for the A&D Lot Improvements.

(g) Permits. If requested by Lender, Borrower shall have provided evidence that Borrower has obtained all Approvals and Permits necessary to permit the construction of the A&D Lot Improvements and the construction and sale of Units in the Subdivision, provided that Borrower may not have obtained all of the Approvals and Permits necessary for construction of the A&D Lot Improvements or the construction and sale of Units to the extent such Approvals and Permits are not yet necessary and Borrower has not requested Advances of the Loan to pay the costs of Improvements for which Approvals and Permits have not been obtained.

(h) Budget. If requested by Lender, Borrower shall have provided Lender a final A&D Lot Development Budget for the A&D Lots.

(i) Construction Schedule. If requested by Lender, Borrower shall have provided Lender the construction schedule for the completion of the A&D Lot Improvements.

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(j) Impositions, Assessments, and Charges. If requested by Lender, Borrower shall have provided evidence that Impositions and all water, sewer, and other charges assessed against the A&D Lots which are then due and payable have been paid in the amount required.

(k) Other Items. Borrower shall have provided Lender such other agreements, documents, and instruments as Lender may reasonably require.

(l) Other Actions. Borrower shall have performed such other actions as Lender may reasonably require.

4.4 Qualification of Units as Eligible Collateral. Borrower may include and maintain a Unit in Eligible Collateral only if the following deliveries have been approved by Lender and if the following conditions precedent are satisfied, at all times that such Unit is included in Eligible Collateral (each of which items must be satisfactory to Lender in its sole and absolute discretion and each of which conditions precedent must be satisfied, as determined by Lender in its sole and absolute discretion):

(a) No Defaults; Material Adverse Change. No Event of Default, Unmatured Event of Default or Material Adverse Change shall have occurred and be continuing

(b) Located in an Approved Subdivision. Such Unit is located on a Lot that is legally described as a Lot on a final subdivision plat or map, or subdivision filing and is in an Approved Subdivision. The applicable conditions of Sections 4.2 and 4.3 shall have been satisfied with respect to such Approved Subdivision.

(c) Limitations. After giving effect to the addition of such Unit to Eligible Collateral, the provisions of Article 3 shall not be violated.

(d) Construction Contracts. If requested by Lender, Borrower shall have provided and Lender shall have approved copies of all executed contracts between Borrower and the licensed contractors retained by Borrower to construct the Unit. Also, if requested by Lender, Borrower shall have provided to Lender a copy of each construction subcontract, architectural agreement, engineering agreement, and other agreements, documents and instruments relating to construction of the Unit, together with assignments of such contracts and agreements to the extent required by Lender. The contract price in each such agreement, document and instrument must be within the budgeted amount in the applicable Unit Budget. Such contracts and agreements shall be in form and content reasonably satisfactory to Lender.

(e) Unit Plans and Specifications. If requested by Lender, Borrower shall have provided and Lender shall have approved Unit Plans and Specifications for the type of Unit in question.

(f) Permits. If requested by Lender, Borrower shall have provided evidence that Borrower has obtained all Approvals and Permits necessary to permit the construction and sale of the Unit, including, without limitation, all applicable public reports, architectural committee approvals, and any other approvals required under any applicable CC&Rs.

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(g) Unit Budget. Borrower shall have provided Lender a Unit Budget for the type of Unit in question.

(h) Unit Appraisal. Lender shall have approved the Unit Appraisal for the type of Unit in question in compliance with Section 3.16. The Appraised Value for the type of Unit shall have been approved by Lender.

(i) Final Subdivision Map or Plat. Borrower shall have delivered to Lender the final Subdivision Documents, maps and plats for the Approved Subdivision and such final Subdivision Documents shall have been recorded or filed with the appropriate Governmental Authorities. Each map or plat must contain a legal description of the Approved Subdivision covered by the map, must describe and show all boundaries of and lot lines within such Approved Subdivision, all streets and other dedications, and all easements affecting such Approved Subdivision. In connection with the approval of plat and/or subdivision pursuant to this subsection, Borrower will also deliver to Lender such title endorsements insuring the continued priority of the applicable Deed of Trust after recording of the plat and/or subdivision maps as Lender may require. Borrower agrees to take such steps as Lender may require including (i) either re-recording the applicable Deed of Trust or amending such Deed of Trust to reflect the new legal description, and (ii) obtaining an endorsement to the Title Policy to amend the legal description therein.

(j) Purchase Contract. If such Unit is a Presold Unit and if requested by Lender, Borrower shall have provided Lender a copy of the fully executed Purchase Contract for such Unit.

(k) Impositions, Assessments, and Charges. If requested by Lender, Borrower shall have provided Lender evidence that Impositions and all water, sewer, and other charges assessed against the Unit which are then due and payable have been paid in the amount required.

(l) Deed of Trust. If the Lot on which the Unit is to be constructed has not previously been encumbered by a Deed of Trust, Borrower shall have provided a first lien Deed of Trust, subject only to Permitted Exceptions, duly executed, acknowledged, delivered and recorded.

(m) Title Insurance. If the Unit has not previously been encumbered pursuant to a Deed of Trust, Borrower shall have provided and Lender shall have approved (i) an American Land Title Association loan policy of title insurance (1970 or 1992 form with the creditor’s rights exception and arbitration provisions deleted and with a revolving credit endorsement and such other endorsements as Lender may require), or (ii) an endorsement to an existing Title Policy issued by a Title Company and in form satisfactory to Lender. Such policy or endorsement will provide coverage (including, without limitation, mechanic’s lien coverage) satisfactory to Lender and insure Lender’s interest (as set forth in the definition of Deed of Trust) under the applicable Deed of Trust

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as a valid first lien on the property encumbered by such Deed of Trust, subject only to Permitted Exceptions. If the Unit has previously been encumbered by an insured Deed of Trust, Borrower shall have provided an endorsement to such Title Policy, in form satisfactory to Lender, eliminating any Schedule B items that are not Permitted Exceptions with respect to Units included in Eligible Collateral.

(n) Start of Construction. Construction of the Unit shall have commenced at least to the Unit Construction Threshold.

(o) Distressed Improvement Districts. Any improvement or assessment district in which the Unit is located shall not be insolvent under applicable law or subject to any bankruptcy or similar proceedings if such situation, in the reasonable opinion of Lender, would have a material adverse impact on development of Units or directly or indirectly cause the Approved Subdivision in which the Unit is to be built to be subject to any suspension, disqualification, or disapproval by FHA, FNMA, VA, FHLMC, or any similar governmental or quasi-governmental agency that originates, purchases, insures or guarantees home mortgage loans, if the Approved Subdivision has been qualified with any such agency and Units in the Approved Subdivision are proposed to be sold with the benefits of such qualification.

(p) Other Items. Borrower has provided to Lender such other agreements, documents, and instruments as Lender may reasonably require.

(q) Other Actions. Borrower has performed such other actions as Lender may reasonably require.

4.5 Additional Conditions Precedent to All Advances Against Eligible Collateral. Lender will be obligated to make Advances against Eligible Collateral only upon satisfaction of the following additional conditions precedent at the time the Advance is requested and at the time the Advance is to be made, as determined by Lender:

(a) Advance Request. Borrower shall have complied with all Advance Request terms and conditions set forth in Section 2.2.

(b) Continued Satisfaction of Conditions Precedent. The conditions precedent set forth in Sections 4.1 through 4.6 continue to be satisfied.

(c) No Defaults; Material Adverse Change. No Event of Default, Unmatured Event of Default or Material Adverse Change shall have occurred and be continuing

(d) Representations and Warranties; Compliance with Covenants. The representations and warranties of Borrower and Guarantor set forth in the Loan Documents continue to be true and correct in all applicable and material respects and Borrower and Guarantor continue to be in compliance with all of the other terms, conditions and covenants set forth in the Loan Documents in all material respects.

(e) Inspection Report. If and to the extent required by Lender, Lender shall have received written evidence from Lender’s inspectors or from Lender’s employees

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performing inspections for Lender (i) that construction of all A&D Lot Improvements and each Unit constituting Eligible Collateral complies with all Requirements and the respective A&D Lot Development Plans and Specifications and Unit Plans and Specifications in all material respects; and (ii) that Borrower has completed all A&D Lot Improvements and each such Unit to the stage reported on the most recent Borrowing Base Report received by Lender. Inspections shall be conducted in accordance with the provisions of Section 6.12 hereof.

(f) Approvals and Inspections by Governmental Authorities. If requested by Lender, all inspections and approvals by Governmental Authorities which may be required for each Unit shall have been obtained and Lender shall have received satisfactory evidence thereof or will have been provided access thereto satisfactory to Lender, or will have obtained such evidence upon inspection of the Approved Subdivision.

(g) Lien Waivers. If requested by Lender in its sole and absolute discretion, Borrower shall have provided Lender with invoices and vouchers for the work for which the Advance is requested and lien waivers for all work actually performed and covered by prior Advances. Such lien waivers may be conditional, so long as the only condition is receipt of payment for the work and Borrower includes with the conditional lien waiver a copy of the canceled check for payment or other evidence of payment.

(h) Title Insurance. At the request of Lender, Borrower shall have provided to Lender with any endorsements to the Title Policy covering the Eligible Collateral, in form satisfactory to Lender, which (i) eliminate any liens, encumbrances and other “Schedule B” items that are not Permitted Exceptions with respect to such Eligible Collateral, and (ii) otherwise insure the priority of, and include the affect of the Advance upon, the Lender’s lien or encumbrance against such Eligible Collateral.

(i) Payment of Costs, Expenses, and Fees. All costs, expenses, and fees due to be paid by Borrower on or before the date of the Advance under the Loan Documents shall have been paid in full.

(j) No Remargining Payment. Lender has determined that, after giving effect to the requested Advance, no Remargining Payment would be required pursuant to Section 2.4(b)(ii).

(k) Loan “In Balance”. After giving effect to the requested Advance, the Loan will be “in balance” in accordance with Section 3.14 and no payments will be required under Section 3.14.

(l) Excess Releases; Updated Borrowing Base Report. In any Calendar Month where the aggregate Collateral Values of Lots and Units released pursuant to Section 2.7 exceeds twenty percent (20%) of the total Collateral Values of all Lots and Units set forth in Borrower’s Borrowing Base Report most recently submitted to Lender, Borrower shall have submitted a new, updated Borrowing Base Report to Lender for approval, and such Borrowing Base shall have been approved by Lender.

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4.6 Right to Waive.

(a) Waiver of Any Condition Precedent. Borrower authorizes Lender and Lender reserves the right to verify any documents and information submitted to it in connection with this Agreement. Lender may waive any of the conditions precedent and requirements in this Article 4. Any such waiver of any condition precedent in connection with the approval of a Subdivision as an Approved Subdivision or in connection with the qualification of any Collateral as Eligible Collateral pursuant to this Agreement, may be conditioned upon such terms and conditions as Lender may require, including without limitation, a decrease in the Maximum Allowed Advance Rates with respect to any such Eligible Collateral.

(b) Limited Waiver. Any such waiver will be limited to the specific conditions precedent or requirements waived and will not apply to or result in the waiver of any other condition precedent or requirement. Delay or failure by Lender to insist on satisfaction of any condition precedent will not be a waiver of such condition precedent or any other condition precedent. The making of an Advance by Lender will not be deemed a waiver by Lender of the occurrence of an Event of Default or Unmatured Event of Default.

ARTICLE 5

BORROWER REPRESENTATIONS AND WARRANTIES

5.1 Representations and Warranties - Borrower. Borrower (which for purposes of this Section 5.1 shall mean WLH) and Guarantor represent and warrant to Lender as of the Effective Date and as of the various other dates specified in this Agreement and the other Loan Documents on which such representations and warranties are to be accurate, complete, and correct the following:

(a) Formation and Authorization. Borrower is a California corporation validly existing, and in good standing, under the laws of the state of California and qualified to conduct business in the states of California, Arizona and Nevada, and has the requisite power and authority to execute, deliver, and perform this Agreement and the applicable Loan Documents. Guarantor is a corporation validly existing, and in good standing, under the laws of the State of Delaware and has the requisite power and authority to execute, deliver, and perform, as Guarantor, the applicable Loan Documents. The execution, delivery and performance by Borrower and Guarantor of this Agreement and the applicable Loan Documents have been duly authorized by all requisite action by or on behalf of Borrower and Guarantor and will not conflict with, or result in a violation of or a default under, the applicable articles of formation, certificate of limited partnership, operating agreement and/or partnership agreement of Borrower or Guarantor.

(b) No Approvals, etc. No approval, authorization, bond, consent, certificate, franchise, license, permit, registration, qualification, or other action or grant by or filing with any Governmental Authority or other Person is required in connection with the execution, delivery, or performance (other than performance which is not yet due) by Borrower or Guarantor of this Agreement and the other applicable Loan Documents.

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(c) No Conflicts. The execution, delivery, and performance by Borrower or Guarantor of the applicable Loan Documents will not conflict with, or result in a violation of or a default under, (i) any applicable law, ordinance, regulation, or rule (federal, state, or local); (ii) any judgment, order, or decree of any arbitrator, other private adjudicator, or Governmental Authority to which such Person is a party or by which such Person or any of its assets are bound; (iii) any of the Approvals and Permits; or (iv) any agreement, document, or instrument to which such Person is a party or by which such Person or any of its assets are bound. Borrower and Guarantor each has reviewed all of the provisions of the Indebtedness of Borrower or Guarantor which may affect their ability to enter into and perform the Loan Documents or for Borrower to incur the Obligations and obtain Advances under the applicable Loan Documents, and none of the terms and conditions of such existing Indebtedness will be violated by Borrower or Guarantor entering into this Agreement or the applicable Loan Documents, incurring Indebtedness hereunder or under the applicable Loan Documents, and performing their respective obligations under the applicable Loan Documents.

(d) Execution and Delivery and Binding Nature of Loan Documents. This Agreement and the other Loan Documents have been duly executed and delivered by or on behalf of Borrower and Guarantor. This Agreement and the other Loan Documents are legal, valid, and binding obligations of Borrower and Guarantor, enforceable in accordance with their terms against Borrower and Guarantor, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization, or similar laws and by equitable principles of general application.

(e) Accurate Information. All information in any loan application, financial statement (other than financial projections), certificate, or other document, and all other information delivered by or on behalf of Borrower or Guarantor to Lender in connection with this transaction or any Subdivision is correct and complete in all material respects as of the date thereof, and there are no omissions from any such information that result in any such information being materially incomplete, incorrect, or misleading as of the date thereof. Neither Borrower nor Guarantor has any knowledge of any material change in any such information. All financial statements (other than financial projections) heretofore delivered to Lender by Borrower were prepared in accordance with the requirements in Section 6.4 and accurately present the financial conditions and results of operations as at the dates thereof and for the periods covered thereby in all material respects. All financial projections have been and will be prepared in accordance with the requirements of this Agreement, will be complete in all material respects as of the date thereof, and will be based on the applicable Person’s best good faith estimates, compiled and prepared with due diligence, of the matters set forth therein.

(f) Legal Proceedings, Hearings, Inquiries, and Investigations. Except as disclosed to Lender in writing prior to the date of this Agreement:

(i) No legal proceeding, individually or in the aggregate with related proceedings, is pending, and Borrower is not aware of any threatened legal proceeding, before any arbitrator, other private adjudicator, or Governmental Authority to which Borrower is a party or by which Borrower or any of its respective assets may be bound or affected that if resolved adversely to any such Borrower could result in a Material Adverse Change; and

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(ii) No hearing, inquiry, or investigation relating to any Borrower any of their respective assets is pending, and no Borrower is aware of any such hearing inquiry or investigation being threatened, by any Governmental Authority that if resolved adversely to any Borrower could result in a Material Adverse Change.

(g) No Defaults; Financial Covenant Compliance. No Event of Default or Unmatured Event of Default has occurred and is continuing. Borrower is in compliance with each of the Financial Covenants as set forth in this Agreement.

(h) Approvals and Permits; Assets and Property. Borrower has obtained and there are in full force and effect all Approvals and Permits presently necessary for the conduct of their respective businesses, and each owns, leases, or licenses all assets necessary for conduct of their respective businesses and operations, except as otherwise permitted pursuant to this Agreement, except for any failure to obtain and maintain in full force and effect any Approval or Permit or any failure to own, lease or license such assets that would not, individually or in the aggregate, (i) be materially adverse to their respective businesses, properties, assets, operations or condition (financial or otherwise), or (ii) materially and adversely affect any Approved Subdivision (or the Lots contained therein) or other property that is at any time included as Eligible Collateral. The Collateral is not subject to any Liens and Encumbrances, other than (A) the Liens and Encumbrances created pursuant to this Agreement and the other Loan Documents; and (B) the Permitted Exceptions. The assets of Borrower (other than Collateral) are not subject to any Liens and Encumbrances other than Liens and Encumbrances disclosed on the financial statements of Borrower (to the extent required to be disclosed on such financial statements in accordance with GAAP).

(i) Impositions. Borrower has filed or caused to be filed all tax returns (federal, state, and local) required to be filed by Borrower and has paid all Impositions and Other Amounts shown thereon to be due (including, without limitation, any interest or penalties) except for any failure to so file or to so pay that would not, individually or in the aggregate, result in an Material Adverse Change.

(j) ERISA.

(i) Neither (x) the execution and delivery of this Agreement or the Loan Documents by Borrower, (y) the performance by Borrower of the Obligations, nor (z) the consummation of any of the other transactions contemplated by this Agreement constitutes or will constitute a “prohibited transaction” within the meaning of Section 4975 of the Code or Section 406 of ERISA. Each Borrower has delivered to Lender a complete and correct list of any “employee benefit plan” (within the meaning of Section 3(3) of ERISA) (a “Plan”) with respect to which Borrower or any Person which is under “common control” with Borrower (within the meaning of Section 414(b) or (c) of the Code

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or Section 4001(b) of ERISA) (an “ERISA Affiliate”) is a “party in interest” (within the meaning of Section 3(14) of ERISA) or with respect to which its securities are “employer securities” (within the meaning of Section 407(d)(1) of ERISA).

(ii) The Plan is in compliance in all respects with applicable provisions of ERISA, the Code and applicable foreign law. Borrower and each ERISA Affiliate have made all contributions to the Plans required to be made by it.

