10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

   SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

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

    SECURITIES EXCHANGE ACT OF 1934

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 No.)
4490 Von Karman Avenue
Newport Beach, California	92660
(Address of principal executive offices)	(Zip Code)

(949) 833-3600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

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

YES  ¨                    NO  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  ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨                    NO  x

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

Class of Common Stock	Outstanding at August 1, 2008
Common stock, par value $.01	1,000

WILLIAM LYON HOMES

INDEX

	Page No.
PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements:
Consolidated Balance Sheets — June 30, 2008 (unaudited) and December 31, 2007	4
Consolidated Statements of Operations — Three and Six Months Ended June 30, 2008  and 2007 (unaudited)	5
Consolidated Statement of Stockholders’ Equity — Six Months Ended June 30, 2008 (unaudited)	6
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2008 and 2007 (unaudited)	7
Notes to Consolidated Financial Statements	8
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.    Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.    Controls and Procedures	59
Item 4T. Not Applicable	59
PART II.    OTHER INFORMATION	60
Item 1.    Legal Proceedings	60
Item 1A. Risk Factors	61
Item 2.    Not Applicable	61
Item 3.    Not Applicable	61
Item 4.    Not Applicable	61
Item 5.    Not Applicable	61
Item 6.    Exhibits	61
SIGNATURES	62
EXHIBIT INDEX	63

2

NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The principal factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in general economic conditions either nationally or in regions in which the Company operates, 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, additional factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those factors or conditions described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the Company’s other filings with the Securities and Exchange Commission. The Company’s past performance or past or present economic conditions in the Company’s housing markets are not indicative of future performance or conditions. Investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to projections over time unless required by federal securities law.

3

PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements.

WILLIAM LYON HOMES

CONSOLIDATED BALANCE SHEETS

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

ASSETS
	June 30, 2008		December 31, 2007
	(unaudited)
Cash and cash equivalents	$	91,910	$	73,197
Receivables — Note 7		27,731		45,267
Real estate inventories — Notes 2 and 3
Owned		916,228		1,061,660
Not owned		124,744		144,265
Investments in and advances to unconsolidated joint ventures — Note 4		2,878		4,671
Property and equipment, less accumulated depreciation of $13,229 and $12,093 at June 30, 2008 and December 31, 2007, respectively		14,980		16,092
Deferred loan costs		8,219		9,645
Goodwill		5,896		5,896
Deferred taxes — Note 7		41,602		—
Other assets		10,614		14,635
	$	1,244,802	$	1,375,328
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	25,292	$	40,890
Accrued expenses		53,833		67,786
Liabilities from inventories not owned		93,874		113,395
Notes payable — Note 5		231,064		266,932
7 5/8% Senior Notes due December 15, 2012 — Note 5		150,000		150,000
10 3/4% Senior Notes due April 1, 2013 — Note 5		247,735		247,553
7 1/2% Senior Notes due February 15, 2014 — Note 5		150,000		150,000
		951,798		1,036,556
Minority interest in consolidated entities — Notes 2 and 4		49,977		56,009
Stockholders’ equity — Note 8
Common stock, par value $.01 per share; 3,000 shares authorized; 1,000 shares outstanding at June 30, 2008 and December 31, 2007, respectively		—		—
Additional paid-in capital		48,867		48,867
Retained earnings		194,160		233,896
		243,027		282,763
	$	1,244,802	$	1,375,328

See accompanying notes.

4

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Operating revenue
Home sales	$	133,241		$	256,920		$	245,957		$	449,600
Lots, land and other sales		6,848			14,168			31,569			27,529
		140,089			271,088			277,526			477,129
Operating costs
Cost of sales — homes		(127,302	)		(219,869	)		(235,086	)		(377,877	)
Cost of sales — lots, land and other		(7,391	)		(12,974	)		(32,276	)		(24,767	)
Impairment loss on real estate assets —  Note 3		(20,918	)		(84,111	)		(46,118	)		(87,665	)
Sales and marketing		(10,999	)		(17,232	)		(22,103	)		(30,705	)
General and administrative		(6,515	)		(9,182	)		(13,499	)		(20,696	)
Other		(332	)		—			(1,774	)		(111	)
		(173,457	)		(343,368	)		(350,856	)		(541,821	)
Equity in (loss) income of unconsolidated joint ventures — Note 4		(714	)		28			(805	)		(614	)
Minority equity in loss (income) of consolidated entities — Note 2		790			(6,935	)		1,715			(9,218	)
Operating loss		(33,292	)		(79,187	)		(72,420	)		(74,524	)
Interest expense, net of amounts capitalized		(6,088	)		—			(9,254	)		—
Other income, net		450			1,401			346			2,542
Loss before benefit (provision) for income taxes		(38,930	)		(77,786	)		(81,328	)		(71,982	)
Benefit (provision) for income taxes — Note 7
Provision for income taxes		—			914			(10	)		413
Reduction of deferred tax assets as a result of election to be taxed as an “S” corporation for income tax purposes effective on January 1, 2007		—			—			—			(31,887	)
Recordation of deferred tax assets as a result of revocation of election to be taxed as an “S” corporation for income tax purposes effective January 1, 2008		—			—			41,602			—
		—			914			41,592			(31,474	)
Net loss	$	(38,930	)	$	(76,872	)	$	(39,736	)	$	(103,456	)

See accompanying notes.

5

WILLIAM LYON HOMES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2008

(in thousands)

(unaudited)

	Common Stock			Additional Paid-In Capital		Retained Earnings			Total
	Shares	Amount
Balance — December 31, 2007	1	$	—	$	48,867	$	233,896		$	282,763
Net loss	—		—		—		(39,736	)		(39,736	)
Balance — June 30, 2008	1	$	—	$	48,867	$	194,160		$	243,027

See accompanying notes.

6

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2008			2007
Operating activities
Net loss	$	(39,736	)	$	(103,456	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,136			1,236
Impairment loss on real estate assets		46,118			87,665
Equity in loss of unconsolidated joint ventures		805			614
Distribution of income from unconsolidated joint ventures		816			—
Minority equity in (loss) income of consolidated entities		(1,715	)		9,218
(Benefit) provision for income taxes		(41,592	)		31,474
Net changes in operating assets and liabilities:
Receivables		17,536			80,591
Real estate inventories — owned		99,496			(80,381	)
Deferred loan costs		1,426			907
Other assets		4,021			(6,865	)
Accounts payable		(15,598	)		2,571
Accrued expenses		(13,963	)		(51,523	)
Net cash provided by (used in) operating activities		58,750			(27,949	)
Investing activities
Investments in and advances to unconsolidated joint ventures		(40	)		(4,636	)
Distributions of capital from unconsolidated joint ventures		212			—
Purchases of property and equipment		(24	)		(615	)
Net cash provided by (used in) investing activities		148			(5,251	)
Financing activities
Proceeds from borrowing on notes payable		325,787			888,899
Principal payments on notes payable		(361,655	)		(855,949	)
Minority interest distributions, net		(4,317	)		(22,573	)
Net cash (used in) provided by financing activities		(40,185	)		10,377
Net increase (decrease) in cash and cash equivalents		18,713			(22,823	)
Cash and cash equivalents — beginning of period		73,197			38,732
Cash and cash equivalents — end of period	$	91,910		$	15,909
Supplemental disclosures of cash flow information
Income tax benefit credited to additional paid-in capital and retained earnings	$	—		$	6,776
Net changes in real estate inventories — not owned and liabilities from inventories not owned	$	19,521		$	29,411
Net changes in real estate inventories —  not owned and minority interests	$	—		$	19,937

See accompanying notes.

7

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 — Basis of Presentation and Significant Accounting Policies

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

The unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

The interim consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a presentation in accordance with U.S. generally accepted accounting principles have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of June 30, 2008 and December 31, 2007 and revenues and expenses for the periods presented. Accordingly, actual results could differ materially from those estimates in the near-term.

Certain reclassifications have been made to the prior period financial statements to conform to the current period 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.

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

The Company evaluates performance and allocates resources primarily based on the operating income of individual home building projects. Operating income is defined by the Company as operating revenue less operating costs plus equity in (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. All other segment measurements are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

8

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

A provision for warranty costs relating to the Company’s limited warranty plans is included in cost of sales at the time the home sale is recorded. The Company generally reserves approximately one percent of the sales price of its homes against the possibility of future charges relating to its one-year limited warranty and similar potential claims. Factors that affect the Company’s warranty liability include the number of homes under warranty, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. Changes in the Company’s warranty liability during the six months ended June 30 are as follows (in thousands):

	June 30,
	2008			2007
Warranty liability, beginning of period	$	30,048		$	23,364
Warranty provision during period		2,337			4,533
Warranty payments during period		(4,795	)		(6,543	)
Warranty charges related to pre-existing warranties during period		317			1,163
Warranty liability, end of period	$	27,907		$	22,517

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements, (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurement and requires prospective application for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (the “FSP”). The FSP amends FAS 157 to delay the effective date of FAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. For items within its scope, the FSP defers the effective date of FAS 157 to fiscal years beginning after November 15, 2008. The adoption of FAS 157 by the Company effective as of January 1, 2008 did not have a material impact on the Company’s consolidated financial position or results of operations.

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

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

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (“FAS 160”). FAS 160 establishes accounting and reporting standards

9

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

for a parent company’s non-controlling interest in a subsidiary and for the de-consolidation of a subsidiary. FAS 160 is effective for fiscal years beginning after December 15, 2008. The adoption of FAS No. 160 on January 1, 2009 shall be applied prospectively, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented, including the non-controlling interest shall be reclassified to equity. The adoption of FAS No. 160 will require the Company to record gains or losses upon changes in control which could have a significant impact on the consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133, (“FAS 161”). FAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”). FAS 161 requires entities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. FAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company does not anticipate the adoption of FAS 161 to have a material impact on its financial position, results of operations or cash flows.

Note 2 — Consolidation of Variable Interest Entities

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

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

Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity 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 has computed expected losses and residual returns based on the probability of future cash flows as outlined in Interpretation No. 46. If the Company has been determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE have been consolidated with the Company’s financial statements.

Supplemental consolidating financial information of the Company, specifically including information for the joint ventures and land banking arrangements consolidated under Interpretation No. 46, is presented below to allow investors to determine the nature of assets held and the operations of the consolidated entities. Investments in consolidated entities in the financial statements of wholly-owned entities presented below use the equity

10

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

method of accounting. Consolidated real estate inventories-owned include land deposits under option agreements or land banking arrangements of $57,372,000 and $57,321,000 at June 30, 2008 and December 31, 2007, respectively.

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 VIEs 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 venturers 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.

Summary information with respect to the Company’s consolidated and unconsolidated land banking arrangements is as follows as of June 30, 2008 (dollars in thousands):

Total number of land banking projects		4
Total number of lots		1,054
Total purchase price	$	243,310
Balance of lots still under option and not purchased:
Number of lots		626
Purchase price	$	124,744
Forfeited deposits (cash and letters of credit) if lots are not purchased	$	42,003

11

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)

	June 30, 2008
	Wholly- Owned		Variable Interest Entities Under Interpretation No. 46		Eliminating Entries			Consolidated Total
ASSETS
Cash and cash equivalents	$	85,665	$	6,245	$	—		$	91,910
Receivables		27,731		—		—			27,731
Real estate inventories
Owned		751,486		164,742		—			916,228
Not owned		93,874		30,870		—			124,744
Investments in and advances to unconsolidated joint ventures		2,878		—		—			2,878
Investments in consolidated entities		64,704		—		(64,704	)		—
Other assets		81,311		—		—			81,311
Intercompany receivables		—		2,475		(2,475	)		—
	$	1,107,649	$	204,332	$	(67,179	)	$	1,244,802
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	70,697	$	8,428	$	—		$	79,125
Liabilities from inventories not owned		93,874		—		—			93,874
Notes payable		150,172		80,892					231,064
7 5/8% Senior Notes due December 15, 2012		150,000		—		—			150,000
10 3/4% Senior Notes due April 1, 2013		247,735		—		—			247,735
7 1/2% Senior Notes due February 15, 2014		150,000		—		—			150,000
Intercompany payables		2,144		331		(2,475	)		—
Total liabilities		864,622		89,651		(2,475	)		951,798
Minority interest in consolidated entities		—		—		49,977			49,977
Owners’ capital
William Lyon Homes		—		64,704		(64,704	)		—
Others		—		49,977		(49,977	)		—
Stockholders’ equity		243,027		—		—			243,027
	$	1,107,649	$	204,332	$	(67,179	)	$	1,244,802

12

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)

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

13

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Three Months Ended June 30, 2008
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	135,819		$	4,270		$	—		$	140,089
Management fees		186			—			(186	)		—
		136,005			4,270			(186	)		140,089
Operating costs
Cost of sales		(130,240	)		(4,639	)		186			(134,693	)
Loss on impairment of real estate assets		(20,918	)		—			—			(20,918	)
Sales and marketing		(10,411	)		(588	)		—			(10,999	)
General and administrative		(6,513	)		(2	)		—			(6,515	)
Other		(332	)		—			—			(332	)
		(168,414	)		(5,229	)		186			(173,457	)
Equity in loss of unconsolidated joint ventures		(714	)		—			—			(714	)
Equity in loss of consolidated entities		(154	)		—			154			—
Minority equity in loss of consolidated entities		—			—			790			790
Operating loss		(33,277	)		(959	)		944			(33,292	)
Interest expense, net of amounts capitalized		(6,088	)		—			—			(6,088	)
Other income, net		435			15			—			450
Net loss	$	(38,930	)	$	(944	)	$	944		$	(38,930	)

14

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Three Months Ended June 30, 2007
	Wholly-Owned			Variable Interest Entities Under Interpretation No. 46			Eliminating Entries			Consolidated Total
Operating revenue
Sales	$	226,062		$	62,368		$	(17,342	)	$	271,088
Management fees		1,128			—			(1,128	)		—
		227,190			62,368			(18,470	)		271,088
Operating costs
Cost of sales		(200,035	)		(51,278	)		18,470			(232,843	)
Impairment loss on real estate assets		(84,111	)		—			—			(84,111	)
Sales and marketing		(14,162	)		(3,070	)		—			(17,232	)
General and administrative		(9,176	)		(6	)		—			(9,182	)
		(307,484	)		(54,354	)		18,470			(343,368	)
Equity in income of unconsolidated joint ventures		28			—			—			28
Equity in income of consolidated entities		1,198			—			(1,198	)		—
Minority equity in income of consolidated entities		—			—			(6,935	)		(6,935	)
Operating (loss) income		(79,068	)		8,014			(8,133	)		(79,187	)
Other income, net		1,282			119			—			1,401
(Loss) income before benefit for income taxes		(77,786	)		8,133			(8,133	)		(77,786	)
Benefit for income taxes		914			—			—			914
Net (loss) income	$	(76,872	)	$	8,133		$	(8,133	)	$	(76,872	)

15

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Six Months Ended June 30, 2008
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	268,022		$	9,504		$	—		$	277,526
Management fees		400			—			(400	)		—
		268,422			9,504			(400	)		277,526
Operating costs
Cost of sales		(257,171	)		(10,591	)		400			(267,362	)
Loss on impairment of real estate assets		(46,118	)		—			—			(46,118	)
Sales and marketing		(20,921	)		(1,182	)		—			(22,103	)
General and administrative		(13,451	)		(48	)		—			(13,499	)
Other		(1,774	)		—			—			(1,774	)
		(339,435	)		(11,821	)		400			(350,856	)
Equity in loss of unconsolidated joint ventures		(805	)		—			—			(805	)
Equity in loss of consolidated entities		(549	)		—			549			—
Minority equity in loss of consolidated entities		—			—			1,715			1,715
Operating loss		(72,367	)		(2,317	)		2,264			(72,420	)
Interest expense, net of amounts capitalized		(9,254	)		—			—			(9,254	)
Other income, net		293			53			—			346
Loss before benefit from income taxes		(81,328	)		(2,264	)		2,264			(81,328	)
Benefit from income taxes		41,592			—			—			41,592
Net loss	$	(39,736	)	$	(2,264	)	$	2,264		$	(39,736	)

16

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Six Months Ended June 30, 2007
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	413,444		$	81,027		$	(17,342	)	$	477,129
Management fees		1,836			—			(1,836	)		—
		415,280			81,027			(19,178	)		477,129
Operating costs
Cost of sales		(356,973	)		(64,849	)		19,178			(402,644	)
Loss on impairment of real estate assets		(87,665	)		—			—			(87,665	)
Sales and marketing		(26,488	)		(4,217	)		—			(30,705	)
General and administrative		(20,683	)		(13	)		—			(20,696	)
Other		(111	)		—			—			(111	)
		(491,920	)		(69,079	)		19,178			(541,821	)
Equity in loss of unconsolidated joint ventures		(614	)		—			—			(614	)
Equity in income of consolidated entities		2,961			—			(2,961	)		—
Minority equity in income of consolidated entities		—			—			(9,218	)		(9,218	)
Operating (loss) income		(74,293	)		11,948			(12,179	)		(74,524	)
Other income, net		2,311			231			—			2,542
(Loss) income before provision for income taxes		(71,982	)		12,179			(12,179	)		(71,982	)
Provision for income taxes		(31,474	)		—			—			(31,474	)
Net (loss) income	$	(103,456	)	$	12,179		$	(12,179	)	$	(103,456	)

17

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

Note 3 — Real Estate Inventories

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

	June 30, 2008		December 31, 2007
Inventories owned: (1)
Land deposits	$	57,372	$	57,321
Land and land under development		579,140		609,023
Homes completed and under construction		171,552		258,161
Model homes		108,164		137,155
Total	$	916,228	$	1,061,660
Inventories not owned: (2)
Variable interest entities — land banking arrangement	$	30,870	$	30,870
Other land options contracts		93,874		113,395
Total inventories not owned	$	124,744	$	144,265

(1) In 2008, the Company has temporarily suspended all development, sales and marketing activities at thirteen of its projects which are in the early stages of development. Management of the Company has concluded that this strategy is necessary under the prevailing market conditions and would allow the Company to market the properties at some future time when market conditions may have improved. The Company has incurred costs related to the thirteen projects of $243,824,000 as of June 30, 2008, of which $131,258,000 is included in Land and land under development, $68,246,000 is included in Homes completed and under construction and $44,320,000 is included in Model homes.

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

The Company accounts for its real estate inventories under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”). Statement No. 144 requires impairment losses to be recorded on real estate inventories when indicators of impairment are present and the undiscounted cash flows estimated to be generated by real estate inventories are less than the carrying amount of such assets. When an impairment loss is required for real estate inventories, the related assets are adjusted to their estimated fair value. Management determines the estimated fair value by present valuing the estimated future cash flows, including interest cost, at discount rates which are commensurate with the risk of the project under evaluation, generally ranging from 8% to 14%.

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.

18

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

The results of operations for the three and six months ended June 30, 2008, include non-cash charges of $20,918,000 and $46,118,000, respectively, to record impairment losses on real estate assets held by the Company at certain of its homebuilding projects. The impairments were primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to softening market conditions. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were written-down to their estimated fair value. The non-cash charges are reflected in impairment loss on real estate assets in the accompanying consolidated statements of operations.

Note 4 — 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 June 30, 2008 and December 31, 2007 is summarized as follows:

CONDENSED COMBINED BALANCE SHEETS

(in thousands)

	June 30, 2008		December 31, 2007
	(unaudited)
ASSETS
Cash and cash equivalents	$	1,646	$	1,912
Real estate inventories		12,412		9,910
Investment in unconsolidated joint venture		721		3,899
	$	14,779	$	15,721
LIABILITIES AND OWNERS’ CAPITAL
Accounts payable	$	485	$	294
Accrued expenses		28		—
Notes payable		7,389		4,991
		7,902		5,285
Owners’ capital
William Lyon Homes		2,878		4,671
Others		3,999		5,765
		6,877		10,436
	$	14,779	$	15,721

19

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED COMBINED STATEMENTS OF OPERATIONS

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Operating costs
General and administrative	$	(226	)	$	—		$	(420	)	$	—
Other		—			(325	)		—			(743	)
		(226	)		(325	)		(420	)		(743	)
Equity in income (loss) of unconsolidated joint ventures		(1,202	)		311			(1,190	)		(592	)
Operating loss		(1,428	)		(14	)		(1,610	)		(1,335	)
Other income, net		—			70			—			108
Net (loss) income	$	(1,428	)	$	56		$	(1,610	)	$	(1,227	)
Allocation to owners:
William Lyon Homes	$	(714	)	$	28		$	(805	)	$	(614	)
Others		(714	)		28			(805	)		(613	)
	$	(1,428	)	$	56		$	(1,610	)	$	(1,227	)

Income and loss allocations and cash distributions to the Company are made on a pro rata basis in accordance with the Company’s ownership interest in each respective joint venture. The Company’s ownership interest in these joint ventures is approximately 50%.

Note 5 — Senior Notes

As of June 30, 2008 and December 31, 2007, the Company had the following outstanding Senior Note obligations (collectively, the “Senior Notes”) (in thousands):

	June 30, 2008		December 31, 2007
	(unaudited)
7 5/8% Senior Notes due December 15, 2012	$	150,000	$	150,000
10 3/4% Senior Notes due April 1, 2013		247,735		247,553
7 1/2% Senior Notes due February 15, 2014		150,000		150,000
	$	547,735	$	547,553

20

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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 December 15, 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 December 15, 2012, which are not registered under the Securities Act of 1933, for a like amount of its new 7 ⁵/8% Senior Notes due December 15, 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 $146,500,000 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.

Except as set forth in the Indenture governing the 7 ⁵/8% Senior Notes, 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.

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.

Except as set forth in the Indenture governing the 10 ³/4% Senior Notes, the 10 ³/4% Senior Notes were not redeemable prior to April 1, 2008. Thereafter, the 10 ³/4% Senior Notes are 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.

7 ¹/2% Senior Notes

On February 6, 2004, California Lyon closed its offering of $150,000,000 principal amount of 7 ¹/2% Senior Notes due 2014 (the “7 ¹/2% Senior Notes”). The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. The notes were issued at par, resulting in net proceeds to the Company of approximately $147,600,000. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes having substantially identical terms. On July 16, 2004, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its

21

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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. Interest on the 7 ¹/2% Senior Notes is payable on February 15 and August 15 of each year.

Except as set forth in the Indenture governing the 7 ¹/2% Senior Notes, 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.

*    *    *    *    *

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 $75,000,000 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 of such 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.

22

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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 June 30, 2008, the Company had approximately $150,172,000 of secured indebtedness (excluding approximately $80,892,000 of secured indebtedness of consolidated entities — see Note 2) and approximately $57,531,000 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.

23

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING BALANCE SHEET

June 30, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	81,275	$	3,774	$	6,861	$	—		$	91,910
Receivables		—		12,980		14,751		—		—			27,731
Real estate inventories
Owned		—		751,486		—		164,742		—			916,228
Not Owned		—		124,744		—		—		—			124,744
Investments in and advances to unconsolidated joint ventures		—		2,878		—		—		—			2,878
Property and equipment, net		—		2,177		12,803		—		—			14,980
Deferred loan costs		—		8,219		—		—		—			8,219
Goodwill		—		5,896		—		—		—			5,896
Deferred taxes		—		41,602		—		—		—			41,602
Other assets		—		7,833		2,781		—		—			10,614
Investments in subsidiaries		243,027		65,170		8,697		—		(316,894	)		—
Intercompany receivables		—		—		195,451		2,475		(197,926	)		—
	$	243,027	$	1,104,260	$	238,257	$	174,078	$	(514,820	)	$	1,244,802
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	16,507	$	357	$	8,428	$	—		$	25,292
Accrued expenses		—		50,337		3,360		136		—			53,833
Liabilities from inventories not owned		—		93,874		—		—		—			93,874
Notes payable		—		137,137		13,035		80,892		—			231,064
7 5/8% Senior Notes		—		150,000		—		—		—			150,000
10 3/4% Senior Notes		—		247,735		—		—		—			247,735
7 1/2% Senior Notes		—		150,000		—		—		—			150,000
Intercompany payables		—		197,581		—		345		(197,926	)		—
Total liabilities		—		1,043,171		16,752		89,801		(197,926	)		951,798
Minority interest in consolidated entities		—		—		—		—		49,977			49,977
Stockholders’ equity		243,027		61,089		221,505		84,277		(366,871	)		243,027
	$	243,027	$	1,104,260	$	238,257	$	174,078	$	(514,820	)	$	1,244,802

24

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING BALANCE SHEET

December 31, 2007

(in thousands)

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

25

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	118,987		$	16,832		$	4,270		$	—		$	140,089
Management fees		—			(186	)		—			—			186			—
		—			118,801			16,832			4,270			186			140,089
Operating costs
Cost of sales		—			(114,663	)		(15,205	)		(4,639	)		(186	)		(134,693	)
Loss on impairment of real estate assets		—			(20,918	)		—			—			—			(20,918	)
Sales and marketing		—			(9,258	)		(1,153	)		(588	)		—			(10,999	)
General and administrative		—			(6,408	)		(105	)		(2	)		—			(6,515	)
Other		—			(332	)		—			—			—			(332	)
		—			(151,579	)		(16,463	)		(5,229	)		(186	)		(173,457	)
Equity in loss of unconsolidated joint ventures		—			(714	)		—			—			—			(714	)
(Loss) income from subsidiaries		(38,930	)		(212	)		3			—			39,139			—
Minority equity in loss of consolidated entities		—			—			—			—			790			790
Operating (loss) income		(38,930	)		(33,704	)		372			(959	)		39,929			(33,292	)
Interest expense, net of amounts capitalized		—			(6,088	)		—			—			—			(6,088	)
Other income (loss), net		—			513			(76	)		13			—			450
Loss before benefit for income taxes		(38,930	)		(39,279	)		296			(946	)		39,929			(38,930	)
Benefit from income taxes		—			—			—			—			—			—
Net loss	$	(38,930	)	$	(39,279	)	$	296		$	(946	)	$	39,929		$	(38,930	)

26

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2007

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	199,472		$	26,590		$	62,368		$	(17,342	)	$	271,088
Management fees		—			1,128			—			—			(1,128	)		—
		—			200,600			26,590			62,368			(18,470	)		271,088
Operating costs
Cost of sales		—			(178,734	)		(21,301	)		(51,278	)		18,470			(232,843	)
Impairment loss on real estate assets		—			(84,111	)		—			—			—			(84,111	)
Sales and marketing		—			(12,593	)		(1,569	)		(3,070	)		—			(17,232	)
General and administrative		—			(9,057	)		(119	)		(6	)		—			(9,182	)
		—			(284,495	)		(22,989	)		(54,354	)		18,470			(343,368	)
Equity in income (loss) of unconsolidated joint ventures		—			190			(162	)		—			—			28
(Loss) income from subsidiaries		(76,872	)		4,626			—			—			72,246			—
Minority equity in income of consolidated entities		—			—			—			—			(6,935	)		(6,935	)
Operating (loss) income		(76,872	)		(79,079	)		3,439			8,014			65,311			(79,187	)
Other income, net		—			264			1,015			122			—			1,401
(Loss) income before provision for income taxes		(76,872	)		(78,815	)		4,454			8,136			65,311			(77,786	)
Provision for income taxes		—			914			—			—			—			914
Net (loss) income	$	(76,872	)	$	(77,901	)	$	4,454		$	8,136		$	65,311		$	(76,872	)

27

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	240,463		$	27,559		$	9,504		$			$	277,526
Management fees		—			400			—			—			(400	)		—
		—			240,863			27,559			9,504			(400	)		277,526
Operating costs
Cost of sales		—			(232,166	)		(25,005	)		(10,591	)		400			(267,362	)
Impairment loss on real estate assets		—			(46,118	)		—			—			—			(46,118	)
Sales and marketing		—			(19,014	)		(1,907	)		(1,182	)		—			(22,103	)
General and administrative		—			(13,234	)		(217	)		(48	)		—			(13,499	)
Other		—			(1,773	)		(1	)		—			—			(1,774	)
		—			(312,305	)		(27,130	)		(11,821	)		400			(350,856	)
Equity in loss of unconsolidated joint ventures		—			(805	)		—			—			—			(805	)
(Loss) income from subsidiaries		(39,736	)		(823	)		4			—			40,555			—
Minority equity in income of consolidated entities		—			—			—			—			1,715			1,715
Operating (loss) income		(39,736	)		(73,070	)		433			(2,317	)		42,270			(72,420	)
Interest expense, net of amounts capitalized		—			(9,254	)		—			—			—			(9,254	)
Other income, net		—			928			(632	)		50			—			346
(Loss) income before provision for income taxes		(39,736	)		(81,396	)		(199	)		(2,267	)		42,270			(81,328	)
Provision for income taxes		—			41,592			—			—			—			41,592
Net (loss) income	$	(39,736	)	$	(39,804	)	$	(199	)	$	(2,267	)	$	42,270		$	(39,736	)

28

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2007

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	346,306		$	67,138		$	81,027		$	(17,342	)	$	477,129
Management fees		—			1,836			—			—			(1,836	)
		—			348,142			67,138			81,027			(19,178	)		477,129
Operating costs
Cost of sales		—			(304,037	)		(52,936	)		(64,849	)		19,178			(402,644	)
Impairment loss on real estate assets		—			(87,665	)		—			—			—			(87,665	)
Sales and marketing		—			(22,806	)		(3,682	)		(4,217	)		—			(30,705	)
General and administrative		—			(20,478	)		(205	)		(13	)		—			(20,696	)
Other		—			—			(111	)		—			—			(111	)
		—			(434,986	)		(56,934	)		(69,079	)		19,178			(541,821	)
Equity in (loss) income of unconsolidated joint ventures		—			(242	)		(372	)		—			—			(614	)
(Loss) income from subsidiaries		(103,456	)		12,481			13			—			90,962			—
Minority equity in income of consolidated entities		—			—			—			—			(9,218	)		(9,218	)
Operating (loss) income		(103,456	)		(74,605	)		9,845			11,948			81,744			(74,524	)
Other income, net		—			663			1,638			241			—			2,542
Income (loss) before provision for income taxes		(103,456	)		(73,942	)		11,483			12,189			81,744			(71,982	)
Provision for income taxes		—			(31,474	)		—			—			—			(31,474	)
Net (loss) income	$	(103,456	)	$	(105,416	)	$	11,483		$	12,189		$	81,744		$	(103,456	)

29

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities
Net loss	$	(39,736	)	$	(39,804	)	$	(199	)	$	(2,267	)	$	42,270		$	(39,736	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			432			704			—			—			1,136
Impairment loss on real estate assets		—			46,118			—			—			—			46,118
Equity in loss of unconsolidated joint ventures		—			805			—			—			—			805
Distribution of income from unconsolidated joint ventures		—			816			—			—			—			816
Minority equity in loss of consolidated entities		—			—			—			—			(1,715	)		(1,715	)
Equity in earnings (loss) of subsidiaries		39,736			823			(4	)		—			(40,555	)		—
Benefit from income taxes		—			(41,592	)		—			—			—			(41,592	)
Net changes in operating assets and liabilities:
Receivables		—			19,365			(1,850	)		21			—			17,536
Intercompany receivables/payables		—			—			(2,737	)		1,834			903			—
Real estate inventories—owned		—			100,458			—			(962	)		—			99,496
Deferred loan costs		—			1,426			—			—			—			1,426
Other assets		—			4,410			(389	)		—			—			4,021
Accounts payable		—			(16,521	)		(34	)		957			—			(15,598	)
Accrued expenses		—			(11,798	)		(133	)		(2,032	)		—			(13,963	)
Net cash provided by (used in) operating activities		—			64,938			(4,642	)		(2,449	)		903			58,750
Investing activities
Net change in investment in and advances to unconsolidated joint ventures		—			(40	)		—			—			—			(40	)
Distributions of capital from unconsolidated joint ventures		—			212			—			—			—			212
Purchases of property and equipment		—			(17	)		(7	)		—			—			(24	)
Investments in subsidiaries		—			1,437			—			—			(1,437	)		—
Advances to affiliates		—			1,263			—			—			(1,263	)		—
Net cash provided by (used in) investing activities		—			2,855			(7	)		—			(2,700	)		148
Financing activities
Proceeds from borrowings on notes payable		—			171,501			149,805			4,481			—			325,787
Principal payments on notes payable		—			(213,431	)		(148,224	)		—			—			(361,655	)
Minority interest contributions, net		—			—			—			—			(4,317	)		(4,317	)
Advances to affiliates		—			—			(89	)		(6,025	)		6,114			—
Net cash provided by (used in) financing activities		—			(41,930	)		1,492			(1,544	)		1,797			(40,185	)
Net (decrease) increase in cash and cash equivalents		—			25,863			(3,157	)		(3,993	)		—			18,713
Cash and cash equivalents at beginning of period		—			55,412			6,931			10,854			—			73,197
Cash and cash equivalents at end of period	$	—		$	81,275		$	3,774		$	6,861		$	—		$	91,910

30

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2007

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net (loss) income	$	(103,456	)	$	(105,416	)	$	11,483		$	12,189		$	81,744		$	(103,456	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			496			740			—			—			1,236
Equity in loss of unconsolidated joint ventures		—			242			372			—			—			614
Minority equity in income of consolidated entities		—			—			—			—			9,218			9,218
Equity in loss (earnings) of subsidiaries		103,456			(12,481	)		(13	)		—			(90,962	)		—
Impairment loss on real estate asset		—			87,665			—			—			—			87,665
Provision for income taxes		—			31,474			—			—			—			31,474
Net changes in operating assets and liabilities:
Receivables		—			44,431			35,641			519			—			80,591
Intercompany receivables/payables		—			—			(16,669	)		(2,151	)		18,820			—
Real estate inventories owned		—			(103,647	)		1,788			21,478			—			(80,381	)
Real estate inventories not owned		—			19,937			—			—			—			19,937
Deferred loan costs		—			907			—			—			—			907
Other assets		—			(6,822	)		(43	)		—			—			(6,865	)
Accounts payable		—			3,567			(359	)		(637	)		—			2,571
Accrued expenses		—			(47,565	)		(3,950	)		(8	)		—			(51,523	)
Net cash (used in) provided by operating activities		—			(87,212	)		28,990			31,390			18,820			(8,012	)
Investing activities:
Net change in investment in unconsolidated joint ventures		—			(4,264	)		(372	)		—			—			(4,636	)
Purchases of property and equipment		—			(113	)		(502	)		—			—			(615	)
Investments in subsidiaries		—			20,438			(1	)		—			(20,437	)		—
Advances (to) from affiliates		—			(10,075	)		—			—			10,075			—
Net cash provided by (used in) investing activities		—			5,986			(875	)		—			(10,362	)		(5,251	)
Financing activities:
Proceeds from borrowings on notes payable		—			489,186			405,320			(5,607	)		—			888,899
Principal payments on notes payable		—			(416,263	)		(439,686	)		—			—			(855,949	)
Minority interest distributions, net		—			—			—			(42,510	)		—			(42,510	)
Advances (to) from affiliates		—			—			(551	)		9,009			(8,458	)		—
Net cash provided by (used in) financing activities		—			72,923			(34,917	)		(39,108	)		(8,458	)		(9,560	)
Net decrease in cash and cash equivalents		—			(8,303	)		(6,802	)		(7,718	)		—			(22,823	)
Cash and cash equivalents at beginning of period		—			12,253			11,222			15,257			—			38,732
Cash and cash equivalents at end of period	$	—		$	3,950		$	4,420		$	7,539		$	—		$	15,909

31

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

Note 6 — 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. Phased takedowns of approximately 20 lots each occurred at periodic intervals for each of several product types through September 2004. As of December 31, 2004, all lots were purchased under this agreement. In addition, one-half of the net profits, as defined, in excess of six percent from the development are to be paid to the seller. During the three months ended March 31, 2007, $8,305,000 was paid to the seller, and a total amount has been paid of $14,015,000 as of March 31, 2007. This land acquisition qualified as an affiliate transaction under the Company’s 12 ¹/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994, as amended (“Old Indenture”). Pursuant to the terms of the Old Indenture, the Company determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to the Trustee under the Old Indenture a resolution of the Board of Directors of the Company set forth in an Officers’ Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company delivered to the Trustee under the 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.

