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 September 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 November 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 — September 30, 2008 (unaudited) and December 31, 2007	4
Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2008  and 2007 (unaudited)	5
Consolidated Statement of Stockholders’ Equity — Nine Months Ended September 30, 2008 (unaudited)	6
Consolidated Statements of Cash Flows — Nine Months Ended September 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	40
Item 3.    Quantitative and Qualitative Disclosures About Market Risk	62
Item 4.    Controls and Procedures	62
Item 4T. Not Applicable	63
PART II.    OTHER INFORMATION	64
Item 1.    Legal Proceedings	64
Item 1A. Risk Factors	65
Item 2.    Not Applicable	66
Item 3.    Not Applicable	66
Item 4.    Not Applicable	66
Item 5.    Not Applicable	66
Item 6.    Exhibits	66
SIGNATURES	67
EXHIBIT INDEX	68

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, volatility in the banking industry and credit markets, 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
	September 30, 2008		December 31, 2007
	(unaudited)
Cash and cash equivalents	$	115,005	$	73,197
Restricted cash  — Note 1		5,000		—
Receivables — Note 8		29,807		45,267
Real estate inventories — Notes 2 and 4
Owned		894,328		1,061,660
Not owned		109,696		144,265
Investments in and advances to unconsolidated joint ventures — Note 5		2,057		4,671
Property and equipment, less accumulated depreciation of $13,769 and $12,093 at September 30, 2008 and December 31, 2007, respectively		14,928		16,092
Deferred loan costs		7,557		9,645
Goodwill		5,896		5,896
Deferred taxes — Note 8		41,602		—
Other assets		7,696		14,635
	$	1,233,572	$	1,375,328
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	15,098	$	40,890
Accrued expenses		69,365		67,786
Liabilities from inventories not owned		82,012		113,395
Notes payable		269,492		266,932
7 5/8% Senior Notes due December 15, 2012 — Note 6		150,000		150,000
10 3/4% Senior Notes due April 1, 2013 — Note 6		247,830		247,553
7 1/2% Senior Notes due February 15, 2014 — Note 6		150,000		150,000
		983,797		1,036,556
Minority interest in consolidated entities — Notes 2 and 5		47,844		56,009
Stockholders’ equity — Note 9
Common stock, par value $.01 per share; 3,000 shares authorized; 1,000 shares outstanding at September 30, 2008 and December 31, 2007, respectively		—		—
Additional paid-in capital		48,867		48,867
Retained earnings		153,064		233,896
		201,931		282,763
	$	1,233,572	$	1,375,328

See accompanying notes.

4

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Operating revenue
Home sales	$	84,800		$	182,244		$	330,757		$	631,844
Lots, land and other sales		7,943			—			39,512			27,529
Construction services — Note 3		9,425			—			9,425			—
		102,168			182,244			379,694			659,373
Operating costs
Cost of sales — homes		(80,190	)		(159,767	)		(315,276	)		(537,644	)
Cost of sales — lots, land and other		(8,622	)		(854	)		(40,898	)		(25,621	)
Impairment loss on real estate assets —  Note 4		(21,910	)		(59,001	)		(68,028	)		(146,666	)
Construction services — Note 3		(8,129	)		—			(8,129	)		—
Sales and marketing		(8,687	)		(14,882	)		(30,790	)		(45,587	)
General and administrative		(6,373	)		(9,691	)		(19,872	)		(30,387	)
Other		(231	)		(407	)		(2,005	)		(518	)
		(134,142	)		(244,602	)		(484,998	)		(786,423	)
Equity in (loss) income of unconsolidated joint ventures — Note 5		(821	)		316			(1,626	)		(298	)
Minority equity in (income) loss of consolidated entities — Note 2		(628	)		(764	)		1,087			(9,982	)
Operating loss		(33,423	)		(62,806	)		(105,843	)		(137,330	)
Interest expense, net of amounts capitalized		(7,142	)		—			(16,396	)		—
Other (expense) income, net		(531	)		1,494			(185	)		4,036
Loss before benefit (provision) for income taxes		(41,096	)		(61,312	)		(122,424	)		(133,294	)
Benefit (provision) for income taxes — Note 8
Benefit (provision) for income taxes		—			1,300			(10	)		1,713
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			—
		—			1,300			41,592			(30,174	)
Net loss	$	(41,096	)	$	(60,012	)	$	(80,832	)	$	(163,468	)

See accompanying notes.