(iii) Except for liabilities to make contributions and to pay Pension Benefit Guaranty Corporation (or any successor thereto) (“PBGC”) premiums and administrative costs, neither Borrower nor any ERISA Affiliate of Borrower has incurred any material liability to or on account of any Plan under applicable provisions of ERISA, the Code or applicable foreign law, and no condition exists which presents a material risk to Borrower or any ERISA Affiliate of Borrower of incurring any such liability. No domestic Plan has an “accumulated funding deficiency” (within the meaning of Section 412 of the Code), whether or not waived, and no foreign Plan is in violation of any funding requirements imposed by applicable foreign law. Neither Borrower nor, any ERISA Affiliate of Borrower, the PBGC or any other Person has instituted any proceedings or taken any other action to terminate any Plan.

(iv) The actuarial present value of all accrued benefit liabilities under each domestic Plan and under each foreign Plan (based on the assumptions used in the funding of such Plan, which assumptions are reasonable, and determined as of the last day of the most recent plan year of such domestic Plan for which an annual report has been filed with the Internal Revenue Service or of such foreign Plan for which year-end actuarial information is available) did not exceed the current fair market value of the assets of such Plan as of such last day.

(v) None of the Plans is a “Multiemployer Plan” (as defined in ERISA), and neither Borrower nor any ERISA Affiliate of Borrower has contributed or been obligated to contribute to any Multiemployer Plan at any time within the preceding six (6) years.

(vi) Borrower and each member in each Borrower qualifies as an “operating company” within the meaning of United States Department of Labor Regulations §2510.3-101(c), and, pursuant to such regulations, the assets of Borrower and each member in Borrower are not “plan assets” of any employee benefit plan subject to the fiduciary responsibility requirements of ERISA. Accordingly, a loan to, or other financial transaction with Borrower or a shareholder in Borrower will not be deemed to be a prohibited loan or transaction under Section 406 of ERISA between any plans subject to the restrictions set forth in Section 406 of ERISA and a party in interest with respect to such plan.

(k) Full Disclosure. There is no material fact that Borrower has not disclosed to Lender which could cause a Material Adverse Change. Neither the financial

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statements nor any other certificate or document delivered herewith or heretofore by Borrower to Lender in connection with negotiations of this Agreement and the other Loan Documents contains any untrue statement of material fact or omits to state any material fact necessary to keep the statements contained herein and therein from being untrue or misleading.

(l) Use of Proceeds; Margin Stock. The proceeds of the Advances will be used solely for the purposes specified in this Agreement. None of such proceeds will be used for the purpose of purchasing or carrying any “margin stock” as defined in Regulation U or G of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221 and 207), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry margin stock or for any other purpose which might constitute this transaction a “purpose credit” within the meaning of such Regulation U or G. No Borrower is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock. Neither Borrower, nor any Person acting on behalf of Borrower has taken or will take any action which might cause this Agreement or any Loan Documents to violate Regulation U or G or any other regulations of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934, or any rule or regulation thereunder, in each case as now in effect or as the same may hereafter be in effect.

(m) Governmental Regulation. Borrower is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940, the Interstate Commerce Act (as any of the preceding have been amended), or any other law which regulates the incurring by Borrower of Indebtedness, including, but not limited to, laws relating to common or contract carriers or the sale of electricity, gas, steam, water, or other public utility services.

(n) Purpose of Advances. The purpose of Advances is a business purpose and not a personal, family, or household purpose.

(o) Compliance with Law. Other than noncompliance with applicable building codes which is not material, is not unusual in the ordinary course of business, and is correctable (and is in the process of being corrected) by Borrower, neither Borrower nor any Approved Subdivision, the Lots or Units contained therein is in violation of any law, ordinance, regulation, or rule (federal, state, or local).

(p) Unit Budgets, Unit Plans and Specifications, and Construction Contracts. Each Unit Budget (as updated from time to time) contains all costs, expenses, and fees anticipated to be incurred by Borrower in connection with the respective type of Unit. The Unit Plans and Specifications and related working drawings are an accurate and complete description of each Unit included or to be included as Eligible Collateral. The construction contracts relating to the construction of each such Unit provide for all work and materials anticipated to be necessary to construct and all payments necessary to pay for the construction of such Unit.

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(q) A&D Lot Development Budgets, Plans and Specifications, and Construction Contract(s). Each A&D Lot Development Budget (as updated from time to time) contains all costs, expenses, and fees anticipated to be incurred by Borrower in connection with acquisition of the applicable Land and, if applicable, construction of the A&D Lot Improvements. The applicable Plans and Specifications and related working drawings for each Approved Subdivision are and will be an accurate and complete description, in all material respects, of the A&D Lot Improvements in that Approved Subdivision. The construction contracts relating to the construction of the A&D Lot Improvements provide for all work and materials anticipated to be necessary to construct and all payments necessary to pay for the construction of the A&D Lot Improvements.

(r) Special Representations and Agreements Relating to Collateral.

(i) Ownership. Subject to Section 8.1, Borrower is and will at all times be the legal and equitable owner of the Collateral, free and clear of all Liens and Encumbrances, except for (A) the Security Instruments encumbering such Collateral and (B) the Permitted Exceptions.

(ii) Authority to Encumber. Borrower has, and will continue to have, the full right and authority to encumber all of the Collateral, including each of the Approved Subdivisions, included or to be included in Eligible Collateral.

(iii) Validity of the Liens and Encumbrances. The Liens and Encumbrances created by the Security Instruments are (A) legal, valid, binding and enforceable, subject only to bankruptcy, insolvency, moratorium, reorganization or similar laws and equitable principles of general application and (B) are in first priority except for, with respect to the Deeds of Trust only, the Permitted Exceptions.

(s) Material Adverse Change. There has been no change in the business, property, prospects, condition (financial or otherwise) or results of operations of Borrower or any Approved Subdivision which could reasonably be expected to have a Material Adverse Effect.

(t) Taxes. Borrower has filed all United States federal tax returns and all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by such Person, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with GAAP and as to which no Lien exists. No tax liens have been filed and no claims are being asserted with respect to any such taxes. The charges, accruals and reserves on the books of Borrower in respect of any taxes or other governmental charges are adequate.

(u) Material Agreements; Material Defaults. Borrower is not a party to any agreement or instrument or subject to any charter or other corporate restriction which could reasonably be expected to have a Material Adverse Effect. Borrower is not in default in the performance, observance or fulfillment of any of the obligations, covenants

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or conditions contained in (i) any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect; (ii) any agreement or instrument evidencing or governing Indebtedness; (iii) any lease or other agreement to which Borrower is a party or which affects their respective properties or assets; (iv) any license, permit, statute, ordinance, law, judgment, order, writ, injunction, decree, rule or regulation of any Governmental Authority, or any determination or award of any arbitrator, to which Borrower may be bound; or (v) any deed of trust, mortgage, instrument, agreement or document by which Borrower or any of their respective properties or assets are bound.

(v) Environmental Matters. In the ordinary course of its business, the managers and Authorized Representatives of Borrower consider the effect of Environmental Laws on the businesses of Borrower, in the course of which they identify and evaluate potential risks and liabilities accruing to Borrower due to Environmental Laws. On the basis of this consideration, Borrower has concluded that Environmental Laws cannot reasonably be expected to have a Material Adverse Effect. No Borrower has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect.

(w) Investment Company Act. Borrower is not an “investment company” or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended.

(x) Public Utility Holding Company Act. Borrower is not a “holding company” or a “subsidiary company” of a “holding company”, or an “affiliate” of a “holding company” or of a “subsidiary company” of a “holding company”, within the meaning of the Public Utility Holding Company Act of 1935, as amended.

(y) Solvency.

(i) Immediately after the consummation of the transactions to occur on the date hereof and immediately following the making of each Loan, if any, made on the date hereof and after giving effect to the application of the proceeds of such Loans, (i) the fair value of the respective assets of Borrower at a fair valuation, will exceed the debts and liabilities, subordinated, contingent or otherwise, of such Person; (ii) the present fair saleable value of the respective property of Borrower will be greater than the amount that will be required to pay the probable liability of such Person on their debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (iii) Borrower will be able to pay their respective debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (iv) Borrower will not have unreasonably small capital with which to conduct their respective businesses in which they are engaged, as such businesses are now conducted and are proposed to be conducted after the date hereof.

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(ii) Borrower does not intend to, and does not believe that it will, incur debts beyond its ability to pay such debts as they mature, taking into account the timing of and amounts of cash to be received by it and the timing of the amounts of cash to be payable on or in respect of its Indebtedness.

(z) Non-Foreign Status. Borrower is not a “foreign corporation,” “foreign partnership,” “foreign trust,” or “foreign estate,” as those terms are defined in the Internal Revenue Code and the regulations promulgated thereunder. Borrower’s U.S. employer identification number is as set forth in the Certification of Non-Foreign Status.

(aa) Other Loan Documents. Each of the representations and warranties of Borrower contained in any of the other Loan Documents is true and correct in all material respects. All of such representations and warranties are incorporated herein for the benefit of Lender.

5.2 Representations Regarding Approved Subdivisions. With respect to Borrower’s request for any Subdivision to become an Approved Subdivision, Borrower represents and warrants to Lender as follows:

(a) Title to Subdivision; Liens and Encumbrances. Borrower is, or upon recording of the Deed of Trust shall be, the sole owner of and has good and marketable title to the fee interest in the Approved Subdivision, any Improvements and all other real property described in the Deed of Trust, free from any Lien or Encumbrance of any kind whatsoever, excepting only (a) the Permitted Exceptions and (b) Liens in favor of Lender.

(b) Rights to Construction and Development Documents and Project Documents. Borrower is the true owner of all rights in and to all existing construction and development and project documents relating to the Approved Subdivision and will be the true owner of all rights in and to all future construction, development and project documents. Borrower’s interest in all present and future construction, development and project documents is not, and will not be, subject to any present claim (other than under the Loan Documents), set-off or deduction other than in the ordinary course of business.

(c) Utilities and Access. Telephone services, electric power, storm sewers, sanitary sewer, potable water facilities and all other utilities and services necessary for the construction, use, operation and maintenance of the Improvements are available to the Approved Subdivision, are adequate to serve the Improvements, and are not subject to any conditions limiting the use of such utilities, other than normal charges to the utility supplier. All streets and easements necessary for the operation and maintenance of the Improvements are available to the boundaries of the Approved Subdivision.

(d) Compliance with Laws. The Improvements and the Approved Subdivision, and the uses to which the Improvements and the Approved Subdivision are and will be put, comply fully with: (i) all laws, ordinances, rules, regulations and

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requirements of all Governmental Authorities having jurisdiction over the Approved Subdivision, including all applicable building, zoning and use laws, ordinances, requirements, rules and regulations; and (ii) all applicable CC&Rs, restrictive covenants and obligations created by private contracts and leases which affect the ownership, construction, equipping, fixturing, use or operation of the Approved Subdivision.

(e) No Condemnation. No condemnation proceedings or moratorium is pending or, to the best of Borrower’s knowledge, threatened against the Approved Subdivision (or any portion thereof) which would impair the use, occupancy or full operation of the Approved Subdivision in any manner whatsoever.

(f) Construction and Development Documents. True, correct and complete copies of all construction, development and project documents in connection with the development, construction or provision of labor, materials or design or supervisory services with respect to the Improvements have been furnished to the Lender prior to the Approved Subdivision Closing Date. All such documents and instruments are in full force and effect and neither Borrower nor any other party thereto is in material default thereunder.

(g) Governmental and Private Approvals. All governmental or regulatory orders, consents, permits, authorizations, licenses and approvals required for the construction and, to the extent available given the status of construction, the use and operation of the Approved Subdivision have been obtained and are in full force and effect. No additional governmental or regulatory actions, filings or registrations with respect to the Improvements, and no approvals, authorizations or consents of any trustee or holder of any Indebtedness or obligation of Borrower, are required for the due execution, delivery and performance by Borrower of the Loan Documents to be executed by them.

(h) Personal Property. Borrower is now and shall continue to be the sole owner of the personal property Collateral free from any Lien of any kind whatsoever, except for Liens in favor of the Lender.

(i) Subdivision Budget. Each Budget for each of the Approved Subdivisions is a true, correct and accurate estimate of all Project Costs for such Approved Subdivision.

(j) Special Assessments. Except for any special assessment which is a Permitted Exception, no special assessments have been imposed upon or are outstanding against any of the Approved Subdivisions and Borrower has not received any notice that any such special assessment is being contemplated by any Governmental Authority having jurisdiction over the Approved Subdivisions.

5.3 Representations and Warranties Upon Requests for Advances. Each request for an Advance will be a representation and warranty by Borrower to Lender that all of the representations and warranties set forth in this Article 5 and in the other Loan Documents are true, correct and complete as of the date of the Advance request and as of the date that the Advance is made and, except in each such case as otherwise disclosed to Lender and approved by Lender in writing.

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5.4 Representations and Warranties Upon Delivery of Financial Statements, Documents, and Other Information. Each delivery by of financial statements, other documents, or information after the date of this Agreement (including, without limitation, documents and information delivered in obtaining an Advance) will be a representation and warranty to Lender by Borrower that such financial statements, other documents, or information (other than financial projections) are true, correct and complete in all material respects, that there are no material omissions therefrom that result in such financial statements, other documents, or information being materially incomplete, incorrect, or misleading as of the date thereof, and that such financial statements accurately present the financial condition and results of operations of the subject thereof as at the dates thereof and for the periods covered thereby. Each delivery by Borrower of financial projections is a representation and warranty to Lender by such Person that such financial projections have been prepared in accordance with the requirements in this Agreement, are complete in all material respects as of the date thereof, and are based on such Person’s best good faith estimates, compiled and prepared with due diligence, of the matters set forth therein.

ARTICLE 6

AFFIRMATIVE COVENANTS

Borrower shall comply with the following affirmative covenants at all times until such time as this Agreement has terminated or expired, the Loan has been paid in full and all other Obligations are paid and performed in full:

6.1 Existence. Borrower will continue to be a validly existing entity under the laws of the state in which it was organized and shall continue to be in good standing and authorized to do business in the jurisdiction of organization and in the state or states in which it owns any Collateral.

6.2 Books and Records; Access. Borrower (but without duplication) shall maintain a standard, modern system of accounting (including, without limitation, a single, complete, and accurate set of books and records of its assets, business, financial condition, operations, prospects, and results of operations) in accordance with GAAP. Borrower (but without duplication) shall maintain complete and accurate records regarding the Acquisition, development and construction of Units, Lots and Approved Subdivisions, including, without limitation, all construction contracts, architectural contracts, engineering contracts, field and inspection reports, applications for payment, estimates and analyses regarding construction costs, names and addresses of all contractors and subcontractors performing work or providing materials or supplies with respect to the development and construction of Units and Lots and Approved Subdivisions, invoices and bills of sale for all costs and expenses incurred by contractors and subcontractors in connection with the development and construction of Units and Lots, payment, performance and other surety bonds (if applicable), releases and waivers of lien for all such work performed and materials supplied, evidence of completion of all inspections required by any Governmental Authority, certificates of substantial completion, notices of

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completion, surveys, as-built plans, Approvals and Permits, Purchase Contracts, escrow instructions, records regarding all sales of Units and Lots, and all other documents and instruments relating to the Acquisition, development, construction and/or sale of Units. Each Borrower shall maintain the books and records required to be maintained pursuant to this Section for a period of time following payment in full of the Obligations at least equal to the statute of limitations period within which Lender would be entitled to commence an action with respect to the Obligations. During business hours, and upon reasonable prior notice, Borrower will give representatives of Lender access to Borrower’s assets, property, books, records, and documents and will permit such representatives to inspect such assets and property and to audit, copy, examine, and make excerpts from such books, records, and documents. Upon request by Lender, Borrower will also provide Lender with copies of the reports, documents, agreements, and other instruments described in this Section.

6.3 Special Covenants Relating to Collateral.

(a) Defense of Title. Borrower will defend the Collateral, the title and interest therein as represented and warranted in each Security Instrument and this Agreement, and the legality, validity, binding nature, and enforceability of each Lien and Encumbrance contained in each Security Instrument and the first priority of each Security Instrument against all matters, including, without limitation, (i) any attachment, levy, or other seizure by legal process or otherwise of any or all such Collateral; (ii) except for Permitted Exceptions with respect to any Deed of Trust, any Lien or Encumbrance or claim thereof on any or all such Collateral; (iii) any attempt to foreclose, conduct a trustee’s sale, or otherwise realize upon any or all Collateral under any Lien or Encumbrance, regardless of whether a Permitted Exception and regardless of whether junior or senior to the Security Instrument; and (iv) any claim questioning the legality, validity, binding nature, enforceability, or priority of any Security Instrument. Borrower will notify Lender promptly in writing of any of the foregoing and will provide such information with respect thereto as Lender may from time to time request.

(b) No Encumbrances. Borrower will not sell, assign, Transfer or otherwise dispose of or grant any option with respect to, or pledge or otherwise encumber, any of the Collateral or any interest therein or any fixtures thereof or proceeds thereof, except for (i) any Permitted Transfer and (ii) sales and transfers in connection with releases permitted pursuant to Section 2.7.

(c) Further Assurances. Borrower will execute and deliver such further instruments and will do and perform all matters and things necessary or expedient to be done or performed for the purpose of effectively creating, maintaining and preserving the Collateral and the Liens and Encumbrances of Lender on such Collateral.

(d) Utilities. Borrower will provide or cause to be provided all required telephone service, electric power, storm sewer (if required), sanitary sewer (if required) and water facilities for each Lot included in Eligible Collateral, and such utilities will be adequate to serve such Lots.

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(e) Contracts. Borrower will perform all of Borrower’s obligations under any contracts and agreements relating to the construction of Units and A&D Lot Improvements and will pay all amounts thereunder as and when due, except to the extent such amounts are contested in accordance with the definition of “Permitted Exceptions”. Borrower will be the sole owner of all Unit Plans and Specifications or, to the extent that Borrower is not the sole owner of such Unit Plans and Specifications, Borrower will have the unconditional right to use such Unit Plans and Specifications in connection with the construction of Units. Lender will not be restricted in any way in use of such Unit Plans and Specifications in connection with the construction of any Units, and Borrower will obtain all consents and authorizations necessary for the use of such Unit Plans and Specifications by Lender. Borrower will be the sole owner of all A&D Lot Development Plans and Specifications or, to the extent that Borrower is not the sole owner of such A&D Lot Development Plans and Specifications, Borrower will have the unconditional right to use such A&D Lot Development Plans and Specifications in connection with the construction of Approved Subdivisions. Lender will not be restricted in any way in use of such A&D Lot Development Plans and Specifications in connection with the construction of any A&D Lot Improvements, and Borrower will obtain all consents and authorizations necessary for the use of such A&D Lot Development Plans and Specifications by Lender.