For the three months ended June 30, 2008 and 2007, the Company incurred reimbursable on-site labor costs of $40,000 and $29,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon, of which $25,000 and $89,000 was due to the Company at June 30, 2008 and December 31, 2007, respectively. For the six months ended June 30, 2008 and 2007, the Company incurred reimbursable on-site labor costs of $95,000 and $79,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon.

For the three months ended June 30, 2008 and 2007, the Company incurred charges of $197,000 and $189,000, respectively related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary. For the six months ended June 30, 2008 and 2007, the Company incurred charges of $385,000 and $378,000, respectively, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.

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

32

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

the aircraft are charged to the Company at the Affiliate’s published rates for maintenance, inspections and repairs in effect at the time such work is completed. The total compensation paid to the Affiliate under the agreement amounted to $422,000 and $259,000 for the three months ended June 30, 2008 and 2007, respectively, and $647,000 and $616,000, for the six months ended June 30, 2008 and 2007, respectively.

General William Lyon entered into a time sharing agreement (“the Agreement”) with the Company pertaining to his personal use of the aircraft. The agreement calls for General Lyon to reimburse the company for all costs incurred by the Company during his personal flights plus a surcharge on fuel consumption of two times the cost. Pursuant to the agreement, the Company had earned revenue of $117,000 and $139,000 for charter services provided to William Lyon personally, during the three months ended June 30, 2008 and 2007, respectively, and $561,000 and $337,000 was due to the Company at June 30, 2008 and December 31, 2007, respectively. For the six months ended June 30, 2008 and 2007, the Company had earned revenue of $223,000 and $198,000, respectively for charter services provided to General Lyon, personally.

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, William Lyon Financial Services. These loans are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. These loans do not involve more than the normal risk of collectibility or present other unfavorable features and are sold to investors typically within 7 to 15 days.

Note 7 — Income Taxes

Effective January 1, 2007, the Company made an election in accordance with federal and state regulations to be taxed as an “S” corporation rather than a “C” corporation. Under this election, the Company’s taxable income flows through to and is reported on the personal tax returns of its shareholders. The shareholders are responsible for paying the appropriate taxes based on this election. The Company does not pay any federal taxes under this election and is only required to pay certain state taxes based on a rate of approximately 1.5% of taxable income. As a result of this election, the Company’s provision for income taxes for the six months ended June 30, 2007 included a reduction of deferred tax assets of $31,887,000 due to the elimination of any future tax benefit by the Company from such assets. In addition, unused recognized built in losses in the amount of $19,414,000 were no longer available to the Company.

Effective January 1, 2008, the Company and its shareholders made a revocation of the “S” corporation election. As a result of this revocation, the Company will be taxed as a “C” corporation. The shareholders will

33

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

not be able to elect “S” corporation status for at least five years. The revocation of the “S” corporation election will allow taxable losses generated in 2008 to be carried back to the 2006 “C” corporation year. As a result of the change in tax status, the Company recorded a deferred tax asset and related income tax benefit of $41,602,000 as of January 1, 2008. The recorded deferred tax asset reflects the anticipated tax refund for the carry back of the estimated 2008 tax loss to 2006 as a result of the reversal of temporary differences in 2008. The Company expects to receive the tax refund in early 2009. In addition, as of January 1, 2008, the Company has unused built-in losses of $19,414,000 which are available to offset future income and expire between 2010 and 2011. The utilization of these losses is limited to $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 2010 and 2011. The maximum cumulative unused built-in loss that may be carried forward through 2010 and 2011 is $11,526,000 and $7,888,000, respectively. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited under certain circumstances.

Effective January 1, 2007, the company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be considered “more-likely-than-not” to be sustained upon examination by taxing authorities. The Company has taken positions in certain taxing jurisdictions for which it is more likely than not that previously unrecognized tax benefits will be recognized. In addition, the Company has elected to recognize interest and penalties related to uncertain tax positions in the income tax provision. In accordance with the provisions of FIN 48, effective January 1, 2007, the Company recorded an income tax refund receivable of $5,654,000 and recognized the associated tax benefit as an increase in additional paid-in capital. In connection therewith, the Company recorded interest receivable of $1,122,000 and recognized the associated tax benefit as an increase in retained earnings. At December 31, 2007 and June 30, 2008, the Company has no unrecognized tax benefits.

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

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

Note 8 — Tender Offer and Merger

On May 18, 2006, General William Lyon announced the completion of a tender offer to purchase all of the outstanding shares of the common stock of the Company not already owned by him for $109.00 net per share in cash. The shares tendered in the offer, together with the shares already owned by General Lyon, The William Harwell Lyon 1987 Trust and The William Harwell Lyon Separate Property Trust, represented over 90% of the outstanding shares of the Company.

After receiving deliveries of a sufficient number of tendered shares to reach the 90% threshold, General Lyon and the two trusts contributed all the shares of the Company owned by them to WLH Acquisition Corp., a corporation owned by General Lyon and the two trusts. On July 25, 2006, WLH Acquisition Corp. was then

34

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

merged with and into the Company under the “short-form” merger provisions of Delaware law, with the Company continuing as the surviving corporation of the merger. At the effective time of the merger, each outstanding share of the Company’s common stock (except for shares owned by WLH Acquisition Corp. and by stockholders who properly exercise their appraisal rights in accordance with Delaware law) was cancelled and converted into the right to receive $109.00 per share in cash, without interest, which is the same consideration that was paid for shares of the Company in the tender offer by General Lyon.

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

See Note 9 for information on certain lawsuits which have been filed relating to General Lyon’s proposal.

Note 9 — 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.

Litigation Arising from General Lyon’s Tender Offer

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

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

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

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

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

35

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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

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

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

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

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

See Note 2 for information relating to the Company’s land banking arrangements.

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

36

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

As of June 30, 2008, the Company had $18,674,000 of outstanding irrevocable standby letters of credit to guarantee the Company’s financial obligations under certain land banking arrangements, joint venture agreements and other contractual arrangements in the normal course of business. 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 through 2009, at which time the Company may be required to renew the letters of credit to coincide with the term of the respective arrangement.

The Company also had outstanding performance and surety bonds of $219,116,000 at June 30, 2008 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 4 and 5 for additional information relating to the Company’s guarantee arrangements.

37

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

WILLIAM LYON HOMES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion of results of operations and financial condition should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1, as well as the information presented in the Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations

Overview and Recent Results

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

	Three Months Ended June 30,
	2008									2007
	Wholly-Owned			Joint Ventures			Consolidated Total			Wholly-Owned			Joint Ventures			Consolidated Total
Selected Financial Information (dollars in thousands)
Homes closed		308			11			319			471			77			548
Home sales revenue	$	128,971		$	4,270		$	133,241		$	224,432		$	32,488		$	256,920
Cost of sales		(122,849	)		(4,453	)		(127,302	)		(195,020	)		(24,849	)		(219,869	)
Gross margin	$	6,122		$	(183	)	$	5,939		$	29,412		$	7,639		$	37,051
Gross margin percentage		4.7	%		(4.3	)%		4.5	%		13.1	%		23.5	%		14.4	%
Number of homes closed
California		200			11			211			302			77			379
Arizona		73			—			73			86			—			86
Nevada		35			—			35			83			—			83
Total		308			11			319			471			77			548
Average sales price
California	$	510,000		$	388,200		$	503,600		$	561,300		$	421,900		$	533,000
Arizona		233,300			—			233,300			294,100			—			294,100
Nevada		284,300			—			284,300			356,800			—			356,800
Total	$	418,700		$	388,200		$	417,700		$	476,500		$	421,900		$	468,800
Number of net new home orders
California		255			22			277			302			47			349
Arizona		78			—			78			87			—			87
Nevada		63			—			63			54			—			54
Total		396			22			418			443			47			490
Average number of sales locations during period
California		25			3			28			30			6			36
Arizona		4			—			4			5			—			5
Nevada		11			—			11			10			—			10
Total		40			3			43			45			6			51

38

	As of June 30,
	2008						2007
	Wholly-Owned		Joint Ventures		Consolidated Total		Wholly-Owned		Joint Ventures		Consolidated Total
Backlog of homes sold but not closed at end of period
California		278		26		304		482		74		556
Arizona		77		—		77		166		—		166
Nevada		65		—		65		74		—		74
Total		420		26		446		722		74		796
Dollar amount of homes sold but not closed at end of period (dollars in thousands)
California	$	117,935	$	8,524	$	126,459	$	299,542	$	32,487	$	332,029
Arizona		15,579		—		15,579		39,311		—		39,311
Nevada		18,326		—		18,326		25,327		—		25,327
Total	$	151,840	$	8,524	$	160,364	$	364,180	$	32,487	$	396,667
Lots controlled at end of period
Owned lots
California		2,745		795		3,540		4,467		1,019		5,486
Arizona		4,362		1,745		6,107		4,716		1,745		6,461
Nevada		2,960		—		2,960		1,173		—		1,173
Total		10,067		2,540		12,607		10,356		2,764		13,120
Optioned lots(1)
California						534						1,163
Arizona						328						2,703
Nevada						—						1,013
Total						862						4,879
Total lots controlled
California						4,074						6,649
Arizona						6,435						9,164
Nevada						2,960						2,186
Total						13,469						17,999

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

39

	Six Months Ended June 30,
	2008									2007
	Wholly-owned			Joint Ventures			Combined Total			Wholly-owned			Joint Ventures			Combined Total
Selected Financial Information (dollars in thousands)
Homes closed		597			25			622			854			115			969
Home sales revenue	$	236,454		$	9,503		$	245,957		$	398,453		$	51,147		$	449,600
Cost of sales		(224,895	)		(10,191	)		(235,086	)		(339,911	)		(37,966	)		(377,877	)
Gross margin	$	11,559		$	(688	)	$	10,871		$	58,542		$	13,181		$	71,723
Gross margin percentage		4.9	%		(7.2	)%		4.4	%		14.7	%		25.8	%		16.0	%
Number of homes closed
California		382			25			407			504			115			619
Arizona		119			—			119			224			—			224
Nevada		96			—			96			126			—			126
Total		597			25			622			854			115			969
Average sales price
California	$	477,400		$	380,100		$	471,500		$	571,900		$	444,800		$	548,300
Arizona		236,600			—			236,600			293,900			—			293,900
Nevada		270,000			—			270,000			352,200			—			352,200
Total	$	396,100		$	380,100		$	395,400		$	466,600		$	444,800		$	464,000
Number of net new home orders
California		485			41			526			683			137			820
Arizona		129			—			129			199			—			199
Nevada		134			—			134			140			—			140
Total		748			41			789			1,022			137			1,159
Average number of sales locations during period
California		31			3			34			31			6			37
Arizona		4			—			4			5			—			5
Nevada		11			—			11			10			—			10
Total		46			3			49			46			6			52

On a consolidated basis, the number of net new home orders for the three months ended June 30, 2008 decreased 14.7% to 418 homes from 490 homes for the three months ended June 30, 2007. The number of homes closed on a consolidated basis for the three months ended June 30, 2008, decreased 41.8% to 319 homes from 548 homes for the three months ended June 30, 2007. On a consolidated basis, the backlog of homes sold but not closed as of June 30, 2008 was 446, down 44.0% from 796 homes a year earlier, and up 28.5% from 347 homes at March 31, 2008.

Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed on a consolidated basis as of June 30, 2008 was $160.4 million, down 59.6% from $396.7 million as of June 30, 2007 and up 13.0% from $141.9 million as of March 31, 2008. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 21% during the three months ended June 30, 2008 compared to 32% during the three months ended June 30, 2007. The inventory of completed and unsold homes was 32 homes as of June 30, 2008, down from 99 homes at March 31, 2008.

The average number of sales locations during the quarter ended June 30, 2008 was 43, down 15.7% from 51 in the comparable period a year ago. The Company’s number of new home orders per average sales location increased slightly to 9.7 for the quarter ended June 30, 2008 as compared to 9.6 for the quarter ended June 30, 2007.

40

Comparison of Three Months Ended June 30, 2008 to June 30, 2007

Consolidated operating revenue for the three months ended June 30, 2008 was $140.1 million, a decrease of $131.0 million, or 48.3%, from consolidated operating revenue of $271.1 million for the three months ended June 30, 2007. Revenue from sales of wholly-owned homes decreased $95.4 million, or 42.5%, to $129.0 million in the 2008 period from $224.4 million in the 2007 period. This decrease was comprised of (i) a decrease of $77.6 million due to a decrease in the number of wholly-owned homes closed to 308 in 2008 from 471 in 2007 and (ii) a decrease of $17.8 million due to a decrease in the average sales price of wholly-owned homes closed to $418,700 in the 2008 period from $476,500 in the 2007 period. Consolidated operating revenue includes revenue from sales of joint ventures due to the adoption of Interpretation No. 46. Revenue from sales of joint venture homes decreased $28.2 million, or 86.8%, to $4.3 million in the 2008 period from $32.5 million in the 2007 period. This decrease was comprised of (i) a decrease of $0.4 million due to a decrease in the average sales price of joint venture homes closed to $388,200 in the 2008 period from $421,900 in the 2007 period and (ii) a decrease of $27.8 million due to a decrease in the number of joint venture homes closed to 11 in 2008 from 77 in 2007. Revenue from sales of lots, land and other decreased to $6.8 million in the 2008 period from $14.2 million in the 2007 period due to the bulk sales of land in California in 2008, compared to the sale of a golf course in one of the Company’s markets and other bulk sales of land in Arizona in 2007.

Operating loss decreased to $33.3 million in the 2008 period from $79.2 million in the 2007 period. The excess of revenue from sales of homes over the related costs of sales (gross margin) decreased by $31.2 million to $5.9 million in the 2008 period from $37.1 million in the 2007 period primarily due to (i) a decrease in the number of homes closed to 319 in the 2008 period from 548 in the 2007 period, (ii) a decrease in the average sales price of homes closed to $417,700 in the 2008 period from $468,800 in the 2007 period and (iii) a decrease in the gross margin percentage to 4.5% in the 2008 period from 14.4% in the 2007 period. The excess of revenue from sales of lots, land and other over the related cost of sales (gross margin) decreased to a loss of $(0.6) million in the 2008 period from a profit of $1.2 million in the 2007 period primarily due to the bulk sales of land in California in the 2008 period and the sale of a golf course in one of the Company’s markets and other bulk sales of land in Arizona in the 2007 period.

Operating costs for the three months ended June 30, 2008 include a non-cash charge of $20.9 million to record impairment loss on real estate assets held by the Company at certain of its homebuilding projects compared to $84.1 million for the three months ended June 30, 2007. The impairment was primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to continued depressed market conditions in the housing industry. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were written-down to their estimated fair value. Management determines the estimated fair value by present valuing the estimated future cash flows, including interest cost, at discount rates which are commensurate with the risk of the project under evaluation, generally ranging from 8% to 14%. The non-cash charge is reflected in impairment loss on real estate assets in the consolidated statements of operations.

Sales and marketing expense decreased $6.2 million to $11.0 million in the 2008 period from $17.2 million in the 2007 period primarily due to (i) a decrease of $0.5 million in sales commissions due to the reduction in units closed and revenue from home sales in 2008 as compared to 2007, (ii) a decrease of $2.2 million in commissions paid to outside brokers in 2008 as compared to 2007, (iii) a decrease of $1.4 million in seller closing costs in 2008 as compared to 2007 and (iv) a decrease of $1.8 million in advertising expenses in 2008 compared to 2007. General and administrative expenses decreased $2.7 million to $6.5 million in the 2008 period from $9.2 million in the 2007 period primarily as a result of (i) a decrease in salaries and benefits of $2.2 million to $4.2 million in the 2008 period from $6.6 million in the 2007 period due to a reduction in the Company’s number of employees and (ii) other cost reduction measures implemented by management due to the soft housing market. Other operating costs consist of (i) operating losses realized by golf course operations in certain of the Company’s divisions which increased to $0.3 million in the 2008 period with no comparable amount in the 2007 period. Equity in (loss) income of unconsolidated joint ventures decreased to $(0.7) million in the 2008 period from $0.02 million in the 2007 period. Minority equity in loss (income) of consolidated entities increased to

41

income of $0.8 million in the 2008 period from a loss of $(6.9) million in the 2007 period, primarily due to net losses recorded at certain joint venture projects in the 2008 period compared to net income recorded at certain joint venture projects in the 2007 period.

Interest incurred decreased to $17.0 million in the 2008 period from $18.7 million in the 2007 period primarily due to a decrease in average debt balances and a decrease in interest rates. Interest expense, net of amounts capitalized was $6.1 million in the 2008 period, with no comparable amount in the 2007 period due to a decrease in real estate assets which qualify for interest capitalization in the 2008 period.

The benefit (provision) for income taxes was a benefit of $0.9 million in the 2007 period with no comparable amount in the 2008 period.

As a result of the foregoing factors, net loss decreased to $38.9 million in the 2008 period from a net loss of $76.9 million in the 2007 period.

Comparison of Six Months Ended June 30, 2008 to June 30, 2007

Consolidated operating revenue for the six months ended June 30, 2008 was $277.5 million, a decrease of $199.6 million, or 41.8%, from consolidated operating revenue of $477.1 million for the six months ended June 30, 2007. Revenue from sales of wholly-owned homes decreased $162.0 million, or 40.6%, to $236.5 million in the 2008 period from $398.5 million in the 2007 period. This decrease was comprised of (i) a decrease of $119.9 million due to a decrease in the number of wholly-owned homes closed to 597 in 2008 from 854 in 2007 and (ii) a decrease of $42.1 million due to a decrease in the average sales price of wholly-owned homes closed to $396,100 in the 2008 period from $466,600 in the 2007 period. Consolidated operating revenue includes revenue from sales of joint ventures due to the adoption of Interpretation No. 46. Revenue from sales of joint venture homes decreased $41.6 million, or 81.4%, to $9.5 million in the 2008 period from $51.1 million in the 2007 period. This decrease was comprised of (i) a decrease of $1.6 million due to a decrease in the average sales price of joint venture homes closed to $380,100 in the 2008 period from $444,800 in the 2007 period and (ii) a decrease of $40.0 million due to a decrease in the number of joint venture homes closed to 25 in 2008 from 115 in 2007. Revenue from sales of lots, land and other increased to $31.6 million in the 2008 period from $27.5 million in the 2007 period due to the bulk sales of land in California in 2008, compared to the sale of a golf course in one of the Company’s markets and other bulk sales of land in Arizona in 2007.

Operating loss decreased to $72.4 million in the 2008 period from $74.5 million in the 2007 period. The excess of revenue from sales of homes over the related costs of sales (gross margin) decreased by $60.8 million to $10.9 million in the 2008 period from $71.7 million in the 2007 period primarily due to (i) a decrease in the number of homes closed to 622 in the 2008 period from 969 in the 2007 period, (ii) a decrease in the average sales price of homes closed to $395,400 in the 2008 period from $464,000 in the 2007 period and (iii) a decrease in the gross margin percentage to 4.4% in the 2008 period from 16.0% in the 2007 period. The excess of revenue from sales of lots, land and other over the related cost of sales (gross margin) decreased to a loss of $(0.7) million in the 2008 period from a profit of $2.7 million in the 2007 period primarily due to the bulk sales of land in California in the 2008 period and the sale of a golf course in one of the Company’s markets and other bulk sales of land in Arizona in the 2007 period.

Operating costs for the six months ended June 30, 2008 include a non-cash charge of $46.1 million to record impairment loss on real estate assets held by the Company at certain of its homebuilding projects compared to $87.7 million for the six months ended June 30, 2007. The impairment was primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to continued depressed market conditions in the housing industry. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were written-down to their estimated fair value. Management determines the estimated fair value by present valuing the estimated future cash flows, including interest cost, at discount rates which are commensurate with the risk of the project

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under evaluation, generally ranging from 8% to 14%. The non-cash charge is reflected in impairment loss on real estate assets in the consolidated statements of operations.

Sales and marketing expense decreased $8.6 million to $22.1 million in the 2008 period from $30.7 million in the 2007 period primarily due to (i) a decrease of $0.8 million in sales commissions due to the reduction in units closed and revenue from home sales in 2008 as compared to 2007, (ii) a decrease of $3.9 million in commissions paid to outside brokers in 2008 as compared to 2007, (iii) a decrease of $1.5 million in seller paid closing costs and (iv) a decrease of $2.7 million in advertising expenses in 2008 compared to 2007. General and administrative expenses decreased $7.2 million to $13.5 million in the 2008 period from $20.7 million in the 2007 period primarily as a result of (i) a decrease in salaries and benefits of $6.1 million to $8.8 million in the 2008 period from $14.9 in the 2007 period due to a reduction in the Company’s number of employees, (ii) a decrease in bonus expense of $0.7 million to $1.6 million in the 2008 period from $2.3 million in the 2007 period and (iii) other cost reduction measures implemented by management due to the soft housing market. Other operating costs consist of (i) operating losses realized by golf course operations in certain of the Company’s divisions which increased to $0.7 million in the 2008 period from $0.1 million in the 2007 period and (ii) non-recurring items of approximately $1.1 million incurred by the Company during the 2008 period. Equity in (loss) income of unconsolidated joint ventures decreased to a loss of $(0.8) million in the 2008 period from a loss of $(0.6) million in the 2007 period. Minority equity in loss (income) of consolidated entities increased to income of $1.7 million in the 2008 period from a loss of $9.2 million in the 2007 period, primarily due to net losses recorded at certain joint venture projects in the 2008 period compared to net income recorded at certain joint venture projects in the 2007 period.

Interest incurred decreased to $35.1 million in the 2008 period from $36.2 million in the 2007 period primarily due to a slight decrease in average debt balances and a decrease in interest rates. Interest expense, net of amounts capitalized was $9.3 million in the 2008 period, with no comparable amount in the 2007 period due to a decrease in real estate assets which qualify for interest capitalization in the 2008 period.

The benefit (provision) for income taxes was a benefit of $41.6 million in the 2008 period compared to a provision of $31.5 million in the 2007 period. Effective January 1, 2008, the Company revoked the “S” corporation election and changed its tax status to a “C” corporation. As a result, the Company recorded a deferred tax asset and related tax benefit of $41.6 million in the 2008 period. Effective January 1, 2007 the Company elected to change its tax status to an “S” Corporation from a “C” Corporation, which required the Company to reduce deferred tax assets and incur an income tax provision of $31.9 million in the 2007 period. See Note 7 of “Notes to Consolidated Financial Statements” for further discussion.

As a result of the foregoing factors, net loss decreased to $39.7 million in the 2008 period from $103.5 million in the 2007 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

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Company may incur may be limited by the terms of the indentures and credit or other agreements governing the Company’s senior note obligations, revolving credit facilities and other indebtedness.

In 2008, the homebuilding industry has experienced continued decreased demand for housing, which has resulted in a decrease in new home orders, home closings, average sales prices and gross margins for the Company compared to the 2007 period. During the three and six months ended June 30, 2008, the Company incurred impairment losses on real estate assets in the amount of $20.9 million and $46.1 million, respectively. The impairments were primarily attributable to slower than anticipated homes sales and lower than anticipated net revenue due to the continued decline in market conditions in the homebuilding industry. The Company was required to write-down the book value of certain real estate assets in accordance with Statement No. 144, as defined in Note 1 of “Notes to Consolidated Financial Statements”.

During 2007 and 2008, in response to the slow-down in the homebuilding industry, the Company entered into certain land sales transactions to improve its liquidity and to reduce its overall debt. On December 26, 2007 and January 7, 2008, the Company entered into ten separate agreements with various affiliates of one of its equity partners (the “Equity Partner Agreements”). Pursuant to the Equity Partner Agreements, the Company agreed to sell to the equity partner affiliates 604 residential lots and 5 model homes in 10 communities in Orange County, San Diego County and Ventura County, California for an aggregate purchase price of $90.6 million in cash. The purchase and sale of 404 of the residential lots and the 5 model homes closed on December 27, 2007 (for an aggregate consideration of approximately $65.9 million) and the remainder of the residential lots closed on January 9, 2008. Prior to the sale, the collective net book value of these lots (as reflected on the Company’s financial statements) was approximately $210.7 million, resulting in a total loss on the sales transactions of $120.1 million. The loss of $40.3 million related to the portion of the land sales which closed in January 2008 was reflected in the Consolidated Statement of Operations as Impairment Losses on Real Estate Assets for the year ended December 31, 2007. The Company has entered into agreements with the various affiliates of the equity partner to build and market homes in 5 of the 10 communities on behalf of the affiliates. For such services, the Company receives fees (generally five percent of the sale price as defined) and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved. On April 4, 2008, certain of the equity partner affiliates acquired an additional 9 model homes in 2 of the 10 communities for an aggregate purchase price of $7.1 million.

On December 27, 2007, the Company sold certain land in San Diego County, California for $12.0 million in cash to a limited liability corporation owned indirectly by Frank T. Suryan, Jr. as Trustee of the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and a trust whose sole beneficiary is William H. Lyon, Executive Vice President and Chief Administrative Officer of the Company. The Company has received a report from a third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all independent members of the Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Company’s financial statements) was approximately $18.7 million, resulting in a loss on the transaction of $6.7 million, which was reflected in the Consolidated Statement of Operations for the year ended December 31, 2007.

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

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

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Under the modified Revolving Credit Facilities, the aggregate loan commitment is $305 million at June 30, 2008 (including one facility of $60.0 million, three of $50.0 million each, two of $35.0 million each and one of $25.0 million), with maturities at various dates as follows:

Loan Commitment Amount (in millions)		Balance Outstanding at June 30, 2008 (in millions)		Initial Maturity Date(1)
$	35.0	$	14.6	September 2008
	60.0		12.5	September 2008
	50.0		21.6	December 2008
	35.0		7.3	April 2009
	25.0		3.3	May 2009
	50.0		28.1	June 2009
	50.0		8.4	July 2009
$	305.0	$	95.8

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

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

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

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

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

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

Effective January 1, 2007, the Company made an election in accordance with federal and state regulations to be taxed as an “S” corporation rather than a “C” corporation. Under this election, the Company’s taxable income flows through to and is reported on the personal tax returns of its shareholders. The shareholders are responsible for paying the appropriate taxes based on this election. The Company does not pay any federal taxes under this election and is only required to pay certain state taxes based on a rate of approximately 1.5% of taxable income. As a result of this election, the Company’s provision for income taxes for the six months ended June 30, 2007 included a reduction of deferred tax assets of $31.9 million due to the elimination of any future tax benefit by the

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Company from such assets. In addition, unused recognized built in losses in the amount of $19.4 million were no longer available to the Company.

Effective January 1, 2008, the Company and its shareholders made a revocation of the “S” corporation election. As a result of this revocation, the Company will be taxed as a “C” corporation. The shareholders will not be able to elect “S” corporation status for at least five years. The revocation of the “S” corporation election will allow taxable losses generated in 2008 to be carried back to the 2006 “C” corporation year. As a result of the change in tax status, the Company recorded a deferred tax asset and related income tax benefit of $41.6 million as of January 1, 2008. The recorded deferred tax asset reflects the anticipated tax refund for the carry back of the estimated 2008 tax loss to 2006 as a result of the reversal of temporary differences in 2008. The Company expects to receive the refund in early 2009. In addition, as of January 1, 2008, the Company has unused built-in losses of $19.4 million which are available to offset future income and expire between 2010 and 2011. The utilization of these losses is limited to $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 2010 and 2011. The maximum cumulative unused built-in loss that may be carried forward through 2010 and 2011 is $11.5 million and $7.9 million, respectively. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited under certain circumstances.