5

WILLIAM LYON HOMES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 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	—		—		—		(80,832	)		(80,832	)
Balance — September 30, 2008	1	$	—	$	48,867	$	153,064		$	201,931

See accompanying notes.

6

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2008			2007
Operating activities
Net loss	$	(80,832	)	$	(163,468	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,676			1,855
Impairment loss on real estate assets		68,028			146,666
Equity in loss of unconsolidated joint ventures		1,626			298
Distribution of income from unconsolidated joint ventures		816			—
Minority equity in (loss) income of consolidated entities		(1,087	)		9,982
(Benefit) provision for income taxes		(41,592	)		30,174
Net changes in operating assets and liabilities:
Restricted cash		(5,000	)		—
Receivables		15,460			88,158
Real estate inventories — owned		99,581			(155,976	)
Deferred loan costs		2,088			862
Other assets		6,939			(7,478	)
Accounts payable		(25,792	)		(1,319	)
Accrued expenses		1,569			(44,328	)
Net cash provided by (used) in operating activities		43,480			(94,574	)
Investing activities
Investments in and advances to unconsolidated joint ventures		(40	)		(4,636	)
Distributions of capital from unconsolidated joint ventures		212			—
Net cash paid for purchase of partner’s interest in unconsolidated joint venture		—			(1,484	)
Purchases of property and equipment		(512	)		(742	)
Net cash used in investing activities		(340	)		(6,862	)
Financing activities
Proceeds from borrowing on notes payable		473,458			1,286,013
Principal payments on notes payable		(470,898	)		(1,168,971	)
Minority interest distributions, net		(3,892	)		(19,882	)
Net cash (used in) provided by financing activities		(1,332	)		97,160
Net increase (decrease) in cash and cash equivalents		41,808			(4,276	)
Cash and cash equivalents — beginning of period		73,197			38,732
Cash and cash equivalents — end of period	$	115,005		$	34,456
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	$	31,383		$	29,411
Net changes in real estate inventories —  not owned and minority interests	$	3,186		$	27,336
Consolidation of net assets from purchase of partner’s interest in unconsolidated joint venture	$	—		$	41,778
Consolidation of net liabilities from purchase of partner’s interest in unconsolidated joint venture	$	—		$	40,294

See accompanying notes.

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 nine months ended September 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 September 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 four geographic home building regions and its mortgage origination operation. Because each of the Company’s geographic home building regions has similar economic characteristics, housing products and class of prospective buyers, the geographic home building regions have been aggregated into a single home building segment.

The Company entered into certain agreements with various affiliates of one of its joint venture equity partners to build and market homes on behalf of the affiliates. For such services, the Company will receive fees and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved.

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

8

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

operating costs plus equity in (loss) income of unconsolidated joint ventures less minority equity in (income) loss 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.

Restricted cash consists of a $5.0 million deposit made by the Company to a restricted bank account held with the lender of one of the Company’s revolving credit facilities as collateral for the use of a letter of credit provided by such lender.

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 nine months ended September 30 are as follows (in thousands):

	September 30,
	2008			2007
Warranty liability, beginning of period	$	30,048		$	23,364
Warranty provision during period		3,340			6,215
Warranty payments during period		(6,799	)		(10,270	)
Warranty charges related to pre-existing warranties during period		577			2,179
Warranty liability, end of period	$	27,166		$	21,488