(f) No Residential Use. All Approved Subdivisions, Lots and Units from time to time encumbered by a Deed of Trust are held only for construction and eventual sale to its first occupant upon or after release from the lien of the applicable Deed of Trust. Borrower (i) represents and warrants that Borrower has no intent to ever occupy any Unit as a residence or to lease or otherwise permit such occupancy of a Unit and (ii) agrees that Borrower will never so occupy, lease or permit occupancy of any Unit; provided, however, that Borrower may use and occupy Model Units solely for the purpose of maintaining a sales office and displaying such Units to prospective purchasers of Units.

(g) Flood Insurance. Unless insurance in accordance with Section 6.8(d) will first have been obtained, no Approved Subdivision will be located in an area that has been identified by the Secretary of Housing and Urban Development as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968.

(h) Compliance with Permitted Exceptions. Borrower will keep and maintain in full force and effect all restrictive covenants, development agreements, easements and other agreements with Governmental Authorities and other Persons that are necessary for the development, use and sale of each applicable Lot and Unit. Borrower will not default in any material respect under any such covenants, development agreements, easements and other agreements and will diligently enforce its rights thereunder.

(i) Model Complexes. Except as may be otherwise permitted under the applicable Loan Documents at the time the Lender has approved the inclusion of the Approved Subdivision, with respect to each Approved Subdivision in which a Borrower is constructing or marketing Units, Borrower will maintain an active complex of Model

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Units representing some of the Unit type(s) available for sale in such Approved Subdivision or will notify Lender that Borrower will be marketing Units from Models owned by Borrower in the same metropolitan area as the Approved Subdivision. If Models are located in the Approved Subdivision, Borrower will grant to Lender a first priority Deed of Trust covering such Model Units which will not be subject to release, until all corresponding plan types are sold pursuant to Section 2.7.

(j) Title Policy Endorsements. If required by Lender, Borrower shall provide (i) such continuation endorsements and date down endorsements to the Title Policies, in form and substance satisfactory to Lender, as Lender determines necessary to insure the priority of the Deeds of Trust as valid first liens on the Collateral; or (ii) an unconditional and irrevocable written commitment by the Title Company to issue such endorsements. Borrower agrees to furnish to the Title Company such surveys and other documents and information as Lender or the Title Company may require for the Title Company to issue such endorsements.

(k) Improvement Districts. Without obtaining the prior written consent of Lender, Borrower will not finalize or record the inclusion of all or any part of the Collateral in any community facilities district or other improvement district that was not already a part of the Lender approval when the Collateral was placed into the Borrowing Base. Borrower will give immediate notice to Lender of any notification or advice that Borrower may receive from any municipality or other third party of any action, contract or other proceeding the purpose of which is to include all or any part of the Collateral in a community facilities district or other improvement district. Upon prior written notice to Borrower, Lender shall have the right to file a written objection to the inclusion of all or any part of the Collateral in a community facilities district or other improvement district, either in its own name or in the name of Borrower, and to appear at, and participate in, any hearing with respect to the formation of any such district. Should the formation of one or more improvement districts be approved by Lender, Lender shall timely subordinate their interests under this Agreement to such improvement districts on terms and conditions reasonably acceptable to Lender, including without limitation, reduction in the Collateral Value of such Approved Subdivision.

6.4 Information and Statements. Borrower and Guarantor, as the case may be, will furnish to Lender the following:

(a) Annual Statements.

(i) Borrower. Within one hundred twenty (120) days after the close of each fiscal year of Borrower, beginning with the fiscal year ending December 31, 2006, unqualified, audited consolidated financial statements of Borrower, each certified by a nationally recognized independent certified public accounting firm reasonably acceptable to Lender, prepared in accordance with GAAP, including balance sheets as of the end of such fiscal year, statements of income and retained earnings, and a statement of cash flows, together with Borrower’s supplemental detailed schedule of Contingent Obligations, and setting forth in comparative form the balance sheet, income statement, retained earnings and cash flow figures

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for the preceding fiscal year. Provided, however, Borrower will not be required to deliver separate financial statements to the extent Borrower’s financial statements are consolidated with Guarantor and Guarantor’s financial statements have been delivered to Lender pursuant to Section 6.4(a)(ii).

(ii) Guarantor. Within one hundred twenty (120) days after the close of each fiscal year of Guarantor, beginning with the fiscal year ending December 31, 2006, unqualified, audited consolidated financial statements of Guarantor, each certified by a nationally recognized independent certified public accounting firm reasonably acceptable to Lender, prepared in accordance with GAAP, including balance sheets as of the end of such fiscal year, statements of income and retained earnings, and a statement of cash flows, together with Guarantor’s supplemental detailed schedule of Contingent Obligations, and setting forth in comparative form the balance sheet, income statement, retained earnings and cash flow figures for the preceding fiscal year. In the event a merger or consolidation pursuant to Section 8.1 occurs, as a condition precedent to such merger or consolidation, Lender may, in its sole and absolute discretion, require that the financial statements described in this Section 6.4(a) be audited.

(b) Quarterly Financial Statements. Within sixty (60) days after the close of each quarter of each fiscal year beginning with the quarter ending March 31, 2006, internally prepared financial statements for Borrower and Guarantor, prepared in accordance with GAAP in each case on a consolidated and consolidating basis (as applicable), including balance sheets as of the end of such quarter, statements of income and retained earnings, a statement of cash flows and a schedule of Contingent Obligations, in each case for the portion of the fiscal year ending with such fiscal period, all certified by an authorized officer of Borrower or Guarantor. All such financial statements shall set forth in comparative form figures for the preceding year end and the corresponding period in the preceding fiscal year. All such income statements shall reflect year-to-date figures. Provided, however, Borrower will not be required to deliver separate financial statements to the extent Borrower’s financial statements are consolidated with Guarantor and Guarantor’s financial statements have been delivered to Lender pursuant to this Section.

(c) Monthly Reports. Within twenty (20) days after the close of each month, the Borrowing Base Reports and the Collateral Certificates.

(d) Annual Business Plan. Within one hundred twenty (120) days after the close of each fiscal year beginning with the fiscal year ending December 31, 2006, an updated consolidated business plan for Borrower and Guarantor for the twelve (12) month period following the close of each fiscal year.

(e) Other Reports. As and when requested by Lender, such other periodic reports, documents, and schedules as may reasonably be requested by Lender from time to time including without limitation the most recently filed federal income tax return of Borrower and/or Guarantor.

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(f) Environmental Incident Reports. As soon as possible and in any event within ten (10) days after receipt by Borrower, a copy of any written notice or claim to the effect that Borrower is or may be liable to any Person as a result of the release of any toxic or hazardous waste or substance into the environment.

(g) Financial Covenant Compliance Information. Concurrently with the delivery of the quarterly financial statements and reports required by Borrower and Guarantor pursuant to Section 6.4(b), a Compliance Certificate in the form of Exhibit B, together with detailed worksheets, schedules and calculations of Borrowers and Guarantor with respect to the financial covenants, (collectively, the “Compliance Certificate”) signed by an authorized officer of Borrower, certifying among other things, that (i) the information contained in and attached to the Compliance Certificate are true, correct and complete in all material respects, (ii), the financial reports delivered to Lender are true, correct and complete in all material respects, (iii) such information and reports have been prepared in accordance with GAAP, and (iv) each of the financial covenants set forth in Article 7 continue to be satisfied. Lender will promptly deliver to Lender any financial statements, reports and Compliance Certificates (together with any detailed worksheets, schedules and calculations attached thereto) received by Lender from Borrower pursuant to this Section 6.4.

(h) Other Items and Information. Borrower shall also provide such other information concerning Borrower, the Approved Subdivisions, and the assets, business, financial condition, operations, prospects, and results of operations as Lender reasonably requests from time to time.

6.5 Law; Judgments; Material Agreements; Approvals and Permits. Borrower will comply with all laws, ordinances, regulations and rules (federal, state and local) and all judgments, orders and decrees of any arbitrator, other private adjudicator, or Governmental Authority relating to Borrower or its respective assets, businesses or operations and Borrower will comply in all material respects with all material agreements, documents and instruments to which Borrower is a party or by which Borrower is bound or affected. Borrower agrees that, except for normal construction corrections occasioning temporary noncompliance which are corrected by Borrower with diligence and without substantial expense, Borrower will comply with all laws, ordinances, regulations, and rules (federal, state, and local) and all judgments, orders, and decrees of any arbitrator, other private adjudicator, or Governmental Authority relating to Borrower, any Approved Subdivisions (and any Lots and Units contained therein), any other Collateral or the other assets, business, or operations of Borrower. Borrower shall comply in all material respects with all material agreements, documents, and instruments to which Borrower is a party or by which Borrower, or any Approved Subdivisions (and any Lots or any Units contained therein), or any of the other assets of Borrower, are bound or affected. Borrower shall also comply with all Requirements (including, without limitation, as applicable, requirements of the Federal Housing Administration and the Veterans Administration) and all conditions and requirements of all Approvals and Permits. Borrower, at its own respective expense, will obtain and maintain in effect from time to time all Approvals and Permits required for the business activities and operations then being conducted by Borrower and as may be required to enable it to comply with its obligations hereunder and under the other Loan Documents.

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6.6 Impositions and Other Indebtedness. Except for amounts being contested as provided in clause (b) of the definition of Permitted Exceptions, Borrower will pay and discharge (i) before delinquency all Impositions affecting it or its assets; (ii) when due all lawful claims (including, without limitation, claims for labor, materials, and supplies), which, if unpaid, might become a Lien or Encumbrance upon any of its assets; and (iii) all its other Indebtedness, when due.

6.7 Assets and Property. Borrower will maintain, keep, and preserve all of its assets (tangible and intangible) necessary or useful in the proper conduct of its business and operations in good working order and condition, ordinary wear and tear excepted.

6.8 Insurance. Borrower, at its expense, shall obtain and deliver to Lender policies of insurance with respect to each Approved Subdivision providing the following:

(a) Policies of insurance evidencing bodily injury, death or property damage liability coverage in amounts not less than $10,000,000.00 (combined single limit), shall be in effect with respect to such Borrower. Such policies must be written on an occurrence basis so as to provide blanket contractual liability, broad form property damage coverage, and coverage for products and completed operations.

(b) “Special Cause of Loss” insurance on the Improvements in an amount not less than the full insurable value on a replacement cost basis of the insured Improvements and personal property related thereto. During the construction period, such policy shall be written in the so-called “Builder’s Risk Completed Value Non-Reporting Form” (or “Reporting Form” if the Improvements are a single family residential development) with no coinsurance requirement and shall contain a provision granting the insured permission to occupy. Such policy shall not contain an exclusion for terrorist losses.

(c) If applicable, evidence of worker’s compensation insurance coverage satisfactory to Lender.

(d) If an Approved Subdivision, or any part thereof, lies within a “special flood hazard area” as designated on maps prepared by the Department of Housing and Urban Development, a National Flood Insurance Association standard flood insurance policy, plus insurance from a private insurance carrier if necessary, for the duration of the Loan in the amount of the full insurable value of the Improvements within such Approved Subdivision.

(e) Such other insurance as Lender may require, which may include, without limitation, errors and omissions insurance with respect to the contractors, architects and engineers, earthquake insurance, rent abatement and/or business loss.

All insurance policies Borrower is obligated to provide under this Section 6.8 shall (i) be issued by an insurance company having a rating of “A” VII or better by A.M. Best Co., in Best’s Rating Guide, (ii) name Lender, as an additional insured on all liability insurance and as mortgagee and lender loss payee on all casualty insurance, (iii) provide that Lender is to receive thirty (30) days written notice prior to non-renewal or cancellation, (iv) be evidenced by a certificate of insurance to be held by Lender, and (v) be in form and amounts acceptable to Lender.

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6.9 ERISA.

(a) Borrower and the ERISA Affiliates each will take all actions and fulfill all conditions necessary to maintain any and all Plans in substantial compliance with applicable requirements of ERISA, the Code and applicable foreign law until such Plans are terminated, and the liabilities thereof discharged, in accordance with applicable law.

(b) No Plan will have any “accumulated funding deficiency” (within the meaning of Section 412 of the Code), which deficiency could, with respect to any Borrower, cause a Material Adverse Change.

(c) Borrower and the ERISA Affiliates each will take and fulfill all actions and conditions necessary to maintain, and will maintain, substantial compliance of any and all employee benefit plans established or maintained, or to which contributions are made, by Borrower and the ERISA Affiliates with the requirements of ERISA and the rules and regulations adopted thereunder, in each case as in effect at the time.

(d) Borrower and each ERISA Affiliate shall continue to qualify at all times as an “operating company” pursuant to United States Department of Labor Regulation Section 2510.3-101(c), and such Persons shall otherwise act to ensure that their respective assets, are not “plan assets” of any employee benefit plan subject to the fiduciary responsibility requirements of ERISA, or, subject to receipt of prior notice by Lender’s consent thereto, such Persons shall otherwise ensure that an exemption from Section 406 of ERISA is available to cover the loan transaction with respect to each portion thereof.

6.10 Special Covenants Relating to Lots and Units.

(a) Change Orders. Borrower agrees that without Lender’s prior written consent in its absolute and sole discretion, it may not (i) amend or modify the A&D Lot Development Budget or Unit Budget, or (ii) make or permit any material amendments or modifications of the construction contracts for development of Lots, the A&D Lot Development Plans and Specifications, Units, the Unit Plans and Specifications or any other agreements, documents, or instruments relating to development of an Approved Subdivision and Units therein. Notwithstanding the provisions of this Section 6.10, Borrower shall not be required to obtain Lender’s consent to any individual amendment or modification of such construction contract(s), the A&D Lot Development Plans and Specifications, Unit Plans and Specifications, the A&D Lot Development Budget and the Unit Budget, or any other agreements, documents, or instruments relating to construction of the Approved Subdivision if the result (when aggregated with all other increases) is an increase of the A&D Lot Development Budget or the Unit Budget, as applicable, equal to or less than 5% of the total original A&D Lot Development Budget or the Unit Budget, as applicable, for the particular Approved Subdivision.

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(b) Certain Information Relating to Approved Subdivision. Borrower agrees that it will provide to Lender, upon Lender’s request (i) the actual costs, expenses, and fees incurred by Borrower for labor and other work performed on the A&D Lot Improvements and Units and for materials incorporated in the A&D Lot Improvements and Units or suitably stored onsite as indicated by bills, invoices, receipts, statements, vouchers, or other written evidence satisfactory to Lender showing the costs, expenses, and fees incurred; and (ii) the amounts allocated to such labor, work, and materials in the line items in the A&D Lot Development Budget and Unit Budget multiplied by the percentage of completion of such labor, work, and materials. Materials will be “suitably” stored onsite only if they are adequately stored and safeguarded to protect against theft and damage and, if required by Lender, are insured against loss, theft, and damage under insurance policies naming Lender as loss payee and complying with the requirements of Section 6.8. Lender, in its absolute and sole discretion, may permit to be included in the Lot Collateral Value and Unit Collateral Value a portion of the costs of materials stored offsite if Borrower shall have supplied to Lender: (i) evidence satisfactory to Lender that such material is included in the coverage of the insurance policies required under Section 6.8 of this Agreement; (ii) evidence satisfactory to Lender from the seller or fabricator of such material that, upon payment, ownership thereof will vest in Borrower free of any liens or claims of third parties; (iii) evidence satisfactory to Lender that such material is satisfactorily stored to protect against theft or damage or if stored at a location other than a location owned and operated by Borrower, (iv) evidence satisfactory to Lender that such material is stored in a bonded warehouse or storage yard approved by Lender and the warehouse or yard has been notified that Lender has a security interest in the subject materials, and (v) Lender shall have received from Borrower the original warehouse receipt

6.11 Title Insurance; Title Insurance Claims. Lender may determine from time to time the allocation of title insurance between parcels of Collateral, and the amount of title insurance coverage that Borrower is required to provide pursuant to Title Policies and Lender may enter into such agreements with each Title Company as Lender reasonably deems appropriate, including, without limitation, aggregation agreements, which shall contain such terms and conditions as Lender may reasonably require. Lender may, from time to time, in its reasonable discretion, (a) require endorsements to Title Policies, including, without limitation, endorsements insuring against any mechanics’, materialmen’s, or other Liens and Encumbrances affecting the Collateral; (b) require co-insurance with respect to the Title Policies; and/or (c) disapprove title insurance companies and require that Borrower obtain Title Policies from other title insurers acceptable to Lender. Lender may require separate Title Policies with respect to each Approved Subdivision. Borrower acknowledges that pursuant to aggregation agreements, Title Policies issued by the same Title Company may be grouped together to create a single insurance coverage amount that applies to all Collateral covered by such Title Policies. If a Title Company pays any claims under any Title Policies and if Lender advises Borrower that Lender has determined that the remaining coverage is insufficient, Borrower will take any and all action necessary to cause the total coverage amount under the Title Policies to remain at or to be increased to the original liability notwithstanding the payment of such claim or claims, including, without limitation, providing any supplemental Title Policies or endorsements or reinsurance agreements if requested by Lender, the cost of which will be paid by Borrower. Upon payment of any such claims, Borrower will obtain and provide to Lender any and all documentation reasonably requested by Lender to ensure that the maximum coverage provided for hereunder will not have been diminished as a result of the payment of such claims.

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6.12 Rights of Inspection; Correction of Defects.

(a) Generally. Lender and its respective agents, employees, and representatives will have the right at any time and from time to time to enter upon the Collateral in order to inspect the Collateral and all aspects thereof, at Borrower’s cost; provided, however, any Person entering upon the Collateral will observe and comply with Borrower’s safety requirements. Each Approved Subdivision and Lots therein may be inspected once each month unless Lender reasonably determines that more frequent inspections are necessary. Lender shall inspect approximately twenty-five percent (25%) of all Units at Borrower’s expense on a quarterly basis unless Lender reasonably determines that more frequent inspections are necessary. If Lender, in its reasonable judgment, determines that any materials or work do not conform with the respective Unit Plans and Specifications or the A&D Lot Development Plans and Specifications, as applicable, in all material respects or with any applicable Requirements or are otherwise not in conformity with sound building practice, Lender will have the right to stop the work and to order replacement or correction of any such materials or work regardless of whether or not such materials or work have theretofore been incorporated in the Unit, regardless of whether Lender’s representatives have previously inspected such work or materials, and regardless of whether Lender has previously made Advances to pay for such work or materials. Borrower will promptly make such replacement or correction.