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, 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.

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 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 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 $13.4 million.

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Except as set forth in the Indenture governing the 10 ³/4% Senior Notes, the 10 ³/4% Senior Notes were not redeemable prior to April 1, 2008. Thereafter, the 10 ³/4% Senior Notes are 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.

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. 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, 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.

*  *  *  *  *

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.

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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 June 30, 2008, the Company had approximately $150.2 million of secured indebtedness, (excluding approximately $80.9 million of secured indebtedness of consolidated entities) and approximately $57.5 million of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas.

Revolving Credit Facilities

As of June 30, 2008, the Company has seven revolving credit facilities which have an aggregate maximum loan commitment of $305.0 million, (including one facility of $60.0 million, three of $50.0 million each, two of $35.0 million each and one of $25.0 million), with maturities at various dates as follows:

Loan Commitment Amount (in millions)		Balance Outstanding at June 30, 2008 (in millions)		Initial Maturity Date(1)
$	35.0	$	14.6	September 2008
	60.0		12.5	September 2008
	50.0		21.6	December 2008
	35.0		7.3	April 2009
	25.0		3.3	May 2009
	50.0		28.1	June 2009
	50.0		8.4	July 2009
$	305.0	$	95.8

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

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

Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases

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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 June 30, 2008, $95.8 million was outstanding under these credit facilities, with a weighted-average interest rate of 4.875%, and the undrawn availability was $57.5 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 three and six months ended June 30, 2008, the Company borrowed $47.4 million and $159.6 million, respectively, and repaid $103.3 million and $203.5 million, respectively, under these facilities. The maximum amount outstanding was $144.4 million and the weighted average borrowings were $123.8 million during the three months ended June 30, 2008. Interest incurred on the revolving credit facilities for the three and six months ended June 30, 2008 was $1.7 million and $4.2 million, respectively. 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 sales proceeds of sales of the real property, including homes, which secure the applicable credit facility.

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

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

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

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

As of and for the period ending June 30, 2008, the Company is in compliance with these covenants.

Construction Notes Payable

At June 30, 2008, the Company had construction notes payable on certain consolidated entities amounting to $122.2 million. The construction notes have various maturity dates through 2017 and bear interest at rates ranging from prime plus 0.25% to prime plus 1.50% at June 30, 2008. Interest is calculated on the average daily balance and is paid following the end of each month.

Seller Financing

At June 30, 2008, the Company had no notes payable outstanding related to land acquisitions for which seller financing was provided.

Revolving Mortgage Warehouse Credit Facilities

The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has entered into two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in September 2008, provides for revolving loans of up to $22.5 million outstanding, $15.0 million of which is committed (lender obligated to lend if stated conditions are satisfied) and $7.5 million is not committed (lender advances are optional even if stated conditions are otherwise satisfied). The

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Company’s mortgage subsidiary and one of its unconsolidated joint ventures entered into an additional $20.0 million credit facility which matures in May 2009. The Company expects the maturities to be extended by the lender at each maturity date. 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 June 30, 2008 the outstanding balance under these facilities was $13.0 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 its right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. Additionally, the Company may be subject to other penalties if lots are not acquired. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider, general housing market conditions and geographic preferences. As described in Note 2 of “Notes to Consolidated Financial Statements”, Interpretation No. 46, requires the consolidation of the assets, liabilities and operations of two of the Company’s land banking arrangements including, as of June 30, 2008, real estate inventories of $30.9 million, which are included in real estate inventories not owned in the Company’s consolidated balance sheet.

In addition, the Company participates in two land banking arrangements, which are not a VIE in accordance with Interpretation No. 46, but are consolidated in accordance with SFAS No. 49, Accounting for Product Financing Arrangements, (“FAS 49”). Under the provisions of FAS 49, the Company has determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangements, and therefore, must record the remaining purchase price of the land of $93.8 million, which is included in real estate inventories not owned and liabilities from inventories not owned in the accompanying balance sheet.

Summary information with respect to the Company’s consolidated and unconsolidated land banking arrangements is as follows as of June 30, 2008 (dollars in thousands):

Total number of land banking projects		4
Total number of lots		1,054
Total purchase price	$	243,310
Balance of lots still under option and not purchased:
Number of lots		626
Purchase price	$	124,744
Forfeited deposits (cash and letters of credit) if lots were not purchased	$	42,003

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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 Note 2 of “Notes to Consolidated Financial Statements”, in accordance with 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. 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 4 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 June 30, 2008, the Company’s investment in and advances to unconsolidated joint ventures was $2.9 million and the venture partners’ investment in such joint ventures was $4.0 million. As of June 30, 2008, these joint ventures had obtained financing from construction lenders which amounted to $7.4 million of outstanding indebtedness.

Assessment District Bonds

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

Cash Flows — Comparison of Six Months Ended June 30, 2008 to Six Months Ended June 30, 2007

Net cash provided by (used in) operating activities increased to a source of $58.8 million in the 2008 period from a use of $27.9 million in the 2007 period. The change was primarily as a result of (i) a decrease in real estate inventories-owned of $99.5 million in the 2008 period from an increase of $80.4 million in the 2007 period, (ii) a decrease in accrued expenses of $14.0 million in the 2008 period compared to a decrease of $51.5 million in the 2007 period, (iii) a decrease in receivables of $17.5 million in the 2008 period compared to a decrease of $80.6 million in the 2007 period, (iv) a benefit for income taxes of $41.6 million in the 2008 period compared to a provision for income taxes of $31.5 million in the 2007 period, (v) impairment loss on real estate assets of $46.1 million in the 2008 period compared to $87.7 million in the 2007 period and (vi) net loss of $39.7 million in the 2008 period compared to net loss of $103.5 million in the 2007 period.

The decrease in real estate inventories-owned is primarily attributable to a decrease in land acquisitions and construction expenditures during the 2008 period compared to the 2007 period due to decreased demand for housing.

51

The decrease in accrued expenses is partially attributable to the decrease in accrued deferred compensation of $6.7 million in the 2008 period due to the termination of the Company’s Executive Deferred Compensation Plan (previously disclosed in the Company’s Annual Report on Form 10-K for the year ending December 31, 2007). As of December 31, 2007, the deferred compensation liability balance was $6.7 million. In addition, a net decrease in accrued bonus expense of $5.3 million during the 2008 period from a balance of $7.1 million as of December 31, 2007 compared to $1.8 million as of June 30, 2008 compared to a net decrease in accrued bonus expense of $29.8 million during the 2007 period from a balance of $39.4 million as of December 31, 2006 compared to $9.6 million as of June 30, 2007. The changes identified above during the first three months of the periods ending March 31, 2008 and 2007 are recurring in nature and are attributable to the timing of bonus payments made each year, offset by normal accruals for the period.

The decrease in receivables is attributable to a decrease in escrow proceeds receivable of $16.9 million during the 2008 period from a balance of $19.2 million as of December 31, 2007 to a balance of $2.3 million as of June 30, 2008, compared to a decrease of $43.2 million during the 2007 period, from a balance of $47.3 million as of December 31, 2006 to a balance of $4.1 million as of June 30, 2007. The large balance as of December 31, 2007 and 2006 was temporary in nature and primarily due to a significant number of homes closed in the last five days of the year of 122 in 2007 and 192 in 2006 where the homes had closed escrow but the Company had not yet received the funds from the escrow and title companies. The entire balance of escrow proceeds receivable at December 31, 2007 and 2006 was collected within the first few days of the following period.

The 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 increased to source of $0.1 million in the 2008 period from a use of $5.3 million in the 2007 period. The change was primarily as a result of a decrease in investments in and advances to unconsolidated joint ventures to $0.04 million in the 2008 period from $4.6 million in the 2007 period.

Net cash (used in) provided by financing activities decreased to a use of $40.2 million in the 2008 period from a source of $10.4 million in the 2007 period, primarily as a result of minority interest distributions of $4.3 million in the 2008 period compared to $22.6 million in the 2007 period and net principal payments on notes payable of $35.9 million in the 2008 period compared to net borrowings on notes payable of $33.0 in the 2007 period.

Off-Balance Sheet Arrangements

The Company enters into certain off-balance sheet arrangements including joint venture financing, option arrangements, land banking arrangements and variable interests in consolidated and unconsolidated entities. These arrangements are more fully described above and in Notes 2, 4 and 9 to Consolidated Financial Statements. In addition, the Company is party to certain contractual obligations, including land purchases and project commitments, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

52

Description of Projects

The Company’s homebuilding projects usually take two to five years to develop. The following tables presents project information to each of the Company’s homebuilding divisions.

Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Cumulative Units Closed as of June 30, 2008	Backlog at June 30, 2008(2)(3)	Lots Owned as of June 30, 2008(4)	Homes Closed for the Year Ended June 30,  2008	Sales Price Range(5)
	SOUTHERN CALIFORNIA REGION
SAN DIEGO/INLAND EMPIRE DIVISION
Wholly-Owned:
San Diego:
Promenade	2006	168	79	1	89	13	$370,000—480,000
Alcala Del Sur	2005	83	83	0	0	2	$660,000—710,000
Pasado Del Sur	2009	89	0	0	25	0	$535,000—575,000
Maybeck	2006	51	51	0	0	13	$620,000—710,000
Sunset Cove	2007	35	35	0	0	6	$420,000—460,000
Santee:
Altair	2008	85	17	14	68	17	$330,000—355,000
Riverside County:
Parkside, Corona	2007	122	81	27	41	12	$436,000—529,000
Serafina, North Corona	2007	314	210	22	104	20	$265,000—349,000
Bridle Creek, Corona	2003	274	240	10	34	5	$436,000—560,000
Savannah at Harveston Ranch, Temecula	2005	162	136	21	26	3	$240,000—306,000
San Bernardino County:
Adelina, Fontana	2008	109	17	7	92	17	$265,000—295,000
Rosabella, Fontana	2008	114	24	4	90	20	$288,000—310,000
Amador, Rancho Cucamonga	2007	69	27	2	42	10	$278,000—335,000
Vintner’s Grove, Rancho Cucamongo
Sollara SFD	2007	45	11	8	34	2	$390,000—455,000
Canela Triplex	2007	63	15	8	48	2	$278,000—335,000
Chapman Heights, Yucaipa
Braeburn	2005	113	104	9	9	12	$434,000—609,000
Crofton	2005	140	140	0	0	4	$403,000—433,000
Vista Bella	2012	108	0	0	108	0	$264,000—295,000
Redcort	2012	90	0	0	90	0	$298,000—323,000
Total Wholly-Owned:		2,234	1,270	133	900	158
Joint Ventures:
San Diego:
Ravenna	2005	199	199	0	0	1	$453,000—513,000
Treviso	2005	186	158	19	28	4	$300,000—410,000
Total Joint Ventures:		385	357	19	28	5
TOTAL SAN DIEGO/INLAND EMPIRE DIVISION		2,619	1,627	152	928	163
ORANGE COUNTY/LOS ANGELES DIVISION
Wholly-Owned:
Irvine:
San Carlos	2007	152	33	2	7	13	$380,000—545,000
Ivy	2009	135	0	0	0	0	$430,000—520,000
Columbus Grove:
Lantana	2006	102	97	5	5	9	$765,000—840,000
Kensington	2006	63	62	1	1	10	$640,000—775,000
Tustin:
Columbus Grove/Columbus Square:
Clarendon	2007	102	102	0	0	2	$270,000—650,000
Astoria	2007	38	37	1	1	11	$725,000—850,000
Cambridge Lane	2007	156	94	30	62	3	$126,000—500,000
Ciara	2007	67	47	7	20	8	$1,000,000—1,265,000
Verandas	2007	44	44	0	0	18	$650,000—705,000

53

Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Cumulative Units Closed as of June 30, 2008	Backlog at June 30, 2008(2)(3)	Lots Owned as of June 30, 2008(4)	Homes Closed for the Year Ended  June 30, 2008	Sales Price Range(5)
San Clemente:
Alora	2008	13	12	1	1	12	$950,000—1,050,000
San Juan Capistrano:
Floralisa	2005	80	80	0	0	6	$1,275,000—1,295,000
Estrella Rosa	2006	40	40	0	0	1	$1,675,000—1,725,000
Moorpark:
Meridian Hills:
Ashford	2006	31	31	0	0	3	$780,000—890,000
Marquis	2007	34	34	0	0	7	$830,000—975,000
Los Angeles:
Arboreta at Rainbird
Vintage	2008	87	0	21	87	0	$435,000—545,000
Tradition	2008	53	0	32	53	0	$600,000—689,000
Hawthorne:
360 South Bay(6):
The Flats	2010	188	0	0	188	0	$495,000—700,000
The Lofts	2010	123	0	0	123	0	$525,000—775,000
The Rows	2010	94	0	0	94	0	$700,000—810,000
The Courts	2010	118	0	0	118	0	$635,000—790,000
The Gardens	2010	102	0	0	102	0	$755,000—980,000
Azusa:
Rosedale(6)
Gardenia	2010	147	0	0	147	0	$455,000—550,000
Sage Court	2010	176	0	0	176	0	$420,000—515,000
TOTAL ORANGE COUNTY/LOS ANGELES DIVISION		2,145	713	100	1,185	103
SOUTHERN CALIFORNIA REGION COMBINED TOTAL
Wholly-Owned		4,379	1,983	233	2,085	261
Joint Ventures		385	357	19	28	5
		4,764	2,340	252	2,113	266
	NORTHERN CALIFORNIA REGION
Wholly-Owned:
Contra Costa County:
Seagate at Bayside, Hercules	2005	96	96	0	0	1	$615,000—727,000
Rivergate I & II, Antioch	2006	167	126	13	41	9	$350,000—430,000
Vista Del Mar, Pittsburgh
Vineyard(6)	2007	155	7	5	148	6	$650,000—710,000
Victory(6)	2008	129	7	2	122	7	$680,000—745,000
Stanislaus County:
Falling Leaf, Modesto
Trails	2006	43	43	0	0	15	$260,000—325,000
Groves	2006	43	43	0	0	9	$273,000—308,000
Meadows	2006	33	33	0	0	14	$359,000—400,000
Placer County:
Whitney Ranch, Rocklin
Shady Lane	2006	96	54	4	42	12	$365,000—391,000
Twin Oaks	2006	92	34	2	58	9	$430,000—558,000
Sacramento County:
Big Horn, Elk Grove
Plaza Walk	2005	106	79	6	27	13	$250,000—300,000
Gallery Walk	2005	149	104	8	45	9	$200,000—235,000
Verona at Anatolia, Rancho Cordova	2005	79	78	1	1	11	$400,000—425,000
Marquee at Fair Oaks	2007	190	14	4	176	6	$300,000—360,000
Total Wholly-Owned		1,378	718	45	660	121

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Cumulative Units Closed as of June 30, 2008	Backlog at June 30, 2008(2)(3)	Lots Owned as of June 30, 2008(4)	Homes Closed for the Year Ended June 30, 2008	Sales Price Range(5)
Joint Ventures:
Contra Costa County:
Vista Del Mar, Pittsburgh
Villages	2007	102	35	4	67	11	$	303,000—361,000
Venue	2007	132	35	3	97	9	$	363,000—579,000
Monterey County:
East Garrison	2011	603	0	0	603	0	$	239,000—780,000
Total Joint Ventures:		837	70	7	767	20
NORTHERN CALIFORNIA REGION COMBINED TOTAL
Wholly-Owned		1,378	718	45	660	121
Joint Ventures		837	70	7	767	20
		2,215	788	52	1,427	141
	ARIZONA REGION
Wholly-Owned:
Maricopa County     Copper Canyon Ranch, Surprise Sunset Point	2004	282	282	0	0	1	$	287,000—383,000
Talavera, Phoenix	2006	134	134	0	0	9	$	256,000—330,000
Coldwater Ranch, Maricopa County	2009	368	0	0	368	0	$	149,000—190,000
Lehi Crossing, Mesa	2013	880	0	0	552	0	$	209,000—288,000
Rancho Mercado, Phoenix	2012	1,850	0	0	1,850	0	$	194,000—282,000
Hastings Property, Queen Creek	2011	631	0	0	631	0	$	158,000—435,000
Lyon’s Gate, Gilbert:
Pride	2006	650	300	35	350	35	$	173,000—188,000
Savanna	2006	174	132	15	42	20	$	200,000—244,000
Sahara	2006	169	126	12	43	24	$	234,000—300,000
Acacia	2007	365	52	15	313	30	$	190,000—252,000
Future Products	2009	213	0	0	213	0
Total Wholly-Owned:		5,716	1,026	77	4,362	119
Joint Ventures:
Maricopa County     Circle G at the Church Farm North	2012	1,745	0	0	1,745	0	$	154,000—435,000
Total Joint Ventures:		1,745	0	0	1,745	0
ARIZONA REGION TOTAL		7,461	1,026	77	6,107	119
	NEVADA REGION
Wholly-Owned:
Clark County
Summerlin, Las Vegas
Kingwood Crossing	2006	100	68	15	32	8	$	385,000—471,000
North Las Vegas
The Cottages	2004	360	301	1	59	4	$	172,000—199,000
La Tierra	2006	67	59	1	8	6	$	315,000—345,000
Tierra Este	2008	126	5	1	121	5	$	275,000—305,000
Carson Ranch, Las Vegas
West Series I	2005	71	67	0	4	0	$	395,000—430,000
West Series II	2005	59	53	0	6	2	$	406,000—503,000
East Series I	2006	103	58	4	45	8	$	355,000—390,000
East Series II	2007	58	12	2	46	5	$	406,000—461,000
West Park, Las Vegas
Villas	2006	191	61	10	130	17	$	283,000—325,000
Courtyards	2006	113	51	11	62	14	$	330,000—380,000
Mesa Canyon, Las Vegas	2011	49	0	0	49	0	$	410,000—446,000
The Lyon Estates, Las Vegas	2012	129	0	0	129	0	$	635,000—700,000

55

Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Cumulative Units Closed as of June 30, 2008	Backlog at June 30, 2008(2)(3)	Lots Owned as of June 30, 2008(4)	Homes Closed for the Year Ended June 30, 2008	Sales Price Range(5)
Nye County
Mountain Falls, Pahrump:
Cascata	2005	147	137	0	10	0	$	216,000—238,000
Tramonto	2005	212	161	3	51	8	$	256,000—291,000
Move up product	2011	91	0	0	91	0
Bella Sera	2005	129	100	5	29	8	$	312,000—352,000
Cascata Ancora	2007	118	44	7	74	7	$	196,000—218,000
Entrata	2007	99	10	5	89	4	$	177,000—199,000
Future Projects	2010	1,925	0	0	1,925	0
NEVADA REGION TOTAL		4,147	1,187	65	2,960	96
GRAND TOTALS:
Wholly-Owned		15,620	4,914	420	10,067	597
Joint Ventures		2,967	427	26	2,540	25
		18,587	5,341	446	12,607	622

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

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

(3) Of the total homes subject to pending sales contracts as of June 30, 2008, 416 represent homes completed or under construction and 30 represent homes not yet under construction.

(4) Lots owned as of June 30, 2008 include lots in backlog at June 30, 2008.

(5) Sales price range reflects base price only and excluded 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 June 30, 2008. The Company consolidated the purchase price of the lots in accordance with Interpretation No. 46, and considers the lots owned at June 30, 2008.

(7) During the three months ended June 30, 2008, 195 homesites were sold from this project in a bulk land sale transaction.

56

Income Taxes

Effective January 1, 2007, the Company made an election in accordance with federal and state regulations to be taxed as an “S” corporation rather than a “C” corporation. Under this election, the Company’s taxable income flows through to and is reported on the personal tax returns of its shareholders. The shareholders are responsible for paying the appropriate taxes based on this election. The Company does not pay any federal taxes under this election and is only required to pay certain state taxes based on a rate of approximately 1.5% of taxable income. As a result of this election, the Company’s provision for income taxes for the six months ended June 30, 2007 included a reduction of deferred tax assets of $31.9 million due to the elimination of any future tax benefit by the Company from such assets. In addition, unused recognized built in losses in the amount of $19.4 million are no longer available to the Company.

Effective January 1, 2008, the Company and its shareholders made a revocation of the “S” corporation election. As a result of this revocation, the Company will be taxed as a “C” corporation. The shareholders will not be able to elect “S” corporation status for at least five years. The revocation of the “S” corporation election will allow taxable losses generated in 2008 to be carried back to the 2006 “C” corporation year. As a result of the change in tax status, the Company recorded a deferred tax asset of $41.6 million as of January 1, 2008. The recorded deferred tax asset reflects the anticipated tax refund for the carry back of the estimated 2008 tax loss to 2006 as a result of the reversal of temporary differences in 2008. The Company expects to receive the refund in early 2009. In addition, as of January 1, 2008, the Company has unused built-in losses of $19.4 million which are available to offset future income and expire between 2010 and 2011. The utilization of these losses is limited to $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 2010 and 2011. The maximum cumulative unused built-in loss that may be carried forward through 2010 and 2011 is $11.5 million and $7.9 million, respectively. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited under certain circumstances.

Effective January 1, 2007, the company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be considered “more-likely-than-not” to be sustained upon examination by taxing authorities. The Company has taken positions in certain taxing jurisdictions for which it is more likely than not that previously unrecognized tax benefits will be recognized. In addition, the Company has elected to recognize interest and penalties related to uncertain tax positions in the income tax provision. In accordance with the provisions of FIN 48, effective January 1, 2007, the Company recorded an income tax refund receivable of $5.7 million and recognized the associated tax benefit as an increase in additional paid-in capital. In connection therewith, the Company recorded interest receivable of $1.1 million and recognized the associated tax benefit as an increase in retained earnings. At December 31, 2007 and June 30, 2008, the Company has no unrecognized tax benefits.

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

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

Related Party Transactions

See Note 6 of the Notes to Consolidated Financial Statements for a description of the Company’s transactions with related parties.

57

Critical Accounting Polices

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and costs and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those which impact its most critical accounting policies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, the Company’s most critical accounting policies are real estate inventories and cost of sales; impairment of real estate inventories; sales and profit recognition; and variable interest entities. Since December 31, 2007, there have been no changes in the Company’s most critical accounting policies and no material changes in the assumptions and estimates used by management.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurement and requires prospective application for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (the “FSP”). The FSP amends FAS 157 to delay the effective date of FAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. For items within its scope, the FSP defers the effective date of FAS 157 to fiscal years beginning after November 15, 2008. The adoption of FAS 157 by the Company effective as of January 1, 2008 does not have a material impact on the Company’s consolidated financial position or results of operations.

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

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

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

58

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133, (“FAS 161”). FAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”). FAS 161 requires entities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. FAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company does not anticipate the adoption of FAS 161 to have a material impact on its financial position, results of operations or cash flows.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Company’s Annual Report on Form 10-K for the year ended December 31, 2007, includes detailed disclosure about quantitative and qualitative disclosures about market risk. Quantitative and qualitative disclosures about market risk have not materially changed since December 31, 2007.

Item 4.    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 Quarterly Report. Although the Company’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives, there can be no assurance that such disclosure controls and procedures will always achieve their stated goals under all circumstances.

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 period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 4T.

Not Applicable

59

WILLIAM LYON HOMES

PART II.     OTHER INFORMATION

Item 1.    Legal Proceedings

Litigation Arising from General Lyon’s Tender Offer

As described above in Part I, Item 2 under the caption “Tender Offer”, on March 17, 2006, the Company’s principal stockholder commenced a tender offer (the “Tender Offer”) to purchase all outstanding shares of the Company’s common stock not already owned by him. Initially, the price offered in the Tender Offer was $93 per share, but it was subsequently increased to $109 per share.

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

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

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

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

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

A purported class action lawsuit challenging the Tender Offer was also filed in the Superior Court of the State of California, County of Orange. On March 17, 2006, a complaint captioned Alaska Electrical Pension

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Fund v. William Lyon Homes, Inc., et al., Case No. 06-CC-00047, was filed. On April 5, 2006, plaintiff in the Alaska Electrical action filed an Amended Complaint (the “California Action”). The complaint in the California Action 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. Plaintiff in the California Action also sought to enjoin the Tender Offer, and, among other things, to obtain attorneys’ fees and expenses related to the litigation.

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

Item 1A.    Risk Factors

The Company’s Annual Report on Form 10-K for the year ended December 31, 2007, includes detailed disclosure about risk factors which should be carefully considered when evaluating any investment in the Company. Risk factors have not materially changed since the filing of the Annual Report on Form 10-K for the year ended December 31, 2007.

Items 2, 3, 4 and 5.

Not applicable.

Item 6.    Exhibits

Exhibit No.	Description
10.1	Amended and Restated Master Loan Agreement dated as of January 28, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.2	Seventh Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of March 12, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and JPMorgan Chase Bank, N.A., a national banking association (“Bank”).
10.3	Fourth Amendment to Borrowing Base Revolving Line of Credit Agreement entered into as of May 14, 2008 between William Lyon Homes, Inc., a California corporation (“Borrower”) and Wachovia Bank, National Association, a national banking association (“Lender”), formerly referenced as Agent for Wachovia Financial Services, Inc., a North Carolina corporation (incorporated herein by reference to Exhibit 10.1 filed with the registrant’s Current Report on Form 8-K filed on July 10, 2008).
10.4	Fifth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of May 20, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”), and California Bank & Trust, a California banking corporation (“Lender”).
10.5	Second Extension and Modification Agreement dated May 21, 2008 by and between William Lyon Homes, Inc., a California corporation (“Owner”), and California National Bank, a national banking association (“Lender”) (incorporated herein by reference to Exhibit 10.1 filed with the registrant’s Current Report on Form 8-K filed on May 28, 2008).
10.6	Eighth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of June 5, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and JPMorgan Chase Bank, N.A., a national banking association (“Bank”).
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

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WILLIAM LYON HOMES

SIGNATURES

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

	WILLIAM LYON HOMES Registrant
Date:  August 5, 2008	By:	/s/    MICHAEL D. GRUBBS
		MICHAEL D. GRUBBS Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)
Date:  August 5, 2008	By:	/s/    W. DOUGLASS HARRIS
		W. DOUGLASS HARRIS Senior Vice President, Corporate Controller and Corporate Secretary (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
10.1	Amended and Restated Master Loan Agreement dated as of January 28, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.2	Seventh Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of March 12, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and JPMorgan Chase Bank, N.A., a national banking association (“Bank”).
10.3	Fourth Amendment to Borrowing Base Revolving Line of Credit Agreement entered into as of May 14, 2008 between William Lyon Homes, Inc., a California corporation (“Borrower”) and Wachovia Bank, National Association, a national banking association (“Lender”), formerly referenced as Agent for Wachovia Financial Services, Inc., a North Carolina corporation (incorporated herein by reference to Exhibit 10.1 filed with the registrant’s Current Report on Form 8-K filed on July 10, 2008).
10.4	Fifth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of May 20, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”), and California Bank & Trust, a California banking corporation (“Lender”).
10.5	Second Extension and Modification Agreement dated May 21, 2008 by and between William Lyon Homes, Inc., a California corporation (“Owner”), and California National Bank, a national banking association (“Lender”) (incorporated herein by reference to Exhibit 10.1 filed with the registrant’s Current Report on Form 8-K filed on May 28, 2008).
10.6	Eighth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of June 5, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and JPMorgan Chase Bank, N.A., a national banking association (“Bank”).
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

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EX-10.1

Exhibit 10.1

William Lyon Homes, Inc.

Loan No. 906-0100

AMENDED AND RESTATED MASTER LOAN AGREEMENT

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

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

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

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

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

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

(b) Such documents and instruments as Lender may require to evidence the status, organization or authority of Borrower and any guarantor (“Guarantor”) of the Loan identified in the Specific Loan Terms.

(c) If indicated in Paragraph 7 of the Specific Loan Terms, continuing guaranties (collectively, the “Guaranty”) of the Loan executed by the Guarantor(s) identified in Paragraph 5 of the Specific Loan Terms.

(d) Construction cost breakdowns for the construction and completion of all Lots, Improvements and Residences comprising the Properties (each, a “Construction Cost Breakdown”) within the Initial Approved Subdivisions then forming a part of the Borrowing Base, each in form and content satisfactory to Lender, and otherwise meeting the criteria set forth in Paragraph 2.2(m) below.

(e) Financial statements of Borrower, Borrower’s general partner (“General Partner”) or managing member (“Managing Member”), if applicable, and any Guarantor (the “Financial Statements”), acceptable in form and content to Lender for such operational periods as are required by Lender.

(f) A written opinion of Borrower’s counsel, satisfactory to Lender, in form and content satisfactory to Lender, addressed to Lender (“Opinion Letter”), opining as to the matters described in Paragraph 10 of the Specific Loan Terms.

(g) Such sums required by Lender in connection with the Loan (“Loan Fees”), including, but not limited to, a loan facility fee (“Loan Facility Fee”), cost analysis and inspection fee in the amounts set forth in Paragraph 19 below, and payment of all accrued and owing Lender Costs (defined in Paragraph 19 below).

(h) Such other documents and instruments as Lender may require to evidence, govern or secure payment of the Loan, including one or more Mortgages encumbering the Approved Subdivisions forming the Borrowing Base and such other documents and instruments as may be specified in Paragraph 7 of the Specific Loan Terms.

(i) If required by Lender, evidence that the Properties within the Initial Approved Subdivisions are not located within any designated flood plain or special flood, earthquake, or other hazard area.

2.2 Additional Borrowing Base Availability Requirements For Initial Approved Subdivisions And For First Disbursements Based On Inclusion Of Additional Approved Subdivisions In Borrowing Base. For Disbursements based on availability under the Borrowing Base with respect to each Additional Approved Subdivision, and in order for such Approved Subdivision to be available for inclusion in the Borrowing Base, Borrower shall execute and deliver to, procure for and deposit with and pay to Lender the following, all in form and substance satisfactory to Lender, such requirements also being applicable to the availability of Disbursements based on the Initial Approved Subdivisions as part of the Borrowing Base in addition to the requirements of Paragraph 2.1 above (without duplication):

(a) Lender shall have received such documents as Lender has required as part of its approval of the subject Approved Subdivision and to evidence, govern or secure the payment of the Loan, including indemnity agreements executed by Borrower and Guarantor covering liability for hazardous materials on, under or about the subject Lots or Properties, and a Construction Deed of Trust (With Security Agreements, Fixture Filing, and Assignment of Rents and Leases) (individually and collectively, the “Mortgage”), securing the payment of the Note and Loan and evidencing a first lien or charge on all Real Property within the applicable Approved Subdivision, all in form and content satisfactory to Lender.

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(b) Evidence that the Mortgage encumbering the Real Property to be included in the Borrowing Base has been recorded in the official real property records (“Official Records”) of the county where such Real Property is located (“Recordation”).