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

9

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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 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 requirement that 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 February 2008, the FASB issued FSP No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP 140-3”). FSP 140-3 provides guidance on the accounting for a purchase of a financial asset from a counterparty and contemporaneous financing of the acquisition through repurchase agreements with the same counterparty. Under this guidance, the purchase and related financing are linked, unless all of the following conditions are met at the inception of the transaction: (i) the purchase and corresponding financing are not contractually contingent; (ii) the repurchase financing provides recourse; (iii) the financial asset and repurchase financing are readily obtainable in the marketplace and are executed at market rates; and (iv) the maturity of financial asset and repurchase are not coterminous. A linked transaction would require an analysis under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) to determine whether the transaction meets the requirements for sale accounting. If the linked transaction does not meet sale accounting requirements, the net investment in the linked transaction is to be recorded as a derivative with the corresponding change in fair value of the derivative being recorded through earnings. The value of the derivative would reflect changes in the value of the underlying debt investments and changes in the value of the underlying credit provided by the counterparty. The Company currently presents these transactions gross, with the acquisition of the financial assets in total assets and the related repurchase agreements as financings in total liabilities on the consolidated balance sheet. The interest income earned on the debt investments and interest expense incurred on the repurchase obligations are reported gross on the consolidated income statements. FSP 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the effect that this pronouncement will have on its 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.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting

10

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

principles to be used in the preparation and presentation of financial statements in accordance with GAAP. This statement will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not anticipate the adoption of SFAS 162 will have a significant effect on its consolidated financial statements.

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 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 September 30, 2008 and December 31, 2007, respectively.

11

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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 September 30, 2008 (dollars in thousands):

Total number of land banking projects		4
Total number of lots		1,054
Total purchase price	$	231,448
Balance of lots still under option and not purchased:
Number of lots		605
Purchase price	$	109,696
Forfeited deposits (cash and letters of credit) if lots are not purchased	$	42,003

12

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)

	September 30, 2008
	Wholly- Owned		Variable Interest Entities Under Interpretation No. 46		Eliminating Entries			Consolidated Total
ASSETS
Cash and cash equivalents	$	112,532	$	2,473	$	—		$	115,005
Restricted cash		5,000		—		—			5,000
Receivables		29,807		—		—			29,807
Real estate inventories
Owned		726,253		168,075		—			894,328
Not owned		82,012		27,684		—			109,696
Investments in and advances to unconsolidated joint ventures		2,057		—		—			2,057
Investments in consolidated entities		64,940		—		(64,940	)		—
Other assets		77,679		—		—			77,679
Intercompany receivables		—		2,962		(2,962	)		—
	$	1,100,280	$	201,194	$	(67,902	)	$	1,233,572
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	80,025	$	4,438	$	—		$	84,463
Liabilities from inventories not owned		82,012		—		—			82,012
Notes payable		186,094		83,398		—			269,492
7 5/8% Senior Notes due December 15, 2012		150,000		—		—			150,000
10 3/4% Senior Notes due April 1, 2013		247,830		—		—			247,830
7 1/2% Senior Notes due February 15, 2014		150,000		—		—			150,000
Intercompany payables		2,388		574		(2,962	)		—
Total liabilities		898,349		88,410		(2,962	)		983,797
Minority interest in consolidated entities		—		—		47,844			47,844
Owners’ capital
William Lyon Homes		—		64,940		(64,940	)		—
Others		—		47,844		(47,844	)		—
Stockholders’ equity		201,931		—		—			201,931
	$	1,100,280	$	201,194	$	(67,902	)	$	1,233,572

13

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

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 September 30, 2008
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	89,650		$	3,093		$	—		$	92,743
Construction services		9,425			—			—			9,425
Management fees		104			—			(104	)		—
		99,179			3,093			(104	)		102,168
Operating costs
Cost of sales		(86,782	)		(2,134	)		104			(88,812	)
Loss on impairment of real estate assets		(21,910	)		—			—			(21,910	)
Construction services		(8,129	)		—			—			(8,129	)
Sales and marketing		(8,173	)		(514	)		—			(8,687	)
General and administrative		(6,373	)		—			—			(6,373	)
Other		(231	)		—			—			(231	)
		(131,598	)		(2,648	)		104			(134,142	)
Equity in loss of unconsolidated joint ventures		(821	)		—			—			(821	)
Equity in loss of consolidated entities		(163	)		—			163			—
Minority equity in income of consolidated entities		—			—			(628	)		(628	)
Operating (loss) income		(33,403	)		445			(465	)		(33,423	)
Interest expense, net of amounts capitalized		(7,142	)		—			—			(7,142	)
Other income, net		(551	)		20			—			(531	)
Net (loss) income	$	(41,096	)	$	465		$	(465	)	$	(41,096	)