(b) No Right to Rely. All inspections by Lender or on behalf of Lender, approvals of Advance Requests by Lender and other actions by Lender in connection therewith are for the sole purpose of protecting the security of Lender and are not to be construed as a representation by Lender that there has been compliance with the Unit Plans and Specifications or the A&D Lot Development Plans and Specifications, the Loan Documents, this Agreement, the applicable Requirements, or that the Units or Lots are free of defects in materials or workmanship. No such inspections or review will limit any of the rights and remedies of Lender pursuant to this Agreement or the other Loan Documents, including, without limitation, the right to require compliance with Sections 6.10 and 6.11. Borrower may make or cause to be made such other independent inspections as Borrower may desire for its own protection. Based on such inspections, Lender may adjust the Eligible Collateral, Unit Collateral Values, Lot Collateral Values, Maximum Allowed Advances and other calculations pursuant to this Agreement.

(c) Inspector(s). Lender may employ outside inspectors to perform some or all of the inspection duties set forth in this Section 6.12 and may also elect to have its own employees perform some or all of such inspection duties and review the reports of outside inspectors.

(d) Miscellaneous. Any inspections or determinations made by Lender or lien waivers, receipts, or other agreements, documents, and instruments obtained by Lender are made or obtained solely for Lender’s own benefit and not in any way for the benefit or protection of Borrower. Lender may accept and rely on any information from an

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architect, any other Person providing labor, materials, or services for Units or Approved Subdivisions, Borrower or any other Person as to labor or materials furnished or incorporated in the Units or the Approved Subdivisions and the cost and payment therefor and as to all other matters relating to construction of the Units and the A&D Lot Improvements without the necessity of verifying such information. Lender will have no obligation to Borrower to ensure compliance by contractor, engineer, or any other Person in carrying out construction of the Units or A&D Lot Improvements.

6.13 Verification of Costs. Lender will have the right at any time and from time to time to review and verify all costs, expenses, and fees in each Unit Budget and each A&D Lot Development Budget. Based on its review and verification of costs, expenses, and fees in each Unit Budget and each A&D Lot Development Budget, Lender will have the right to (a) adjust any and all such budgeted amounts for purposes of determining Collateral Values of Eligible Collateral and (b) reduce or increase the applicable Collateral Values.

6.14 Use of Proceeds of Advances. Borrower will use proceeds of Advances only for the purposes described in Section 2.2(c).

6.15 Further Assurances. Each Borrower will promptly execute, acknowledge, and deliver such additional agreements, documents, and instruments and do or cause to be done such other acts as Lender may reasonably request from time to time to better assure, preserve, protect, and perfect the interest of Lender in the Collateral and the rights and remedies of Lender under this Agreement and the other Loan Documents. Without limiting the foregoing, to the extent that Lender determines from time to time that additional Deeds of Trust, amendments to Deeds of Trust, financing statements, subordinations, and other documents are required in order to perfect all Liens and Encumbrances in favor of Lender, and cause all Collateral encumbered by any of the Deeds of Trust to be subject only to Permitted Exceptions, Borrower will execute and deliver such documents, instruments and other agreements as Lender may request.

6.16 Costs and Expenses of Borrower’s Performance of Covenants and Satisfaction of Conditions. Borrower will perform all of its obligations and satisfy all conditions applicable to it under this Agreement and the other Loan Documents at its sole cost and expense.

6.17 Notices with Respect to any Approved Subdivision. Borrower will deliver to Lender within ten (10) Business Days of receipt any notice of default, non-compliance, suspension, termination or any other notice with respect to any Approvals and Permits, contracts, agreements, bonds (i.e., performance bonds, completion bonds or payment bonds), letters of credit, or with respect to any Permitted Exceptions related to any Approved Subdivision, or any off-site improvements related to any Approved Subdivision, including without limitation, any such notice with respect to any subdivision improvement agreement.

6.18 Notification of Certain Matters. Borrower will promptly disclose to Lender the occurrence of (a) any default by Borrower under or pursuant to the terms and conditions of any Indebtedness for borrowed money owed by Borrower to any Person, whether now existing or hereafter arising; (b) the occurrence of any event or other circumstance of which Borrower has knowledge and that with the giving of notice or the passage of time would constitute a default referred to in clause (a) above; (c) any Material Adverse Change; and (d) any change in the

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Requirements of any Governmental Authority that would materially and adversely affect Borrower’s ability to develop Approved Subdivisions and Units or sell Units or Lots or the cost of construction thereof. Borrower further covenants to keep Guarantor informed of Borrower’s financial condition and business operations, the condition and use of the Collateral, and all other circumstances which may affect Borrower’s ability to pay or perform its obligations under the Loan Documents to which it is a party.

6.19 Maintain Business.

(a) Maintain Business. Each Borrower shall continue to engage primarily in the business being conducted by such Borrower as of the date of this Agreement (or the date of such Borrower’s admission hereunder) at all times during the term of the Loan.

(b) Trade Names. At the request of Lender from time to time, Borrower shall execute a certificate in form satisfactory to Lender listing the trade names or fictitious business names under which Borrower intends to operate any Collateral or any business located thereon and representing and warranting that Borrower does business under no other trade names or fictitious business names with respect to any Collateral. Borrower shall immediately notify Lender in writing of any change in said trade names or fictitious business names, and will, upon request of Lender, execute any additional financing statements and other certificates necessary to reflect the change in trade names or fictitious business names.

(c) Separate Records. Borrower will maintain and prepare all of its books, records, financial statements, financial reports and bank accounts separate from those of its Affiliates, any constituent party and any other person or entity, and Borrower will file its own tax returns unless required otherwise by applicable law. Borrower shall maintain its books, records and resolutions and agreements as official records.

(d) Separate Entity. Borrower will at all times hold itself out to the public as a legal entity separate and distinct from any other entity (including any Affiliate of the Borrower or any constituent party of the Borrower), shall correct any known misunderstanding regarding its status as a separate entity, shall conduct business in its own name, shall not identify itself or any of its Affiliates as a division or part of the other and shall maintain and utilize separate invoices and checks.

6.20 Borrower Equity Requirement. Borrower shall contribute and maintain sufficient funds with respect to each of the Approved Subdivisions as necessary in order to satisfy the loan balancing requirements of Section 3.14.

ARTICLE 7

FINANCIAL COVENANTS

The following financial covenants shall be applicable to WLH until this Agreement has terminated or expired, the Loan has been paid in full, and all other Obligations are paid and performed in full and all obligations of Lender arising under the Loan Documents have terminated:

7.1 Minimum Tangible Net Worth Covenant. WLH will maintain, on a consolidating basis, a minimum Tangible Net Worth equal to or greater than: (a) $200,000,000.00 plus (b) fifty percent (50%) of WLH’s Net Income on a cumulative basis commencing as of June 30, 2004.

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7.2 Leverage Ratio. WLH will maintain, on a consolidating basis, at all times a ratio of (a) Total Liabilities to (b) Tangible Net Worth that is equal to or less than 3.25 to 1 as of the Effective Date and at all times thereafter. As used herein, the term “Total Liabilities” shall mean the total book value of WLH’s assets less Tangible Net Worth, all as determined in accordance with GAAP.

7.3 Interest Coverage Ratio. As of the Effective Date and at all times thereafter, WLH will at all times, maintain, on a consolidating basis, an interest coverage ratio of (a) EBITDA to (b) Interest Incurred which is equal to or greater than 2.0 to 1 on a rolling four-fiscal quarter basis, as determined as of the end of each fiscal quarter of WLH.

7.4 Minimum Liquidity. WLH shall maintain, on a consolidating basis, at all times minimum Available Liquidity which is equal to or greater than Ten Million Dollars ($10,000,000).

7.5 Conformance to GAAP; Consolidation. Except to the extent specifically provided otherwise, all financial covenants and WLH’s compliance therewith shall be determined in conformance to GAAP (including requirements that assets be valued at the lower of cost or market value). Any other provision of this Agreement to the contrary notwithstanding, all Financial Covenant tests will be measured and determined on a consolidated basis. Lender shall test compliance with the Financial Covenants set forth in this Section on a quarterly basis beginning with the quarter ending March 31, 2006, and Borrower shall provide Lender with a Compliance Certificate with respect thereto in accordance with Section 6.4(h).

ARTICLE 8

NEGATIVE COVENANTS

The following negative covenants shall be applicable to Borrower until this Agreement has terminated or expired, all obligations of Lender arising under the Loan Documents have terminated, the Loan has been paid in full, and all other Obligations are paid and performed in full:

8.1 Fundamental Changes. Neither Borrower nor any Guarantor shall dissolve or liquidate, or become a party to any merger or consolidation, or acquire by purchase, lease or otherwise all or substantially all of the assets of or ownership interest in any Person; provided, however, that the foregoing shall not operate to prevent a transaction (a) otherwise prohibited pursuant to this Section 8.1 but that results in all Obligations being paid and performed in full and the termination of this Agreement and the commitment of Lender to make Advances of the Loan, (b) with respect to any Borrower, the assets of such Borrower have been sold and released pursuant to the terms and conditions of this Agreement, such Borrower no longer owns any Collateral, the Loan has terminated with respect to such Borrower, and such Borrower is to be dissolved as a result thereof pursuant to the terms and conditions of its formation documents, or (c) the formation or addition of any joint ventures, (each a “New Borrower”); provided that Lender determines, in its sole and absolute discretion, that the following conditions are satisfied:

(a) No Defaults. No Event of Default or Unmatured Event of Default shall have occurred and be continuing, and Borrower shall be in compliance with the Financial Covenants set forth in this Agreement.

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(b) Financial Condition. Lender shall be satisfied: (i) with the financial condition of New Borrower and (ii) that the Financial Covenants of Borrower set forth in this Agreement or in other Loan Document continue to be satisfied.

(c) No Material Adverse Change. Lender shall have determined that no Material Adverse Change has occurred since the most recent audited, consolidated financial statements and reports of Borrower provided to Lender.

(d) Documents. Lender shall have received the following agreements, documents, and instruments, each duly executed by the parties thereto and in form and substance satisfactory to Lender and its legal counsel:

(i) Formation Documents. With respect to New Borrower, the respective managing member(s) or manager(s) thereof, and such other entities as may be requested by Lender in order to confirm that each such Person is authorized to execute, deliver, and perform their respective obligations under such Loan Documents: (A) the certificate of formation, organization, or partnership or the articles of incorporation (as applicable), (B) the operating agreement, partnership agreement or bylaws (as applicable), (C) good standing certificates, and (D) certified copies of resolutions of New Borrower’s board of directors, members or partners (as applicable) authorizing New Borrower to execute, deliver, and perform its obligations under the Loan Documents and any other documents to be executed and delivered by New Borrower or any other Person in connection herewith and certifying the names and signatures of the officers authorized to execute the Loan Documents;

(ii) Opinions. Lender shall have received and approved a legal opinion satisfactory to Lender from counsel for Borrower; and

(iii) Loan Documents. Lender, WLH and New Borrower shall have executed and delivered to Lender such additional Loan Documents, or amendments, addendums or other modifications thereto, as may be required by Lender, and shall have obtained and delivered to Lender any new Guaranties and any Guarantor and third party consents, reaffirmations or other agreements, as Lender may require.

(e) Other Items or Actions. Lender will have received and approved such other information, agreements, documents, consents, certificates (including, if required by Lender, bring-down certificates), and instruments, and New Borrower will have performed such other actions, as Lender may reasonably require.

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(f) Title Policy Endorsements. To the extent required by Lender, New Borrower shall provide (i) such continuation endorsements and date down endorsements to the Title Policies, in form and substance satisfactory to Lender, as Lender determines necessary to insure the priority of the Deeds of Trust as valid first liens on the Collateral; or (ii) an unconditional and irrevocable written commitment by the Title Company to issue such endorsements. New Borrower agrees to furnish to the Title Company such surveys and other documents and information as Lender or the Title Company may require for the Title Company to issue such endorsements.

(g) Fees and Costs. Lender shall have received all out-of-pocket costs, expenses and disbursements (including attorneys’ fees and legal expenses actually incurred by the Lender in connection with the formation of New Borrower).

8.2 Prohibition on Sales of Assets; Transfers. Except for the provisions set out in Section 2.7 or with respect to any Permitted Transfer, no Borrower shall convey, sell, lease, encumber, Transfer or otherwise dispose of to any Person, in one transaction or a series of transactions, any portion of any Approved Subdivision or all or substantially all of its business or property. In addition, no Borrower shall convey, sell, lease, encumber, Transfer or otherwise dispose of to any of its Affiliates, in one transaction or a series of transactions, any of its business or property if the effect of such transaction would be to cause Borrower to violate the Financial Covenants or would otherwise cause or contribute to a Material Adverse Change. However, the restrictions in this Section 8.2 do not preclude the Liens and Encumbrances created pursuant to this Agreement and the other Loan Documents.

8.3 Prohibition on Amendments to Organizational Documents. No Borrower shall amend, modify, restate, supplement, or terminate its Organizational Documents, including without limitation, its articles of organization or formation (as applicable) or its operating agreement, if such change would result in a Material Adverse Change or would result in a violation of any of the representations, warranties, or covenants set forth in any Loan Document.

8.4 Lines of Business. No Borrower (directly or through any subsidiaries or other Persons) shall engage to any substantial extent in any line or lines of business activity other than (a) the business of acquiring, entitling, developing, constructing, marketing and selling Subdivisions (and Lots and Units contained therein); (b) any business directly related thereto; (c) other lines of business actively engaged in as of the date hereof; and (d) other lines of business related to homebuilding that have been previously approved in writing by Lender in its reasonable discretion. Except as permitted pursuant to Section 8.1, no Borrower will cease to engage in the business of entitling and selling Subdivisions (and the Lots contained therein).

8.5 Distributions. No Distribution by any Borrower shall be made or accepted by any Person at any time if, after giving effect to such Distribution, (i) such Borrower would be rendered insolvent (either based on its Indebtedness exceeding its Tangible Net Worth or its inability to pay its debts as they become due), (ii) such Borrower would be unable to make the required payments under the Loan Documents or otherwise perform its Obligations, (iii) such Distribution would otherwise result in a Material Adverse Change or (iv) after giving effect to such Distribution, any of the Financial Covenants would be violated.

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8.6 Secondary Financing. No Borrower shall permit secondary financing on any of the Approved Subdivisions (or the Lots and Units therein), or any financing or Liens and Encumbrances with respect to any Ownership Interest in any Borrower (excluding the granting of a security interest therein in favor of Lender pursuant to this Agreement), without the Lender’s prior written consent. Lender shall not consider any request for secondary financing with respect to any Approved Subdivision unless the proposed secondary financing is provided by a lender acceptable to Lender and the terms and conditions of that proposed secondary financing are acceptable to Lender, including without limitation: (a) requirement of full Lien and payment subordination by such secondary lender; (b) requirement that no payments may be received by such lender in the event of an Unmatured Event of Default or Event of Default with respect to the Loan; (c) requirement that such lender must unconditionally release its lien against the Collateral upon demand by lender notwithstanding the failure of such lender to receive any payment with respect to such release; (d) an agreement by such lender to a prohibition against lender declaring a default or otherwise pursuing any remedy against any Borrower or the subject Collateral until such time as the Loan has been paid in full and the Commitment terminated; (e) requirement that seller financing shall be subject to a subordination and intercreditor agreement acceptable to Lender; and (f) requirement that all rights of repurchase, profit participation agreements, development agreements and CC&Rs shall be subordinated to the Deeds of Trust with subordination agreements acceptable to Lender.

8.7 Transactions with Affiliates. Other than arrangements and contracts in existence as of Effective Date and that have been disclosed to Lender in writing, no Borrower will enter into, or cause, suffer, or permit to exist, any arrangement or contract with any of its Affiliates, including, without limitation, any management contract, unless such transaction is on terms that are no less favorable to any such Borrower than those that could have been obtained in a comparable transaction on an arms’ length basis from a Person that is not an Affiliate.

ARTICLE 9

EVENTS OF DEFAULT

9.1 Events of Default. Each of the following (each, an “Event of Default”) will be an event of default which entitles Lender to exercise all of its rights and remedies under this Agreement, the other Loan Documents, and at law, including without limitation, the rights and remedies in Section 9.2:

(a) Payments.

(i) Failure to Pay Principal and Interest. Failure by Borrower to pay to Lender any interest payments within five (5) days after the same becomes due under this Agreement or any other Loan Document or the failure of Borrower to pay to Lender any principal payments as and when due (after expiration of all applicable notice and grace periods), including without limitation, any payment required pursuant to Section 2.4(b).

(ii) Failure to Pay at Maturity. Failure to pay all Obligations, including all outstanding principal amounts, accrued but unpaid interest, Other Amounts, and any other amounts which may be due pursuant to this Agreement or any other Loan Document, in full on the Maturity Date.

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(iii) Other Payments. Failure by Borrower to pay any amount (other than those payments identified in this Section 9.1) when due under this Agreement or any other Loan Document or, if not otherwise stated when due, the expiration of ten (10) days after written notice of such failure by Lender to Borrower.

(b) Specified Defaults. Failure of Borrower to comply with the requirements set forth in the following Sections: (i) Section 6.4 (financial reporting requirements), (ii) Article 7 (financial covenants); or (iii) and the negative covenants of Article 8; provided, however, in the event Lender determines that any default by Borrower of the foregoing sections is curable by Borrower, then Borrower shall have fifteen days after written notice from Lender thereof to cure such default.

(c) Other Loan Documents. The occurrence of an Event of Default (after expiration of the applicable notice and cure periods) pursuant to any other Loan Document.

(d) Other Defaults With Respect to Loans. Failure of any Borrower or any Guarantor (or any other Person who may be obligated with respect thereto pursuant to any Loan Document) to perform any obligation, or to comply with any term or condition applicable to such Person in this Agreement or any other Loan Document and not otherwise constituting an Event of Default, and the expiration of thirty (30) days after written notice of such failure is given by Lender to Borrower without such failure being cured; provided, however, that if (i) such failure cannot be remedied by the payment of money and cannot be remedied within such thirty (30) day period (as determined by Lender), (ii) Borrower promptly commences and diligently pursues at all times to remedy such failure, and (iii) such failure does not otherwise constitute a Material Adverse Change pending such cure (as determined by Lender), then Borrower shall have an additional period of time, not to exceed sixty (60) days, within which Borrower may remedy such failure.