(c) At Recordation for the subject Mortgage, Lender shall have received a commitment for, and subsequent delivery thereof within the time therefor required by Lender, an ALTA construction loan policy of title insurance or its equivalent, on the form required by Lender, together with any endorsements that Lender may require (“Title Endorsements Required”), as set forth in Paragraph 8 of the Specific Loan Terms, with a liability limit of not less than the maximum aggregate amounts of the Loan Allocations (as hereinafter defined) for each Property covered by such Mortgage assuming that Residences are to be constructed on each Lot in the Approved Subdivision (the “Aggregate Loan Allocation”), issued by an issuer of title insurance, acceptable to Lender as set forth in Paragraph 8 of the Specific Loan Terms (“Title Insurer”), insuring Lender’s interest under each such Mortgage as a valid first-priority lien on the Lots and Properties with full coverage against mechanics’ and materialmen’s liens, subject only to the permitted exceptions acceptable to Lender (“Permitted Exceptions”) (each, a “Title Policy”). In order for each Approved Subdivision to remain eligible under the Borrowing Base for Disbursement availability after Recordation in the Official Records in the counties in which the subject Real Property is located, Borrower shall, at its own cost and expense, maintain the first priority of the Mortgages as a lien on the subject Lots and Properties and deliver or cause to be delivered to Lender from time to time such endorsements to the Title Policies as Lender deems necessary to insure such priority; provided, however, the maximum title insurance for title insurance underwriters must be acceptable to Lender, and if required by Lender, from time to time, Borrower shall cause to be issued to Lender re-insurance or an additional Title Policy or Title Policies, in such amounts and from such title insurance underwriters, as are acceptable to Lender.

(d) Policies of risk insurance in form and content and from insurers acceptable to Lender, which policies shall include clauses requiring a minimum of thirty (30) days’ written notice to Lender before such insurance may be canceled or reduced, and which shall not include any coinsurance provision, and which shall provide coverage, in amounts satisfactory to Lender (“Insurance Required”), for the risks set forth in, and otherwise meeting the requirements of, Paragraph 9 of the Specific Loan Terms. Notice is hereby given to Borrower pursuant to the provisions on California Civil Code Section 2955.5 that no lender shall require a borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the property. Borrower hereby acknowledges and agrees that it has received and reviewed the foregoing notice prior to its execution of the Note and any other security documents comprising the Loan Instruments.

(e) To the extent the same exist at the time Borrower requests Disbursements based on availability of Loan Proceeds due to the inclusion of a subject Approved Subdivision in the Borrowing Base, and in all events prior to the first Disbursement for the construction of a Residence in such Approved Subdivision, a complete set of representative construction plans and specifications, including grading, mechanical and electrical (the “Plans”) with respect to each type or model of Residence to be constructed by Borrower on every Lot in such Approved Subdivision prepared by a licensed civil engineer or architect acceptable to Lender.

(f) If and when the same exist, if requested by Lender, assignment of any construction contract(s), engineering contract(s) and architectural contract(s), including the Plans for such Approved Subdivision.

(g) Recorded Subdivision Map or Plat, as applicable based on the location of the Approved Project (“Final Map”), meeting the requirements of Applicable Law, legally describing all Lots covered by the Mortgage encumbering such Approved Subdivision, approved by all applicable governmental authorities having jurisdiction (collectively, “Governmental Authorities”), so that for all purposes and under all Applicable Law, each such Lot or Property may be mortgaged, conveyed and otherwise dealt with as a separate legal lot or parcel. For Lots Being Actively Developed, Lender may

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accept an approved tentative map or plat if such map or plat and all conditions thereto are approved by Lender and if the Final Map for all such Lots will be recorded on a date approved in writing by Lender prior to the making of any Disbursement based on Borrowing Base availability for such Approved Subdivision; provided, however, no Disbursements for construction of Residences, other than Models (as defined in Paragraph 2 of the Specific Loan Terms) in any Approved Subdivision shall be permitted until the Final Map is recorded in the Official Records as contemplated above and only to the extent permitted under Applicable Law.

(h) Appraisal of the Real Property in the subject Approved Subdivision, which shall be ordered directly by Lender, at Borrower’s expense, prepared by an appraiser satisfactory to Lender and otherwise in form and substance satisfactory to Lender.

(i) Any sums for Lender Costs which are then due and payable.

(j) Evidence that each Lot covered by the applicable Mortgage is not located within any designated flood plain or special hazard area.

(k) True, correct and complete copies of all executed contracts of sale and escrow instructions (the “Contracts”) for Borrower’s acquisition of the Real Property within such Approved Subdivision.

(l) If construction or site development work has commenced on the Real Property located within the subject Approved Subdivision, and as requested by Lender, a waiver of mechanics lien and stop notice rights from each original contractor, subcontractor and material supplier, enforceable in accordance with Applicable Law, to be submitted with the initial Application for Disbursement (as defined in Paragraph 5(a) below) based on Borrowing Base availability for such Approved Subdivision, or with a Residential Draw Request (as defined in Paragraph 5(a) below) for such Approved Subdivision, as applicable.

(m) A detailed Construction Cost Breakdown of all costs and expenses required to acquire, develop and complete construction of the Lots and Properties in the relevant Approved Subdivision as to the following:

(i) with respect to acquisition of the Real Property and construction of the Lots and Improvements in such Approved Subdivision to be financed with proceeds of the Loan; and

(ii) with respect to construction of the Residences and any Improvements in such Approved Subdivision to be financed with proceeds of the Loan.

Each Construction Cost Breakdown shall be approved by Lender in its sole discretion and is subject to change only with the prior written consent of Lender which may be withheld in its sole discretion.

(n) If and as requested by Lender and depending on the Stage (as defined in Paragraph 5(a)(i) below) of development of the Approved Subdivision in question, (i) evidence that all applicable zoning ordinances, map approvals and conditions, permit requirements and restrictive covenants (collectively, “Restrictions”) affecting the Real Property covered by such Mortgage permit the construction of and use and density intended for the Residences to be constructed thereon and have been or will be complied with; (ii) evidence of building permits and all other permits and governmental approvals reasonably required with respect to the Real Property covered by such Mortgage, (iii) evidence of the availability of all utilities to and for the Real Property covered by such Mortgage; (iv) evidence that all streets providing access to the Real Property covered by such Mortgage have been or will be dedicated to public use (if such dedication is then required by applicable governmental authorities) and installed and accepted by the applicable governmental authorities (if such installation and/or acceptance is then required by such authorities); (v) a Phase 1 and, if recommended therein, Phase 2 environmental site assessment report with respect to the Real Property covered by such Mortgage (together with any additional studies, tests or reports recommended therein) which is

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prepared by a qualified firm acceptable to Lender and which certifies as follows: (a) that the Lots and Properties are in compliance with the requirements of Paragraph 14 below and meeting Lender’s other standard requirements for such reports; and (b) there is no publicly available information or records, or evidence at the Property covered by such Mortgage or visible in the surrounding community, of environmental matters that could restrict the development or use of such Properties or of any high voltage transmission lines, wetlands, or hazardous material except as to such matters consented to in writing by Lender, in advance of any disbursement with respect to such Properties, and (vi) such other information and evidence as Lender shall require relating to Borrower or such Property.

(o) Evidence, which may take the form of a certification thereof by Borrower provided Lender has no reason to believe such certification is inaccurate or misleading as to any such matter stated therein, that all representations and warranties of Borrower set forth in this Loan Agreement are true and correct and that no Default or Event of Default (as each such term is hereafter defined in Paragraph 11 below) shall exist.

(p) Evidence that performance and labor and material payment bonds required by applicable Governmental Authorities with respect to such Approved Subdivision have been posted in accordance with Applicable Law.

(q) Subordination agreements, in form and content satisfactory to Lender, providing for the subordination to the lien and charge of the relevant Mortgage any liens, rights to payment or performance or clouds on title affecting the Real Property in such Approved Subdivision, including, without limitation, pursuant to any Contracts under which Borrower has acquired such Real Property.

(r) If requested by Lender following the imposition of any lien filed against any of the Lots or Properties with respect to site improvement work in such Approved Subdivision, which lien is susceptible of having preference over the lien of the Mortgage encumbering such Approved Subdivision under California Civil Code Section 3137, as determined by Lender in its sole discretion, Lender shall have received evidence satisfactory to Lender of Borrower’s procurement and recordation of a payment bond meeting the requirements of California Civil Code Section 3139. The requirements of this subparagraph shall apply (with such modifications as are necessary to accommodate Applicable Laws in such jurisdiction) equally to Approved Subdivisions in jurisdictions other than California.

(s) Evidence that Borrower is in compliance with any development agreements, public or private, affecting the Real Property in such Approved Subdivision.

2.3 Requirements For Certain Borrowing Base Stages. Borrower shall satisfy the following requirements and, if required by Lender, deliver to Lender evidence of such satisfaction, (i) to establish availability under the Borrowing Base for Disbursements based on the below specified Stages of construction in an Approved Subdivision, or (ii) as a condition to Disbursements pursuant to the draw procedure set forth in Paragraph 5(a)(ii) below if the Borrowing Base has been discontinued, as applicable:

(a) As to any Stage, all material conditions to precedent availability of Disbursements for any prior Stage shall have been satisfied, or if Lender has deferred the satisfaction of any such conditions to a later date, the satisfaction of such conditions by the required date.

(b) As to Stage 1, specified in the attached Exhibit “B”, building permit(s) and all other permits required with respect to the Residences covered by such Mortgage shall have been issued and in full force and effect.

(c) As to Stage 2, specified in the attached Exhibit “B”, if requested by Lender, Lender’s Inspector (defined in Paragraph 7(c) below) shall have certified in writing, as to the completion of the foundation and Title Insurer shall have issued its foundation endorsement to the Title Policy, in the form of CLTA endorsement No. 102.5 or 102.7 or as Lender may otherwise require, assuring Lender that such foundation is constructed wholly within the boundaries of the Properties, does not encroach on any easements, and does not violate any applicable set-back requirements.

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(d) Availability under the Borrowing Base for Disbursements based on the final Stage (Stage 9 in “Exhibit B”) for a Property will not be deemed to exist until Lender has received, if Lender so requests, an affidavit or certificate executed by Borrower certifying that, as to such Property (1) all requirements of Governmental Authorities having jurisdiction have been satisfied; (2) no mechanics’ or materialmen’s liens or other encumbrances have been filed against the Property; (3) a final certificate of occupancy or an unconditional temporary certificate of occupancy has been issued by the governing municipal authority; and (4) all invoices, bills, and other payments have been paid in full to the appropriate parties with respect to such Property other than invoices or bills being paid from such final Disbursement; however, Lender shall have the right to require at any time the evidence of such certified matters, including without limitation, evidence that either (i) the Property has been completed; or (ii) a certificate of occupancy has been issued by the appropriate Governmental Authority and final lien releases or waivers by all parties who have supplied labor, materials, or services for the construction of such Property, or who otherwise might be entitled to claim a contractual, statutory, or constitutional lien against such Property.

(e) As to any Stage, the applicable Mortgage shall continue to constitute a valid first-priority lien on the Properties encumbered thereby and a valid first-priority security interest in any related personal property for the full amount then outstanding on account of the Loan, and, if requested by Lender, Title Insurer shall have issued its endorsement to the Title Policy (which may be in the form of a CLTA 122 endorsement) insuring the continuing first priority of such Mortgage for all prior Disbursements and/or its commitment to insure such priority as to any pending Disbursements, subject only to such exceptions thereto as have been approved in writing by Lender.

(f) As to each Stage, if requested by Lender, such certificates, approvals and evidence of completion, in whole or in part, of the applicable construction item described on the applicable Construction Cost Breakdown from the prior Stage of construction of the Properties in such Approved Subdivision, together with copies of contracts and subcontractors’ bills and invoices as Lender may request.

(g) Lender shall have timely received any applicable Lender Costs then required to have been paid pursuant to this Loan Agreement with respect to such Approved Subdivision.

3. DISBURSEMENT PRIOR TO RECORDATION. Notwithstanding any contrary provisions of the Note, this Loan Agreement, or any of the other Loan Instruments, and in consideration of Lender’s Disbursement of all or part of the Loan Proceeds prior to the Recordation of a Mortgage on Lots or Property for which such Loan Proceeds are being disbursed, Borrower and Lender covenant and agree as follows as to such Mortgage and such Loan Proceeds:

(a) Provided Borrower has then satisfied all conditions to Disbursement of the Loan Proceeds under this Loan Agreement, except those requiring the Recordation of the subject Mortgage, Lender agrees to make Disbursements of the Loan Proceeds, or so much thereof as Borrower shall request, directly to the Title Insurer as part of the closing of the transaction whereby an Additional Approved Subdivision is included in the Borrowing Base to provide availability of Loan Proceeds based on such Approved Subdivision, or for availability of Loan Proceeds to acquire or construct such Approved Subdivision (in each case, the “Loan Closing”) prior to Recordation of said Mortgage. Said Disbursement shall be made in accordance with and subject to Lender’s escrow instructions to the Title Insurer which shall provide, among other things, that the funds so disbursed may be used for the benefit of Borrower only when Recordation of the subject Mortgage has occurred and the conditions for the Loan Closing can be complied with.

(b) For purpose of this Loan Agreement, all terms and provisions of the Note, and Borrower’s obligations thereunder, shall be deemed effective and in full force and effect on the date the requested Disbursement is made to the Title Insurer, except as those terms and provisions are amended hereby.

(c) Interest shall commence and accrue at the rate provided in the Note on all Loan Proceeds disbursed by Lender to the Title Insurer from the date of such Disbursement irrespective of when or if the subject Mortgage is recorded or when or if such Loan Proceeds are disbursed by the Title Insurer to or for the benefit of Borrower.

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(d) Unless and until Recordation has occurred, the Note shall be deemed unsecured as to such Approved Subdivision and, if such Mortgage is not recorded within three (3) Business Days following the date of said Disbursement to the Title Insurer, the principal amount of such Disbursement, and all interest accrued thereon in accordance herewith, shall be due and payable by Borrower to Lender upon Lender’s demand made at any time after said third Business Day. Until the Recordation of the subject Mortgage has occurred, the Note shall be deemed amended to conform to the provisions of this Paragraph 3.

This Section is intended to cover the rights and obligations of the parties relative to the Disbursement of Loan Proceeds applicable to Lots and Property covered by a specific Mortgage prior to Recordation of such Mortgage and, except as to the provisions hereof relating to commencement of interest, the provisions of this Section shall be deemed canceled and of no further effect upon Recordation of the subject Mortgage. Lender’s election to make any Disbursement of Loan Proceeds prior to Recordation of such Mortgage shall be in Lender’s sole and absolute discretion and the provisions of this Section shall in no event be deemed to compel Lender to waive any condition to Disbursements under this Loan Agreement, including without limitation, Recordation of the subject Mortgage prior to any Disbursement of Loan Proceeds as to the Initial Disbursements.

4. PROCEDURE FOR APPROVAL OF NEW SUBDIVISIONS. Disbursements shall only be made, and availability of Loan Proceeds under the Borrowing Base shall only exist, with respect to Approved Subdivisions. Lender shall have approved all aspects of each Subdivision for which Disbursements are sought, in advance of any such Disbursement for acquisition or construction of such Approved Subdivision, or based on its inclusion in the Borrowing Base. Borrower shall request approval of each Subdivision prior to a request for Disbursements with respect thereto, and shall provide Lender with all information required by Lender in connection therewith, including, without limitation, a Construction Cost Breakdown applicable to such Subdivision. Lender’s failure to approve a Subdivision in writing, or any portion thereof, within fifteen (15) business days of its receipt of all information required in connection therewith shall be deemed a disapproval thereof. Upon, and as a condition to, any approval of a new Subdivision by Lender, Borrower shall execute and deliver to Lender a confirmation of any restrictions or requirements imposed by Lender as a condition to its approval of such Subdivision, including any required supplements or modifications to the Loan Instruments, or confirmations thereof, as may be required by Lender in connection therewith. A Subdivision which is approved in writing by Lender for inclusion in the Borrowing Base and/or for Disbursements for acquisition or construction thereof, and otherwise meeting the requirements of this Loan Agreement, shall be an “Approved Subdivision.”

5. PROCEDURE FOR DISBURSEMENTS. Subject to all of the terms and provisions of this Loan Agreement, Disbursements under the Loan shall be in accordance with the following:

(a) Except as set forth in subsection (ii) below, Disbursements of the Loan shall be made in accordance with the Borrowing Base (as defined in subsection (i) below) and in accordance with the following:

(i) Borrower shall be entitled only to Disbursements in the amount approved by Lender, based upon: (A) as to Lots, the percentage of completion of each such Lot, as reasonably determined by Lender based on the Construction Cost Breakdown for the Approved Subdivision in which such Lots are located, as the same may be verified by Lender’s Inspector, and (B) as to Properties, the stage, as specified in Exhibit “B” attached hereto (the “Stage”), of construction of the Properties in the subject Approved Subdivision and for which all other requirements under this Loan Agreement for Disbursement have been met. On a monthly basis, Borrower shall submit to Lender a work in progress report (the “WIP Report”) which identifies each Property by Subdivision, its address, lot and block number, plan type, Loan Allocation (as defined below), whether or not it is Under Contract (as defined in Paragraph 3 of the Specific Loan Terms), sales price, and its Stage of completion either as a Residence, a Finished Lot or a Lot Being Actively Developed, according to the applicable Construction Cost Breakdown therefor (as approved by Lender, the “Borrowing Base Summary”). The Borrowing Base Summary, as approved by Lender, shall establish the

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current Borrowing Base availability (subject to reduction for Lots and Residences released or required to be released from Mortgages after the date of such WIP Report), and shall be certified on behalf of Borrower by Borrower’s Agent (as identified in Paragraph 6 of the Specific Loan Terms) as true and correct. To request a Disbursement based on the Borrowing Base, Borrower’s Agent shall execute and deliver an Application for Disbursement in the form of the attached Exhibit “C” (“Application for Disbursement”) accompanied by such information as Lender may reasonably request regarding satisfaction of any conditions to the requested Disbursement required under the terms of this Loan Agreement. At any given time, the Borrowing Base will be determined by the most recent Borrowing Base Summary based on the most recent WIP Report, as received and accepted by Lender. However, if inspections by Lender reveal that the WIP Report overstates the actual work in progress in the aggregate, the Borrowing Base for that and subsequent WIP Reports will be reduced by the amount of overstatement until another inspection has been performed by Lender. If inspection by Lender reveals that more than one WIP Report by Borrower overstates the actual work in progress, Lender may restrict the Borrowing Base to that amount determined by the last inspection by Lender or discontinue Borrowing Base Disbursements, as contemplated under subparagraph (ii) below. The aggregate amount, determined by Lender in its sole discretion, available from time to time, of the Stage of Lots Being Actively Developed (as such Stage is set forth in Exhibit “B” attached hereto) and the Stage of actual work in process (as such Stage is set forth in Exhibit “B” attached hereto) of the Residences, is referred to herein as the “Borrowing Base.”

(ii) Notwithstanding anything to the contrary in this Loan Agreement or the other Loan Instruments, at any time (and from time to time) Lender may, in its sole discretion, following the occurrence of an Event of Default, elect, pursuant to written notice thereof given to Borrower, to discontinue the Borrowing Base method of Disbursement hereunder and require that any and all future Disbursements of the Loan shall be made in installments to Borrower for the payment of the acquisition and development and refinancing costs of Lots and/or, after actual commencement of construction hereunder, for payment of all costs of labor, materials or services for the construction of the Residences based on work actually done in accordance with the applicable Construction Costs Breakdown for such Properties. From and after the date of such written notice, Paragraph 5(a)(i) above shall be of no force and effect. Thereafter, Disbursements under this Loan Agreement shall be based upon work actually done during the preceding period less retainage (if required by Lender), and all draw requests shall be executed and certified on behalf of Borrower by Borrower’s Agent and shall be in the form of, and contain the information as set forth in a residential draw request, in the form of Exhibit “D” attached hereto (“Residential Draw Request”), accompanied by such other information as may be requested by Lender from time to time, such information and documentation to include invoices, canceled checks, lien waivers and other evidence as may be reasonably required by Lender, such as: (i) unconditional lien releases and waivers, in form and content acceptable to Lender, from the general contractor and all other contractors, subcontractors and suppliers of materials or labor, acknowledging receipt of, and release and waiver of any lien, stop notice or other right with respect to, amounts equal to prior Disbursements made for such materials or labor; (ii) if Lender so requests, unconditional lien releases and waivers to similar effect, with respect to the requested Disbursements; and (iii) evidence reasonably satisfactory to Lender establishing actual payment of Property costs of a type which does not give rise to lien rights and for which lien releases are, as a result, not appropriate (such as permits), for which prior Disbursements were made. In addition, delivery to Lender of information and of evidence of the satisfaction of certain conditions specified under Sections 2.2 and 2.3 above, shall be a condition precedent to any Disbursements upon any discontinuation of the Borrowing Base hereunder and such requirements may be applied on an individual Property-by-Property basis.

(b) Any provision herein to the contrary notwithstanding, for purposes of determining the Borrowing Base and/or as to Disbursements for the construction of a Property, the maximum amount of the Loan allocated to be disbursed for a Property (the “Loan Allocation” or if applicable to more than one Property, the “Loan Allocations”) shall not exceed the lesser of: (1) the percentage set forth in Paragraph 11 of the Specific Loan Terms of the direct costs of such Property, as determined by Lender (the “Loan to Cost Ratio”); or (2) the percentage set forth in Paragraph 11 of the Specific Loan Terms of the lesser of the following values which is applicable to such Property (the “Loan to Value Ratio”):

(i) The actual price of the Property as stated in a Sales Contract; or

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(ii) The value established in an appraisal prepared at Borrower’s cost and expense by an appraiser satisfactory to Lender and in form and substance satisfactory to Lender; or

(iii) The list price offered by Borrower.

(c) Anything herein or in any of the other Loan Instruments to the contrary notwithstanding, at no time shall Lender be obligated to make any Disbursement hereunder if the outstanding balance of the Loan equals or exceeds the Loan Amount or the then amount of the Borrowing Base, or the loans-to-one-borrower limitation imposed upon Lender by any applicable laws, rules, and regulations of entities having jurisdiction over Lender in connection with indebtedness owing by Borrower and its affiliates to Lender (the “Loans-to-One Borrower Limitation”).

(d) Anything herein or in any of the other Loan Instruments to the contrary notwithstanding, Lender will disburse Loan Proceeds, provided Borrower is not in Default or an Event of Default has not occurred and is continuing, and subject to the limitations in Paragraphs 5(b) and (c), in a single Disbursement to Borrower for the payment of the acquisition or refinancing costs for any Finished Lots. Nothing herein shall be construed as an obligation or commitment on the part of Lender to finance the construction of Residences on any Inventory Lots, except as may be otherwise expressly approved in writing by Lender, other than as part of an Approved Subdivision. Lender shall have the right to approve in advance Borrower’s acquisition of an Inventory Lot that is to be encumbered by a Mortgage in favor of Lender.

6. BORROWER’S DEPOSIT.

(a) With respect to any Approved Subdivision, if in Lender’s reasonable judgment, there are insufficient funds remaining in the Loan, or insufficient availability under the Borrowing Base, as applicable, for the completion of the Properties in such Approved Subdivision in accordance with the then-effective Construction Cost Breakdown for such Approved Subdivision and Borrower fails, within ten (10) business days of Lender’s delivery of notice to Borrower of Lender’s determination of the existence of such insufficiency as to such Approved Subdivision, to submit a revised Construction Cost Breakdown for such Approved Subdivision addressing such apparent or actual insufficiency of funds, which Construction Cost Breakdown shall be acceptable in form and content to Lender’s satisfaction, and which takes into account Borrower’s compliance with all other Construction Cost Breakdowns then in effect as to all other Approved Subdivisions then included in the Borrowing Base, it shall constitute a Default hereunder. If Lender determines, based on its review of the revised Construction Cost Breakdown, together with such other information required in connection therewith by Lender, that the Loan will not be In-Balance (as defined below) after giving effect to such revised Construction Cost Breakdown, then in such case, Borrower shall deposit with Lender, within fifteen (15) days after demand by Lender, such sums, either in the form of cash or letter(s) of credit acceptable to Lender (“Borrower’s Deposit”), as Lender may deem necessary, in addition to the Loan, for the completion of the Properties in such Approved Subdivision, the payment of all costs in connection with the construction of such Properties, and the performance of any obligation of Borrower to Lender owed with respect thereto. Borrower hereby agrees that Lender (i) shall have a security interest in any Borrower’s Deposit in any form to secure all of Borrower’s obligations under the Loan Instruments, and (ii) may apply any proceeds of any Borrower’s Deposit for the purposes contemplated herein without any further consent or action on Borrower’s part. Lender shall not be required to pay interest on the Borrower’s Deposit. Lender will disburse all or a portion of the Borrower’s Deposit prior to any disbursement of any portion of the Loan Proceeds to complete Properties in the affected Approved Subdivision(s). Borrower shall promptly notify Lender in writing if and when the cost of the construction of the Properties in an Approved Subdivision materially exceeds, or appears likely to materially exceed, the amounts budgeted therefor in the then-current Construction Cost-Breakdown for such Approved Subdivision. For purposes hereof, “materially” shall mean a variance of ten percent (10%) from the budgeted amounts for such item.

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(b) The Loan is in-balance whenever the amount of the undisbursed Loan Proceeds or availability under the Borrowing Base (taking into account Borrower’s compliance with the Construction Cost Breakdowns then in effect as to all Approved Subdivisions then included in the Borrowing Base), as applicable, plus any sums on deposit in the Borrower’s Deposit, are sufficient in the reasonable judgment of Lender to pay, through completion of the Properties, in accordance with the then-applicable Construction Cost Breakdowns for each Approved Subdivision then subject to a Mortgage and maturity of the Loan, all of the following sums (“In-Balance”):

(i) All costs of construction, ownership and maintenance of the Properties;

(ii) All costs of marketing and sale of the Properties (if this Loan Agreement contemplates such marketing and sale during the term of the Loan); and

(iii) All interest and all other sums which may accrue or be payable under the Loan Instruments.

(c) Failure of the Loan to be In-Balance shall mean that the Loan is out-of-balance (“Out-Of-Balance”); provided, however, Borrower shall have the right to submit revised Construction Cost Breakdowns for the Approved Projects in the Borrowing Base, which shall be subject to the approval of Lender, which, in the aggregate, shall bring the Loan In-Balance;

(i) Borrower acknowledges that the Loan may become Out-Of-Balance in numerous ways, not all of which may now be foreseen. Borrower further acknowledges that the Loan may become Out-Of-Balance from a shortage of funds in any single line item or category of the Construction Cost Breakdowns, even if there are undisbursed Loan Proceeds in other line items or categories. Undisbursed Loan Proceeds in one category or line item (e.g., construction costs) may not be applied to another category or line item (e.g., interest reserve) unless either the Construction Cost Breakdowns allow such use (and only to the extent specifically allowed) or Lender consents in writing to such use in each instance.

(ii) Whenever the Loan becomes Out-Of-Balance, Lender may make written demand on Borrower to deposit Borrower’s own funds into Borrower’s Deposit in an amount sufficient, in Lender’s reasonable judgment, to cause the Loan to be In-Balance. Borrower must immediately deposit all funds required by Lender’s demand. Borrower must also submit, for Lender’s approval, revised Construction Cost Breakdowns as to all Approved Subdivisions affected thereby within fifteen (15) days after any such demand. Lender shall disburse all funds held in Borrower’s Deposit in the manner provided in this Loan Agreement for Disbursements of the Loan Proceeds.

7. WARRANTIES, REPRESENTATIONS AND COVENANTS. As a material inducement to Lender to enter into this Loan Agreement, Borrower warrants, represents, covenants and agrees as follows:

(a) Commencement, Continuation and Completion. Borrower will diligently prosecute construction of all Lots Being Actually Developed and Residences, as applicable, after the commencement of construction thereon, and will complete same, including all necessary utility connections, in substantial accordance with the Plans submitted to and approved by Lender, and in accordance with good building practices and Applicable Laws.

(b) No Changes to Plans. Without the prior written consent of Lender, Borrower will make no material change in the Plans submitted to Lender that either reduces the value of the Properties or causes the Loan to be Out-Of-Balance.

(c) Inspections. Lender shall have the right to inspect the Properties either itself or using Lender’s inspector or appraiser (“Lender’s Inspector”), at Borrower’s cost and expense (subject to Paragraph 19 below), to determine Borrower’s compliance with the requirements of this Loan Agreement.

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Borrower will permit Lender and Lender’s agents and representatives, at any and all times, during regular business hours, to inspect construction in the Approved Subdivisions in the Borrowing Base, including the Residences located therein and to examine and copy all of Borrower’s books and records and all contracts and bills pertaining to said construction and the Residences. After a Default hereunder, if Lender shall examine the aforesaid books and records, Borrower shall pay on demand by Lender, subject to Paragraph 19 hereof, reasonable expenses incurred by Lender as a result of such examination.

(d) Use of Disbursements. Borrower will accept Disbursements in accordance with the provisions hereof and, if made to Borrower, will use or cause each such Disbursement to be used solely for the payment (or reimbursement) of materials, labor, services, costs and expenses incurred or expended in connection with the construction of the Lots and/or Properties within Approved Subdivisions or for such additional costs and expenses as may be approved in writing by Lender, and in payment or performance of any obligation of Borrower to Lender, and for no other purpose. If requested by Lender, Lender shall have received within fifteen (15) days of its request therefor all information and documentation, including invoices, canceled checks, lien waivers and other evidence as may be required by Lender with respect to any Approved Subdivision, such as: (i) unconditional lien releases and waivers, in form and content acceptable to Lender, from the general contractor and all other contractors, subcontractors and suppliers of materials or labor, acknowledging receipt of, and release and waiver of any lien, stop notice or other right with respect to, amounts equal to payments made by Borrower for such materials or labor for such Subdivision and depending on the Stage of development of the Lot or Property in question, and (ii) evidence satisfactory to Lender establishing actual payment of Property costs of a type which does not give rise to lien rights and for which lien releases are, as a result, not appropriate (such as permits), for which prior Disbursements for such Subdivision were made.

(e) Borrower Liability for Construction. Borrower is solely liable for construction and completion of the Lots and/or Properties in accordance with this Loan Agreement. Lender has no liability or obligation whatsoever for the Lots or Properties or the construction or completion thereof or work performed thereon, and has no obligation except to disburse the Loan as herein agreed, and is not obligated to inspect the Lots or Properties; nor is Lender liable for the performance or default of any contractor or subcontractor, or for any failure to construct, complete, protect or insure the Lots or Properties, or for the payment of any cost or expense incurred in connection therewith, or for the performance or nonperformance of any obligation of Borrower to Lender; and nothing, including without limitation any Disbursement hereunder or the deposit or acceptance of any document or instrument, shall be construed as a representation or warranty, express or implied, on Lender’s part.

(f) No Conditional Sale Contracts. Without the prior written consent of Lender, no materials, equipment, fixtures or any other part of the Residences shall be purchased or installed under security agreements, conditional sale contracts or lease agreements, or other arrangement wherein a security interest or title to said property is retained or the right is reserved or accrues to anyone to remove or repossess any such items or to consider them as personal property.

(g) Right to Defend. Lender may (but shall not be obligated to) commence, appear in or defend any action or proceeding purporting to affect any Real Property or the rights or duties of Lender or Borrower or the payment of any funds hereunder, and in connection therewith may pay all necessary expenses, including reasonable attorneys’ fees, which Borrower agrees to pay to Lender upon demand.

(h) Borrower’s Approval of Plans. The Plans submitted to Lender by Borrower are satisfactory to Borrower, have been approved by any Guarantor(s), and to the extent required by Applicable Law or any restrictive covenant, by all Governmental Authorities and beneficiary of any such covenant respectively. Any existing improvements on the Properties are within the perimeter of the Properties (except any required off-site Property) in accordance with the Plans and any Restrictions applicable thereto. There are no encroachments, defects or conditions (including unstable soil conditions) in, on or about any of the Properties that would or could render it unfit for Residences. There are no structural defects in the Properties, and no violation of any Applicable Law exists with respect to the Lots or Properties.