15

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Three Months Ended September 30, 2007
	Wholly-Owned			Variable Interest Entities Under Interpretation No. 46			Eliminating Entries			Consolidated Total
Operating revenue
Sales	$	166,634		$	15,610		$	—		$	182,244
Management fees		542			—			(542	)		—
		167,176			15,610			(542	)		182,244
Operating costs
Cost of sales		(148,317	)		(12,846	)		542			(160,621	)
Impairment loss on real estate assets		(59,001	)		—			—			(59,001	)
Sales and marketing		(13,518	)		(1,364	)		—			(14,882	)
General and administrative		(9,691	)		—			—			(9,691	)
Other		(407	)		—			—			(407	)
		(230,934	)		(14,210	)		542			(244,602	)
Equity in income of unconsolidated joint ventures		316			—			—			316
Equity in income of consolidated entities		732			—			(732	)		—
Minority equity in income of consolidated entities		—			—			(764	)		(764	)
Operating (loss) income		(62,710	)		1,400			(1,496	)		(62,806	)
Other income, net		1,398			96			—			1,494
(Loss) income before benefit for income taxes		(61,312	)		1,496			(1,496	)		(61,312	)
Benefit for income taxes		1,300			—			—			1,300
Net (loss) income	$	(60,012	)	$	1,496		$	(1,496	)	$	(60,012	)

16

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Nine Months Ended September 30, 2008
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	357,673		$	12,596		$	—		$	370,269
Construction services		9,425			—			—			9,425
Management fees		504			—			(504	)		—
		367,602			12,596			(504	)		379,694
Operating costs
Cost of sales		(343,953	)		(12,725	)		504			(356,174	)
Loss on impairment of real estate assets		(68,028	)		—			—			(68,028	)
Construction services		(8,129	)		—			—			(8,129	)
Sales and marketing		(29,094	)		(1,696	)		—			(30,790	)
General and administrative		(19,823	)		(49	)		—			(19,872	)
Other		(2,005	)		—			—			(2,005	)
		(471,032	)		(14,470	)		504			(484,998	)
Equity in loss of unconsolidated joint ventures		(1,626	)		—			—			(1,626	)
Equity in loss of consolidated entities		(720	)		—			720			—
Minority equity in loss of consolidated entities		—			—			1,087			1,087
Operating loss		(105,776	)		(1,874	)		1,807			(105,843	)
Interest expense, net of amounts capitalized		(16,396	)		—			—			(16,396	)
Other (expense) income, net		(252	)		67			—			(185	)
Loss before benefit from income taxes		(122,424	)		(1,807	)		1,807			(122,424	)
Benefit from income taxes		41,592			—			—			41,592
Net loss	$	(80,832	)	$	(1,807	)	$	1,807		$	(80,832	)

17

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Nine Months Ended September 30, 2007
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	580,079		$	96,636		$	(17,342	)	$	659,373
Management fees		2,378			—			(2,378	)		—
		582,457			96,636			(19,720	)		659,373
Operating costs
Cost of sales		(505,291	)		(77,694	)		19,720			(563,265	)
Loss on impairment of real estate assets		(146,666	)		—			—			(146,666	)
Sales and marketing		(40,006	)		(5,581	)		—			(45,587	)
General and administrative		(30,373	)		(14	)		—			(30,387	)
Other		(518	)		—			—			(518	)
		(722,854	)		(83,289	)		19,720			(786,423	)
Equity in loss of unconsolidated joint ventures		(298	)		—			—			(298	)
Equity in income of consolidated entities		3,697			—			(3,697	)		—
Minority equity in income of consolidated entities		—			—			(9,982	)		(9,982	)
Operating (loss) income		(136,998	)		13,347			(13,679	)		(137,330	)
Other income, net		3,704			332			—			4,036
(Loss) income before provision for income taxes		(133,294	)		13,679			(13,679	)		(133,294	)
Provision for income taxes		(30,174	)		—			—			(30,174	)
Net (loss) income	$	(163,468	)	$	13,679		$	(13,679	)	$	(163,468	)

18

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

Note 3 — Construction Services

The Company entered into construction management agreements with various affiliates of one of its joint venture equity partners to build and market homes on behalf of the affiliates in 5 separate communities. For such services, the Company will receive fees (generally 5 percent of the sales price, as defined) and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved.