(e) Representations and Warranties. Any representation or warranty set forth in this Agreement or the applicable Loan Documents or otherwise provided to Lender in connection with this Agreement or the Loan is materially incomplete, incorrect or misleading as of the date made or renewed.

(f) Failure to Maintain Insurance. Any of the insurance coverages required pursuant to Section 6.8 lapses or expires without being replaced by other insurance policies that comply with Section 6.8 prior to such lapse or expiration.

(g) Insolvency. Any Borrower or Guarantor, or any other Person who may become obligated under any Loan Document; (i) is unable or admits in writing its inability to pay its monetary obligations as they become due; (ii) makes a general assignment for the benefit of creditors; or (iii) applies for, consents to, or acquiesces in,

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the appointment of a trustee (other than a trustee under a deed of trust), receiver, or other custodian with respect to any material portion or all of the property of any Borrower or Guarantor, or in the absence of such application, consent, or acquiescence by any Borrower or Guarantor, a trustee, receiver, or other custodian is appointed for any Borrower or Guarantor or any or all of the property of any Borrower or Guarantor.

(h) Bankruptcy. Commencement of any case under the Bankruptcy Code (Title 11 of the United States Code, as may be amended or replaced by similar laws governing federal insolvency proceedings) or commencement of any other bankruptcy, arrangement, reorganization, receivership, custodianship, or similar proceeding under any federal, state, or foreign law by or against any Borrower or Guarantor; provided, however, with respect to any involuntary proceeding not initiated by any Person affiliated directly or indirectly with any Borrower or Guarantor, including, without limitation, any Affiliate of any Borrower or Guarantor, such commencement will not be an Event of Default so long as any such Borrower or Guarantor is in good faith contesting such involuntary proceeding, no order for relief has been entered against it, and such proceeding is dismissed within ninety (90) days after the commencement thereof.

(i) Material Adverse Change. Lender determines in good faith that a Material Adverse Change has occurred and is continuing twenty (20) days after written notice thereof by Lender.

(j) Dissolution, etc. Except as otherwise permitted pursuant to Section 8.1, the dissolution or liquidation of any Borrower or Guarantor or the taking of any action by any Borrower or Guarantor toward a dissolution or liquidation of such Borrower or Guarantor.

(k) Foreclosure Proceedings. Filing of any foreclosure proceeding, giving notice of a trustee’s sale, or any other action by any Person, other than Lender, to realize upon any of the Collateral under any Lien or Encumbrance on any or all of the Collateral, regardless of whether such Lien or Encumbrance is a Permitted Exception and regardless of whether junior or senior to the Security Instrument.

(l) Judgments. Any judgment or order for the payment of money that would result in a Material Adverse Change as determined by Lender, if rendered against any Borrower or Guarantor and either (i) enforcement proceedings are commenced by any creditor upon such judgment or order or (ii) such judgment or order is not vacated, stayed, satisfied, discharged or bonded pending appeal within thirty (30) days from the entry thereof.

(m) Rate Management Obligations. Nonpayment by any Borrower of any Rate Management Obligation when due or the breach by any Borrower of any term, provision or condition contained in any Rate Management Transaction or any transaction of the type described in the definition of “Rate Management Transactions,” whether or not any Lender or Affiliate of a Lender is a party thereto.

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(n) Claims. Any Borrower or any other Person on behalf of any Borrower claims that this Agreement or any Loan Document is not legal, valid, binding, and enforceable against any Borrower, that any lien, security interest, or other encumbrance securing any of the obligations under this Agreement or the other Loan Documents is not legal, valid, binding, and enforceable, or that the priority of any lien, security interest, or other encumbrance securing any of the obligations in this Agreement or the other Loan Documents is different than the priority represented and warranted in this Agreement or the other Loan Documents.

(o) Title Insurance. (i) If any Title Insurance Policy issued (A) reflects Liens or Encumbrances that are not Permitted Exceptions and were not otherwise approved in writing by Lender and such Liens or Encumbrances are not removed within thirty (30) days after written demand by Lender, (B) fails to contain endorsements requested by Lender and such endorsements are not included within thirty (30) days after written demand by Lender, or (C) is not issued to Lender within thirty (30) days after the Subdivision becomes an Approved Subdivision, or (ii) a Title Insurance Company becomes insolvent, bankrupt or otherwise unable to pay claims and the affected Title Insurance Policy is not replaced with another Title Insurance Policy approved by Lender within thirty (30) days after written demand by Lender therefor.

(p) Environmental Laws. Any Borrower shall (i) be the subject of any proceeding or investigation pertaining to the release by any Borrower or any other Person of any toxic or hazardous waste or substance into the environment, or (ii) violate any Environmental Law, which, in the case of an event described in clause (i) or clause (ii), could reasonably be expected to have a Material Adverse Change.

(q) Injunction. Any Person shall obtain an order or decree in any court of competent jurisdiction (a) enjoining or delaying the construction of the Improvements; or (b) enjoining or prohibiting the Lender, any of the Lender or any Borrower from carrying out the terms and conditions of any of the Loan Documents; in either case, if such order or decree is not vacated or stayed within thirty (30) days after the filing thereof.

(r) Forfeiture of Collateral. Formal charges are filed against any Borrower or any other Person under any federal, state, or municipal statute, law, or ordinance for which forfeiture of any of the Collateral is a potential penalty, or any Collateral is in fact so seized or forfeited (whether directly or as result of seizure or forfeiture of any Ownership Interest in any Borrower).

(s) Assignment. Any Borrower assigns this Agreement, any of the other Loan Documents, any Advance or any right to receive an Advance under this Agreement without the prior written approval of Lender.

(t) Cross-Default. Any default (after expiration of all applicable notice and cure periods) by any Borrower or any Guarantor with respect to any loan, credit facility, credit extension or other financial accommodation of Lender (or any Affiliate of Lender) to such Person, whether as an agent or as a lender, including without limitation, any corporate credit facility (secured or unsecured) in which Lender or any Affiliate of Lender has acted as an agent or has participated as a lender thereunder.

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9.2 Remedies. Upon the occurrence of any Event of Default (after the expiration of any applicable notice and cure periods) and at any time thereafter, for so long as such Event of Default is continuing:

(a) Termination of Commitments. If any Event of Default described in Sections 9.1(h) or (i) occurs with respect to Borrower, the obligations of Lender to make Loans hereunder shall automatically terminate without any election or action on the part of the Lender. If any other Event of Default occurs, may cause or declare any commitment of Lender to make Advances to be suspended or terminated, whereupon any obligation to make further Advances will immediately be suspended or terminated.

(b) Acceleration. If any Event of Default described in Sections 9.1(h) or (i) occurs with respect to Borrower, the Obligations shall immediately become due and payable without any election or action on the part of the Lender. If any other Event of Default occurs, the Required Lender may declare an Event of Default and/or declare any or all of the Obligations to be immediately due and payable in full, whereupon all of the principal, interest and other Obligations will forthwith become due and payable in full without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived.

(c) Delivery of Contracts, etc. Borrower will, upon request of Lender, deliver to Lender all surveys, plans and specifications, building permits, construction contracts and subcontracts, plats and other maps, lien releases, subdivision reports, annexation documents, declarant’s rights, marketing material and other documents, permits, licenses and contracts which are necessary to complete development, construction, marketing and sale of the Lots, and Borrower will, on request of Lender, assign to Lender such of Borrower’s rights thereunder as Lender may request.

(d) Enforcement of Rights. Lender may enforce any and all rights and remedies under this Agreement and the other Loan Documents, the Security Instruments and all other documents delivered in connection therewith and against any or all Collateral and may pursue all rights and remedies available at law or in equity, including without limitation, foreclosure with respect to any and all of the Collateral, and Borrower acknowledges and agrees that the Collateral located within the State of California constitutes mixed collateral under Section 9604 of the California Commercial Code, that Lender may foreclose upon same in such order and priority as Lender determines.

(e) Receivers. Without limiting any other rights and remedies to which they are entitled, Lender may, at its option, without notice to Borrower and without regard to the adequacy of the Collateral for the payment of the Obligations, appoint one or more receivers of the Collateral, and Borrower does hereby irrevocably consent to such appointment, with such receivers having all the usual powers and duties of receivers in similar cases, including the full power to maintain, sell, dispose and otherwise operate the Collateral upon such terms that may be approved by a court of competent jurisdiction.

(f) Payments. Lender may direct all escrow companies and closing Lenders to pay over to Lender directly all moneys to which Borrower is entitled and held by such parties in pending escrows.

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9.3 Collateral Protection; Completion of Construction. Lender may at any time, but will not be obligated to, make Protective Advances which will be deemed to be Advances hereunder. In addition, Lender may take all action necessary to complete the construction of any improvements and expend all sums necessary therefor. Lender may, but will not be obligated to, make Advances from time to time to pay all costs and expenses of such completion. All amounts so Advanced will be immediately due and payable by Borrower and will be added to the outstanding principal amount of all Advances. Lender will have no duty to account to Borrower for any expenditures they may incur in furtherance of their rights under this Section 9.3.

9.4 Secured by Collateral and Security Instruments. All Protective Advances, all other Advances by Lender, and all other charges, costs and expenses, including reasonable outside attorneys’ fees, incurred or paid by Lender in exercising any right, power or remedy conferred by this Agreement, the Security Instruments or any other Loan Document, or in the enforcement hereof, or in the protection of the Collateral or the completion of the Collateral, together with interest thereon at the Interest Rate, prior to the occurrence of an Event of Default or Unmatured Event of Default, and at the Default Rate thereafter, from the date advanced, paid or incurred until repaid shall be secured by each Security Instrument and each other Loan Document. Any Protective Advance will only occur through Lender or at Lender’s direction and will not be funded directly to Borrower or any of its Affiliates by Lender. Notwithstanding the foregoing, each Protective Advance and the charges, costs and expenses, including reasonable attorneys’ fees, incurred or paid by Lender in exercising any right, power or remedy conferred by this Agreement, the Security Instruments or any other Loan Document or in the enforcement thereof or in the protection of the Collateral or the completion of Collateral shall be charged to Borrower pursuant to Section 2.5.

9.5 Multiple Real and Personal Property Security. Borrower (and any Guarantor by execution of a Guaranty) hereby acknowledges and agrees that: (a) Lender is extending credit based upon both the financial statements of WLH and any such Guarantor and the values of the Collateral and that the Collateral may be located in different jurisdictions; and (b) from and after any Event of Default, Lender will be allowed, to the greatest extent permitted by applicable law, including the laws of the jurisdiction set out in Article 13, to pursue and realize all of the remedies available to it under any of the Loan Documents, at law, in equity, or otherwise, and simultaneously or consecutively, under any portion or all of the Collateral, in the sole discretion of Lender, including, without limitation, commencement of one or more actions in one or more jurisdictions for repayment of all or portions of the Obligations, for the separate or simultaneous sale or foreclosure of the Collateral or portions thereof, for the obtaining of judgments and/or deficiency judgments, for the seeking of injunctive relief and receiverships, and for maximum access to and realization from the Obligations and Collateral or portions thereof in such manner as Lender may deem in the interest of the Lender, and Borrower (and any Guarantor by execution of a Guaranty) hereby waive any requirement that any deficiency judgment proceeding be initiated or completed with respect to any other property constituting Collateral as a condition to commencing any enforcement proceeding against any party or any particular item of Collateral. Borrower (and any Guarantor by execution of a Guarantor) hereby expressly

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acknowledge and agree that various consents, waivers, agreements and limitations set forth in any of the Loan Documents, including the Security Instruments, were granted in recognition of the foregoing, and that all such waivers, consents and agreements will apply to each other Loan Document as though set forth therein. In addition to any other consents, waivers, agreements and limitations set forth in any of the Loan Documents, and without limiting the foregoing, Borrower (and any Guarantor by execution of a Guaranty) agree that, to the maximum extent permitted by applicable law, Lender may foreclose on and/or sell all properties serving as Collateral and located in the same state in any one or more counties where any of the properties in that state are located; any personal property located on real property encumbered by any Security Instrument may be foreclosed upon in the manner provided for, simultaneously with, or separate from, and as a part of the proceeding for foreclosure of the real property or in a separate proceeding; and Borrower (and any Guarantor by execution of a Guaranty) hereby waive, to the full extent permitted by law, the benefits of any “one-action rule” of any state which may be applicable to it or to any of the Collateral and hereby waive marshaling of assets for themselves and all other parties claiming by, through or under them.

9.6 Right of the Lender to Take Certain Actions; Power of Attorney. Without in any way limiting the Lender’s other rights and remedies under this Agreement and the other Loan Documents, Borrower hereby constitutes and appoints the Lender, or independent contractors selected by the Lender, as its true and lawful attorney-in-fact with full power of substitution, for the purposes of completing, securing, winterizing, preserving, protecting and otherwise acting with respect to the Approved Subdivisions and the Collateral, and of performing Borrower’s obligations under this Agreement and the other Loan Documents, in the name of Borrower, and hereby empowers said attorney-in-fact to enter onto the Approved Subdivisions and the Improvements to do any or all of the following, upon the occurrence of an Event of Default:

(a) To use any of the funds of Borrower, including any unused portion of the Aggregate Commitment, and any funds which may be held by the Lender under this Agreement or the other Loan Documents (including any impositions impounds, insurance impounds, loan balancing payments, insurance proceeds, condemnation proceeds or any other funds or amounts) for the purpose of effecting both substantial completion and final completion of the Improvements;

(b) To make such additions, changes and corrections in the Plans and Specifications and the other construction, development and project documents for each Approved Subdivision as shall be necessary or desirable to both Substantially Complete and finally complete the Improvements to the satisfaction of the Lender;

(c) To employ any contractors, subcontractors, agents, architects and inspectors required for said purposes;

(d) To employ attorneys to defend against attempts to interfere with the exercise of power granted hereby;

(e) To pay, settle or compromise all existing bills and claims which are or may be liens against the Approved Subdivisions and the Improvements or may be necessary or desirable for such completion of the Improvements or clearance of objections to or encumbrances on title;

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(f) To execute all applications and certificates in the name of Borrower, which may be required by any general contract, any subcontract or any other construction, development and project documents;

(g) To prosecute and defend all actions or proceedings in connection with the Approved Subdivisions and to take such action, require such performance and do any and every other act as is deemed necessary with respect to such completion of the Improvements which Borrower might do on its own behalf;

(h) To terminate any of the construction, development and project documents or other contractual arrangements with respect to any and all Approved Subdivisions and to let new or additional contracts with the same contractor(s) or others to the extent not prohibited by their existing contracts;

(i) To employ watchmen and erect security fences to protect the Approved Subdivisions from injury; and

(j) To take such action and require such performance as it deems necessary under any of the bonds or insurance policies to be furnished hereunder, to make settlements and compromises with the sureties or insurers thereunder, and in connection therewith to execute instruments of release and satisfaction.

It is understood and agreed that the foregoing power of attorney shall be deemed to be a power coupled with an interest which cannot be revoked until the repayment in full in cash of the Obligations and the termination of the Commitments. Borrower acknowledges that the Lender may (but is not obligated to) exercise any of the foregoing powers. All sums expended by the Lender or the Lenders for the foregoing purposes, or in the exercise of the foregoing rights and remedies (including attorneys’ fees and costs), shall be deemed to have been disbursed to and borrowed by Borrower and shall be evidenced and secured by the Loan Documents and all Collateral from time to time securing the Obligations.

9.7 Other Actions By Lender. Without in any way limiting Lender’s rights and remedies under this Agreement and the other Loan Documents, after an Event of Default, Lender may (but is not obligated to), and without releasing Borrower from any of its Obligations, make any payment or perform any act, covenant or condition that Borrower is required to pay or perform under any of the Loan Documents, in such manner and to such extent it may deem necessary or appropriate. In connection therewith, the Lender may (but is not obligated to):

(a) Enter upon and take possession of any or all of the Approved Subdivisions;

(b) Take such action that it may consider necessary or appropriate to keep any or all of the Approved Subdivisions and the Improvements in good condition and repair;

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(c) Appear and participate in any action or proceeding affecting or which may affect the security hereof or the rights or powers of the Lender;

(d) Satisfy any Lien or Encumbrance or alleged Tax, Other Tax, Lien or Encumbrance whether superior or junior to this Agreement; and

(e) In exercising such powers, pay necessary expenses (including attorneys’ fees and the fees of other necessary or desirable consultants). All sums expended by the Lender for the foregoing purposes, or in the exercise of the foregoing rights and remedies (including attorneys’ fees and costs), shall be deemed to have been disbursed to and borrowed by Borrower and shall be evidenced and secured by the Loan Documents and all Collateral from time to time securing the Obligations.

9.8 Application of Payments After Default. From and after the date on which the Lender has taken any action pursuant to this Article 9 and until all of the Obligations have been paid in full, any and all proceeds or other funds received by the Lender from (i) Borrower or any other Person, (ii) any sale or other disposition of any Collateral, or any part thereof, or (iii) the exercise of any other right or remedy by the Lender, shall, in each case, be applied as follows:

(a) First, to pay late charges and to pay or reimburse Lender for out-of-pocket costs, expenses and disbursements (including (i) attorneys’ fees and legal expenses actually incurred by the Lender in connection with exercising their rights and remedies, realizing on any Collateral or collecting any Obligations and (ii) Advances or disbursements made subsequent to an Event of Default (and subsequent to the obtaining of title to any or all of the Approved Subdivisions or any other Collateral by the Lender, the Lender or an entity on their behalf) by the Lender, the Lender or any of them, pursuant to the terms of this Agreement or any of the other Loan Documents);

(b) Second, to the repayment of all of the Obligations in any order determined by the Lender provided, however, that any such repayment shall be in accordance with the Pro Rata Share of each Lender; and

(c) The balance, if any, as required by law.

9.9 No Lender Obligations. If the Lender elects, as provided elsewhere in this Article 9, to continue with the construction of the Improvements, the Lender will not assume any liability to Borrower or any other Person for completing the Improvements or for the manner or quality of construction of the Improvements and Borrower expressly waives any such liability, except to the extent that such liability shall be caused directly by the gross negligence or willful misconduct of the Lender.

9.10 Cumulative Remedies. All of the rights and remedies under this Agreement and the other Loan Documents shall be cumulative and non-exclusive, to the extent permitted by law, and may be exercised successively, concurrently or in any order as the Lender shall elect.