(i) Notice of Litigation. Borrower shall promptly inform Lender of (i) any litigation, proceeding or enforcement of judgment (collectively, “litigation”) threatened or commenced against Borrower, General Partner, Managing Member or any Guarantor(s) or affecting the Lots or Properties, which, if

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determined adversely, might have a material adverse effect upon the financial condition of Borrower, General Partner, Managing Member or Guarantor(s) or upon the Lots or Properties, or might cause a Default; (ii) any material claim or controversy which might become the subject of such litigation; and (iii) any material adverse change in the financial condition of Borrower, General Partner, Managing Member or Guarantor(s). For the purposes hereof, material adverse change and/or material adverse effect shall mean a decline of fifteen percent (15%) in the net worth of Borrower, General Partner, Managing Member or Guarantor(s) as shown on the Financial Statements delivered to Lender from time to time in connection with the Loan or an event which places Borrower out of compliance with any Additional Loan Covenants (as defined in Paragraph 15 below).

(j) Financial Statements and Reports. As required by Lender, Borrower shall provide Lender with the Financial Statements and other reports during the term of the Loan in accordance with Paragraph 12 of the Specific Loan Terms. Borrower shall also provide, on or before the thirtieth (30th) day of each calendar month, sales, closings and inventory reports on all for-sale residential construction projects owned by Borrower, General Partner, Managing Member or Guarantor, acceptable to Lender, and for Properties securing the Loan, including a sales report showing all currently pending sales (separated into new sales entered into during the month being reported on and previous sales contracted for in preceding months), all closings which took place during the month being reported on, all sales previously reported that for any reason will not close, the status of all inventory and all other sales information reasonably requested by Lender, all in form and content acceptable to Lender. All Financial Statements and other reports shall be true, correct, and complete as of the dates specified therein and, in the case of the Financial Statements, shall fully and accurately present the financial condition of Borrower and any other party obligated for the Loan, as appropriate, as of the dates specified. Borrower represents to Lender that on the date hereof, no material adverse change has occurred in the financial condition of Borrower or, to Borrower’s knowledge, any other party obligated for the Loan since the dates the initial Financial Statements of Borrower or any other party obligated for the Loan were delivered to Lender. Borrower shall also promptly deliver to Lender such other sales information and documents that Lender from time to time may request, including operating statements, any one or more of the sales agreements (“Sales Agreements”) for particular Residences or Lots, or notice of or information regarding any claimed breach or disavowal of buyer’s or seller’s obligations under any one or more Sales Agreements, and any written marketing report(s) including all brochures and prospective purchaser lists.

(k) Required Releases. Subject to the provisions of Paragraph 20 hereof, Borrower shall cause a Lot or Property to be released from a Mortgage at such times as provided in the Specific Loan Terms attached hereto (the “Required Release Date”). On the Required Release Date, Borrower shall repay in full the amount of the Loan advanced with respect to such Property, as determined by Lender as of such date, such amount to be not less than the full amount of the Loan Allocation disbursed for such Property regardless of whether all conditions to a Partial Release (as defined in Paragraph 20(b)) below) are satisfied with respect to such Property.

(l) Occupancy. Neither Borrower nor any other party shall occupy any Residence which is covered by a Mortgage.

(m) Discharge of Liens. Borrower shall pay and discharge all lawful claims, including taxes, assessments, and governmental charges or levies imposed upon it or its income or profits or upon any properties belonging to it, prior to the date upon which penalties attach thereto and deliver receipts of those payments to Lender as required under the Mortgage; however, Borrower shall not be required to pay any such tax, assessment, charge or levy, the payment of which Borrower is diligently contesting in good faith and by proper proceedings and for which a bond and/or other security to prevent impairment of Lender’s security is posted as Lender may require. Borrower shall pay upon demand any costs incurred by Lender for realty tax service if required by Lender. Each Lot is taxed separately without regard to any other real property.

(n) Formation, Existence. Borrower warrants and represents as to standing and organization as follows: (i) If Borrower is a corporation, it is duly organized and validly existing, in good standing under the laws of the state of its incorporation, and is qualified to do business, and in good standing, in the state in which the Lots and Properties are situated (and all other states if any in which Borrower is required to be qualified); (ii) If Borrower is a partnership, it is duly organized and validly existing, is in good standing under the laws of the state of its formation and is qualified to do business in the state in which the Lots and Properties are situated (and all other states if any in which Borrower is required to be qualified); (iii) If

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Borrower is a trust, it is duly organized, validly existing, the trustees thereof are qualified to act as trustees, and the trust is qualified to do business in the state in which the Lots and Properties are situated (and all other states if any in which Borrower is required to be qualified); (iv) If Borrower is a limited liability company, it is duly organized and validly existing, in good standing under the laws of the State of its organization, and is qualified to do business, and in good standing, in the State in which the Properties are situated (and all other States, if any), in which Borrower is required to be qualified.

(o) Proper Authority. Borrower has full right, power and authority to own the Properties, execute and deliver the Loan Instruments to be executed and delivered by it, consummate the transactions contemplated thereby, and perform its obligations thereunder. The Loan Instruments to be executed and delivered by Borrower have been duly authorized, executed and delivered, and constitute valid and legally binding obligations of Borrower, enforceable in accordance with their terms, and the Loan is not usurious. The individual(s) executing the Loan Instruments on behalf of Borrower or any person comprising a part of Borrower are authorized and empowered by his/her or their signatures alone to bind Borrower. If Borrower is more than one person, firm or corporation, all receipts, requests and instructions pertaining to the Loan, or for any Disbursement thereof, may be made by any one of the undersigned Borrowers with the same effect as if signed by all.

(p) No Pending Actions. As of the date of Recordation of any Mortgage, other than as disclosed to Lender in writing, there are no actions, suits or proceedings pending or, to the knowledge of Borrower, threatened against or affecting it, the Properties, or any Guarantor(s) of the nature or type required to be reported to Lender under Section 7(i) hereof or involving the validity or enforceability of any Mortgage or the priority of the lien thereof, at law or in equity, or before or by any Governmental Authority. Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or any Governmental Authority.

(q) CC&Rs. Borrower may submit to Lender a proposed form of declaration of covenants, conditions and restrictions (“CC&Rs”) affecting all or part of the Properties which may include provisions for the formation of an owner’s association for the Approved Subdivisions, and may request Lender to approve and to subordinate the Mortgage to the CC&Rs. Lender shall have no obligation to grant such a request by Borrower. However, Lender shall consider and honor any such request if that would not impair or adversely affect the security of any obligation evidenced by the Loan Instruments. Lender may require as a condition to its consent to such subordination the issuance of one or more endorsements to the Title Policy at Borrower’s sole cost and expense.

(r) Notice of Completion, Notice of Cessation. Borrower shall fully pay and discharge all claims for labor done and materials and services furnished in connection with the Properties, diligently file or procure the filing of a valid Notice of Completion upon completion of construction, diligently file or procure the filing of a Notice of Cessation upon a cessation of labor on the work of improvement for a continuous period of thirty (30) days or more, and take all other reasonable steps to forestall the assertion of claims of lien against the Properties, and of stop notices against Lender of claims against any funds to be advanced hereunder. Nothing herein contained shall require Borrower to pay any claims for labor, materials, or services which Borrower is diligently contesting in good faith and by proper proceedings, if Borrower posts a surety bond, in the required statutory amounts, sufficient to release any claim of lien or stop notice within ten (10) days after the filing or service thereof. Borrower agrees, upon demand by Lender, to defend, indemnify and hold Lender harmless against any action filed or claim asserted against Lender for any reason in connection with any such lien claim or stop notice. Borrower hereby irrevocably appoints and authorizes Lender, as Borrower’s attorney-in-fact under a power of attorney coupled with interest, to execute, file and record any Notice of Completion or Cessation of Labor or any other notice which Lender deems necessary or advisable to protect its interest hereunder or the security for the Loan.

(s) Correcting Defects. Within thirty (30) days after demand by Lender, Borrower shall correct any defect in the Properties or any change in or deviation from the Plans not approved by Lender, and the making of any Disbursements shall not constitute a waiver of this covenant; provided, however, if such thirty (30) day period is insufficient to make such correction, Borrower shall nonetheless promptly commence such correction and submit a schedule to Lender, satisfactory in form and content to Lender, within said thirty-day period providing for the completion of such correction within a time period approved by Lender therefor. Borrower shall thereafter diligently prosecute such correction to completion and, in all events, not later than the expiration of the time period approved by Lender for such correction.

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(t) Cancellation of Contracts. Borrower shall promptly inform Lender if any Contracts are canceled and/or materially modified.

(u) Preliminary Notices. At Lender’s request, Borrower shall deliver to Lender, so that Lender receives within three (3) business days after Borrower receives, copies of all preliminary notices and related documents served on Borrower pursuant to California Civil Code Sections 3097 and 3097.1 and any similar or successor statutes including all such notices and documents addressed to Lender or to “Construction Lender” and received by Borrower. This subparagraph shall also apply to Approved Subdivisions in jurisdictions other than California (with such conforming changes as are necessary to comply with the statutory requirements in such jurisdiction).

(v) Use of Models. With respect to any Approved Subdivision that does not include as part of the Real Property encumbered by the lien of the Mortgage applicable to such Approved Subdivision, Models (as defined in the Specific Loan Terms) to be used in connection with the marketing and sale of Residences in such Approved Subdivision, Borrower hereby grants to, and for the benefit of, Lender, such use and access rights to any such Models, to the extent of Borrower’s interest therein, as may be required by Lender in connection with Lender’s exercise of its rights and remedies under this Loan Agreement and the other Loan Instruments as the same apply to any such Approved Subdivision.

8. REQUIRED PRINCIPAL PAYMENTS. Borrower shall pay the principal of the Note as therein provided and as may be provided in the Specific Loan Terms attached hereto. Further, if, at any time, the outstanding balance of the Loan exceeds (a) the Loan Amount, (b) the Loans-to-One-Borrower Limitation, (c) the Borrowing Base approved by Lender, or (d) as to any individual Property, the Loan Allocation for that Property, then Borrower shall immediately pay in cash to Lender, following receipt of a written demand therefor, the amount of such excess. Further, at any time after the recording of a Mortgage in the Official Records, Lender shall have the right, but not at the expense of Borrower, unless such appraisal is required by federal regulations applicable to Lender, to obtain an appraisal of any Property covered by such Mortgage, from an appraiser satisfactory to Lender, and in the event such appraisal determines that the portion of the Loan disbursed by Lender for such Property exceeds the Loan Allocation for such Property, then Borrower shall also immediately pay in cash to Lender, following demand therefor, the amount of such excess. Notwithstanding the foregoing provisions of this Paragraph 8, but subject to all other provisions of this Loan Agreement, the aggregate Loan Allocations for Properties included in the Borrowing Base may exceed the Loan Amount; provided, however, (i) in no event shall such aggregate Loan Allocations exceed the amounts specified in Paragraph 19 of the Specific Loan Terms, and (ii) in no event shall the outstanding principal balance of the Loan exceed the Loan Amount.

9. REVOLVING LOAN. All or any portion of the principal of the Loan may be borrowed, paid, prepaid, repaid and reborrowed from time to time prior to maturity in accordance with the provisions of the Loan Instruments. The excess of borrowing (Disbursements and re-Disbursements) over repayments shall be the principal balance of the Loan from time to time and at any time. The aggregate amount of all Disbursements under the Loan may exceed the Loan Amount, but neither the outstanding principal balance of the Loan nor the outstanding aggregate amount of the Loan Allocations (not including those with respect to Properties released of record by Lender) shall ever exceed the Loan Amount.

10. MATURITY AND EXTENSION. The Loan shall mature as provided in the Note and as described in Paragraph 14 of the Specific Loan Terms.

11. DEFAULT. Each of the following events shall constitute a default (“Default”) under this Loan Agreement prior to the giving of notice or expiration of a cure period, as may be required hereunder, and, following the giving of such notice and/or expiration of such cure period, or if no notice or cure period is provided, shall constitute an “Event of Default” under this Loan Agreement and under the other Loan Instruments:

(a) Failure to Pay Principal or Interest. Any failure to pay or deposit when due or required any sum of principal or, subject to any cure periods which may be set forth on the Note, interest under the Note.

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(b) Breach of Other Monetary Obligations. Any failure to pay or deposit when due or required any sum (other than principal or interest) under this Loan Agreement or other Loan Instruments which is not cured within fifteen (15) days of Lender’s delivery of written notice thereof to Borrower.

(c) Breach of Condition/Covenant. Any breach or failure to satisfy or perform any condition, covenant or other provision of this Loan Agreement which is not cured within thirty (30) days of Lender’s delivery of written notice thereof to Borrower.

(d) Breach of Other Obligation. The occurrence of any breach or default which is not cured within the applicable time periods (if any) designated therein by Borrower, General Partner, Managing Member or any Guarantor(s) under: (i) any other Loan Instruments, evidencing, securing or relating to the Loan, in addition to this Loan Agreement; (ii) any Guaranty (or any revocation thereof); (iii) if the Properties are subject to any leasehold estate, the lease creating such estate; or (iv) any general contract for construction of the Properties; (v) any Contract, with respect to any material continuing obligations of Borrower thereunder; or (vi) any evidences of indebtedness or undertakings with respect to any other loan(s) extended by Lender to Borrower.

(e) Suspension of Business/Bankruptcy. Borrower, General Partner, Managing Member or any Guarantor(s): (i) voluntarily suspends the transaction of business; (ii) becomes insolvent or unable to pay its debts as they mature; (iii) makes an assignment for the benefit of creditors; (iv) becomes the subject of a bankruptcy, reorganization or similar debtor-relief proceeding unless, in the case of an involuntary petition filed against Borrower, General Partner, Managing Member or any Guarantor(s), the petition is dismissed within sixty (60) days; (v) becomes, or any material part of its property becomes, the subject of appointment of a receiver, trustee, or conservator, unless, in the case of such appointment without Borrower’s, General Partner’s, Managing Member’s or a Guarantor’s consent, the appointment is vacated within sixty (60) days; (vi) has any of its property become subject to any attachment, execution, sequestration or other judicial seizure not discharged within sixty (60) days; (vii) fails to pay or discharge any judgment against it, singly or in the aggregate, in excess of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) as to Borrower, or to appeal such judgment(s) and obtain a stay thereof within ten (10) days of entry; or (viii) is dissolved or terminated.

(f) False Representations. Any representation by Borrower, General Partner, Managing Member or any Guarantor(s) of any material fact herein or in any Financial Statement or other submittal delivered to Lender is false, incorrect or misleading as of the date made.

(g) Project Enjoined. Any court of competent jurisdiction issues an order or decree enjoining the construction on any Lot, or enjoining or prohibiting the performance of this Loan Agreement or any other Loan Instrument, and any such decree or order is not vacated within sixty (60) days after its issuance.

(h) Lapsed Permit/License. Borrower neglects, fails or refuses to keep in full force and effect any permit, license or approval necessary for the construction, sale, use, and/or occupancy of the Properties.

(i) Bonded Notice. Any bonded stop or other notice to withhold in connection with the Loan is served on Lender pursuant to the provisions of Title 15, Division 3, Part 4 of the California Civil Code or any similar or successor statute, and within ten (10) days of the receipt of such notice the claim set forth therein is not discharged or, if the amount claimed is disputed in good faith by Borrower, an appropriate counter bond or equivalent acceptable to Lender is not filed with Lender.

(j) Liens; Priority of Mortgage. Other than the statutory lien for non-delinquent real property taxes and assessments, the imposition of any voluntary or involuntary lien upon any of the Properties, except as permitted by the Mortgage or approved by Lender in writing, unless (i) a bond in an amount not less than that required by statute or other security acceptable to Lender is provided within ten (10) days following actual knowledge by Borrower of such lien, or (ii) such lien is released within ten (10) days of the Borrower’s knowledge thereof; provided, however, no Disbursements will be available until such lien is released or bonded over.

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(k) Destruction. The demolition, destruction or material damage of any of the Properties, if Lender determines that the Properties cannot be restored or rebuilt within a reasonable time (not later than the applicable Completion Date) at a cost not exceeding the aggregate amount then undisbursed by Lender for Disbursements and allocated to such Properties plus insurance proceeds, plus Borrower’s contributions as more particularly provided in the Mortgage.

(l) Uninsured Casualty. The occurrence of an uninsured casualty with respect to any material portion of the Properties, if Lender determines that the Properties cannot be restored or rebuilt within a reasonable time (not later than the applicable Completion Date), at a cost not exceeding the aggregate amount then held by Lender for Disbursements and allocated to such Properties, plus Borrower’s contributions as more particularly provided in the Mortgage.

(m) No Pledge or Change of Stock or Partnership Interest. If Borrower is a corporation, the shareholders of Borrower shall not sell, pledge or assign any shares of the stock of Borrower without the prior written consent of Lender; provided, however, any transfer of up to ten percent (10%) in the aggregate of Borrower’s shares shall not constitute a Default hereunder. If Borrower is a partnership or joint venture, the partners, members or joint venturers of Borrower shall not sell, pledge or assign any of their partnership, membership or joint venture interest nor shall any general partner, member or joint venturer be removed as the managing general partner, member or joint venturer or withdraws from or is admitted to Borrower without the prior written consent of Lender.

(n) Criminal Activity. The occurrence of any criminal activity, regardless of whether Borrower or any person under Borrower’s control is at fault, which could result in the forfeiture of the Properties to any Governmental Authority.

(o) Adverse Change. A material adverse change in the business or financial condition of Borrower, any General Partner, Managing Member or Guarantor(s) which materially potentially or adversely affects (a) the Approved Subdivisions, (b) the performance by Borrower, General Partner, Managing Member or Guarantor(s) of any of their respective obligations under any of the Loan Instruments or any Guaranty, or (c) the priority of the liens, charges, encumbrances or security interests created by any of the Loan Instruments.

(p) Unapproved Deviation. The occurrence of substantial deviations in the work of construction from the Plans or any Subdivision completion schedule without the prior approval of Lender, or the appearance of defective workmanship or materials, which deviations or defects are not corrected within thirty (30) days after Borrower’s discovery or receipt of written notice thereof.

(q) Valuation. The amount of the Loan with respect to any Approved Subdivision exceeds one hundred percent (100%) of the discounted bulk value thereof at completion.

(r) Non-Monetary Defaults.

(i) Generally. Notwithstanding any other provision of this Paragraph, if Lender determines in its reasonable judgment that the Default complained of, other than a Default for the payment of monies, cannot be cured within the period requiring curing as specified in Lender’s written notice of Default, then the Default shall be deemed to be cured if Borrower within the notice period shall have commenced the curing of the Default and shall thereafter diligently prosecute the same to completion. If in Lender’s reasonable judgment Borrower fails to diligently prosecute the curing of the Default or Lender determines that said Default is incurable, then this Default shall constitute an Event of Default.

(ii) Affecting Approved Subdivisions. The Defaults specified in Paragraph 11(c) (with respect to breaches of covenants, representations or warranties set forth in any of Paragraphs 7(a), 7(b), or 7(s)), 11(d)(i) (with respect to defaults under other

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Loan Instruments that are breaches of covenants or representations relating to individual Approved Subdivisions or are Events of Default relating to acts or omissions concerning individual Approved Subdivisions), 11(d)(iii), 11(d)(iv), 11(d)(v), 11(g), 11(h), 11(i), 11(j), 11(k), 11(l), 11(p) and 11(q) shall be deemed to apply to each Approved Subdivision on an individual basis only and shall be deemed cured as to the subject Approved Subdivision to which the Default applies on the first to occur of: (A) Borrower’s cure of such Default within the cure periods specified, if any, for such Default; or (B) removal of the subject Approved Subdivision from the Borrowing Base and re-margining of the Loan, if required by Lender, such that the outstanding principal amount of the Loan does not exceed the amounts permitted to be borrowed by Borrower under this Loan Agreement based on the Borrowing Base as reduced due to the elimination of the Approved Subdivision required to be removed as provided hereinabove; provided that Borrower shall repay within three (3) business days of demand by Lender any principal amounts outstanding with respect to the Loan as may be required to effect such re-margining. Upon the occurrence of any Default referenced in this subsection (ii), no Disbursements based on availability under the Borrowing Base with respect to the Approved Subdivision which is the subject of such Default shall be available to the Borrower until such Default is cured under subsection (A) hereinabove.

(s) Additional Defaults. Any “Additional Defaults” set forth in Paragraph 15 of the Specific Loan Terms shall have occurred and are continuing.

12. REMEDIES. Upon the occurrence of any Event of Default, Lender may at its option, without prior demand or notice, exercise any one or more of the following remedies, and any one or more of such other remedies as may be provided by any Loan Instrument or by law or equity, all of which remedies shall be cumulative:

(a) Right to Terminate Disbursements. Terminate the obligation of Lender to make Disbursements hereunder.

(b) Right to Call Loan. Declare the Loan and all obligations of Borrower under the Loan Instruments immediately due and payable.

(c) Correction. Where substantial deviations from the Plans and Specifications appear which have not been approved, or defective or unworkmanlike labor or materials are being used in the Properties, or there exist encroachments to which there has been no consent, Lender may order immediate stoppage of construction, after which no further work shall be done without the prior written consent of Lender unless and until such condition has been fully corrected notwithstanding any cure periods set forth hereunder.

(d) No Waiver. Notwithstanding the exercise of any or all of the remedies described in Sections 12(a), (b) or (c) hereof, make any Disbursements without thereby waiving (i) its right to demand payment of the Note, (ii) its right not to make any further Disbursements, or (iii) any of its other rights or remedies.

(e) Possession and Completion.

(i) To disburse and directly apply the proceeds of any Disbursement under the Loan to the satisfaction of any of Borrower’s obligations hereunder. Any Disbursement by Lender for such purpose shall be part of the Loan and shall be secured by the Mortgages, except a Disbursement of a Borrower’s Deposit. Borrower hereby authorizes Lender to hold, use, disburse, and apply the Loan and the Borrower’s Deposit for payment of costs of construction of the Properties, expenses incident to the Loan and each Property, costs of completion of all necessary off-site development of each Property, and the payment or performance of any obligation of Borrower hereunder. Borrower hereby assigns and pledges the proceeds of the Loan and Borrower’s Deposit to Lender for such purposes. Lender may disburse and incur such expenses as Lender deems necessary for the completion of construction of the Properties and to preserve each Property and any other security for the Loan, and such expenses, even though in excess of the amount of the Loan, shall be secured by the Mortgages, and payable to Lender upon demand. Lender may

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disburse any portion of any Disbursement at any time, and from time to time, to persons other than Borrower for the purposes specified herein irrespective of the provisions of Paragraph 5 hereof, including without limitation, to general contractors, subcontractors, laborers, material suppliers, or to hire an escrow firm to make such Disbursements, and the amount of Disbursements to which Borrower shall thereafter be entitled shall be correspondingly reduced.

(ii) Without limiting the provisions of subparagraph (i) above, Lender may also take possession of the Properties and perform all work and labor necessary to complete the work of construction, in which event such expenditures (except to the extent made from funds of Borrower) shall be deemed Disbursements under the Note, and any expenditures in excess of the total amount advanced under the Loan shall be deemed an additional Disbursement to Borrower, payable on demand and bearing interest at the rate specified in the Note. In addition, Borrower shall pay Lender a supervision fee at the current market rate, but not to exceed fifteen percent (15%) of the cost of such completion, for supervision of construction. Such additional Disbursement and the supervision fee is secured by the Mortgages and all other agreements securing the performance of Borrower’s obligations under this Loan Agreement and the other Loan Instruments. Borrower hereby irrevocably constitutes and appoints Lender its attorney-in-fact, coupled with an interest, with full power of substitution, to complete the construction of the Project, or any part thereof in Borrower’s name or Lender’s name (but with no obligation to do so), and in connection therewith to: (a) use any funds of Borrower to complete the construction; (b) make such additions, changes and corrections in the Plans as Lender deems desirable to complete the Residences or any part thereof in an economically sound manner; (c) discharge, replace or employ such contractors, subcontractors, agents, architects and inspectors as may be deemed necessary for such purposes; (d) make Disbursements directly to any general contractor, subcontractors, laborers, material suppliers, or to hire an escrow firm to make such Disbursements; (e) pay, settle, or compromise bills and claims; (f) execute applications and certificates; (g) employ watchmen to protect the Properties (including personal property located thereon) from damage, injury, or (h) prosecute and defend actions or proceedings in connection with any of the Properties, and (i) do any act which Borrower might do in its own behalf. In no event shall Lender be required to expend its own funds to complete any of the Properties.

13. INDEMNITY. Borrower hereby agrees to defend (by counsel satisfactory to Lender), indemnify and hold harmless Lender, its officers, directors, shareholders, agents, employees, affiliates, subsidiaries, successors and assigns, from and against all losses, damages, liabilities, claims, actions, judgments, costs and attorneys’ fees which Lender may incur, in any capacity, as a direct or indirect consequence of (a) the making of the Loan (except for violations of banking law or regulations by Lender), (b) Borrower’s failure to perform any obligations as and when required by any Loan Instrument, (c) the failure at any time of any of Borrower’s representations or warranties to be true and correct, or (d) any act or omission by Borrower, any contractor, subcontractor, engineer, architect or other person with respect to any Property.

14. HAZARDOUS MATERIALS.

(a) Representations and Definitions. Borrower and the Properties are in compliance with all applicable present and future federal, state and local laws, ordinances, rules, regulations, decisions and other requirements of governmental authorities relating to hazardous materials, including, without limitation, any substance now or in the future defined or listed in, or otherwise classified pursuant to, or regulated by, any applicable laws or regulations as a hazardous substance, hazardous material, hazardous waste, infectious waste, toxic substance, toxic pollutant or any other term used to define, list, classify or regulate substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity or reproductive toxicity, including asbestos and polychlorinated biphenyls (“Hazardous Materials”), including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendment and Reauthorization Act of 1980, the Resource Conservation and Recovery Act, the Hazardous Materials Transportation Act, the Clean Water Act, the Clean Air Act, the Toxic Substances Control Act, the Safe Drinking Water Act, and regulations thereunder (“Hazardous Materials Laws”).

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(b) Covenants. Borrower shall: (i) keep and maintain the Properties in compliance with, and shall not cause or permit the Properties to be in violation of, any present or future Hazardous Materials Laws; (ii) not engage in or permit the use, generation, manufacture, production, storage, release, discharge, disposal or transportation on, under or about the Properties of any Hazardous Materials; provided, however, that materials containing Hazardous Materials which are normally, prudently and properly used in connection with the development, construction or operation of a project of the same type as the Properties may be stored and used on the Properties, in reasonably necessary quantities, provided such use and storage is incident to and reasonably necessary for normal, prudent and proper development, construction or operation of the Properties, in all respects in strict compliance with all present or future Hazardous Materials Laws, but in no event shall asbestos or asbestos-containing material be incorporated into or placed upon the Properties, nor shall polychlorinated biphenyls be brought onto the Properties; (iii) in the event that any Hazardous Materials are found on, under or about the Properties (except as provided in (ii) above), take all necessary and appropriate actions, at its own expense, to cause them to be cleaned up and immediately removed, all in compliance with all present or future Hazardous Materials Laws and all other applicable laws.

(c) Notice. Borrower shall immediately advise Lender in writing upon Borrower’s receipt of all notices of (i) enforcement, clean up, removal, mitigation or other governmental or regulatory acts instituted, contemplated or threatened pursuant to any present or future Hazardous Materials Laws affecting the Properties; (ii) claims made or threatened by any third party against Borrower or the Properties relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Material or violation of any present or future Hazardous Materials Laws; (iii) acts, events or conditions on any real property adjoining or in the vicinity of the Properties that could cause the Properties or any part thereof to be classified as “border-zone property” under the provisions of California Health & Safety Section 25220 et seq., or any regulation thereunder, or which may support a similar claim or cause of action under any present or future Hazardous Materials Laws; and (iv) occurrences or conditions on the Properties or any real property adjoining or in the vicinity of the Properties which could subject Borrower or the Properties to any restrictions on ownership, occupancy, transferability or use of the Properties under any present or future Hazardous Materials Laws.

(d) Border Zone. There is no occurrence or condition on any other real property that could cause the Properties or any part thereof to be classified as “border-zone property” under California Health and Safety Code Sections 25220 et seq., or any regulation related thereto, or to be otherwise subject to any restriction on ownership, occupancy, transferability or use.

(e) Inquiry. Borrower has conducted an appropriate inquiry into the present and prior condition, uses, and ownership of the Properties and has disclosed in writing to Lender all violations of Hazardous Materials Laws discovered as a result of such inquiry.

(f) Actions. Lender shall have the right but not the duty to join and participate in, as a party if it so elects, any settlements, legal proceedings or actions initiated in connection with any Hazardous Materials or present or future Hazardous Materials Laws and to have its reasonable attorneys’ fees and expenses in connection therewith paid by Borrower.

(g) Testing. If Lender reasonably believes that Borrower may be in violation of this Section, Lender has the right to enter the Properties and conduct testing, at Borrower’s cost and expense to satisfy itself that Borrower is in full compliance with the Loan Instruments.

15. ADDITIONAL LOAN COVENANTS. If there are any additional loan covenants (the “Additional Loan Covenants”) listed in Paragraph 16 of the Specific Loan Terms attached hereto, and in the event Borrower or Guarantor (if applicable to Guarantor) breaches any of the Additional Loan Covenants, such breach shall constitute an Event of Default under the provisions of Paragraph 11 above applicable to such breach and Lender shall be entitled to exercise all rights and remedies under this Loan Agreement with respect to such Event of Default.

16. LIMITATION ON INTEREST. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of acceleration of the maturity of the Note or otherwise, shall the interest contracted for, charged or received by Lender exceed the maximum amount permissible under Applicable Law. If, from any circumstance

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whatsoever, interest would otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to Lender shall be reduced to the maximum amount permitted under Applicable Law, and if from any circumstance Lender shall ever receive anything of value deemed interest by Applicable Law in excess of the maximum lawful amount, an amount equal to any excessive interest shall be applied to the reduction of the principal of the Note and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Note such excess shall be refunded to Borrower. All interest paid or agreed to be paid to the holder of the Note shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated, and spread throughout the full period from the date of the Note until payment in full of the principal (including the period of any renewal or extension thereof) so that the interest thereon for such full period shall not exceed the maximum amount permitted by Applicable Law. This Paragraph shall control all agreements between Borrower and Lender.

17. CHOICE OF LAW. EXCEPT WHERE FEDERAL LAW IS APPLICABLE (INCLUDING, WITHOUT LIMITATION, ANY FEDERAL USURY CEILING OR OTHER FEDERAL LAW WHICH, FROM TIME TO TIME, IS APPLICABLE TO THE INDEBTEDNESS HEREIN AND WHICH PREEMPTS STATE USURY LAWS), THIS LOAN AGREEMENT, THE NOTE, THE MORTGAGES AND THE OTHER LOAN INSTRUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.

18. NOTICES. All notices, demands, requests, and other communications required or permitted hereunder shall be in writing and shall be deemed effective (a) upon actual delivery if delivered by personal delivery or certified postage prepaid mail; or (b) on the next business day after timely and proper deposit with an overnight air courier with request for next business day delivery; or (c) within two (2) business days after deposit with the U.S. Postal Services by registered or certified mail; or (d) by confirmed facsimile telecopy transmission, in each such case, addressed to Borrower or Lender, as the case may be, at the respective addresses set forth on the first page of this Loan Agreement, or such other address or facsimile telecopier number as Borrower or Lender may from time to time designate by written notice to the other as herein required.