The Company accounts for the construction management agreements using the Percentage of Completion Method in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, (“SOP 81-1”). Under SOP 81-1, the Company records revenues and expenses as work on a contract progresses, and based on the percentage of costs incurred to date compared to the total estimated costs of the contract.

Based on the provisions of SOP 81-1, the Company has recorded construction services revenues and expenses of $9,425,000 and $8,129,000, respectively, for the three and nine months ended September 30, 2008, in the accompanying consolidated statement of operations.

Note 4 — Real Estate Inventories

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

	September 30, 2008		December 31, 2007
Inventories owned: (1)
Land deposits	$	57,372	$	57,321
Land and land under development		543,913		609,023
Homes completed and under construction		191,305		258,161
Model homes		101,738		137,155
Total	$	894,328	$	1,061,660
Inventories not owned: (2)
Variable interest entities — land banking arrangement	$	27,684	$	30,870
Other land options contracts		82,012		113,395
Total inventories not owned	$	109,696	$	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 $238,202,000 as of September 30, 2008, of which $132,812,000 is included in Land and land under development, $63,690,000 is included in Homes completed and under construction and $41,700,000 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.

19

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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.

The results of operations for the three and nine months ended September 30, 2008, include non-cash charges of $21,910,000 and $68,028,000 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 continued deterioration of 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.

20

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

Note 5 — Investments in and Advances to Unconsolidated Joint Ventures

The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. The consolidated financial statements of the Company include the accounts of the Company, all majority-owned and controlled subsidiaries and certain joint ventures which have been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). The financial statements of joint ventures which have not been determined to be variable interest entities in which the Company is considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Condensed combined financial information of these unconsolidated joint ventures as of September 30, 2008 and December 31, 2007 is summarized as follows:

CONDENSED COMBINED BALANCE SHEETS

(in thousands)

	September 30, 2008		December 31, 2007
	(unaudited)
ASSETS
Cash and cash equivalents	$	1,030	$	1,912
Real estate inventories		12,608		9,910
Investment in unconsolidated joint venture		—		3,899
	$	13,638	$	15,721
LIABILITIES AND OWNERS’ CAPITAL
Accounts payable	$	159	$	294
Accrued expenses		854		—
Notes payable		7,389		4,991
		8,402		5,285
Owners’ capital
William Lyon Homes		2,057		4,671
Others		3,179		5,765
		5,236		10,436
	$	13,638	$	15,721

21

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONDENSED COMBINED STATEMENTS OF OPERATIONS

(in thousands)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
Operating costs
General and administrative	$	(201	)	$	—	$	(621	)	$	—
Other		—			—		—			(743	)
		(201	)		—		(621	)		(743	)
Equity in income (loss) of unconsolidated joint ventures		(1,440	)		631		(2,630	)		39
Operating loss		(1,641	)		631		(3,251	)		(704	)
Other income, net		—			—		—			108
Net (loss) income	$	(1,641	)	$	631	$	(3,251	)	$	(596	)
Allocation to owners:
William Lyon Homes	$	(821	)	$	316	$	(1,626	)	$	(298	)
Others		(820	)		315		(1,625	)		(298	)
	$	(1,641	)	$	631	$	(3,251	)	$	(596	)

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%.

As of September 30, 2008, one of these joint ventures had obtained financing from a construction lender which amounted to $7,389,000 of outstanding indebtedness. As of September 30, 2008, the Company was not in compliance with the ratio of indebtedness to tangible net worth covenant under the loan documents. The Company and its joint venture partner have agreed to repay the $7,389,000 of outstanding indebtedness in December 2008, which would require a cash expenditure of approximately $3,694,500 (plus accrued and unpaid interest) from the Company.