9.11 Preservation of Rights. No disbursement of Advances shall constitute a waiver of: (a) any conditions to the Lender’s obligation to make further Advances; or (b) any Unmatured Event of Default or Event of Default that exists at the time such Advance is made;

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nor shall any such Advances have the effect of precluding the Lender from thereafter (i) declaring that any inability of Borrower to satisfy such conditions constitutes an Unmatured Event of Default or Event of Default or (ii) exercising its rights and remedies under this Agreement or the other Loan Documents due to any such Event of Default. No delay or omission of the Lender to exercise any rights or remedies under the Loan Documents shall impair such rights or remedies or be construed to be a waiver of any Event of Default or Unmatured Event of Default or an acquiescence therein. Any single or partial exercise of any right or remedy by the Lender under this Agreement or the other Loan Documents shall not preclude other or further exercises thereof or the exercise of any other right or remedy, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing and signed by the Lender, and then only to the extent such writing expressly provides therefor. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Lender until the Obligations have been paid in full.

ARTICLE 10

CONTRIBUTION BETWEEN BORROWERS

10.1 Transaction in Best Interests of Borrower; Consideration. The transactions evidenced by this Agreement and the other Loan Documents are in the best interests of each Borrower. The direct and indirect benefits to inure to each Borrower pursuant to this Agreement and the other Loan Documents constitute substantially more than “reasonably equivalent value” (as such term is used in Section 548 of the Bankruptcy Code) and “valuable consideration,” “fair value,” and “fair consideration,” (as such terms are used in any applicable state fraudulent conveyance law), in exchange for the benefits to be provided by each Borrower pursuant to this Agreement and the other Loan Documents and, but for the willingness of each Borrower to be jointly and severally liable for the Loans (and each Guarantor to guaranty the Loan), no Borrower would be able to obtain the financing contemplated hereunder which financing will enable each Borrower to have available financing to conduct and expand their business.

10.2 No Fraudulent Intent. Neither the execution and delivery of this Agreement or any of the other Loan Documents nor the performance of any actions required hereunder or thereunder is being undertaken by any Borrower or any Guarantor with or as a result of any actual intent by any of such Persons to hinder, delay or defraud any entity to which any of such Persons is now or will hereafter become indebted.

10.3 Solvency. As of the Closing Date and after giving affect to the transactions contemplated by this Agreement and the other Loan Documents, including all of the Advances made or to be made hereunder, none of the Borrowers nor any Guarantor is insolvent on a balance sheet basis, the sum of such Person’s assets exceeds the sum of such Person’s liabilities, each such Person is able to pay its debts as they become due, and each such Person has sufficient capital to carry on its business.

10.4 Bankruptcy Filing. None of the Borrowers nor any Guarantor is contemplating either the filing of a petition by it under any state or federal bankruptcy or insolvency laws or the liquidation of its assets or property, and neither any Borrower nor any Guarantor have any knowledge of any Person contemplating the filing of any such petition against it or any of such other Persons.

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10.5 Joint and Several. Each Borrower shall be obligated for all of the Obligations on a joint and several basis, notwithstanding which of Borrower may have directly received the proceeds of any particular Loan. Each Borrower acknowledges and agrees that, for purposes of the Loan Documents, Borrower constitute a single integrated financial enterprise and that each receives a benefit from the availability of credit under this Agreement to all of Borrowers. Each Borrower waives all defenses arising under the Laws of suretyship, to the extent such Laws are applicable, in connection with its joint and several obligations under this Agreement. Without limiting the foregoing, each Borrower agrees to the Joint Borrower Provisions set forth in Exhibit “C”, incorporated by this reference.

ARTICLE 11

MISCELLANEOUS

11.1 Survival of Representations. All representations and warranties of Borrower contained in this Agreement shall survive the making of the Loans herein contemplated.

11.2 Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation.

11.3 Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents.

11.4 Entire Agreement. The Loan Documents embody the entire agreement and understanding among Borrower, Guarantor and the Lender and supersede all prior agreements and understandings among Borrower, Guarantor and the Lender relating to the subject matter thereof (other than those contained in the fee letter agreement dated as of even date herewith by and among Borrower and Lender, which shall survive and remain in full force and effect during the term of this Agreement).

11.5 Lender Successors and Assigns; Participations. At any time either concurrently with or subsequent to the execution and delivery of this Agreement by Lender, Lender may assign to one or more banks or other financial institutions (each, an “Assignee”) portions of its rights and obligations as a Lender under this Agreement, provided, however, that (a) each such assignment shall be of a constant, not a varying, percentage of all rights and obligations under this Agreement, (b) the parties to each such assignment shall execute and deliver to Lender, for its acceptance such assignment documents as Lender may require, and (c) so long as no Event of Default has occurred and is continuing, such assignment by Lender shall be subject to Borrower’s approval, which approval shall not be unreasonably withheld or delayed so long as Lender remains as Agent and continues to hold no less than $10,000,000 of the Commitment. If any such approval is not withheld in writing with a statement of the reasons therefor within ten (10) days after Lender gives notice of its desire to make such an assignment, such approval shall be deemed given. Upon such assignment, and, to the extent that rights and obligations under this

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Agreement have been assigned, the Assignee shall have the rights and obligations of Lender under the Loan Documents and Lender shall be relieved of such obligations. Lender may also transfer interests by way of participations; provided, in each case (i) such selling party’s obligations to Borrower under this Agreement and the Loan Documents shall remain unchanged; (ii) such selling party shall remain solely responsible to the other parties hereto for the performance of such obligations; and (iii) parties to this Agreement and the Loan Documents shall continue to deal solely and directly with such selling party in connection with such selling party’s rights and obligations under this Agreement and the Loan Documents. In order to facilitate such assignments and participations, Borrower shall execute such further documents, instruments or agreement as Lender may reasonably require.

11.6 Expenses; Indemnification.

(a) Borrower shall reimburse the Lender for any costs, internal charges and out-of-pocket expenses (including reasonable attorneys’ fees and time charges of attorneys for the Lender, which attorneys may be employees of the Lender) paid or incurred by the Lender in connection with the preparation, negotiation, execution, delivery, syndication, distribution (including, without limitation, via the internet), review, amendment, modification, and administration of the Loan Documents. Borrower also agrees to reimburse the Lender, for any costs, internal charges and out-of-pocket expenses (including reasonable attorneys’ fees and time charges of attorneys for the Lender, which attorneys may be employees of the Lender) paid or incurred by the Lender, in connection with the collection and enforcement of the Loan Documents. Expenses being reimbursed by Borrower under this Section include, without limitation, the cost and expense of obtaining an appraisal of each parcel of real property or interest in real property described in the Deeds of Trust, which appraisal shall be in conformity with the applicable requirements of any law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, including, without limitation, the provisions of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, reformed or otherwise modified from time to time, and any rules promulgated to implement such provisions and costs and expenses incurred in connection with the Reports described in the following sentence.

(b) In addition, Borrower shall pay all taxes and assessments and all expenses, charges, costs and fees provided for in this Agreement or relating to the Loan or the construction of the Improvements, including any fees incurred for recording or filing any of the Loan Documents, title insurance premiums and charges, tax service contract fees, fees of any consultants, documentation and processing fees, printing, photostating and duplicating expenses, air freight charges, escrow fees, costs of surveys, premiums of hazard insurance policies and surety bonds, fees for any Appraisal, updated Appraisal and appraisal review, fees for market or feasibility studies required pursuant to the Loan Documents and costs, fees and expenses incurred in collecting the Obligations, realizing upon the Collateral and operating and selling any of the Approved Subdivisions after title thereto has been taken by the Lender, or by an entity controlled or owned by the Lender. Borrower and the Lender hereby authorize the Lender to make Advances to pay all such expenses, charges, costs and fees notwithstanding that Borrower may not have requested

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a disbursement of such amount. The Lender may make such Advances notwithstanding the fact that the Loans are not “in balance” or that an Unmatured Event of Default or Event of Default exists. The authorization hereby granted shall be irrevocable, and no further direction or authorization from Borrower shall be necessary for the Lender to make such Advances. However, the provision of this Section shall not prevent Borrower from paying such expenses, charges, costs and fees from its own funds. All such expenses, charges, costs and fees shall be Borrower’s obligation regardless of whether or not Borrower has requested and met the conditions for an Advance. The obligations on the part of Borrower under this Section shall survive the payment of the Obligations and the termination of this Agreement.

(c) Borrower hereby further agrees to indemnify the Lender, its respective Affiliates, and its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Lender or any Affiliate is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Loan hereunder except to the extent that they are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the party seeking indemnification.

(d) Without in any way limiting the foregoing, to the fullest extent permitted by law, Borrower agrees to protect, indemnify, defend and save harmless the Lender, and its directors, officers, employees, successors and assigns for, from and against any and all liability, expense or damage of any kind or nature, and for, from and against any suits, claims or demands, including legal fees and expenses on account of or arising out of: (i) this Agreement or the Loan Documents or otherwise in connection herewith or in connection with the Approved Subdivisions, the Improvements, any Collateral or any Obligation, including any suit, claim or demand arising out of the removal of, or failure to remove, any and all nuclear, toxic, radioactive or other hazardous waste from any of the Approved Subdivisions; (ii) any applicable CC&Rs, including any suit, claim or demand that Borrower or any other person has violated or failed to comply with any such CC&Rs; (iii) any applicable approvals by any Governmental Authority, including any suit, claim or demand that seeks to challenge any approval (including zoning approvals) issued or granted by any such Governmental Authority with respect to any of the Approved Subdivisions; and (iv) any matter arising from or related to the construction of the Improvements, any general contractor, any construction contractor, any subcontractor or any other person providing labor, services or materials with respect to the Approved Subdivisions, including any suit, claim or demand that the Lender is obligated to make any Advances to or for the benefit of any such Person. Upon receiving knowledge of any suit, claim or demand asserted by a third party that the Lender believes is covered by this indemnity, the Lender shall give Borrower notice of the matter and an opportunity to defend it, at Borrower’s sole cost and expense, with legal counsel satisfactory to the Lender. The Lender may also require Borrower to so defend the matter. The obligations of Borrower under this Section 11.6 shall survive the termination of this Agreement.

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11.7 [Reserved]

11.8 Accounting. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP.

11.9 Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable.

11.10 Nonliability of Lender. The relationship between Borrower on the one hand and the Lender on the other hand shall be solely that of borrower and lender. The Lender shall have no fiduciary responsibilities to Borrower. Lender undertakes no responsibility to any Borrower to review or inform any Borrower of any matter in connection with any phase of any Borrower’s business or operations. Lender, shall have no liability to any Borrower (whether sounding in tort, contract or otherwise) for losses suffered by any Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. Lender shall have no liability with respect to, and Borrower hereby waives, releases and agrees not to sue for, any special, indirect, consequential or punitive damages suffered by any Borrower in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby.

11.11 Confidentiality. Lender agrees to hold any confidential information which it may receive from Borrower pursuant to this Agreement in confidence, except for disclosure (i) to its Affiliates and their respective Affiliates, (ii) to legal counsel, accountants, and other professional advisors to Lender, (iii) to regulatory officials, (iv) to any Person as requested pursuant to or as required by law, regulation, or legal process, (v) to any Person in connection with any legal proceeding to which Lender is a party, (vi) to Lender’s direct or indirect contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties, and (vii) to rating agencies if requested or required by such agencies in connection with a rating relating to the Advances hereunder.

11.12 Nonreliance. Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) for the repayment of the Loans provided for herein.

11.13 Disclosure. Borrower and Lender hereby acknowledge and agree that Lender and/or its Affiliates from time to time may hold investments in, make other loans to or have other relationships with Borrower and its Affiliates.

11.14 Authority to File Notices. Borrower hereby irrevocably appoints the Lender as its attorney-in-fact, with full power of substitution, to file for record, at Borrower’s cost and

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expense and in Borrower’s name, any notices of completion, notices of cessation of labor, or any other notices that the Lender considers necessary or desirable to protect the Collateral should (a) Borrower fail to file for record such documents within ten (10) Business Days after Borrower’s actual receipt of Lender’s written request for Borrower to so act, and (b) such filing be lawful.

11.15 Inconsistencies with the Loan Documents. In the event of any inconsistencies between any terms of this Agreement and any terms of any of the Loan Documents, the terms of this Agreement shall govern and prevail.

11.16 Lender Determination of Facts. Lender shall at all times be free to establish independently, to its satisfaction, the existence or nonexistence of any fact or facts, the existence or nonexistence of which is a condition, term or requirement of this Agreement.

11.17 Incorporation of Preamble, Recitals and Exhibits. The preamble, recitals and exhibits hereto are hereby incorporated in to this Agreement.

11.18 Third-Party Consultants. Lender may hire such third-party consultants as it deems necessary, the costs of which shall be paid by Borrower, to provide the following services: (a) review Plans and Specifications, the Budget, construction cost breakdowns, the construction Schedule and all other construction, development and project documents for each Approved Subdivision; (b) conduct compliance inspections with respect to the progress of construction in each Approved Subdivision and approve each element of a request for disbursement relating to construction costs; and (c) perform such other services as may, from time to time, be reasonably required by the Lender. The obligation on the part of Borrower to pay the amounts required pursuant to this Section shall survive the repayment of the Obligations and the termination of this Agreement. Borrower hereby authorizes the Lender to pay such expenses, charges, costs and fees at any time by a making an Advance.

11.19 Disclaimer by the Lender. Lender shall not be liable to any general contractor or any construction contractor, subcontractor, supplier, laborer, architect, engineer or any other party for services performed or materials supplied in connection with any of the Approved Subdivisions or the Improvements. Lender shall not be liable for any debts or claims accruing in favor of any such parties against Borrower or others or against any Approved Subdivision or any other Collateral. No Borrower is nor shall it be an agent of the Lender for any purpose. Lender is not a joint venture partner with Borrower or with its respective partners, members, managers or shareholders in any manner whatsoever. Lender shall not be deemed to be in privity of contract with any contractor or provider of services or materials to any of the Approved Subdivisions nor shall any payment of funds directly to any such Person, including without limitation, a general contractor, any construction contractor, subcontractor or other provider of services or materials, be deemed to create any third party agent status or recognition of same by the Lender. Approvals granted by Lender for any matters covered under this Agreement shall be narrowly construed to cover only the parties and facts identified in any written approval or, if not in writing, such approvals shall be solely for the benefit of Borrower.

11.20 Waiver of Recovery. Borrower waives any and all right to claim or recover against Lender, any Lender, their respective successors and assigns and their respective directors,

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officers, employees, agents and representatives, for any loss of or damage to Borrower, the Approved Subdivisions, the Improvements, Borrower’s property or the property of others under Borrower’s control from any cause insured against or required to be insured against by this Agreement, unless directly or indirectly attributable to the gross negligence or willful acts of the party seeking such waiver.

11.21 No Set-Off. All Obligations shall be paid by Borrower without notice (except for such notice as may be expressly required hereunder or under the other Loan Documents), demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the Obligations shall in no way be released, discharged or otherwise affected (except as expressly provided herein) by reason of: (a) any damage to or destruction of or any taking of the Approved Subdivision or any part thereof by an Governmental Authority; (b) any restriction or prevention of, or interference by any Person with, any use of the Approved Subdivision or any part thereof; (c) any title defect or encumbrance or any eviction from the premises or the Improvements or any part thereof by title paramount or otherwise; (d) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to any Lender, or any action taken with respect to this Agreement by any trustee or receiver of any Lender, or by any court, in any such proceeding; (e) any claim that Borrower has or might have against or any Lender; (f) any default or failure on the part of any Lender to perform or comply with any of the terms of the Loan Documents or of any other agreement with Borrower; or (g) any other occurrence whatsoever, whether similar or dissimilar to the foregoing; in each case, whether or not Borrower shall have notice or knowledge of any of the foregoing. Borrower waives all rights now or hereafter conferred by statute or otherwise to any abatement, suspension, deferment, diminution or reduction of any Obligation.

11.22 Brokers. Borrower and the Lender represent to each other that none of them knows of any brokerage commissions or finders’ fee due or claimed with respect to the transaction contemplated hereby. Borrower and the Lender shall indemnify and hold harmless the other parties for, from and against any and all loss, damage, liability, or expense, including costs and attorney fees, which such other party may incur or sustain by reason of or in connection with any misrepresentation by the indemnifying party with respect to the foregoing.

11.23 Disbursements in Excess of Commitment Amount. In the event the total Advances made by the Lender exceed the Commitment Amount, to the extent not expressly prohibited by applicable law, all such Advances shall be secured by the Deeds of Trust and the other Loan Documents. All other sums expended by the Lender pursuant to this Agreement or any other Loan Documents shall be deemed to have been paid to Borrower and shall be secured by, among other things, the Deed of Trust.

11.24 Time is of the Essence. Time is of the essence of this Agreement.

11.25 Signs. Throughout the term of the Loan, the Lender shall have the right to erect one or more signs on each of the Approved Subdivisions indicating their provision of financing for the Approved Subdivision (provided that any such sign shall not interfere with Borrower’s development of such Approved Subdivision), and Lender shall also have the right to publicize their financing of the Approved Subdivisions as the Lender may deem appropriate.

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11.26 Interpretation.

(a) References to the plural include the singular, the plural, the part and the whole; “or” has the inclusive meaning represented by the phrase “and/or”; and “including” has the meaning represented by the phrase “including without limitation”.

(b) The words “hereof,” “herein,” “hereunder,” “hereto” and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document as a whole and not to any particular provision of this Agreement or such other Loan Document.

(c) Reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement or the other Loan Documents, as the case may be.

(d) Reference to any agreement (including this Agreement and any other Loan Document together with the schedules and exhibits hereto or thereto), document or instrument means such agreement, document or instrument as amended, modified, replaced, substituted for, superseded or restated.

11.27 Actions by the Lender. Unless otherwise expressly provided in this Agreement or any other Loan Document, all determinations, consents, approvals, disapprovals, calculations, requirements, requests, acts, actions, elections, selections, opinions, judgments, options, exercise of rights, remedies or indemnities, satisfaction of conditions or other decisions of or to be made by or on behalf of any Lender under this Agreement or any of the other Loan Documents shall be made in the sole and absolute discretion of such Lender and shall be deemed final, conclusive and binding on Borrower absent manifest error.