19. FEES AND EXPENSES. Borrower agrees to pay when due (a) a modification fee of TWENTY-FIVE THOUSAND DOLLARS ($25,000.00), which shall be due and payable upon the Effective Date (as defined below), and shall be a condition to the closing of the Loan under this Loan Agreement, (b) a non-refundable Loan Facility Fee to Lender of thirty-five hundredths of one percent (0.35%) of the committed amount of the Loan each calendar year during the term (or extended term if permitted by Lender) of the Loan, payable at Recordation of the first Mortgage and annually thereafter on the anniversary thereof, (c) fees of Lender’s Inspector, (d) cost review expenses of Lender of up to FIVE THOUSAND DOLLARS ($5,000.00) for each requested update and/or change to the Construction Cost Breakdowns, (e) the reasonable attorneys’ fees and expenses of Lender’s counsel, (f) actual title insurance and examination charges, (g) actual survey costs, (h) actual hazard insurance premiums, (i) actual filing and recording fees, and (j) other reasonable expenses payable to third parties incurred by Lender in connection with the consummation of the transactions contemplated by this Loan Agreement, the exercise of Lender’s rights under this Loan Agreement and the other Loan Instruments, and the verification of the performance and satisfaction of all obligations of Borrower, General Partner, Managing Member (and any constituent entities or individuals thereof)and Guarantor under this Loan Agreement and the other Loan Instruments, including all renewals, extensions and modifications thereof. In the event it becomes necessary for Lender to utilize legal counsel for the enforcement of the Loan Instruments or any of their terms, if successful in such enforcement by legal proceedings or otherwise, Lender shall be reimbursed immediately by Borrower for reasonably incurred attorneys’ fees (including fees for Lender’s in-house attorneys) and other costs and expenses. Borrower shall also immediately reimburse Lender for all attorneys’ fees and costs reasonably incurred in connection with the representation of Lender in any bankruptcy, insolvency, reorganization or other debtor-relief or similar proceeding of or relating to Borrower, any General Partner, Managing Member or Guarantor(s), the Property, or any other property which secures the obligations of any of the Loan Instruments. All amounts due under this Section shall bear interest from the date of expenditure until paid at the rate specified in the Note and are collectively referred to as “Lender Costs”. All facility fees payable to Lender hereunder shall be deemed earned when due and are non-refundable to Borrower. All such fees shall be retained by Lender and shall not be applied to any payments of principal or interest due from Borrower under the Loan Instruments.

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20. PARTIAL RELEASES. Borrower shall have the right to obtain partial releases of the Property subject to the following terms and conditions:

(a) There shall not be a Default or Event of Default hereunder or under any other of the Loan Instruments;

(b) Borrower shall submit to Lender a request for partial release of a Property (the “Partial Release”) in form and substance satisfactory to Lender together with a lot and block description of the Residence to be released. In addition, the Partial Release should be accompanied with information necessary for Lender to process the Partial Release, including the name and address of the title insurance company, if any, to whose attention the Partial Release should be directed, numbers that reference the Partial Release (i.e., order numbers, release numbers, assessor’s parcel numbers, etc.) and the date when the Partial Release is to become effective;

(c) If required by Lender, all accrued and unpaid interest on the principal amount of the Loan being prepaid shall be paid at the time such Partial Release is requested; provided that any payment in immediately available funds, received by Lender after one-thirty o’clock, p.m. (1:30 p.m.), Dallas, Texas time, will be deemed to have been made on the next following business day;

(d) Payment to Lender of an amount in cash equal to the Release Price as provided, and as such term is defined in Paragraph 18 of the Specific Loan Terms attached hereto; and

(e) Payment to Lender of all reasonable costs and expenses arising in connection with any Partial Release.

Notwithstanding any provision herein to the contrary, at such time as Lender provides to the title company (which is closing the sale of a Property) a “payoff” quote for a Property being released from a Mortgage, in accordance with this Paragraph 20, Borrower shall not be entitled to any further Disbursements under the Loan with respect to such Property. Notwithstanding any provision herein to the contrary, Lots Being Actively Developed cannot be released from a particular Subdivision until all work is completed to finish the Lot.

21. GENERAL PROVISIONS.

(a) Waiver. No delay or omission of Lender in exercising any right or power arising from any Default or Event of Default by Borrower shall be construed as a waiver of such Default or as an acquiescence therein, nor shall any single or partial exercise of any such right or power preclude any further exercise thereof. Lender may, at its option, waive or postpone satisfaction of any condition herein, all of which are for its benefit, and any such waiver or postponement shall not be deemed to have occurred unless set forth in writing, signed by Lender and delivered to Borrower, and any such written waiver shall be operative only for the time and to the extent expressly stated therein.

(b) No Assignment. Borrower may not assign or otherwise transfer this Loan Agreement or any right hereunder, and this Loan Agreement shall be binding upon Borrower and the representatives and successors of Borrower. In the event of the termination or dissolution of Borrower prior to the completion of the Residences or prior to the use, release or disbursement of all proceeds of the Loan and any Borrower’s Deposit, this Loan Agreement shall not, at the option of Lender, be terminated or affected by such dissolution or termination. Except as provided in the foregoing sentences, this Loan Agreement is made for the sole benefit of Borrower and Lender, their successors and assigns, and no other person or persons shall have any rights or remedies under or by reason of this Loan Agreement. Lender shall not owe any duty whatsoever to any claimant (i) for labor performed or material furnished in connection with the construction of the improvements, (ii) to advance any portion of the Loan to pay any such claim, or (iii) to exercise any right or power of Lender hereunder or arising from any Default.

(c) Payments. Borrower agrees to make each payment which it owes under the Loan Instruments not later than one-thirty (1:30 p.m.) o’clock, p.m., Dallas, Texas time, or such other time as is specifically provided herein, on the date such payment becomes due and payable (or the date any voluntary prepayment is made), in immediately available funds. Any payment received by Lender after such time will be deemed to have been made on the next following business day.

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(d) Writing Necessary. No approval, acceptance or consent of Lender required by any provision of the Loan Instruments, nor any waiver of any required approval, acceptance, consent or condition, shall be deemed to have occurred until set forth in writing, signed by Lender, and delivered to Borrower.

(e) Time Is of the Essence. Time is of the essence of the Loan Instruments and of every part hereof, and Borrower therefore acknowledges that Lender has no obligation to grant any extension of any provision thereof, and any extension which Lender may elect to grant may be conditioned upon such terms and conditions as Lender may impose in its sole discretion.

(f) Joint and Several Obligation. If more than one person has executed this Loan Agreement as Borrower, the obligations of all such persons shall be joint and several. Any married person who executes this Loan Agreement agrees that recourse may be had against his or her separate property. If Borrower is a partnership, the obligations of Borrower shall be the joint and several obligations of all general partners therein. If Borrower is a limited liability company, the obligations of Borrower hereunder shall bind all members of Borrower to the extent of their interests therein.

(g) Government Regulation. If payment of the Loan is to be insured or guaranteed by any governmental agency, Borrower shall comply with all rules, regulations, requirements and statutes relating thereto or provided in any commitment issued by any such agency to insure or guarantee such payment.

(h) Headings. The Paragraph headings hereof and in the Exhibits hereto are inserted for convenience of reference only and shall not alter, define, or be used in construing the text of such Paragraphs or limit the scope of provisions of this Loan Agreement.

(i) Survival. All provisions of the Loan Instruments shall survive each Recordation of a Mortgage and all Disbursements of the Loan.

(j) Severability. In the event of any invalidity or unenforceability of any Loan Instrument or any provision of any Loan Instruments, the remainder of the Loan Instruments shall remain in full force and effect.

(k) Disclosure. Lender may disclose terms of the Loan and payment information (i) whenever a request for a credit rating is received; (ii) pursuant to a court or regulatory order; (iii) pursuant to regulatory reporting requirements; or (iv) to facilitate a sale by Lender of all or any part of the Loan.

(l) Interpretation: Include, Day, Person. Each of the Loan Instruments shall be construed without regard to whether it was prepared or drafted by one party or other or either of their attorneys. As used herein: (i) the terms “include,” “including” and forms thereof are not exclusive; (ii) the term “day” means calendar day, except when used in the defined term “Business Day” which shall mean any day on which Lender is open for business at its Dallas, Texas main office; and (iii) the term “person” means any individual, corporation, partnership, Governmental Authority, or other entity of any kind.

(m) Exhibits. All Exhibits referred to herein are incorporated herein by this reference and are a part hereof.

(n) Waiver of Judicial Procedural Matters. Borrower hereby expressly and unconditionally waives, in connection with any suit, action or proceeding brought by Lender in connection with any of the Loan Instruments, any and every right it may have to (i) injunctive relief; (ii) a trial by jury, to the extent permitted under applicable law; (iii) interpose any counterclaim therein; and (iv) have the same consolidated with any other or separate suit, action or proceeding, with respect to any matter arising out of the Loan Instruments.

(o) Counterparts. This Loan Agreement may be executed in one or more counterparts, all of which, taken together, shall constitute one and the same agreement.

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(p) Use of Certain Terms. As used in this Loan Agreement, the term “General Partner” shall apply only if Borrower’s form of legal existence is that of a partnership and the term “Managing Member” shall apply only if Borrower’s form of legal existence is that of a limited liability company.

22. FINAL AGREEMENT. THIS LOAN AGREEMENT AND THE OTHER LOAN INSTRUMENTS REPRESENT THE FINAL LOAN AGREEMENT BETWEEN LENDER AND BORROWER CONCERNING THE LOAN, AND THE LOAN INSTRUMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF LENDER AND BORROWER OR ANY AGENT, BROKER, EMPLOYEE OR REPRESENTATIVE OF EITHER OF THEM. THERE ARE NO ORAL AGREEMENTS BETWEEN LENDER AND BORROWER.

23. Letters of Credit. Borrower may request Lender’s issuance of letters of credit under the Loan in accordance with the following:

23.1 Issuance of Letters of Credit. Subject to the terms and conditions of this Agreement applicable to Disbursements, any additional agreements, instruments and undertakings required by Lender in connection with its issuance of letters of credit generally (collectively, the “Letter of Credit Agreements”), and the conditions and procedures set forth in this Agreement, Lender agrees to issue, from time to time, letters of credit (the “Letters of Credit”) upon the request by and for the account of Borrower. The maximum face amount of Letters of Credit outstanding at any time shall not exceed Twenty Million Dollars ($20,000,000).

(a) Conditions. The conditions precedent to the issuance of each Letter of Credit are all of the following:

(i) the face amount of the Letter of Credit shall not exceed the then available Borrowing Base;

(ii) Borrower shall have executed and delivered to Lender any required Letter of Credit Agreements;

(iii) No Letter of Credit shall have a term exceeding three hundred sixty-four (364) days or ending on a date after the Maturity Date;

(iv) No Letter of Credit shall have any “evergreen” or similar provisions requiring renewal thereof;

(v) Lender shall have received, in immediately available funds, a Letter of Credit fee of fifteen one-hundredths of one percent (0.15%) of the face principal amount of the Letter of Credit; such fee may be paid from a Disbursement, if all other conditions precedent to a Disbursement are satisfied;

(vi) No Default or Event of Default has occurred and is continuing; and

(vii) All policies, procedures and requirements of Lender in effect from time to time for issuance of Letters of Credit shall have been satisfied.

(b) Procedure. To obtain a Letter of Credit, Borrower shall deliver a written request for a Letter of Credit, specifying all material terms of such Letter of Credit, not later than fourteen (14) days prior to the date requested for issuance of such Letter of Credit. Lender will process the Letter of Credit request as an application in accordance with its policies, procedures and requirements then in effect. If the application meets Lender’s requirements and is within Lender’s policies then in effect, the conditions set forth in Paragraph 23.1(a) above are satisfied and all other conditions to Disbursement set forth in this Agreement are satisfied, then Lender will issue the requested Letter of Credit.

23.2 Letter of Credit Reimbursement Obligations. Borrower’s obligations under this Agreement and any Letter of Credit Agreement to reimburse Lender for any drawings under any Letter of Credit and to repay Lender in the full amount of any draws under any Letter of Credit (collectively “Reimbursement Obligation”) are absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim, or defense to payment which Borrower may have or have had against Lender or any beneficiary of the Letter of Credit, including any defense or other matter described in Paragraph 23.3 below.

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23.3 Nature of Letter of Credit Reimbursement Obligations. Borrower shall assume all of the risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. Lender shall not be responsible for (a) the form, validity, sufficiency, accuracy, genuineness or legal effect of any Letter of Credit or any document submitted by any party in connection with the issuance of any Letter of Credit, even if such document should in fact prove to be, in any or all respects, invalid, insufficient, inaccurate, fraudulent or forged; (b) the form, validity, sufficiency, accuracy, genuineness or legal effect of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof in whole or in part, which may prove to be invalid or ineffective for any reason; (c) the failure of any beneficiary of any Letter of Credit to comply fully with the terms or conditions required in order to demand payment under a Letter of Credit; (d) errors, omissions, interruptions or delays in transmission or delivery of any messages by mail, cable, telegraph, telecopy, telex or otherwise; (e) any loss or delay in the transmission or otherwise of any document or draft required by or from a beneficiary to make a disbursement under a Letter of Credit or the proceeds thereof; or (f) any nonapplication or misapplication by the beneficiary of the Letter of Credit of proceeds of such payment; or (g) the legality, validity, form, regularity or enforceability of the Letter of Credit. None of the foregoing shall affect, impair or prevent the vesting of any of the rights or powers granted to Lender hereunder. In furtherance and extension and not in limitation or derogation of any of the foregoing, any act taken or omitted to be taken by Lender in good faith shall be binding upon Borrower and shall not put Lender under any resulting liability to Borrower.

23.4 Interest on Letter of Credit Amounts. From and after the date of issuance of any Letter of Credit until the expiration or cancellation thereof, interest shall accrue and be payable on all amounts drawn under such Letter of Credit at the Applicable Rate (as defined in the Note), subject to all the terms and provisions of the Note; provided, however, interest on such amounts shall be payable quarterly, in arrears, subject to the Maturity Date.

24. Confidentiality. Notwithstanding anything to the contrary set forth herein or in any other written or oral understanding or agreement to which the parties hereto are parties or by which they are bound, the parties hereto acknowledge and agree that (i) any obligations of confidentiality contained herein and therein do not apply and have not applied from the commencement of discussions between the parties to the tax treatment and tax structure of the transactions contemplated by the Loan Instruments (and any related transactions or arrangements), and (ii) each party (and each of its employees, representatives, or other agents) may disclose to any and all parties as required, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated by the Loan Instruments and all materials of any kind (including opinions or other tax analyses) that are provided to such party relating to such tax treatment and tax structure, all within the meaning of Treasury Regulations Section 1.6011-4; provided, however, that each party recognizes that the privilege each has to maintain, in its sole discretion, with regard to the confidentiality of a communication relating to the transactions contemplated by the Loan Instruments, including a confidential communication with its attorney or a confidential communication with a federally authorized tax practitioner under Section 7525 of the Internal Revenue Code, is not intended to be affected by the foregoing. The foregoing acknowledgements and agreements shall also apply to any state tax or treasury regulations similar or analogous to the federal regulations referenced hereinabove.

25. Amendment and Restatement of Prior Loan Agreement. Notwithstanding any provision to the contrary herein, effective as of December 31, 2007 (the “Effective Date”), subject to all the terms and provisions of this Loan Agreement, and expressly conditioned upon recordation of a memorandum of this Loan Agreement in the Official Records with respect to each of the Initial Approved Subdivisions, this Loan Agreement shall amend and restate, in its entirety, that certain Master Loan Agreement dated August 31, 2000, by and between Borrower, as “Borrower,” and Guaranty Bank, as “Lender,” as amended by (i) that certain Agreement for First Modification of Deeds of Trust and Other Loan Instruments dated June 8, 2001, (ii) that certain Agreement For Second Modification of Deeds of Trust and Other Loan Instruments dated July 23, 2001, (iii) that certain Agreement for Third Modification of Deeds of Trust and Other Loan Instruments dated December 19, 2001, (iv) that certain Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments dated May 29, 2002, (v) that certain Agreement for Fifth Modification of Deeds of Trust and Other Loan Instruments dated June 6, 2003, (vi) that certain Agreement for Sixth Modification of Deeds of Trust and Other Loan Instruments dated November 14, 2003, (vii) that certain Agreement for Seventh Modification of Deeds of Trust and Other

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Loan Instruments dated October 6, 2004, (viii) that certain Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated October 14, 2005, (ix) that certain Agreement for Ninth Modification of Deeds of Trust and Other Loan Instruments dated October 31, 2006, and (x) that certain Agreement for Tenth Modification of Deeds of Trust and Other Loan Instruments dated April 3, 2007 (as so amended, the “Prior Loan Agreement”). Notwithstanding the foregoing, each of the other Loan Instruments executed in connection with the Prior Loan Agreement (including, without limitation, each Supplement (as defined below) and Mortgage executed in connection with the Prior Loan Agreement) (collectively, the “Prior Loan Instruments”) shall continue in full force and effect, as amended by this Loan Agreement, and all references in the Prior Loan Instruments to the “Loan Agreement” shall be deemed to refer to this Loan Agreement. Further notwithstanding the foregoing, each Supplement to Loan Agreement and Other Loan Instruments (“Supplement”) entered into between Borrower and Lender prior to the Effective Date shall remain in full force and effect with respect to each Initial Approved Subdivision, except to the extent amended to this Agreement; provided, however, all references in such Supplement to the “Loan Agreement” shall be deemed to refer to this Loan Agreement, and each Supplement is hereby amended to incorporate the modifications set forth in this Loan Agreement. Borrower agrees to execute and deliver, such additional instruments, undertakings and agreements as are required by Lender to confirm, acknowledge and effectuate the foregoing. As a condition to the effectiveness of this Agreement, Guarantor and each subordinate lienholder shall have consented to the modification to the Prior Loan Agreement under this Loan Agreement, all in form and content acceptable to Lender.

[Remainder of Page Left Intentionally Blank]

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IN WITNESS WHEREOF, this Loan Agreement has been executed by the undersigned as of the date first set forth above.

BORROWER:		LENDER:
WILLIAM LYON HOMES, INC., a California corporation		GUARANTY BANK, a federal savings bank organized and existing under the laws of the United States
By:	/s/ Michael D. Grubbs	By:	/s/ Kent Newberry
Name:	Michael D. Grubbs	Name:	Kent Newberry
Title:	Senior Vice President	Title:	Senior Vice President
By:	/s/ Richard S. Robinson
Name:	Richard S. Robinson
Title:	Senior Vice President

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CONSENT OF GUARANTOR

The undersigned Guarantor hereby consents to the foregoing Amended and Restated Master Loan Agreement and the transactions contemplated thereby and reaffirms its obligations under any guaranties and/or indemnities given in favor of Lender with respect to the obligations of Borrower to the extent accruing prior to the Effective Date. Defined terms used herein have the meanings ascribed thereto in the above-referenced Agreement.

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

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CONSENT OF JUNIOR LIENHOLDER

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

A) Whitney Ranch: (1161) dated November 8, 2004 and recorded in the Official Records of Placer County, California on December 30, 2004 as Instrument No 2004-0175176.

JUNIOR LIENHOLDER:	SUNSET RANCHOS INVESTORS, LLC, a Delaware limited liability company, dba Whitney Ranch Associates
	By:	/s/ Peter Bridges
	Name:	Peter Bridges
	Title:	Authorized Representative
	By:	/s/ Reneé McDannell
	Name:	Reneé McDannell
	Title:	Authorized Representative

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CONSENT OF JUNIOR LIENHOLDER

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

A) Bayside: (1133 & 1138) dated March 1, 2004 and recorded in the Official Records of Contra Costa County, California on March 19, 2004 as Series No. 92736.

JUNIOR LIENHOLDER:	LEWIS-HERCULES, LLC, a Delaware limited liability company
	By:	LEWIS OPERATING CORP., a California corporation
	Its:	Sole Manager
		By:	/s/ Randall W. Lewis
		Name:	Randall W. Lewis
		Title:	Executive Vice President
		By:
		Name:
		Title:

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CONSENT OF JUNIOR LIENHOLDER

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

A) Copper Canyon Ranch: (2216) dated May 17, 2004 and recorded in the Official Records of Maricopa County, Arizona on May 26, 2004 as Instrument No. 2004-0586207.

JUNIOR LIENHOLDER:	WILLIAM LYON SOUTHWEST, INC., an Arizona corporation dba WILLIAM LYON HOMES
	By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
	By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President

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CONSENT OF JUNIOR LIENHOLDER

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

A) Three Sixty° @ South Bay - The Flats: (2360) dated June 20, 2007 and recorded in the Official Records of Los Angeles County, California on July 9, 2007 as Instrument No. 2007-1620874.

JUNIOR LIENHOLDER:	SAMS VENTURE, LLC, a Delaware limited liability company
	By:	/s/ illegible
	Name:
	Title:
	By:
	Name:
	Title:

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CONSENT OF JUNIOR LIENHOLDER

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

A) Acacia @ Lyon’s Gate: (1190) dated July 12, 2007 and recorded in the Official Records of Maricopa County, Arizona on July 20, 2007 as Instrument No. 2007-0826702.

JUNIOR LIENHOLDER:	WILLIAM LYON SOUTHWEST, INC., an Arizona corporation dba WILLIAM LYON HOMES
	By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
	By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President

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EXHIBITS

TO LOAN AGREEMENT

EXHIBIT “A”:	SPECIFIC LOAN TERMS, CONDITIONS AND DEFINITIONS
EXHIBIT “B”:	STAGE DRAW BREAKDOWN
EXHIBIT “C”:	APPLICATION FOR DISBURSEMENT
EXHIBIT “D”:	RESIDENTIAL DRAW REQUEST
EXHIBIT “E”:	CONSTRUCTION COST BREAKDOWN

William Lyon Homes, Inc.

Loan No. 906-0100

EXHIBIT “A”

TO AMENDED AND RESTATED MASTER LOAN AGREEMENT

SPECIFIC LOAN TERMS, CONDITIONS AND DEFINITIONS

This Exhibit, setting out specific loan terms, conditions and definitions, is a part of the Amended and Restated Master Loan Agreement of even date herewith between Lender and Borrower to which it is attached.

1. LOAN CLOSING DEADLINE. The Loan Closing Deadline shall be April 22, 2008.

2. APPROVED SUBDIVISIONS. The following Subdivisions comprise the Initial Approved Subdivisions previously approved by Lender for inclusion in the Borrowing Base pursuant to the Prior Loan Agreement, and may be supplemented by additional Subdivisions approved by Lender in its sole discretion pursuant to the Loan Agreement:

Project Name	Date Added to Borrowing Base	County	State	Approved SF Range	Price Range
Carson Ranch	2/27/04	Clark County	NV	2,100 - 2,650	$264,000 - $297,000
Carson Ranch East	3/17/06	Clark County	NV	Product A: 2,133 - 2,627 Product B: 2,527 - 3,091	Product A: $395,000 - $430,000 Product B: $457,000 - $504,000
Bayside	3/19/04	Contra Costa	CA	Project A: 1,612 - 2,060 Project B: 2,204 - 2,614	Project A: $438,000 - $473,000 Project B: $503,000 - $548,000
Three Sixty° @ South Bay – The Flats	7/9/07	Los Angeles	CA	957 - 1,548*	$512,000 - $690,000*
Copper Canyon Ranch	5/26/04	Maricopa	AZ	1,447 - 3,092	$142,500 - $218,300
Talavera	12/15/04	Maricopa	AZ	1,200 - 2,169	$168,000 - $201,000
Acacia @ Lyon’s Gate	7/20/07	Maricopa	AZ	1,343 - 2,708	$225,000 - $292,500
Whitney Ranch	12/30/04	Placer	CA	3,450 - 3,900	$544,000 - $576,000
Adelina	7/10/07	San Bernardino	CA	1,278 - 1,711*	$330,000 - $405,000*

* Square footage and price range vary based on plan type, as described in the applicable Supplement.

3. DEFINITIONS. The following terms shall have the meanings set forth below:

“Model” means a Residence specifically furnished and used for the purpose of marketing similar Residences in a Subdivision.

“Inventory Residence” means any Residence that is not a Model.

“Spec” means an Inventory Residence that is not Under Contract.

“Under Contract” means a Residence that is subject to a signed written Sales Agreement to sell to a bona fide third party unrelated to Borrower, which Sales Agreement shall have no contingency or other conditions not reasonably acceptable to Lender, and pursuant to which the purchaser has deposited an earnest money deposit of at least One Thousand Five Hundred Dollars ($1,500.00), and which Sales Agreement provides for a purchase price (not including upgrades) of at least ninety percent (90%) of the value of the Residence established in an appraisal by an appraiser satisfactory to lender.

“Contingent Contract” means a Sales Agreement for a Residence that contains contingencies or other conditions that are reasonably acceptable to Lender and otherwise meets the conditions for such Residence to be Under Contract.

“Finished Lot” means a Lot as to which (a) all design, development and construction work has been completed (or as to offsite improvements, bonded for completion) for the improvements other than construction of a Residence, in accordance with the plans submitted to and approved by Lender pursuant to the Loan Agreement; and (b) such improvements as are required by the California Subdivision Map Act, if Lot is located in California, and by the applicable local ordinance or resolution enacted pursuant thereto have been completed. Such improvements shall include without limitation: (i) completion of all public roadways necessary to provide sufficient access to such Lot, including all curbs and gutters; (ii) completion of all water, sanitary and storm sewer and other utilities in capacities sufficient for single family residential use so that the Lot is ready and of sufficient size for a Residence to be constructed thereon; and (iii) other improvements (except Residences) to be constructed in or on the Subdivision, pursuant to any applicable permits, or map or plat conditions and Applicable Law.

“Lot Being Actively Developed” means a Lot for which construction and development has commenced (or will commence within thirty (30) days after Recordation of a Mortgage covering such Lot) including engineering and mapping and is being actively pursued by Borrower, for which a valid Vesting Tentative Map has been filed and has not expired and for which a Final Map will be recorded as provided in the California Subdivision Map Act and applicable regulations and local ordinances within ninety (90) days after recordation of a Mortgage on the Property.

“Inventory Lot” means any lot which is not either a Lot Being Developed or a Finished Lot located in an Approved Subdivision.

4. LOT/RESIDENCE/SUBDIVISION RESTRICTIONS. At any time, Lots, Residences and Subdivisions financed under the Loan shall be limited to the restrictions below (in addition to the restrictions set forth in Paragraph 19 below), unless modified by Lender in writing. The following restrictions and Loan Allocations may be changed in Lender’s sole discretion in connection with Lender’s approval for any additional Subdivisions. In the absence of any such change, the following shall apply to subsequently approved Subdivisions. Borrower covenants and agrees that the Properties and Subdivisions will not exceed the numbers set forth below and that the Borrowing Base will not include any Properties or Subdivisions in excess of the numbers set forth below.

MAXIMUM NUMBERS

Approved Subdivisions				$60 Million Loan Amount
A.	Residences.
	(i)	Maximum number of Residences at any one time in all Approved Subdivisions:	Four Hundred Fifty	(450)
B.	Spec Residences.
	(i)	Maximum number of Specs at any one time in any one Approved Subdivision:	Twelve	(12)
	(ii)	Maximum number of Specs at any one time in all Approved Subdivisions:	One Hundred	(100)

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	(iii)	Maximum number of Specs at any one time in all Approved Subdivisions located in Las Vegas, NV:	Sixty	(60)
C.	Models.
	(i)	Maximum number in any Subdivision:	Five	(5)
D.	Sales Prices. The base sales price of a Residence shall not include options, upgrades, or lot premiums. If market conditions warrant it, Borrower may increase base sale pricing by up to fifteen percent (15%) per unit.
E.	Maximum Loan Allocations.		Loan Amount Per Approved Subdivision	Maximum for All Approved Subdivisions
	(i)	For Finished Lots and Lots Being Actively Developed:	$15,000,000	$30,000,000
	(ii)	For attached Residences in all Approved Subdivisions:	N/A	40% of all Loan Allocations
	(iii)	For Residences in all Approved Subdivisions with base prices in excess of $700,000 and up to $1,200,000:	N/A	15% of all Loan Allocations
F.	Locations. All Approved Subdivisions shall be located in major residential markets located in Northern and Southern California, Phoenix, Arizona and/or Las Vegas, Nevada.
G.	Additional Restrictions on Las Vegas Subdivisions.
	(i)	Maximum number of Finished Lots and Lots Being Actively Developed in all Approved Subdivisions located in Las Vegas, NV:	One hundred fifty	(150)
	(ii)	Maximum number of Approved Subdivisions located in Las Vegas, NV at any one time:	Four	(4)
	(iii)	Maximum aggregate Loan Allocations for all Approved Subdivisions located in Las Vegas, NV:	$30,000,000

5.	GUARANTOR.
	Paragraph 2.1(b) of Loan Agreement.
	William Lyon Homes, a Delaware corporation
6.	BORROWER’S AGENT(S):
	Paragraph 5(a)(i) of Loan Agreement.
	Name:	Michael D. Grubbs	Name:	Richard S. Robinson
		William Lyon Homes, Inc.		William Lyon Homes, Inc.
	Address:	4490 Von Karman Avenue	Address:	4490 Von Karman Avenue
		Newport Beach, CA 92660		Newport Beach, CA 92660
	Phone:	(949) 833-3600	Phone:	(949) 833-3600

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7.	ADDITIONAL DOCUMENTS REQUIRED (All in form and content acceptable to Lender):
	A.	Initial Disbursement
		Paragraph 2.1(h) of Loan Agreement.
		(1	)	Amended and Restated Environmental Indemnity – Borrower
		(2	)	Amended and Restated Environmental Indemnity – Guarantor: William Lyon Homes
		(3	)	Amended and Restated Guaranty Agreement – William Lyon Homes
		(4	)	Authorization to Sign
		(5	)	Corporate Resolution Authorizing Execution of Guaranty Documents
		(6	)	Corporate Resolution: Borrower
		(7	)	Loans to One Borrower Affidavit – Guarantor: William Lyon Homes
		(8	)	Loans to One Borrower Affidavit – Borrower
		(9	)	Notice and Agreement – No Oral Representation
	B.	Additional Approved Subdivisions
		Paragraph 2.2(a) of Loan Agreement.
		(1	)	UCC-1 Financing Statement and Attached Schedule 1 (for each State in which an Approved Subdivision is located), if required by Lender
		(2	)	Certification of Non-Foreign Status
		(3	)	Assignment of Architect’s Contract and Plans and Specifications and Permits, and Consent and Certificate of Architect (for each Approved Subdivision)

8. TITLE ENDORSEMENTS REQUIRED

Paragraph 2.2(c) of Loan Agreement.

x ALTA ( X 2006)

¨ 100 (Off-Record Endorsement)

x Mod 100 (Off-Record Endorsement)

x 116 (Address Endorsement)

¨ 101.2 (Mechanic’s Lien)

¨ 101.6 (Mechanic’s Lien)

x 101.10 (Mechanic’s Lien)

x 110.9 (Environmental Protection Lien Endorsement, ALTA 1970)

x 111.5 (Adjustable Rate Endorsement)

¨ 108.8 (Additional Advances, 1970)

¨ 108.9 (Additional Advances, 1987)

¨ 110.12 (CC&R)

x 102.5 (Foundation 1970) or 102.7 (Foundation 1970)

x 103.1 (Encroachment)

x 103.5 (Water Rights)

x 110.1 (Deletion of Arbitration Clause)

x 111.11 (Line of Credit Advance with Priority)

x 116.7 (Subdivision Map Act Compliance)

x 131-06 (Creditors’ Rights)

x Other endorsements reasonably required by Lender, depending on the condition of title for particular Properties.

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TITLE INSURER:

Paragraph 2.2(c) of Loan Agreement.