Note 6 — Senior Notes

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

	September 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		247,830		247,553
7 1/2% Senior Notes due February 15, 2014		150,000		150,000
	$	547,830	$	547,553

22

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 was exchanged for new notes in October 2008. 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.

In October 2008, the Company purchased, in privately negotiated transactions, $16,200,000 principal amount of its outstanding 7 ⁵/8% Senior Notes at a cost of $3,564,000, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $12,516,000. Upon settlement of the transaction, the Company authorized these notes to be cancelled, leaving $133,800,000 in principal outstanding.

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.

In October 2008, the Company purchased, in privately negotiated transactions, $30,000,000 principal amount of its outstanding 10 ³/4% Senior Notes at a cost of $7,500,000, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs and unamortized discount costs was $21,799,000. Upon settlement of the transaction, the Company authorized these notes to be cancelled, leaving $220,000,000 in principal outstanding.

23

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

7 ¹/2% Senior Notes

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

In October 2008, the Company purchased, in privately negotiated transactions, $25,700,000 principal amount of its outstanding 7 ¹/2% Senior Notes at a cost of $5,654,000, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $19,728,000. Upon settlement of the transaction, the Company authorized these notes to be cancelled, leaving $124,300,000 in principal outstanding.

*    *    *    *    *

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.

24

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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 September 30, 2008, the Company had approximately $186,094,000 of secured indebtedness (excluding approximately $83,399,000 of secured indebtedness of consolidated entities — see Note 2) and approximately $9,653,000 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.

25

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING BALANCE SHEET

September 30, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	109,261	$	2,658	$	3,086	$	—		$	115,005
Restricted cash		—		5,000		—		—		—			5,000
Receivables		—		17,691		12,116		—		—			29,807
Real estate inventories
Owned		—		726,253		—		168,075		—			894,328
Not Owned		—		109,696		—		—		—			109,696
Investments in and advances to unconsolidated joint ventures		—		2,057		—		—		—			2,057
Property and equipment, net		—		2,465		12,463		—		—			14,928
Deferred loan costs		—		7,557		—		—		—			7,557
Goodwill		—		5,896		—		—		—			5,896
Deferred taxes		—		41,602		—		—		—			41,602
Other assets		—		6,025		1,671		—		—			7,696
Investments in subsidiaries		201,931		65,403		8,698		—		(276,032	)		—
Intercompany receivables		—		—		196,008		2,962		(198,970	)		—
	$	201,931	$	1,098,906	$	233,614	$	174,123	$	(475,002	)	$	1,233,572
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	10,416	$	244	$	4,438	$	—		$	15,098
Accrued expenses		—		67,604		1,625		136		—			69,365
Liabilities from inventories not owned		—		82,012		—		—		—			82,012
Notes payable		—		175,276		10,818		83,398		—			269,492
7 5/8% Senior Notes		—		150,000		—		—		—			150,000
10 3/4% Senior Notes		—		247,830		—		—		—			247,830
7 1/2% Senior Notes		—		150,000		—		—		—			150,000
Intercompany payables		—		198,382		—		588		(198,970	)		—
Total liabilities		—		1,081,520		12,687		88,560		(198,970	)		983,797
Minority interest in consolidated entities		—		—		—		—		47,844			47,844
Stockholders’ equity		201,931		17,386		220,927		85,563		(323,876	)		201,931
	$	201,931	$	1,098,906	$	233,614	$	174,123	$	(475,002	)	$	1,233,572