11.28 Continuing Obligations. This Agreement amends, restates and supersedes the Original Loan Agreement and the obligations under that original agreement constitute continuing obligations of Borrowers as amended and restated by this Agreement and continue to be secured pursuant to the Security Instruments. Any references to the Original Loan Agreement or this Agreement in any Loan Document shall be deemed a reference to this Agreement, as this Agreement may be amended, modified or restated from time to time.

11.29 Notices. Except as otherwise permitted by Section 2.2 with respect to Advance Requests, all notices, requests and other communications to any party hereunder shall be in writing (including electronic transmission, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of Borrower or Lender, at its address or facsimile number set forth in Schedule “1” hereof, (y) in the case of any Lender, at its address or facsimile number set forth in its administrative questionnaire or (z) in the case of any party, at such other address or facsimile number as such party may hereafter specify for the purpose by notice to Lender and Borrower in accordance with the provisions of this Section. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered (or, in the

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case of electronic transmission, received) at the address specified in this Section; provided that notices to the Lender under Article 2 shall not be effective until received. Borrower and Lender may each change the address for service of notice upon it by a notice in writing to the other parties hereto.

ARTICLE 12

RATABLE PAYMENTS

12.1 Setoff. In addition to, and without limitation of, any rights of the Lender under applicable law, if Borrower becomes insolvent, however evidenced, or if any Event of Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender or any Affiliate of any Lender to or for the credit or account of Borrower may be offset and applied toward the payment of the Obligations, owing to such Lender, whether or not the Obligations, or any part thereof, shall then be due; provided, however, as between Lender only, Lender agrees as to each other (but not as to Borrower and Borrower hereby acknowledges and agrees that it is not a beneficiary of such agreement) that neither Lender nor any Lender will exercise any right of setoff pursuant to this Section 12.1 without the prior written approval of Lender and all Lender.

12.2 Ratable Payments. If any Lender has payment made to it upon its Loans (other than payments received pursuant to Section 2.4(a), 2.4(b), 2.4(d) or 2.4(g) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion the Loans held by the other Lender so that after such purchase each Lender will have received its ratable share of such payment in accordance with the proportion that its Commitment bears to the Aggregate Commitment. If any Lender receives collateral or other protection for its Obligations, such Lender agrees, promptly upon demand, to take such action necessary such that all Lender share in the benefits of such collateral ratably in proportion to their Loans. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made.

ARTICLE 13

CHOICE OF LAW; CONSENT TO JURISDICTION; JURY WAIVER; WAIVER OF SPECIAL DAMAGES

13.1 CHOICE OF LAW. THE LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF CALIFORNIA, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.

13.2 CONSENT TO JURISDICTION. BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR CALIFORNIA STATE COURT SITTING IN ORANGE COUNTY, CALIFORNIA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION

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IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN LOS ANGELES, CALIFORNIA.

13.3 JURY WAIVER. BORROWER, AGENT AND EACH LENDER HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THEM ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT, ANY OTHER LOAN DOCUMENT OR ANY RELATIONSHIP BETWEEN OR AMONG BORROWER, AGENT AND THE LENDER. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER LOAN DOCUMENTS.

13.4 WAIVER OF SPECIAL DAMAGES. BORROWER WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT BORROWER MAY HAVE TO CLAIM OR RECOVER FROM AGENT AND ANY LENDER IN ANY LEGAL ACTION OR PROCEEDING ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.

ARTICLE 14

PATRIOT ACT NOTIFICATION AND COMPLIANCE

14.1 Patriot Act Notification and Compliance.

(a) USA PATRIOT ACT NOTIFICATION. The following notification is provided to Borrower pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318: “IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person or entity that opens an account, including any deposit account, treasury management account, loan, other extension of credit, or other financial services product. What this means for Borrower: When Borrower opens an account, if Borrower is an individual, Lender will ask for Borrower’s name, taxpayer identification number, residential address, date of birth, and other information that will allow Lender to identify Borrower, and, if Borrower is not an individual, Lender will ask for Borrower’s name, taxpayer identification number, business address, and other information that will allow Lender to identify Borrower. Lender may also ask, if Borrower is an individual, to see Borrower’s driver’s license or other identifying documents, and, if Borrower is not an individual, to see Borrower’s legal organizational documents or other identifying documents.”

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(b) Compliance with Patriot Act. Borrower and each other Person that from time to time is or becomes obligated to Lender for any payment of the Indebtedness under any Loan Document (each a “Loan Party”) is not and shall not (a) be or become subject at any time to any law, regulation, or list of any government agency (including, without limitation, the U.S. Office of Foreign Asset Control list) that prohibits or limits Lender from making any advance or extension of credit to Borrower or from otherwise conducting business with Borrower, or (b) fail to provide documentary and other evidence of any Loan Party’s identity as may be requested by Lender at any time to enable Lender to verify each Loan Party’s identity or to comply with any applicable law or regulation, including, without limitation, Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318.

ARTICLE 15

COUNTERPARTS

This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by Borrower and the Lender and each party has notified the Lender by facsimile transmission or telephone that it has taken such action.

[Signature Pages Follows]

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IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written.

BORROWER	WILLIAM LYON HOMES, INC.,
	a California corporation
	By:	/s/ RICHARD S. ROBINSON
	Name:	Richard S. Robinson
	Its:	Senior Vice President
	By:	/s/ MICHAEL D. GRUBBS
	Name:	Michael D. Grubbs
	Its:	Senior Vice President

[Signature Pages Continue on Following Page]

Signature Page to Borrowing Base Revolving Line of

Credit Agreement

LENDER:	WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association
	By:	/s/    BRIAN A. PHILLIPS
	Name:	Brian A. Phillips
	Its:	Vice President

[End of Signature Pages]

Signature Page to Borrowing Base Revolving Line of

Credit Agreement

SCHEDULE 1

ADDRESSES FOR NOTICES

To Lender:   Wachovia Bank 18300 Von Karman Avenue Suite 450 Irvine CA 92612 Fax: (949) 251-9016 Attention: Brian Phillips To Borrower:   William Lyon Homes, Inc. 4490 Von Karman Avenue Newport Beach CA 92660 Fax: (949) 252-2575 Attention: Mike Grubbs To Guarantor:   William Lyon Homes 4490 Von Karman Avenue Newport Beach CA 92660 Fax: (949) 252-2575 Attention: Mike Grubbs

SCHEDULE 1

TO BORROWING BASE REVOLVING LINE

OF CREDIT AGREEMENT

EXHIBIT “A”

STANDARD DRAW INSPECTION FORM FOR:
DESCRIPTION	PERCENTAGE		SUBDIVISION:            0
		LOTS:	0	0	0	0	0	0
PERMITS/LAYOUT TRENCHING AND STEEL POUR FOOTERS	5
POUR STEM WALLS	10
SET UNDERGROUNDS BACK FILL SOIL	15
ABC/GRADE SET COPPER SLAB	20
DELIVER LUMBER, TRUSSES & WINDOWS	25
FRAMING ROUGH CARPENTRY COMPLETED	30
ROUGH PLUMBING, HVAC, ELECTRIC	35
ROUGH INSPECTIONS ROOF DRY IN, WINDOWS, SLIDERS SET	40
STUCCO LATH INSULATION	45
STUCCO 1st COAT STOCK DRYWALL	50
HAND DRYWALL TAPE DRYWALL	55
FLOAT JOINTS STUCCO FINISH COAT	60
SAND WALLS TEXTURE DRYWALL	65
DELIVER DOORS & TRIM EXTERIOR PAINT	70
TRIM CARPENTRY/INTERIOR PAINT	75
DELIVER CABINETS, ROOF COMPLETE	80
INSTALL CABINETS, SET TOPS	85
INSTALL INTERIOR HARDWARE PLUMBING/ELECTRICAL/HVAC TRIM	90
PRE-CLEAN APPLIANCES/SHEET GOODS	95
FLOOR COVERINGS FINAL CLEAN & CITY FINAL	100

DISCLAIMER: This report is for Wachovia Bank, N.A. use only. No other party including the property owner, builder, or Borrower may rely upon the contents or conclusions.

CERTIFICATION: I certify that I saw and reviewed this property on the date indicated below, and I have reported all observed unacceptable or incomplete work, and that I have no personal interest present or prospective in the property, applicant or loan proceeds.

COMMENTS:

SIGNATURE & DATE:

EXHIBIT “A”

TO BORROWING BASE REVOLVING LINE

OF CREDIT AGREEMENT

EXHIBIT “B”

COMPLIANCE CERTIFICATE

TO: Wachovia Bank, N.A.

For the Fiscal Quarter Ending                                 

OR

For the Fiscal Year Ending                                     

This Compliance Certificate is furnished pursuant to Section 6.4(g) and Article 7 of the Borrowing Base Revolving Line of Credit Agreement dated as of February 14, 2006 (“Loan Agreement”), entered into by and among WILLIAM LYON HOMES, INC., a California corporation (the “Borrower”), WACHOVIA BANK, N.A., a national banking association as agent (“Agent”) on behalf of itself and the other Lender, and each of the Lender on the signature pages to the Loan Agreement and such other Lender from time to time added pursuant to the Loan Agreement (the “Lender”). Unless otherwise defined herein, the terms used in this Compliance Certificate have the meanings ascribed thereto in the Loan Agreement. Each of the undersigned below is referred to as “Reporting Party”.

The undersigned hereby certifies as follows:

1. The financial statements, which are delivered concurrently with the delivery of this Compliance Certificate, fairly present in all material respects the consolidated financial conditions and operations of Borrower at such date for the period then ended. The financial statements are in accordance with GAAP applied consistently throughout such period and with prior periods (except as approved by the accountants performing the audit in connection therewith or the undersigned, as the case may be, and disclosed therein), subject, in the case of interim financial statements, to normal and customary year-end adjustments.

2. The covenants set forth in Article 7 of the Loan Agreement are calculated as of the date set forth above and, as of such date:

(a) Minimum Tangible Net Worth Covenant. The minimum Tangible Net Worth of Borrower, on a consolidated basis but without duplication, is                         ;

(b) Leverage Ratio. The ratio of (a) Indebtedness to (b) Tangible Net Worth of Borrower, on a consolidated basis but without duplication, is                         ;

EXHIBIT “B”

TO BORROWING BASE REVOLVING LINE

OF CREDIT AGREEMENT

(d) Interest Coverage Ratio. The interest coverage ratio of (a) EBITDA to (b) Interest Incurred of Borrower, on a consolidated basis but without duplication, is                          on trailing twelve (12) Calendar Month basis.

(e) Minimum Liquidity. The Available Liquidity of Borrower, on a consolidated basis but without duplication, is $            , which is     % of their total Indebtedness.

Attached hereto are the worksheets, schedules and calculations of the Reporting Party for each of the foregoing covenants.

3. During the period referred to above and as of the end of such period and as of the date hereof, the undersigned has no knowledge of any Default or Event of Default under the Loan Agreement or under the Loan Documents of the Loan, except as follows:

______________________________________________________________________________________________

______________________________________________________________________________________________

______________________________________________________________________________________________

______________________________________________________________________________________________

______________________________________________________________________________________________

The undersigned hereby certifies to Lender and each of the Lender that the information and statements set forth above are true and correct and, with respect to each covenant listed above, Borrower has performed the required calculations and that such calculations are true and accurate.

IN WITNESS WHEREOF, the undersigned executes this Compliance Certificate as of the date set forth above.

“BORROWER”

WILLIAM LYON HOMES, INC., a California corporation

By:

Name:

Its:

By:

Name:

Its:

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EXHIBIT “C”

JOINT BORROWER PROVISIONS

1. Attorney-in-Fact. For the purpose of implementing the joint borrower provisions of the Loan Documents, Borrowers hereby irrevocably appoint WLH as their respective agent and attorney-in-fact for all purposes of the Loan Documents, including the giving and receiving of notices and other communications.

2. Accommodation. It is understood and agreed that the handling of this credit facility on a joint borrowing basis as set forth in this Agreement is solely as an accommodation to Borrowers and at their request. Accordingly, Lender is entitled to rely, and shall be exonerated from any liability for relying upon, any request for an Advance or any other request made by an Authorized Representative (as Borrower’s designated agent) or any purported officer of any Borrower without the need for any consent or other authorization of any other Borrower and upon any information or certificate provided on behalf of any Borrower by an Authorized Representative.

3. Rights of the Lender. Each Borrower acknowledges that, except to the extent of the borrowings made by it and the proceeds received by it, the Obligations undertaken by it under the Loan Documents will or may guarantee obligations of other Borrower (the “Joint and Several Obligations”) and, in full recognition of that fact, each Borrower consents and agrees that Lender may, at any time and from time to time, agree with WLH to, without notice or demand to the other Borrower, and without affecting the enforceability of the Joint and Several Obligations under any Loan Document or giving the other Borrower any recourse or right of action against Lender or any of the Lender (and no Borrower will assert or take advantage of any defense based on any such actions):

a. supplement, modify, amend, extend, renew, or otherwise change the time for payment or the terms of the Joint and Several Obligations or any part thereof, including, without limitation, any increase or decrease of the rate(s) of interest thereon;

b. supplement, modify, amend or waive, or enter into or give any agreement, approval or consent with respect to, the Joint and Several Obligations or any part thereof or any of the Loan Documents or any security or guaranties, or any condition, covenant, default, remedy, right, representation or term thereof or thereunder;

c. accept new or additional instruments, documents or agreements relative to any of the Loan Documents or the Joint and Several Obligations or any part thereof;

d. accept partial payments or performance on the Joint and Several Obligations;

e. receive and hold additional security or guaranties for the Joint and Several Obligations or any part thereof;

EXHIBIT “C”

TO BORROWING BASE REVOLVING LINE

OF CREDIT AGREEMENT

f. release, reconvey, terminate, waive, abandon, subordinate, exchange, substitute, transfer and enforce any security or guaranties for the Joint and Several Obligations, and apply any security and direct the order or manner of sale thereof as Lender may determine;

g. release any Person or any guarantor from any personal liability with respect to the Joint and Several Obligations or any part thereof;

h. settle, release on terms satisfactory to the Lender or by operation of applicable laws or otherwise liquidate or enforce any Joint and Several Obligations and any security or guaranty therefor in any manner, consent to the transfer of any security and bid and purchase at any sale;

i. consent to the merger, change or any other restructuring or termination of the existence of any Borrower or any other Person, and correspondingly restructure the Joint and Several Obligations, and any such merger, change, restructuring or termination shall not affect the liability of the other Borrower or the continuing existence of any Lien or Encumbrance securing the Joint and Several Obligations under any Loan Document to which such Borrower are party or the enforceability hereof or thereof with respect to all or any part of the Joint and Several Obligations;

j. exercise or forbear from exercising any of its rights or privileges under the Loan Documents or any security or guaranties; and

k. consent to the transfer of any Approved Subdivision or any portion thereof or any other collateral described in the Loan Documents or otherwise.

Upon the occurrence of and during the continuance of any Event of Default, Lender may enforce each Loan Document independently as to each Borrower and independently of any other remedy or security Lender or the Lender at any time may have or hold in connection with the Joint and Several Obligations, and it shall not be necessary for the Lender or the Lender to marshal assets in favor of any of Borrower or any other Person or to proceed upon or against and/or exhaust any other security or remedy before proceeding to enforce such Loan Document. Each Borrower expressly waives with respect to the Joint and Several Obligations the benefit of all appraisement, valuation, stay, extension, homestead, exemption or redemption laws which such Person may claim or seek to take advantage of in order to prevent or hinder the enforcement of any of the Loan Documents or the exercise by the Lender or the Lender of any of their remedies under the Loan Documents, and Borrowers further expressly waive any right to require Lender to marshal assets in favor of any Borrower or any other Person or to proceed against any other Person or any collateral provided by any other Person, and agrees that the Lender may proceed against any Persons and/or collateral in such order as they shall determine. The Lender may file a separate action or actions against any Borrower, whether action is brought or prosecuted with respect to any other security or against any other Person, or whether any other Person is joined in any such action or actions. Each Borrower expressly waives the benefit of any statute(s) of limitations affecting its liability under the Loan Documents or the enforcement of the Joint and Several Obligations or any Liens or Encumbrances created or granted by any Loan Document. The rights of Lender hereunder and under the Loan Documents shall be

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reinstated and revived, and the enforceability of this Agreement shall continue, with respect to any amount at any time paid on account of the Obligations which thereafter shall be required to be restored or returned by Lender upon the bankruptcy, insolvency or reorganization of any Borrower or any other Person, or otherwise, all as though such amount had not been paid. The enforceability of the Loan Documents at all times shall remain effective as to each Borrower as to the Joint and Several Obligations of such Borrower even though such Joint and Several obligations, including any part thereof may be or hereafter may become invalid or otherwise unenforceable as against any other Borrower or any other Person and whether or not any of the other Borrower or any other Person shall have any personal liability with respect thereto. Each Borrower expressly waives, to the full extent permitted by law, in respect of the Joint and Several Obligations any and all defenses now or hereafter arising or asserted by reason of (a) any disability or other defense of any of the other Borrower or any other Person with respect to the Joint and Several Obligations, (b) the unenforceability or invalidity of any security or guaranty for the Joint and Several Obligations or the lack of perfection or continuing perfection or failure of priority of any security for the Joint and Several Obligations, (c) the cessation for any cause whatsoever of the liability of any other Borrower or any other Person (other than by reason of the full payment and performance of all Obligations), (d) any failure of Lender to marshal assets in favor of any of the other Borrower or any other Person, (e) except as otherwise required by law or as provided in any Loan Document, any failure of Lender to give notice of sale or other disposition of collateral to any of the other Borrower or any other Person or any defect in any notice that may be given in connection with any sale or disposition of collateral, (f) except as otherwise required by law or as provided in any Loan Document, any failure of Lender to comply with applicable laws in connection with the sale or other disposition of any collateral or other security for any of the Joint and Several Obligations, including without limitation, any failure of Lender to conduct a commercially reasonable sale or other disposition of any collateral or other security for any Joint and Several Obligation, (g) any incapacity, lack of authority, death or disability of the other Borrower or any other Person, (h) any failure of Lender to give notice of the existence, creation or incurring of any new or additional indebtedness or other obligation or of any action or nonaction on the part of any other Person in connection with the Loan Documents, including the waiver of any conditions to the making of any advance of proceeds of any Loan, (i) any failure on the part of Lender to ascertain the extent or nature of any assets of any Person or any insurance or other rights with respect thereto, or the liability of any party liable for the Loan Documents or the obligations evidenced or secured thereby, (j) except as specifically required in the Loan Documents, any notice of intention to accelerate any of the Joint and Several Obligations or any notice of acceleration of the Joint and Several Obligations, (k) any lack of acceptance or notice of acceptance of this Agreement by Lender, (l) any lack of presentment, demand, protest, or notice of dishonor, demand, protest or nonpayment with respect to any indebtedness or obligations under any of the Loan Documents, (m) except as specifically required in the Loan Documents, any lack of other notices to which Borrower, or any of them, might otherwise be entitled, (n) any invalidity or irregularity, in whole or in part, of any one or more of the Loan Documents, (o) the inaccuracy of any representation or other provision contained in any Loan Document, (p) any sale or assignment of the Loan Documents, in whole or in part, (q) any sale or assignment by any Borrower of any assets of such Person, or any portion thereof, whether or not consented to by Lender, (r) the dissolution or termination of existence of any Borrower or any other Person, (s) the voluntary or involuntary liquidation, sale or other disposition of all or substantially all of the assets of any Borrower, (t) any failure or