Name:	Fidelity National Title Insurance Company
Address:	1300 Dove Street, Suite 310
	Newport Beach, CA 92660
Phone:	(949) 477-3670 Fax (949) 261-8913

9.	INSURANCE REQUIRED
	Paragraph 2.2(d) of Loan Agreement.
	x	All Risk Hazard, in an amount not less than the full replacement cost of the Properties at completion with 438BFU (or equivalent acceptable to Lender) loss payable endorsement naming Lender as payee, and with course of construction endorsement (or, as appropriate, a course of construction policy during construction); include debris removal, collapse and transit coverage with deductible not to exceed $5,000.00. This insurance must be in place as to each Property and evidence thereof delivered to Lender, prior to or concurrently with the recordation of each Mortgage as to that Property.
	x	Commercial General Liability, naming Lender as additional insured, containing a primary and noncontributing clause; limit per occurrence $1,000,000; aggregate $2,000,000; and include coverage for independent contractors and broad blanket contractual. Liability will be on an “occurrence” basis only. Liability insurance on a “claims made” basis will not be acceptable.
	x	Worker’s Compensation, issued to Borrower or to a general contractor; for all employees and independent contractors.
	x	Business Auto, hired and non-owned auto; $500,000 combined single limit.
	x	Excess Liability coverage should be excess over Business Auto, Commercial General Liability, and Worker’s Compensation for a minimum of $10,000,000. Defense cost should be covered on a “First Dollar” basis in addition to policy limits.
	x	Earthquake, if the Properties are located on a potentially or recently active fault as determined by the State Geologist pursuant to California Public Resource Code Section 2622; and
	x	Such other coverages or conditions as Lender may require:
		(1)    Policies should be written by companies with a rating of B-6 or better from A. M. Best Company.
		(2)    Loss Payee should read as follows:
		Guaranty Bank
		Attn: Commercial Insurance Administrator
		8333 Douglas Avenue
		Dallas, TX 75225
		(3)    Certified copies of original property policy are required. Binders will be acceptable as proof of temporary coverage pending receipt of policy from insurance company. Binder will reflect coverages, limits, deductibles, applicable forms and Guaranty Federal Bank, as their interest may appear.

10. OPINION LETTER

Paragraph 2.1(f) of Loan Agreement.

Attorney:	Roy Geiger
	Irell & Manella
Address:	840 Newport Center Drive, Suite 500
	Newport Beach, CA 92660
Phone:	(949) 760-0991

OPINION LETTER TO ADDRESS: The opinion requirement is hereby waived solely for purposes of this Loan Agreement.

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11. LOAN ALLOCATIONS

Paragraph 5(b) of Loan Agreement.

The Loan Allocation shall not exceed the least of the amounts set forth below, for each category of Property:

For Residences: The Loan Allocation for Residences shall not exceed the lesser of one hundred percent (100%) of the total direct costs of Residences Under Contract (including all allocated Lot and other indirect costs), or one hundred percent (100%) of the total direct cost for Specs and Models (including all allocated Lot and other indirect costs) as determined by Lender; or (2) eighty percent (80%) of the lower of the applicable values provided in Paragraph 5(b) of the Loan Agreement for Residences Under Contract, and seventy-five percent (75%) for Specs and Models (including without limitation, Residences subject to contingent sales contracts).

For Finished Lots and Lots Being Actively Developed: (1) seventy-five percent (75%) of costs; or (2) seventy percent (70%) of discounted bulk appraised value.

All of the foregoing costs shall be based on Construction Cost Breakdowns for construction of individual Residences and Finished Lots, as approved by Lender. In calculating the above values, no deferred equity of Borrower, other than for general and administrative costs, shall be included in the calculation of the total direct costs for a Property. The foregoing Loan Allocations are subject to change, in Lender’s sole discretion, in connection with any approval by Lender of additional Subdivisions.

12. FINANCIAL STATEMENTS AND TAX RETURN REQUIREMENTS

Paragraph 2.1(e) of Loan Agreement.

Name:	William Lyon Homes, Inc.	Tax ID: 33-0253855
Address:	4490 Von Karman Avenue
	Newport Beach, CA 92660
	(949) 833-3600
Fiscal Year End:	12/31

Regularly Required Financial Statements:

Annual: Audited financial statements and financial covenant compliance certificate from Borrower’s chief financial officer within one hundred twenty (120) days of fiscal year end. Borrower shall cause Guarantor to deliver to Lender cash flow, net profit and balance sheet projections for at least a two (2)-year period hence, within ninety (90) days of each year end.

Quarterly: Unaudited quarterly financial statements and financial covenant compliance certificate from Borrower’s chief financial officer within sixty (60) days of the quarterly periods ending March 31, June 30, and September 30.

13. REQUIRED RELEASES

Paragraph 7(k) of Loan Agreement.

A Property shall no longer be included in the Borrowing Base at the following times, subject to extension, at Lender’s sole discretion provided no Default or Event of Default then exists (the “Required Release Date”):

a) Inventory Residences shall be released from the Borrowing Base not later than three hundred sixty-four (364) days from the first to occur, as applicable, of (i) the Initial Disbursement with respect to a completed Inventory Residence located in an Initial Approved Subdivision; or (ii) the initial Disbursement for construction of the subject Inventory Residence, subject to two (2) possible three (3)-month extensions per Residence in the case of Residences whose construction is financed with Loan Proceeds; provided, however, the Loan Allocation shall be reduced by 10% (65% maximum LTV), and Borrower shall pay down such amount, for any Spec which has not be released within the initial three hundred sixty-four (364) day period.

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b) Models shall be released from the Borrowing Base not later than thirty (30) months from the date of the first to occur of (i) the Recordation of a Mortgage with respect to an existing Model; or (ii) the initial Disbursement for construction of such Model, subject to three (3) possible three (3)-month extensions per Model in the case of Models whose construction is financed with Loan Proceeds; provided, however, at Lender’s discretion, no Model shall be released from the Mortgage to which it is subject later than the required Release Date for the final Residence for which such Model is a Model;

c) Finished Lots shall be released from the Borrowing Base not later than twenty-four (24) months from the date of Recordation of a Mortgage with respect to such Finished Lot, unless construction of a Residence has been commenced thereon prior to such deadline, subject to two (2) possible six (6)-month extensions per Lot;

d) Lots Being Actively Developed shall be released from the Borrowing Base not later than twenty-four (24) months from the date of the Recordation of a Mortgage with respect to such Lot, subject to two (2) possible six (6)-month extensions per Lot; provided, however, such Required Release Date shall be reduced to twelve (12) months from the date of the Recordation of the Mortgage with respect to such Lot, if, at the time such Lot Being Actively Developed is added to the Borrowing Base, it has not been graded to 0.1 feet of finish grade.

Borrower shall not commence construction of any additional Residences in any Subdivisions using Loan Proceeds, no additional Finished Lots shall be included in the Borrowing Base and no additional Lots Being Actively Developed shall be eligible for Disbursements under the Loan from and after the date of expiration of said availability. Lots shall be subject to the additional requirements of Paragraph 16(C) below. No Lots Being Actively Developed shall be permitted to be converted into Finished Lots under the Borrowing Base. All extensions to Required Release Dates shall require the prior consent of Lender, which may be given or withheld in Lender’s sole discretion, following receipt of Borrower’s request for such extension given not later than ten (10) days prior to the then-applicable Required Release Date.

14. MATURITY AND EXTENSION

Paragraph 10 of the Loan Agreement.

The Maturity Date of the Note shall be as defined in the Note.

After the Facility Expiration Date, no additional Mortgage shall be recorded and the amount of the Loan Allocation for each Lot and Residence or Property, as applicable, will be removed from the Borrowing Base on the Required Release Date for such Lot, Residence or Property, as applicable. In no event shall Lots Being Actively Developed be eligible to become Finished Lots from and after the Maturity Date.

15. ADDITIONAL DEFAULTS

Paragraph 11 of the Loan Agreement.

In addition to the Events of Default stipulated in the Loan Instruments, it shall be an Event of Default under this Loan Agreement if:

A. Borrower fails to comply with any of the covenants in this Exhibit “A”; or

B. Lender has determined on two or more occasions, that the WIP Report submitted by Borrower reflects a status of completion of construction in excess of that observed by Lender’s Inspector or is otherwise materially inaccurate based on such observations; or

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C. Any default or breach, beyond applicable cure periods, shall occur under (i) that certain Indenture dated June 29, 1994 given by Borrower’s predecessor-in-interest, The Presley Companies in favor of American National Bank and Trust Company, as Trustee (the “Indenture”); (ii) any instruments or undertakings evidencing other indebtedness owed by Borrower to any other lender, other than with respect to indebtedness constituting non-recourse debt owed to vendors of land; or (iii) any instruments or undertakings entered into by Borrower with respect to any party subordinating a lien securing Borrower’s obligations under such instruments or with respect to such undertakings, to the lien of any Mortgage; or

D. Any default or breach, beyond applicable cure periods, shall occur under that certain Indenture dated as of March 17, 2003 between Borrower, Guarantor and U.S. Bank National Association, as Trustee, with respect to certain indebtedness of Borrower in the original principal amount of TWO HUNDRED FIFTY MILLION DOLLARS ($250,000,000.00).

16. ADDITIONAL LOAN COVENANTS

Paragraph 15 of the Loan Agreement.

Borrower shall fully perform and satisfy, or caused to be fully performed and satisfied, the following “Additional Loan Covenants”:

A. Borrower covenants and agrees not to permit the occurrence of any material adverse change in the financial condition of Borrower.

B. The Tangible Net Worth plus minority interest of Guarantor, at all times shall be not less than ONE HUNDRED SEVENTY-FIVE MILLION DOLLARS ($175,000,000.00), adjusted upwards quarterly by fifty percent (50%) of Guarantor’s net income earned after December 31, 2008;

C. Guarantor shall maintain a ratio of total liabilities to Tangible Net Worth of not more than 4.5 to 1 on a quarterly basis, through the quarter ending September 30, 2008; provided, however, such ratio shall decrease to 4.0 to 1 commencing as of the quarter ending December 31, 2008. Notwithstanding the foregoing, in no event may any additional Lots be added to the Borrowing Base unless and until such ratio of total liabilities to Tangible Net Worth plus minority interest is lower than 3.25 to 1, and Guarantor continues to maintain such ratio.

D. Guarantor shall maintain a minimum liquidity of TWENTY MILLION DOLLARS ($20,000,000.00). For purposes of the foregoing covenant, “liquidity” shall mean and include certified available funds from lenders, amounts due from title companies for escrow closings in the ordinary course, marketable securities and unrestricted cash.

E. Guarantor shall at all times maintain a limitation on investments in joint ventures of fifty percent (50%) of Guarantor’s Tangible Net Worth.

F. William Lyon and William H. Lyon shall maintain a combined ownership of at least forty percent (40%) of the outstanding stock of Guarantor.

G. Guarantor shall be profitable, as measured on a semi-annual basis. Notwithstanding the foregoing, the profitability covenant shall be waived solely for the period ending December 31, 2007.

“Tangible Net Worth” is defined as the Generally Accepted Accounting Principles (“GAAP”) determination of net worth (which shall include minority interests for purposes of this definition), minus intangible assets. All other accounting terms used herein above shall have the meanings commonly ascribed to them under GAAP.

Any failure to comply with the covenants of this Paragraph 16 shall constitute an automatic Event of Default, without the benefit of any notice or cure periods.

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17. REQUIRED PRINCIPAL REDUCTIONS

Paragraph 8 of Loan Agreement.

A. Finished Lots. Ten percent (10%) reduction of the Loan Allocation shall be paid twenty-four (24) months after the Initial Disbursement;

B. Inventory Residences: Ten percent (10%) reduction of the Loan Allocation shall be paid fifteen (15) months after the Initial Disbursement (subject to Paragraph 13(a) above for Specs);

C. Models: Ten percent (10%) reduction of the Loan Allocation shall be paid thirty (30) months after the Initial Disbursement;

D. Lots Under Development: Ten percent (10%) reduction of the Loan Allocation shall be paid thirty (30) months after the Initial Disbursement.

18. RELEASE PRICE

Paragraph 20(d) of Loan Agreement.

The partial release price (“Release Price”) for the Property for which release is sought shall be an amount in cash equal to (i) the release price for the Lot comprising a portion of the Property, in the amount specified in Exhibit “B” to the Mortgage encumbering such Property; and (ii) the full Loan Allocation for the Residence for which release is sought, plus an amount equal to any other proceeds of the Loan disbursed by Lender for the Property which are ratably allocable to such Property as determined by Lender. At Lender’s sole discretion, the Release Price may be reduced or waived for each reconveyance of a Lot or Property. All releases of Properties shall comply with the requirements of the Release Price Agreement attached as Exhibit “B” to the Mortgage.

19. LOAN REDUCTIONS

Introductory Paragraph of Loan Agreement.

Effective as of the Effective Date, the Loan Amount shall be SIXTY MILLION DOLLARS ($60,000,000.00), and aggregate Loan Allocations shall not exceed NINETY MILLION DOLLARS ($90,000,000.00).

Effective as of the following dates, the Loan Amount and maximum aggregate Loan Allocations shall be reduced as follows:

DATE	LOAN AMOUNT		MAXIMUM LOAN ALLOCATIONS
March 31, 2008	$	55,000,000.00	$	82,000,000.00
June 30, 2008	$	50,000,000.00	$	75,000,000.00

Pursuant to Paragraph 8 of the Loan Agreement, Borrower shall pay down the principal balance as required in order to reduce such balance to the Loan Amount and comply with the maximum Loan Allocation restrictions on or prior to the dates that the Loan Amounts and maximum Loan Allocations are reduced. Such required pay down shall include any payment of any amounts necessary in order to repay amounts disbursed under the Prior Loan Agreement, which payment shall be a condition to closing under the Loan Agreement.

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20. Restrictions on Availability. Total availability under the Loan for Disbursements shall automatically be reduced by an amount equal to the greater of (i) the aggregate outstanding principal balance under any Other Loan at such time of determination by Lender, and (ii) the principal amount of Lender’s commitment to lend with respect to any Other Loan, in the aggregate, as the same may be reduced over the term of the Other Loan, until all such outstanding amounts, and all other obligations, under and with respect to such Other Loan have been performed and paid in full, and Lender’s commitment to lend under the Other Loan has been terminated in its entirety. In no event shall the aggregate outstanding principal balance under the Loan and any Other Loan exceed the Loan Amount. Any event of default under any Other Loan (subject to applicable notice and cure periods, if any, thereunder) shall constitute an Event of Default under the Loan Agreement without benefit of any other notice or cure period under the Loan Agreement. Borrower shall execute and deliver to Lender such other instruments, undertakings and agreements, including with respect to title insurance, as Lender may require in connection with the foregoing. Borrower shall reimburse Lender for all costs and expenses, including reasonable attorneys fees and costs, incurred in connection with the foregoing. For purposes hereof, “Other Loan” means, collectively, any other loan or loans which may hereafter extended by Lender to Borrower, provided that in no event shall the aggregate maximum principal amount of such loan or loans exceed TWENTY MILLION DOLLARS ($20,000,000.00).

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EX-10.2

Exhibit 10.2

SEVENTH MODIFICATION AGREEMENT TO BORROWING BASE REVOLVING

LINE OF CREDIT AGREEMENT

DATE:	As of March 12, 2008
PARTIES:
	Borrower:	WILLIAM LYON HOMES, INC., a California corporation
	Guarantor:	WILLIAM LYON HOMES, a Delaware corporation
	Bank:	JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association

JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association (“Bank”), and WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), hereby enter into this Seventh Modification Agreement (the “Modification”) to the Borrowing Base Revolving Line of Credit Agreement dated as of June 28, 2004, as modified by a Modification Agreement, dated as of December 7, 2004, by a Second Modification to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, by a Third Modification to Borrowing Base Revolving Line of Credit Agreement, dated as of October 23, 2006, by a Fourth Modification to Borrowing Base Revolving Line of Credit Agreement, dated as of April 26, 2007, by a Fifth Modification to Borrowing Base Revolving Line of Credit Agreement, dated as of November 6, 2007, and by a Sixth Modification to Borrowing Base Revolving Line of Credit Agreement, dated as of February 20, 2008 (the “Loan Agreement”), with the consent of guarantor WILLIAM LYON HOMES, a Delaware corporation (“Guarantor”).

RECITALS

A. Bank has extended to Borrower credit (“Loan”) up to the maximum principal amount of Seventy Million Dollars ($70,000,000) pursuant to the Loan Agreement, as presently evidenced by that certain Amended and Restated Promissory Note dated as of July 14, 2005 (the “Note”) executed by Borrower and payable to the order of Bank.

B. The Loan is secured by, among other things, certain Construction Deeds of Trust and Fixture Filing (With Assignment of Rents and Security Agreement) executed by Borrower as Trustor for the benefit of Bank (such Deeds of Trust, as amended to dated, shall be hereinafter referred to, individually, as a “Deed of Trust” and, collectively, as the “Deeds of Trust”). The Loan is further secured by the personal

property described in certain UCC-1 Financing Statements relating to the property encumbered by the Deeds of Trust naming Borrower as Debtor and Bank as Secured Party (as amended to date, the “UCC Financing Statements”). The Deeds of Trust, the UCC Financing Statements, and such other agreements, documents and instruments securing the Loan are referred to individually and collectively as the “Security Documents”).

C. Repayment of the Loan and the completion of the improvements have been, and continue to be, guaranteed by the Repayment Guaranty dated as of June 28, 2004 and executed by Guarantor in favor of Bank (the “Guaranty”). The Guaranty and any other agreements, documents and instruments guarantying the Loan are referred to individually and collectively as the “Guaranty Documents”.

D. The Loan Agreement, the Note, the Security Documents, the Guaranty Documents, any environmental certification and indemnity agreement, and all other agreements, documents, and instruments evidencing, securing, or otherwise relating to the Loan, as may be amended, modified, extended or restated from time to time, are sometimes referred to individually and collectively as the “Loan Documents”. Hereinafter, the Loan Documents shall mean such documents as modified in this Modification.

E. The Borrower and the Bank have agreed to modify the Loan as provided herein.

F. All capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Loan Agreement.

AGREEMENT

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Bank agree as follows:

1. ACCURACY OF RECITALS.

Borrower acknowledges the accuracy of the Recitals.

2. MODIFICATION OF LOAN DOCUMENTS.

2.1 The Pricing Schedule set forth in Exhibit C of the Loan Agreement is deleted in its entirety and replaced with the Pricing Schedule attached hereto as Appendix I.

2.2 The Deeds of Trust are modified to secure payment and performance of the Loan as amended to date, in addition to all other “Obligations” of Borrower as therein defined. The foregoing notwithstanding, certain obligations continue to be excluded from the Obligations, as provided in the Deeds of Trust.

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2.3 Each of the Loan Documents is modified to provide that it shall be a default or an event of default thereunder if Borrower shall fail to comply with any of the covenants of Borrower herein or if any representation or warranty by Borrower herein or by any guarantor in any related Consent and Agreement of Guarantor is materially incomplete, incorrect, or misleading as of the date hereof.

2.4 Each reference in the Loan Documents to any of the Loan Documents shall be a reference to such document as modified herein.

3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.

The Loan Documents are ratified and affirmed by Borrower and shall remain in full force and effect as modified herein. Any property or rights to or interests in property granted as security in the Loan Documents shall remain as security for the Loan and the obligations of Borrower in the Loan Documents.

4. CONDITIONS PRECEDENT.

Before this Agreement becomes effective and any party becomes obligated under it, all of the following conditions shall have been satisfied at Borrower’s sole cost and expense in a manner acceptable to Bank in the exercise of Bank’s sole judgment:

4.1 Bank shall have received such assurance as Bank may require that the validity and priority of the Deeds of Trust have not been and will not be impaired by this Agreement or the transactions contemplated by it, including the issuance by the title company of CLTA Endorsement No. 110.5 to be attached to Bank’s title policies insuring the liens of the Deeds of Trust.

4.2 Bank shall have received fully executed and, where appropriate, acknowledged originals of this Modification, the attached consents signed by Guarantor, certain Amendments to Deed of Trust dated of even date herewith (the “Amendments to Deed of Trust”) and any other documents which Bank may require or request in accordance with this Agreement or the other Loan Documents.

4.3 The Amendments to Deed of Trust shall have been recorded in the Official Records of the Counties in which the Deeds of Trust were originally recorded, in addition to all other documents which Bank may require to be recorded.

4.4 Bank shall have received reimbursement, in immediately available funds, of all costs and expenses incurred by Bank in connection with this Agreement, including charges for title insurance (including endorsements), recording, filing and escrow charges, fees for appraisal, architectural and engineering review, construction services and environmental services, mortgage taxes, and legal fees and expenses of Bank’s counsel. Such costs and expenses may include the allocated costs for services of Bank’s in-house staffs, such as legal, appraisal, construction services and environmental services. Borrower acknowledges that any extension and modification fees payable in connection with this transaction do not include the amounts payable by Borrower under this subsection.

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5. ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.

The Loan Documents as modified herein contain the entire understanding and agreement of Borrower and Bank in respect of the Loan and supersede all prior representations, warranties, agreements, arrangements, and understandings. No provision of the Loan Documents as modified herein may be changed, discharged, supplemented, terminated, or waived except in a writing signed by Bank and Borrower.

6. BINDING EFFECT.

The Loan Documents as modified herein shall be binding upon, and inure to the benefit of, Borrower and Bank and their respective successors and assigns.

7. CHOICE OF LAW.

This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflicts of law principles.

8. COUNTERPART EXECUTION.

This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Signature pages may be detached from the counterparts and attached to a single copy of this Agreement to physically form one document.

[Signatures on following page]

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DATED as of the date first above stated.

BORROWER:	WILLIAM LYON HOMES, INC., a California corporation
	By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
	By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President
BANK:	JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association
	By:	/s/ Kimberlee Edwards
	Name:	Kimberlee Edwards
	Title:	Senior Vice President

S-1

CONSENT AND AGREEMENT OF GUARANTOR

With respect to that certain Seventh Modification Agreement to the Borrowing Base Revolving Line of Credit Agreement (hereinafter, the “Modification”) between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), and JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association (“Bank”), to which this Consent is attached, the undersigned (“Guarantor”), hereby (i) ratifies and reaffirms all of its obligations to Bank under the Guaranty, (ii) consents to the execution and delivery by Borrower of the attached Modification, and (iii) confirms that the Guaranty remains in full force and effect notwithstanding Borrower’s execution of the attached Modification. The undersigned agrees that the execution of this Consent and Reaffirmation of Guarantor (the “Consent”) is not necessary for the continued validity and enforceability of the Guaranty, but it is executed to induce Bank to enter into the Modification Agreement.

This Consent may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Signature pages may be detached from the counterparts and attached to a single copy of this Consent to physically form one document. Facsimile transmission of the signed original of this Consent or the retransmission of any signed facsimile transmission will be deemed the same as delivery of an original.

IN WITNESS WHEREOF, Guarantor has executed this Agreement as of the date set forth on the attached Seventh Modification Agreement.

“Guarantor”	WILLIAM LYON HOMES, a Delaware corporation
	By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
	By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President

CONSENT

APPENDIX I

PRICING SCHEDULE

APPLICABLE MARGIN	LEVEL I STATUS	LEVEL II STATUS	LEVEL III STATUS	LEVEL IV STATUS	LEVEL V STATUS	LEVEL VI STATUS
LIBOR Rate	2.60%	2.70%	2.80%	2.90%	3.00%	3.10%
Floating Rate	0.00%	0.00%	0.10%	0.20%	0.30%	0.40%

For the purposes of this Schedule, the following terms have the following meanings, subject to the final paragraph of this Schedule:

LEVERAGE-BASED PRICING

“Financials” means the annual or quarterly financial statements of Guarantor delivered pursuant to Section 6.4.

“Level I Status” exists at any date if, as of the last day of the fiscal quarter of Guarantor referred to in the most recent Financials, the ratio Indebtedness to Tangible Net Worth determined in accordance with Section 7.2 is less than 2.50 to 1.00.

“Level II Status” exists at any date if, as of the last day of the fiscal quarter of Guarantor referred to in the most recent Financials, Borrower has not qualified for Level I Status and the ratio Indebtedness to Tangible Net Worth determined in accordance with Section 7.2 is less than 3.00 to 1.00.

“Level III Status” exists at any date if, as of the last day of the fiscal quarter of Guarantor referred to in the most recent Financials, Borrower has not qualified for Level I Status or Level II Status and the ratio Indebtedness to Tangible Net Worth determined in accordance with Section 7.2 is less than 3.50 to 1.00.

“Level IV Status” exists at any date if, as of the last day of the fiscal quarter of Guarantor referred to in the most recent Financials, Borrower has not qualified for Level I Status, Level II Status or Level III Status and the ratio Indebtedness to Tangible Net Worth determined in accordance with Section 7.2 is less than 4.00 to 1.00.

“Level V Status” exists at any date if, as of the last day of the fiscal quarter of Guarantor referred to in the most recent Financials, Borrower has not qualified for Level I Status, Level II Status, Level III Status Level IV Status and the ratio Indebtedness to Tangible Net Worth determined in accordance with Section 7.2 is less than 4.50 to 1.00.

APPENDIX I

“Level VI Status” exists at any date if the Borrower has not qualified for Level I Status, Level II Status, Level III Status, Level IV Status or Level V Status.

“Status” means either Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status, or Level VI Status.

The Applicable Margin shall be determined in accordance with the foregoing table based on the ratio Indebtedness to Tangible Net Worth of Guarantor as reflected in the then most recent Financials. Adjustments, if any, to the Applicable Margin shall be effective five (5) Business Days after Bank has received the applicable Financials. If Borrower or Guarantor fails to deliver the Financials to Bank at the time required pursuant to Section 6.4, then the Applicable Margin shall be the highest Applicable Margin set forth in the foregoing table until five (5) days after such Financials are so delivered.

APPENDIX I

EX-10.4

Exhibit 10.4

FIFTH AMENDMENT TO AMENDED AND

RESTATED REVOLVING LINE OF CREDIT LOAN AGREEMENT

THIS FIFTH AMENDMENT TO AMENDED AND RESTATED REVOLVING LINE OF CREDIT LOAN AGREEMENT (“Agreement”), dated as of May 20, 2008, by and between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), and CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”), with reference to the following facts:

RECITALS

A. Borrower originally agreed to borrow a sum not to exceed Fifty Million Dollars ($50,000,000.00) (as the same has been and may be further amended from time to time, “Loan”) from Lender for the purpose of providing Borrower with funding for the acquisition and development of residential lots, the construction of existing and future residential home projects, and the issuance of letters of credit for the payment of costs incurred or associated with said projects. The terms and conditions of the Loan are more particularly set forth in that certain Amended and Restated Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of September 16, 2004, by and between Borrower and Lender (as the same has been and may be further amended from time to time, “Loan Agreement”). All capitalized terms not specifically defined herein shall have the meanings given to such terms in the Loan Agreement.

B. The Loan is evidenced by that certain Sixth Amended and Restated Construction Loan Promissory Note (Construction Revolving Line of Credit) dated as of December 28, 2007, given by Borrower to Lender (as the same has been and may be further amended from time to time, “Current Note”).

C. The Loan is secured by, among other things, the “Deed of Trust” (as defined in the Loan Agreement).

D. This Agreement, the Current Note and the other documents evidencing or relating to the Loan collectively shall be referred to as the “Loan Documents.”

E. Borrower has requested that Lender modify the Loan by, among other things, decreasing (i) the maximum amount of the Loan, (ii) the maximum “Commitment Amount” (as defined in the Loan Agreement), and (iii) the face amount of the Current Note, from Fifty Million Dollars ($50,000,000.00) to Thirty-Five Million Dollars ($35,000,000.00) (“New Commitment Amount”).

F. Lender is willing to consent to the modifications to the Loan Documents set forth herein, subject to the conditions set forth below. The date on which all conditions in this Agreement have been satisfied shall be referred to as the “Modification Closing Date.”

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TERMS AND CONDITIONS

NOW, THEREFORE, in consideration of the foregoing premises and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Recitals. The preamble, recitals and any exhibits hereto are hereby incorporated into this Agreement.

2. Decrease in the Loan Amount.

2.1 Decrease in the Maximum Commitment Amount. From and after the Modification Closing Date, the maximum amount of the Loan and the maximum Commitment Amount are hereby decreased from the current amount of Fifty Million Dollars ($50,000,000.00) to the New Commitment Amount of Thirty-Five Million Dollars ($35,000,000.00). All references in the Loan Documents to the maximum amount of the Loan and maximum Commitment Amount shall be revised to refer to the New Commitment Amount set forth herein.

2.2 Amendment to Definition of Commitment Amount. The definition of “Commitment Amount” set forth in the Loan Agreement shall be replaced with the following:

“Commitment Amount” means (a) during the Initial Line Term, the sum of Thirty-Five Million Dollars ($35,000,000.00), and (b) during the Reduction Period, beginning upon the last day of the first Calendar Quarter following the Initial Line Maturity Date, and on or prior to the last day of each Calendar Quarter thereafter during the Reduction Period, the Commitment Amount shall be reduced in the minimum amount of Eight Million Seven Hundred Fifty Thousand Dollars ($8,750,000.00) (each, “Reduced Commitment Amount”):

Date	Reduced Commitment Amount
Initial Line Maturity Date	$	35,000,000.00
First Calendar Quarter	$	26,250,000.00
Second Calendar Quarter	$	17,500,000.00
Third Calendar Quarter	$	8,750,000.00
Fourth Calendar Quarter	$	0.00

2.3 Decrease in the Amount of the Current Note. As a result of the decrease in the amount of the Loan and the maximum Commitment Amount, the face amount of the Current Note shall be decreased from the current amount of Fifty Million Dollars ($50,000,000.00) to the New Commitment Amount of Thirty-Five Million Dollars ($35,000,000.00) (“New Note Amount”). All references in the Loan Documents to the face amount of the Current Note shall be revised to refer to the New Note Amount set forth herein.

2.4 Amendment and Restatement of the Current Note. Borrower shall execute and deliver to Lender a Seventh Amended and Restated Promissory Note of even date herewith (the Current Note, as amended by said document, shall hereafter be referred to as the “Note”) evidencing the decrease in the amount of the Loan and the maximum Commitment Amount as described herein. All references in the Loan Documents to the Current Note shall be revised to refer to the Note, as amended and restated.

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3. Maximum Aggregate Loan Allocation(s). New Definitions. The definition of Maximum Aggregate Loan Allocation(s) in Section 1.1 of the Loan Agreement shall be replaced with the following:

“Maximum Aggregate Loan Allocation(s)” shall mean each and every one of the following:

(a) With respect to all Qualified Projects included in the Borrowing Base (collectively or individually “Geographic Concentration Limitation”):

(1) The aggregate Loan Allocations for all Lots and/or Homes for Qualified Projects (whether Advances have been made and/or have been committed but have not yet advanced) located in the State of Arizona shall not exceed the sum of Ten Million Five Hundred Thousand Dollars ($10,500,000.00); and/or

(2) The aggregate Loan Allocations for all Lots and/or Homes for Qualified Projects (whether Advances have been made and/or have been committed but have not yet advanced) located in the State of Nevada shall not exceed the sum of Ten Million Five Hundred Thousand Dollars ($10,500,000.00).

(b) With respect to all Lots to be included in the Borrowing Base, the aggregate Loan Allocations for all Entitled Land, Lots Under Development and Developed Lots for all Qualified Projects (whether Advances have been made and/or have been committed but have not yet advanced) shall not exceed the sum of Fourteen Million Dollars ($14,000,000.00) (“Lot Concentration Limitation”).