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delay of Lender to commence an action against Borrower, to assert or enforce any remedies against Borrower under the Notes or the Loan Documents, or to realize upon any security, (u) the compromise, settlement, release or termination of any or all of the obligations of a Borrower under the Notes or the Loan Documents, (v) any act or omission of Lender or others that directly or indirectly results in or aids the discharge or release of any other Borrower or any other Person or any other security or guaranty for the Joint and Several Obligations by operation of law or otherwise, (w) any law which provides that the obligation of a surety or guarantor must neither be larger in amount nor in other respects more burdensome than that of the principal or which reduces a surety’s or guarantor’s obligation in proportion to the principal obligation, (x) any failure of Lender to file or enforce a claim in any bankruptcy or other proceeding with respect to any Person, (y) the election by Lender, in any bankruptcy proceeding of any Person, of the application or non-application of Section 1111(b)(2) of the United States Bankruptcy Code, (z) any extension of credit or the grant of any lien under Section 364 of the United States Bankruptcy Code, (aa) any use of cash collateral under Section 363 of the United States Bankruptcy Code, (bb) any agreement or stipulation with respect to the provision of adequate protection in any bankruptcy proceeding of any Person, (cc) the avoidance of any Lien or Encumbrance in favor of the Lender for any reason, (dd) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, liquidation or dissolution proceeding commenced by or against any Person, including any discharge of, or bar or stay against collecting, all or any of the Joint and Several Obligations (or any interest thereon) in or as a result of any such proceeding, (ee) to the extent permitted, the benefits of any form of one-action rule, (ff) any right to require Lender to proceed against any Borrower or any guarantor at any time or to proceed against or exhaust any security held by Lender at any time or to pursue any other remedy whatsoever at any time; (gg) any Borrower’s application of the proceeds of the Loan for purposes other than the purposes represented by such Borrower to Lender or intended or understood by Lender or any guarantor; (hh) where applicable, California Civil Code Sections 2787 to 2855, inclusive, 2899 and 3433; (ii) Lender’s and/or the Lender’s failure or delay to perfect or continue the perfection of any lien or security interest in any collateral which secures the obligations of Borrower, or to protect the property covered by such lien or security interest; or (jj) to the fullest extent permitted by law, any other legal, equitable or surety defenses whatsoever to which a Borrower might otherwise be entitled solely with respect to the Joint and Several Obligations.

4. Financial Information. Each Borrower represents and warrants to Lender that such Borrower has established adequate means of obtaining from the other Borrower, on a continuing basis, financial and other information pertaining to the businesses, operations and condition (financial and otherwise) of the other Borrower and their respective assets, and each Borrower now is and hereafter will be completely familiar with the businesses, operations and condition (financial and otherwise) of the other Borrower and their respective assets. Each Borrower hereby expressly waives and relinquishes any duty on the part of Lender to disclose to such Borrower any matter, fact or thing related to the businesses, operations or condition (financial or otherwise) of any other Borrower or such other Borrower’s assets, whether now known or hereafter known by Lender during the life of this Agreement, whether such matter, fact or thing materially increases the risks to such Borrower or not.

5. Waivers Concerning Liens. In the event that all or any part of the Joint and Several Obligations at any time are secured by any one or more deeds of trust, security deeds or

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mortgages creating or granting Liens or Encumbrances on any interests in real estate, each Borrower authorizes Lender, upon the occurrence of and during the continuance of any Event of Default, at their sole option, without notice or demand and without affecting any Obligations, the enforceability of the Joint and Several Obligations under this Agreement, or the validity or enforceability of any Liens and Encumbrances of Lender on any collateral securing the Joint and Several Obligations, to foreclose any or all of such deeds of trust, security deeds or mortgages by judicial or nonjudicial sale. Insofar as the Liens and Encumbrances created by the Loan Documents secure the Joint and Several Obligations of other Persons (a) each Borrower expressly waives, to the full extent permitted by law, any defenses to the enforcement of this Agreement or the other Loan Documents or any Liens and Encumbrances created or granted hereby or by the other Loan Documents or to the recovery by Lender against any other Borrower or any other Person liable therefor of any deficiency after a judicial or nonjudicial foreclosure or sale, even though such a foreclosure or sale may impair the subrogation rights of such Borrower and may preclude any of them from obtaining reimbursement or contribution from any other Person; and (b) each Borrower expressly waives, to the full extent permitted by law, any defenses to the enforcement of this Agreement or the other Loan Documents based upon an election of remedies by Lender, including any election to proceed by judicial or nonjudicial foreclosure of any security, whether real or personal property security, or by deed in lieu thereof, and whether or not every aspect of any foreclosure sale is commercially reasonable; and (c) each Borrower expressly waives, to the full extent permitted by law, any defenses or benefits that may be derived from California Code of Civil Procedure §§580a, 580b, 580d or 726, or comparable provisions of the laws of any other jurisdiction and all other suretyship defenses it otherwise might or would have under California law or other applicable law.

6. Contribution. Notwithstanding anything to the contrary elsewhere contained herein or in any other Loan Document to which any Borrower is a party, each Borrower hereby waives with respect to each other Borrower and its respective successors and assigns (including any surety) and any other party any and all rights at or in equity, to subrogation, to reimbursement, to exoneration, to contribution, to indemnity, to setoff or to any other rights that could accrue to a surety against a principal, to a guarantor against a maker or obligor, to an accommodation party against the party accommodated, or to a holder or transferee against a maker and which each Borrower may have or hereafter acquire against any other Borrower or any other party in connection with or as a result of any Borrower’s execution, delivery and/or performance of this Agreement or any other Loan Document to which any such Borrower is a party. In connection with the foregoing, each Borrower expressly waives any and all rights of subrogation to Lender against the other Borrower, and each Borrower hereby waives any rights to enforce any remedy which Lender may have against the other Borrower and any rights to participate in any collateral or any other assets of the other Borrower. Except as expressly provided in the Contribution Agreement, each Borrower agrees that it shall not have or assert any such rights against any other Borrower or any such Borrower’s successors and assigns or any other Person (including any surety, Lender or the Lender), either directly or as an attempted setoff to any action commenced against such Borrower by the other such Borrower (as borrower or in any other capacity) or any other Person. Each Borrower hereby acknowledges and agrees that this waiver is intended to benefit Lender and shall not limit or otherwise affect any of the Borrower’s liability hereunder, under any other Loan Document to which any Borrower is a party, or the enforceability hereof or thereof. Without limiting the generality of the foregoing and to the extent otherwise applicable, each Borrower hereby waives discharge by waiving all defenses based on suretyship or impairment of collateral securing the Joint and Several Obligations.

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7. Reliance by Lender. Each Borrower warrants and agrees that each of the waivers and consents set forth herein is made with full knowledge of its significance and consequences, with the understanding that events giving rise to any defense waived may diminish, destroy or otherwise adversely affect rights which each Borrower otherwise may have against the other Borrower, the Lender, or others, or against any collateral securing the Joint and Several Obligations. If any of the waivers or consents herein contained are determined to be contrary to any applicable law or public policy, such waivers and consents shall be effective to the maximum extent permitted by law.

8. Applicability. For purposes of this Agreement, the provisions of Paragraphs 5 and 6 above shall apply and be effective only to the extent that any court, tribunal or other governmental agency shall have deemed Borrower to be sureties of one another rather than co-borrowers.

9. Waiver of Automatic or Supplemental Stay. Each Borrower represents, warrants and covenants to the Lender that in the event of the filing of any voluntary or involuntary petition in bankruptcy by or against any Borrower at any time following the execution and delivery of this Agreement, none of the other Borrower shall seek a supplemental stay or any other relief, whether injunctive or otherwise, pursuant to Section 105 of the United States Bankruptcy Code or any other provision of the United States Bankruptcy Code, to stay, interdict, condition, reduce or inhibit the ability of the Lender to enforce any rights they have by virtue of this Agreement, the Loan Documents, or at law or in equity, or any other rights Lender has, whether now or hereafter acquired, against any other Borrower or against any property owned by any other Borrower.

10. Subordination. In addition to and without in any way limiting the foregoing, each Borrower hereby subordinates any and all indebtedness it may now or hereafter owe to such other Borrower, including, without limitation, any and all indebtedness under any contribution agreement between Borrowers, to all indebtedness of Borrower to Lender, and agrees with the Lender that no Borrower shall claim any offset or other reduction of such Borrower’s obligations hereunder because of any such indebtedness and shall not take any action to obtain any collateral or any other assets of the other Borrower. Each Borrower further agrees not to assign all or any part of such indebtedness unless Lender is given prior notice and such assignment is expressly made subject to the terms of this Agreement.

11. Limitations. Notwithstanding anything to the contrary in this Agreement, the Notes or the other Loan Documents, the maximum liability of any Borrower for the Obligations created, evidenced and secured hereby and thereby shall not be voided or rendered void as a fraudulent conveyance or transfer but, to the extent such Obligations may be determined by a court of competent jurisdiction to be a fraudulent conveyance or transfer, such Borrower’s liability therefor shall be reduced to that amount which may be incurred without rendering such Obligations, as they relate to such Borrower, void or voidable as a fraudulent conveyance or transfer. As used herein, the terms “fraudulent conveyance or transfer” shall mean as determined pursuant to the United States Bankruptcy Code or under any other present or future federal or

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state laws or statutes relating to bankruptcy, insolvency, assignment for the benefit of creditors or other relief for debtors, including, without limitation, the Uniform Fraudulent Transfer Act or the Uniform Fraudulent Conveyance Act, as in effect in any jurisdiction wherein any such Borrower’s solvency is subject to determination. For purposes of determining such liability of any Borrower, due consideration shall be given to the benefits received, directly or indirectly, by such Borrower from the loans and Advances made to it.

12. Subrogation. Each Borrower understands that the exercise by Lender of certain rights and remedies may affect or eliminate such Borrower’s right of subrogation against another Borrower or any guarantor and that each Borrower may therefore incur partially or totally nonreimbursable liability hereunder. Nevertheless, each Borrower hereby authorizes and empowers the Lender, its respective successors, endorsees and assigns, to exercise in its or their sole discretion, any rights and remedies, or any combination thereof, which may then be available, it being the purpose and intent of each Borrower that the obligations hereunder shall be absolute, continuing, independent and unconditional under any and all circumstances. Each Borrower understands that: (i) the applicable jurisdictions in which the Property may be located may prohibit a deficiency judgment against a borrower after a non-judicial foreclosure; (ii) such Borrower’s subrogation rights may be destroyed by a non-judicial foreclosure under a Deed of Trust because such Borrower may not be able to pursue the other Borrower for a deficiency judgment; and (iii) a lender may be estopped from pursuing a guarantor for a deficiency judgment after a non-judicial foreclosure (on the theory that a guarantor should be exonerated if a lender elects a remedy that eliminates that guarantor’s subrogation rights) absent an explicit waiver. Without limitation on the generality of the other waivers contained in this Agreement, each Borrower hereby waives (1) any suretyship or guarantor defense that might otherwise be available to such Borrower as a result of Lender’s pursuit of a non-judicial foreclosure, and (2) all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a Joint and Several Obligation, has destroyed the guarantor’s rights of subrogation and reimbursement against the principal by the operation of any applicable law or otherwise. In addition, each Borrower waives all rights and defenses that such Borrower may have because the Joint and Several Obligations are secured by real property.

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EX-12.1

Exhibit 12.1

STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

	Year Ended December 31,
	2005			2004			2003			2002			2001
	(dollars in thousands)
Income before provision for income taxes	$	314,780		$	285,148		$	123,952		$	67,781		$	53,525
Interest incurred		73,208			59,024			47,188			26,783			21,908
Less interest capitalized		(73,208	)		(59,024	)		(47,188	)		(26,783	)		(21,681	)
Amortization of capitalized interest included in cost of sales		55,748			62,671			36,376			28,109			20,537
Cash distributions of income from unconsolidated joint ventures		2,708			—			37,501			24,621			18,404
Less equity in (income) loss of unconsolidated joint ventures		( 4,301	)		699			(31,236	)		(27,748	)		(22,384	)
Earnings	$	368,935		$	348,518		$	166,593		$	92,763		$	70,309
Interest incurred
Interest expensed	$	—		$	—		$	—		$	—		$	227
Interest capitalized		73,208			59,024			47,188			26,783			21,681
Fixed Charges	$	73,208		$	59,024		$	47,188		$	26,783		$	21,908
Ratio of Earnings to Fixed Charges		5.04x			5.91x			3.53x			3.46x			3.21x

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES

William Lyon Homes, Inc.

State of Incorporation: California

Presley Homes

State of Incorporation: California

California Equity Funding, Inc.

State of Incorporation: California

PH Ventures – San Jose

State of Incorporation: California

Presley CMR, Inc.

State of Incorporation: California

HSP Inc.

State of Incorporation: California

Duxford Financial, Inc.

State of Incorporation: California

William Lyon Southwest, Inc.

State of Incorporation: Arizona

PH-LP Ventures

State of Incorporation: California

PH-Rielly Ventures

State of Incorporation: California

Duxford Title Reinsurance Company

State of Incorporation: Vermont

Sycamore CC, Inc.

State of Incorporation: California

Cerro Plata Associates, LLC

State of Organization: Delaware

St. Helena Westminster Estates, LLC

State of Organization: Delaware

Laurel Creek Associates, LLC

State of Organization: Delaware

Woodlake, L.P.

State of Organization: Delaware

Stonebriar L.P.

State of Organization: California

Reston Associates, LLC

State of Organization: Delaware

Hampton Road Associates, LLC

State of Organization: Delaware

Henry Ranch, LLC

State of Organization: Delaware

Otay R-29, LLC

State of Organization: Delaware

4S Lot 12, LLC

State of Organization: Delaware

Bayport Mortgage, L.P.

State of Organization: California

OX I Oxnard, L.P.

State of Organization: California

OX II Oxnard, L.P.

State of Organization: Delaware

4S Lots 2 & 8, LLC

State of Organization: Delaware

Silver Creek Preserve

State of Incorporation: California

California Pacific Mortgage, L.P.

State of Organization: California

Duxford Escrow, Inc.

State of Incorporation: California

Valencia Partners, L.P.

State of Organization: Delaware

Brentwood Legends, L.P.

State of Organization: Delaware

Hercules Overlook, L.P.

State of Organization: Delaware

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Valencia II Associates, LLC

State of Organization: Delaware

Lyon Morgan Creek, L.P.

State of Organization: Delaware

Lyon Harada, L.P.

State of Organization: California

242 Cerro Plata, LLC

State of Organization: Delaware

Lyon East Garrison Company I, LLC

State of Organization: California

East Garrison Partners I, LLC

State of Organization: California

Lyon Waterfront, LLC

State of Organization: Delaware

WLH Enterprises

State of Organization: California

Chino Reserve 89, LLC

State of Organization: Delaware

Montecito Ranch-Corona, L.P.

State of Organization: California

Lyon Montecito, LLC

State of Organization: California

Spectrum 90 Investors, LLC

State of Organization: Delaware

4S Ranch Planning Area 38, LLC

State of Organization: Delaware

San Miguel Village, LLC

State of Organization: Delaware

Lyon Treviso, LLC

State of Organization: Delaware

Covenant Hills P-30A, LLC

State of Organization: Delaware

Covenant Hills P30B, LLC

State of Organization: Delaware

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The Ranch Golf Club, LLC

State of Organization: California

Nobar Water Company

State of Incorporation: California

Whitney Ranch Village 5, LLC

State of Organization: Delaware

Laguna Big Horn, LLC

State of Organization: Delaware

PLC/Lyon Waterfront Residential, LLC

State of Organization: Delaware

Luke Preservation Trust, LLC

State of Organization: Arizona

Queen Creek Joint Venture, LLC

State of Organization: Arizona

Circle G at the Church Farm North Joint Venture, LLC

State of Organization: Arizona

WLH/WB Rainbow Valley Properties JV, LLC

State of Organization: Arizona

Lyon Vista Del Mar 533, LLC

State of Organization: Delaware

Mountain Falls, LLC

State of Organization: Nevada

Tustin Villas Partners, LLC

State of Organization: Delaware

Marble Mountain Partners, LLC

State of Organization: Delaware

Tustin Vistas Partners, LLC

State of Organization: Delaware

Other names under which William Lyon Homes conducts business:

William Lyon Homes-Southern California Division

William Lyon Homes-Northern California Division

William Lyon Homes-San Diego Division

William Lyon Homes-Arizona Division

William Lyon Homes-Nevada Division

Horsethief Canyon Partners

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EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-121700, Form S-8 No. 333-82448 and Form S-8 No. 333-50232) of our reports dated March 10, 2006, with respect to the consolidated financial statements of William Lyon Homes, William Lyon Homes management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of William Lyon Homes, included in this Annual Report (Form 10-K) for the year ended December 31, 2005.

/s/    ERNST & YOUNG LLP

Irvine, California

March 10, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, William Lyon, certify that:

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

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

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

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

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

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: March 10, 2006

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

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Michael D. Grubbs, certify that:

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

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

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

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

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

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: March 10, 2006

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

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of William Lyon Homes (the Company) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, William Lyon, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/    WILLIAM LYON

William Lyon

Chief Executive Officer

March 10, 2006

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

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of William Lyon Homes (the Company) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Michael D. Grubbs, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/    MICHAEL D. GRUBBS

Michael D. Grubbs

Senior Vice President, Chief Financial

Officer and Treasurer

March 10, 2006

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.