(c) With respect to all Spec Homes to be included in the Borrowing Base (“Spec Home Concentration Limitation”):

(1) For all Projects financed hereunder, the aggregate Loan Allocations for all Spec Homes for all Projects (whether Advances have been made and/or have been committed but have not yet advanced) shall not exceed the sum of Eight Million Four Hundred Thousand Dollars ($8,400,000.00); and/or

(2) For each and every Project financed hereunder, the total number of Spec Homes shall not exceed the greater of (A) eight (8), (B) four (4) months’ appraised absorption for the Project, or (C) four (4) months’ actual absorption for the subject Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for said Project.

4. Amendment to Letter of Credit Definitions in Loan Agreement. The definitions of Letter of Credit Line, LOC Maximum Commitment Amount, and LOC Total Commitment Amount in Section 1.1 of the Loan Agreement shall be replaced with the following:

“Letter of Credit Line” shall mean that certain line of credit to be provided under the Loan for the purposes set forth in Section 2.3 of this Agreement, which line of credit shall not exceed at any time the sum of Four Million Two Hundred Thousand Dollars ($4,200,000.00) (“LOC Total Commitment Amount”). The Letter of Credit Line shall be a revolving line of credit. Prior to the Maturity Date, the Letter of Credit Line may be drawn, repaid and drawn again through individual Advances in repetition, subject to the limitations herein, so long as:

(1) The sum of (a) the amounts outstanding on the Letter of Credit Line, and (b) the cumulative Letter of Credit Line amounts that are committed but not yet advanced on the Letter of Credit Line, never exceed the LOC Total Commitment Amount; and

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(2) The sum of (a) the amounts outstanding on the Loan, and (b) the cumulative Loan amounts that are committed but not yet advanced on the Loan, never exceed the Commitment Amount; and

(3) No Event of Default has occurred and is continuing.

Upon the Maturity Date, if the Loan is not renewed as provided herein, the Letter of Credit Line shall be repaid during the Reduction Period as set forth herein.

“LOC Maximum Commitment Amount” shall mean the amount committed under each Letter of Credit, which sum shall not exceed the sum equal to (a) Four Million Two Hundred Thousand Dollars ($4,200,000.00), less (b) any committed portion of the Letter of Credit Line that Borrower has requested and Lender has approved in its discretion be available for disbursement under the Loan.

“LOC Total Commitment Amount” shall mean the sum of all amounts committed under any Letters of Credit issued hereunder plus all Letter of Credit Advances in the aggregate, which sum shall not exceed Four Million Two Hundred Thousand Dollars ($4,200,000.00).

5. Amendment to Definition of Maximum Allowed Advance for The Court Project.

5.1 From and after the Modification Closing Date, the definition of Maximum Allowed Advance in Section 1.1 of the Loan Agreement shall have the following meanings, solely with regard to the “Qualified Project” (as defined in the Loan Agreement) known as “The Court” or “360 @ South Bay” (“The Court Project”).

“Maximum Allowed Advance” shall have the following meanings:

• Developed Lots: The sum of all Advances and Reserved Allocations committed but not disbursed for said Lots shall not exceed the lesser of (i) sixty percent (60%) of Total Project Costs, or (ii) sixty percent (60%) of the Bulk Finished Lot Value for said Lots, subject to Lender’s approval.

• Spec Homes: The sum of all Advances and Reserved Allocations committed but not disbursed for said Homes shall not exceed the lesser of (i) sixty-five percent (65%) of Total Project Costs, or (ii) sixty-five percent (65%) of the Base Appraisal for said Homes, subject to Lender’s approval.

5.2 Solely with regard to The Court Project: (a) all model “Units” (as defined in the Loan Agreement), Units 225, 227, 229, and 230 (Building 66), located on Lot 9 of the Property, shall be classified as Spec Homes; and (b) all Undesignated Units, Units 226 and 228 (Building 66), located on Lot 9 of the Property, all Spec Units, Units 1 through 6, inclusive (Building 14), and Units 7 and 8 (Building 13), located on Lot 4 of the Property, and all finished “Lots” (as defined in the Loan Agreement), Units 9 through 12, inclusive (Building 13), Units 19 through 24, inclusive (Building 12), and Units 25 through 30, inclusive (Building 11), located on Lot 4 of the Property, shall be classified as Developed Lots.

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5.3 Notwithstanding the foregoing, upon Lender’s receipt, review and approval of an updated “Appraisal” (as defined in the Loan Agreement) for The Court Project, the amendments to the definition of Maximum Allowed Advance set forth in Section 5.1 above shall not be applicable, the current definition of Maximum Allowed Advances shall be utilized, and the Maximum Allowed Advances shall be reduced in two and one-half percent (2.5%) increments, with full removal of The Court Project from the “Borrowing Base” (as defined in the Loan Agreement) on or before June 30, 2009. Accordingly, upon Lender’s receipt, review and approval of an updated Appraisal for The Court Project, the sum of all Advances and Reserved Allocations committed but not disbursed for the Developed Lots and Spec Homes, respectively, shall not exceed the amounts set forth in, and shall be subject to, the following schedule:

Date	LTV for Developed Lots		LTV for Spec Homes
Upon Lender’s receipt of updated Appraisal	70.0	%	75.0	%
9/30/08	67.5	%	72.5	%
12/31/08	65.0	%	70.0	%
3/31/09	62.5	%	67.5	%
6/30/09	0	%	0	%

The definition of Maximum Allowed Advance with regard to any other “Project” (as defined in the Loan Agreement) or Qualified Project, other than The Court Project, shall not be modified or changed in any way.

6. Amendment to Deed of Trust. Each Deed of Trust shall be amended to secure the obligations under the Note and the other Loan Documents, as amended herein.

7. Conditions Precedent. In no event shall Lender have any obligation to close this transaction unless and until all of the following conditions are satisfied:

7.1 No Defaults. There shall be no: (a) uncured, material default hereunder or under the Loan Documents; (b) continuing representation, covenant or warranty hereunder or under the Loan Documents that is false or misleading in any manner; and (c) event currently existing which, with the passage of time, will result in a material default or the falsity of any continuing representation, covenant or warranty hereunder or under the Loan Documents.

7.2 No Financial Change. There has been no material adverse change in Borrower’s, financial condition since the closing of the Loan.

7.3 Payment Of Lender’s Costs. Borrower shall pay all of Lender’s costs and expenses incurred in connection with the documentation and closing of the modifications to the Loan Documents described herein, including without limitation all attorneys’ fees and other closing fees and costs.

7.4 Additional Documents. Lender shall have received all additional documents executed by Borrower, as required by Lender in connection with this Agreement, including, without limitation, the Note and all Recorded Amendments.

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8. Representations and Warranties. Borrower hereby represents and warrants to Lender as follows:

8.1 No Default. No default or event of default under any of the Loan Documents has occurred that remains uncured, and no event has occurred which, with the giving of notice or the passage of time, or both, would constitute a default or an event of default under any of the Loan Documents.

8.2 Representations and Warranties. As of the date hereof, all of the warranties and representations contained in all of the Loan Documents remain true, correct, complete and accurate.

8.3 No Claims or Defenses. As of the date hereof, neither Borrower nor its managing member has any claims against Lender nor defenses to the enforcement of any of the Loan Documents in accordance with their respective terms, as amended by this Agreement.

8.4 Financial Covenants. Borrower acknowledges and agrees that the financial covenants contained in the Loan Documents are in full force and effect and shall be monitored by Lender based on the financial reports to be provided under the Loan Agreement.

8.5 Satisfaction of Conditions. All of the conditions precedent set forth above have been fully satisfied.

9. Further Assurances. Borrower agrees to perform such other and further acts, and to execute such additional documents, agreements, notices or financing statements, as Lender deems necessary or desirable from time to time to create, preserve, continue, perfect, validate or carry out any of Lender’s rights under this Agreement and the other Loan Documents.

10. Integration. All rights, remedies, powers and interest provided for Lender herein are in addition to the rights, remedies, powers and interests provided for Lender in the Loan Documents, the terms and provisions of which are incorporated herein by this reference and made a part hereof. If and to the extent any term or provision hereof is inconsistent with any term or provision of the Loan Documents, the term or provision of this Agreement shall prevail.

11. Entire Agreement; Amendments. This Agreement and the other Loan Documents contain the entire agreement between Borrower and Lender with respect to the Loan Documents, and all prior negotiations, commitments, understandings and agreements are superseded by this Agreement and the Loan Documents. No amendment, modification, supplement, extension, termination or waiver of any provision of this Agreement, any Loan Document, or any other agreement executed in connection with any of the foregoing shall be effective unless in writing and signed by Lender and Borrower, and then only in the specific instance and for the specific purpose given.

12. Governing Law. The Loan Documents shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California, without regard to its conflict of laws principles.

13. Section Headings. The section headings of this Agreement are included for convenience only, and shall not affect the construction or interpretation of any provision of this Agreement.

14. Attorneys’ Fees. If any action or other proceeding is brought to interpret or enforce any provision of this Agreement, the prevailing party shall be entitled to recover attorneys’ fees and expenses.

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15. Binding Effect. This Agreement and the other Loan Documents shall be binding upon, and shall inure to the benefit of, Borrower and Lender and their respective successors and assigns, or heirs and personal representatives, as applicable, subject to any provision of the Loan Documents restricting transfers of the Property.

16. Severability of Provisions. No provision of this Agreement or any other Loan Document that is held to be inoperative, unenforceable and invalid shall affect the remaining provisions, and this and all provisions of this Agreement and the Loan Documents are hereby declared to be severable.

17. Miscellaneous. No reference to this Agreement is necessary in any instrument or document at any time referring to the Loan Documents. A reference to the Loan Documents shall be deemed a reference to such document as modified hereby.

18. No Commitment. The furnishing of this Agreement and other modification documents shall in no way be construed as a commitment by Lender to modify, amend, extend or otherwise alter the Loan Documents. Lender shall be under no obligation to close the transaction evidenced by this Agreement unless this Agreement and all related documents are returned to Lender fully executed by Borrower, and unless this Agreement is actually executed by Lender and delivered to Borrower.

19. No Other Amendments. Except as expressly amended herein, the Loan Agreement, and all of the other Loan Documents remain unmodified and in full force and effect.

20. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, this Agreement has been executed by Borrower and Lender as of the date first above written.

BORROWER:
WILLIAM LYON HOMES, INC., a California corporation
By:	/s/ Douglas F. Bauer
Name:	Douglas F. Bauer
Title:	President
By:	/s/ Michael D. Grubbs
Name:	Michael D. Grubbs
Title:	Senior Vice President
LENDER:
CALIFORNIA BANK & TRUST, a California banking corporation
By:	/s/ James A. Lehmkuhl
Name:	James A. Lehmkuhl
Its:	Vice President

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EX-10.6

EXHIBIT 10.6

EIGHTH MODIFICATION AGREEMENT TO BORROWING BASE REVOLVING

LINE OF CREDIT AGREEMENT

DATE:	June 5, 2008
PARTIES:
	Borrower:	WILLIAM LYON HOMES, INC., a California corporation
	Guarantor:	WILLIAM LYON HOMES, a Delaware corporation
	Bank:	JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association

JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association (“Bank”), and WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), hereby enter into this Eighth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement (the “Modification”) to the Borrowing Base Revolving Line of Credit Agreement dated as of June 28, 2004, as modified by a Modification Agreement, dated as of December 7, 2004, by a Second Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, by a Third Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of October 23, 2006, by a Fourth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of April 26, 2007, by a Fifth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of November 6, 2007, by a Sixth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of February 20, 2008, and by a Seventh Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of March 12, 2008 (the “Loan Agreement”), with the consent of guarantor WILLIAM LYON HOMES, a Delaware corporation (“Guarantor”).

RECITALS

A. Bank has extended to Borrower credit (“Loan”) up to the maximum principal amount of Seventy Million Dollars ($70,000,000) pursuant to the Loan Agreement, as presently evidenced by that certain Amended and Restated Promissory Note dated as of July 14, 2005 (the “Note”) executed by Borrower and payable to the order of Bank.

B. The Loan is secured by, among other things, certain Construction Deeds of Trust and Fixture Filing (With Assignment of Rents and Security Agreement) executed by Borrower as Trustor for the benefit of Bank (such Deeds of Trust, as

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amended to dated, shall be hereinafter referred to, individually, as a “Deed of Trust” and, collectively, as the “Deeds of Trust”). The Loan is further secured by the personal property described in certain UCC-1 Financing Statements relating to the property encumbered by the Deeds of Trust naming Borrower as Debtor and Bank as Secured Party (as amended to date, the “UCC Financing Statements”). The Deeds of Trust, the UCC Financing Statements, and such other agreements, documents and instruments securing the Loan are referred to individually and collectively as the “Security Documents”).

C. Repayment of the Loan and the completion of the improvements have been, and continue to be, guaranteed by the Repayment Guaranty dated as of June 28, 2004 and executed by Guarantor in favor of Bank (the “Guaranty”). The Guaranty and any other agreements, documents and instruments guarantying the Loan are referred to individually and collectively as the “Guaranty Documents”.

D. The Loan Agreement, the Note, the Security Documents, the Guaranty Documents, any environmental certification and indemnity agreement, and all other agreements, documents, and instruments evidencing, securing, or otherwise relating to the Loan, as may be amended, modified, extended or restated from time to time, are sometimes referred to individually and collectively as the “Loan Documents”. Hereinafter, the Loan Documents shall mean such documents as modified in this Modification.

E. The Borrower and the Bank have agreed to modify the Loan as provided herein.

F. All capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Loan Agreement.

AGREEMENT

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Bank agree as follows:

1. ACCURACY OF RECITALS.

Borrower acknowledges the accuracy of the Recitals.

2. MODIFICATION OF LOAN DOCUMENTS.

2.1 The Commitment Amount is hereby reduced from $70,000,000 to $50,000,000. In no event shall the Bank be obligated to make any disbursement of the Loan which would cause the outstanding principal balance of the Loan to exceed the Commitment Amount, as reduced hereby.

2.2 The Facility LC Sublimit is hereby reduced from $10,000,000 to $5,000,000. In no event shall the Bank be obligated to issue or Modify any Facility LC if

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the issuance or Modification of any such Facility LC would cause the aggregate amount of the outstanding LC Obligations to exceed the Facility LC Sublimit, as reduced hereby.

2.3 Notwithstanding any provision in the Loan Agreement or in any other Loan Document to the contrary, with respect to the Approved Subdivision commonly known as “Altair,” which was approved as an Approved Subdivision pursuant to that certain Project Loan Addendum (the “Altair Project Loan Addendum”), dated as of June 26, 2007:

(a) The MFR A&D Lots in such Approved Subdivision may be included in the Borrowing Base as Eligible Collateral for a term of thirty-six (36) Calendar Months from the original Lot Eligibility Date for such A&D Lots.

(b) The MFR Model Units in such Approved Subdivision may be included in the Borrowing Base as Eligible Collateral for a term of thirty-six (36) Calendar Months from the original Unit Eligibility Date for such Model Units.

(c) The Mandatory Lot Commitment Reduction Schedule attached as Exhibit B to the Altair Project Loan Addendum is hereby amended and restated in it entirety by the Revised Mandatory Lot Commitment Reduction Schedule attached hereto as Schedule 1.

2.4 Notwithstanding any provision in the Loan Agreement or in any other Loan Document to the contrary, with respect to the Approved Subdivision commonly known as “Rosabella at Shady Trails,” which was approved as an Approved Subdivision pursuant to that certain Project Loan Addendum (the “Rosabella Project Loan Addendum”), dated as of April 3, 2006:

(a) The MFR A&D Lots in such Approved Subdivision may be included in the Borrowing Base as Eligible Collateral for a term of forty-five (45) Calendar Months from the original Lot Eligibility Date for such A&D Lots.

(b) The MFR Model Units in such Approved Subdivision may be included in the Borrowing Base as Eligible Collateral for a term of thirty-six (36) Calendar Months from the original Unit Eligibility Date for such Model Units.

(c) The Mandatory Lot Commitment Reduction Schedule attached as Exhibit B to the Rosabella Project Loan Addendum is hereby amended and restated in it entirety by the Revised Mandatory Lot Commitment Reduction Schedule attached hereto as Schedule 2.

2.5 Notwithstanding any provision in the Loan Agreement or in any other Loan Document to the contrary, with respect to the Approved Subdivision commonly known as “Tradition at Arboreta,” which was approved as an Approved Subdivision pursuant to that certain Project Loan Addendum (the “Arboreta Project Loan Addendum”), dated as of November 28, 2007, the Mandatory Lot Commitment Reduction Schedule attached as Exhibit B to the Arboreta Project Loan Addendum is

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hereby amended and restated in it entirety by the Revised Mandatory Lot Commitment Reduction Schedule attached hereto as Schedule 3.

2.6 Notwithstanding any provision in the Loan Agreement or in any other Loan Document to the contrary, with respect to the Approved Subdivision commonly known as “Tramonto,” which was approved as an Approved Subdivision pursuant to that certain Project Loan Addendum (the “Tramonto Project Loan Addendum”), dated as of October 7, 2005, the Mandatory Lot Commitment Reduction Schedule attached as Exhibit B to the Tramonto Project Loan Addendum is hereby amended and restated in it entirety by the Revised Mandatory Lot Commitment Reduction Schedule attached hereto as Schedule 4.

2.7 Notwithstanding any provision in the Loan Agreement or in any other Loan Document to the contrary, with respect to the Approved Subdivision commonly known as “The Lofts,” which was approved as an Approved Subdivision pursuant to that certain Project Loan Addendum (the “Lofts Project Loan Addendum”), dated as of June 20, 2007:

(a) Each of the MFR Spec Units in such Approved Subdivision included in the Borrowing Base, other than the MFR Spec Units identified as Unit Nos. 333, 334 and 335, are hereby converted from MFR Spec Units to MFR A&D Lots and shall continue to be included in the Borrowing Base as MFR A&D Lots. The MFR Spec Units in such Approved Subdivision included in the Borrowing Base which are identified as Unit Nos. 333, 334 and 335 shall continue to be included in the Borrowing Base as MFR Spec Units.

(b) The Maximum Allowed Advance for each MFR A&D Lot in such Approved Subdivision included in the Borrowing Base is hereby reduced to the lesser of (i) 50% of the “bulk wholesale as-if complete” value of such Approved Subdivision divided by the total number of Lots in such Approved Subdivision (regardless of whether such total number of Lots are Eligible Collateral), or (ii) 50% of the Total Lot Cost for such Approved Subdivision divided by the total number of Lots in such Approved Subdivision (regardless of whether such total number of Lots are Eligible Collateral).

(c) The Maximum Allowed Advance for each MFR Spec Unit in such Approved Subdivision included in the Borrowing Base is hereby reduced to the lesser of (i) 60% of the Appraised Value for that Unit or (ii) 60% of the Unit Cost for that Unit.

(d) The Maximum Allowed Advance for each MFR Model Unit in such Approved Subdivision included in the Borrowing Base is hereby reduced to the lesser of (i) 60% of the Appraised Value for that Unit or (ii) 60% of the Unit Cost for that Unit.

(e) From and after the date of this Modification, Borrower shall no longer be required to comply with the Mandatory Lot Commitment Reduction

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Schedule attached as Exhibit B to the Lofts Project Loan Addendum, and such Mandatory Lot Commitment Reduction Schedule shall no longer be of any force or effect.

(f) The MFR A&D Lots in such Approved Subdivision may be included in the Borrowing Base as Eligible Collateral for a term of twenty-four (24) Calendar Months from the original Lot Eligibility Date for such MFR A&D Lots.

(g) The MFR Model Units in such Approved Subdivision may be included in the Borrowing Base as Eligible Collateral for a term of twenty-four (24) Calendar Months from the original Unit Eligibility Date for such MFR Model Units.

(h) The MFR Spec Units in such Approved Subdivision may be included in the Borrowing Base as Eligible Collateral for a term of twenty-four (24) Calendar Months from the original Unit Eligibility Date for such MFR Spec Units.

2.8 The Deeds of Trust are modified to secure payment and performance of the Loan as amended to date, in addition to all other “Obligations” of Borrower as therein defined. The foregoing notwithstanding, certain obligations continue to be excluded from the Obligations, as provided in the Deeds of Trust.

2.9 Each of the Loan Documents is modified to provide that it shall be a default or an event of default thereunder if Borrower shall fail to comply with any of the covenants of Borrower herein or if any representation or warranty by Borrower herein or by any guarantor in any related Consent and Agreement of Guarantor is materially incomplete, incorrect, or misleading as of the date hereof.

2.10 Each reference in the Loan Documents to any of the Loan Documents shall be a reference to such document as modified herein.

3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.

The Loan Documents are ratified and affirmed by Borrower and shall remain in full force and effect as modified herein. Any property or rights to or interests in property granted as security in the Loan Documents shall remain as security for the Loan and the obligations of Borrower in the Loan Documents.

4. CONDITIONS PRECEDENT.

Before this Agreement becomes effective and any party becomes obligated under it, all of the following conditions shall have been satisfied at Borrower’s sole cost and expense in a manner acceptable to Bank in the exercise of Bank’s sole judgment:

4.1 Bank shall have received fully executed and, where appropriate, acknowledged originals of this Modification, the attached consents signed by Guarantor, and any other documents which Bank may require or request in accordance with this Agreement or the other Loan Documents.

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4.2 Bank shall have received reimbursement, in immediately available funds, of all costs and expenses incurred by Bank in connection with this Agreement, including charges for title insurance (including endorsements), recording, filing and escrow charges, fees for appraisal, architectural and engineering review, construction services and environmental services, mortgage taxes, and legal fees and expenses of Bank’s counsel. Such costs and expenses may include the allocated costs for services of Bank’s in-house staffs, such as legal, appraisal, construction services and environmental services. Borrower acknowledges that any extension and modification fees payable in connection with this transaction do not include the amounts payable by Borrower under this subsection.

5. ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.

The Loan Documents as modified herein contain the entire understanding and agreement of Borrower and Bank in respect of the Loan and supersede all prior representations, warranties, agreements, arrangements, and understandings. No provision of the Loan Documents as modified herein may be changed, discharged, supplemented, terminated, or waived except in a writing signed by Bank and Borrower.

6. BINDING EFFECT.

The Loan Documents as modified herein shall be binding upon, and inure to the benefit of, Borrower and Bank and their respective successors and assigns.

7. CHOICE OF LAW.

This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflicts of law principles.

8. COUNTERPART EXECUTION.

This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Signature pages may be detached from the counterparts and attached to a single copy of this Agreement to physically form one document.

[Signatures on following page]

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DATED as of the date first above stated.

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

BANK:	JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association
	By:	/s/ Kimberlee Edwards
	Name:	Kimberlee Edwards
	Title:	Senior Vice President

7

CONSENT AND AGREEMENT OF GUARANTOR

With respect to that certain Eighth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement (hereinafter, the “Modification”) between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), and JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association (“Bank”), to which this Consent is attached, the undersigned (“Guarantor”), hereby (i) ratifies and reaffirms all of its obligations to Bank under the Guaranty, (ii) consents to the execution and delivery by Borrower of the attached Modification, and (iii) confirms that the Guaranty remains in full force and effect notwithstanding Borrower’s execution of the attached Modification. The undersigned agrees that the execution of this Consent and Agreement of Guarantor (the “Consent”) is not necessary for the continued validity and enforceability of the Guaranty, but it is executed to induce Bank to enter into the Modification.

This Consent may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Signature pages may be detached from the counterparts and attached to a single copy of this Consent to physically form one document. Facsimile transmission of the signed original of this Consent or the retransmission of any signed facsimile transmission will be deemed the same as delivery of an original.

IN WITNESS WHEREOF, Guarantor has executed this Agreement as of the date set forth on the attached Eighth Modification Agreement.

“Guarantor”	WILLIAM LYON HOMES, a Delaware corporation
	By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President
	By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President

8

SCHEDULE 1

REVISED MANDATORY LOT COMMITMENT REDUCTION SCHEDULE

(ALTAIR)

Mandatory Lot Commitment Reduction Schedule
Total Lots		65	Altair @ Padre Dam
Total Lot Commitment/MAA per lot		$4,128,000	$63,507.69/Lot
Reductions Start At End Of Month >>		12	Final Quarterly Reduction At End Of Month >>				36
Appraised Absorption/ Required Qtrly Takedown (75% Appr. Abs)		8	6.00	$381,046 (Par Quarterly Reduction Amount)
Appraised Bulk Value		$6,880,000	$105,846/Lot	Total Cost	$13,390,737		$206,011/Lot
End of Month	Development & Marketing Period	% OF Par Release Price	Reduction Amount/Qtr	Lot Sub-Commit.	Maximum Lots With Availability	Maximum Advance Rates
						LTV	LTC
9	Unit Construction Continues; Units Begin to Close – 03/31/2008	0%	$0	$4,128,000	65	60%	31%
12	Unit Construction Continues; Units Begin to Close – 06/30/2008	125%	$476,308	$3,651,692	59	58%	30%
15	Unit Construction Continues; Units Begin to Close – 09/30/2008	125%	$476,308	$3,175,384	53	57%	29%
18	Unit Construction Continues; Units Begin to Close – 12/31/2008	125%	$476,308	$2,699,076	47	54%	28%
21	Unit Construction & Closings Continue – 03/31/2009	125%	$476,308	$2,222,768	41	51%	26%
24	Unit Construction & Closings Continue – 06/30/2009	125%	$476,308	$1,746,460	35	47%	24%
27	Unit Construction & Closings Continue – 09/30/2009	125%	$476,308	$1,270,152	29	41%	21%
30	Unit Construction & Closings Continue – 12/31/2009	125%	$476,308	$793,844	23	33%	17%
33	Unit Construction & Closings Continue – 03/31/2010	125%	$476,308	$317,536	17	18%	9%
36	Unit Construction & Closings Continue – 06/30/2010	83%	$317,536	0%	0	0%	0%

SCHEDULE 1

SCHEDULE 2

REVISED MANDATORY LOT COMMITMENT REDUCTION SCHEDULE

(ROSABELLA AT SHADY TRAILS)

Mandatory Lot Commitment Reduction Schedule
Total Lots		82	Rosabella at Shady Trails
Total Lot Commitment/MAA per lot		$2,634,000	$32,122.00/Lot
Reductions Start At End Of Month >>		15	Final Quarterly Reduction At End Of Month >>				45
Appraised Absorption/ Required Qtrly Takedown (75% Appr. Abs)		9	8.00	$256,976 (Par Quarterly Reduction Amount)
Appraised Bulk Value		$4,390,034	$53,537/Lot	Total Cost	$12,623,408		$153,944/Lot
End of Month	Development & Marketing Period	% OF Par Release Price	Reduction Amount/ Qtr	Lot Sub-Commit.	Maximum Lots With Availability	Maximum Advance Rates
						LTV	LTC
21	Unit Construction Continues	0%	$0	$2,634,004	82	60%	21%
24	Unit Construction Continues; Units Begin to Close – 04/30/2008	125%	$321,220	$2,312,784	74	58%	20%
27	Unit Construction & Closings Continue – 07/31/2008	125%	$321,220	$1,991,564	66	56%	20%
30	Unit Construction & Closings Continue – 10/31/2008	125%	$321,220	$1,670,344	58	54%	19%
33	Unit Construction & Closings Continue – 01/31/2009	125%	$321,220	$1,349,124	50	50%	18%
36	Unit Construction & Closings Continue – 04/30/2009	125%	$321,220	$1,027,904	42	46%	16%
39	Unit Construction & Closings Continue – 07/31/2009	125%	$321,220	$706,684	34	39%	14%
42	Unit Construction & Closings Continue – 10/31/2009	125%	$321,220	$385,464	26	28%	10%
45	Unit Construction & Closings Continue – 01/31/2010	150%	$385,464	$0	0	0%	0%

SCHEDULE 2

SCHEDULE 3

REVISED MANDATORY LOT COMMITMENT REDUCTION SCHEDULE

(TRADITION AT ARBORETA)

Mandatory Lot Commitment Reduction Schedule
Total Lots		53	Tradition at Arboreta
Total Lot Commitment/MAA per lot		$9,533,848	$179,883.92/Lot
Reductions Start At End Of Month >>		3	Final Quarterly Reduction At End Of Month >>				27
Appraised Absorption/ Required Qtrly Takedown (75% Appr. Abs)		6	5.00	$899,420 (Par Quarterly Reduction Amount)
Appraised Bulk Value		$14,667,458	$276,744/Lot	Total Cost	$15,615,005		$294,623/Lot
End of Month	Development & Marketing Period	% OF Par Release Price	Reduction Amount/Qtr	Lot Sub-Commit.	Maximum Lots With Availability	Maximum Advance Rates
						LTV	LTC
0	Unit Construction Begins	0%	$0	$9,533,848	53	65%	61%
3	Unit Construction Continues 02/29/2008	100%	$899,420	$8,634,428	48	65%	61%
6	Unit Construction Continues 05/31/2008	100%	$899,420	$7,735,008	43	65%	61%
9	Unit Construction Continues; Units Begin to Close – 08/31/2008	125%	$1,124,275	$6,610,733	38	63%	59%
12	Unit Construction & Closings Continue – 11/30/2008	125%	$1,124,275	$5,486,458	33	60%	56%
15	Unit Construction & Closings Continue – 02/28/2009	125%	$1,124,275	$4,362,183	28	56%	53%
18	Unit Construction & Closings Continue – 05/31/2009	125%	$1,124,275	$3,237,908	23	51%	48%
21	Unit Construction & Closings Continue – 08/31/2009	125%	$1,124,275	$2,113,633	18	42%	40%
24	Unit Construction & Closings Continue – 11/30/2009	125%	$1,124,275	$989,358	13	27%	26
27	Unit Construction & Closings Continue – 02/28/2010	110%	$989,358	0%	0	0%	0%

SCHEDULE 3

SCHEDULE 4

REVISED MANDATORY LOT COMMITMENT REDUCTION SCHEDULE

(TRAMONTO)

Mandatory Lot Commitment Reduction Schedule
Total Lots		49	Tramonto
Total Lot Commitment/MAA per lot		$2,199,169	$44,881.00/Lot
Reductions Start At End Of Month >>		3	Final Quarterly Reduction At End Of Month >>				36
Appraised Absorption/ Required Qtrly Takedown (75% Appr. Abs)		15	12.00	$538,572 (Par Quarterly Reduction Amount)
Appraised Bulk Value		$3,523,688	$71,912/Lot	Total Cost	$3,141,684		$64,116/Lot
End of Month	Development & Marketing Period	% OF Par Release Price	Reduction Amount/ Qtr	Lot Sub-Commit.	Maximum Lots With Availability	Maximum Advance Rates
						LTV	LTC
27	Unit Construction & Closings Continue – 01/31/2008	0%	$0	$2,199,169	49	62%	70%
30	Unit Construction Continues; Units Begin to Close – 04/30/2008	125%	$673,215	$1,525,954	37	57%	64%
33	Unit Construction & Closings Continue – 07/31/2008	125%	$673,215	$852,739	25	47%	53%
36	Unit Construction & Closings Continue – 10/31/2008	158%	$852,739	$0	0	0%	0%

SCHEDULE 4

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, William Lyon, certify that:

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

2. Based on my knowledge, this 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 operating of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

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

Date: August 5, 2008

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

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Michael D. Grubbs, certify that:

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

2. Based on my knowledge, this 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 function):

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 controls over financial reporting.

Date: August 5, 2008

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

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of William Lyon Homes (the Company) on Form 10-Q for the period ending June 30, 2008 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, to my knowledge:

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

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

/s/    WILLIAM LYON

William Lyon

Chairman and Chief Executive Officer

August 5, 2008

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

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of William Lyon Homes (the Company) on Form 10-Q for the period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Michael D. Grubbs, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

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

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

/s/    MICHAEL D. GRUBBS

Michael D. Grubbs

Senior Vice President, Chief Financial

Officer and Treasurer

August 5, 2008

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