26

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

27

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	78,086		$	11,564		$	3,093		$	—		$	92,743
Construction services		—			9,425			—			—			—			9,425
Management fees		—			104			—			—			(104	)		—
		—			87,615			11,564			3,093			(104	)		102,168
Operating costs
Cost of sales		—			(76,366	)		(10,416	)		(2,134	)		104			(88,812	)
Loss on impairment of real estate assets		—			(21,910	)		—			—			—			(21,910	)
Construction services		—			(8,129	)		—			—			—			(8,129	)
Sales and marketing		—			(7,484	)		(689	)		(514	)		—			(8,687	)
General and administrative		—			(6,280	)		(93	)		—			—			(6,373	)
Other		—			(276	)		45			—			—			(231	)
		—			(120,445	)		(11,153	)		(2,648	)		104			(134,142	)
Equity in loss of unconsolidated joint ventures		—			(821	)		—			—			—			(821	)
(Loss) income from subsidiaries		(41,096	)		(597	)		1			—			41,692			—
Minority equity in income of consolidated entities		—			—			—			—			(628	)		(628	)
Operating (loss) income		(41,096	)		(34,248	)		412			445			41,064			(33,423	)
Interest expense, net of amounts capitalized		—			(7,142	)		—			—			—			(7,142	)
Other income (loss), net		—			405			(953	)		17			—			(531	)
Net (loss) income	$	(41,096	)	$	(40,985	)	$	(541	)	$	462		$	41,064		$	(41,096	)

28

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2007

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	144,152		$	22,482		$	15,610		$	—		$	182,244
Management fees		—			542			—			—			(542	)		—
		—			144,694			22,482			15,610			(542	)		182,244
Operating costs
Cost of sales		—			(130,338	)		(17,979	)		(12,846	)		542			(160,621	)
Impairment loss on real estate assets		—			(59,001	)		—			—			—			(59,001	)
Sales and marketing		—			(12,158	)		(1,360	)		(1,364	)		—			(14,882	)
General and administrative		—			(9,592	)		(99	)		—			—			(9,691	)
Other		—			(414	)		7			—			—			(407	)
		—			(211,503	)		(19,431	)		(14,210	)		542			(244,602	)
Equity in income (loss) of unconsolidated joint ventures		—			316			—			—			—			316
(Loss) income from subsidiaries		(60,012	)		3,427			7			—			56,578			—
Minority equity in income of consolidated entities		—			—			—			—			(764	)		(764	)
Operating (loss) income		(60,012	)		(63,066	)		3,058			1,400			55,814			(62,806	)
Other income, net		—			505			899			90			—			1,494
(Loss) income before provision for income taxes		(60,012	)		(62,561	)		3,957			1,490			55,814			(61,312	)
Provision for income taxes		—			1,300			—			—			—			1,300
Net (loss) income	$	(60,012	)	$	(61,261	)	$	3,957		$	1,490		$	55,814		$	(60,012	)

29

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	318,550		$	39,123		$	12,596		$	—		$	370,269
Construction services		—			9,425			—			—			—			9,425
Management fees		—			504			—			—			(504	)		—
		—			328,479			39,123			12,596			(504	)		379,694
Operating costs
Cost of sales		—			(308,532	)		(35,421	)		(12,725	)		504			(356,174	)
Impairment loss on real estate assets		—			(68,028	)		—			—			—			(68,028	)
Construction services		—			(8,129	)		—			—			—			(8,129	)
Sales and marketing		—			(26,498	)		(2,596	)		(1,696	)		—			(30,790	)
General and administrative		—			(19,513	)		(311	)		(48	)		—			(19,872	)
Other		—			(2,050	)		45			—			—			(2,005	)
		—			(432,750	)		(38,283	)		(14,469	)		504			(484,998	)
Equity in loss of unconsolidated joint ventures		—			(1,626	)		—			—			—			(1,626	)
(Loss) income from subsidiaries		(80,832	)		(1,512	)		6			—			82,338			—
Minority equity in loss of consolidated entities		—			—			—			—			1,087			1,087
Operating (loss) income		(80,832	)		(107,409	)		846			(1,873	)		83,425			(105,843	)
Interest expense, net of amounts capitalized		—			(16,396	)		—			—			—			(16,396	)
Other income (expense), net		—			1,384			(1,637	)		68			—			(185	)
Loss before benefit for income taxes		(80,832	)		(122,421	)		(791	)		(1,805	)		83,425			(122,424	)
Benefit for income taxes		—			41,592			—			—			—			41,592
Net loss	$	(80,832	)	$	(80,829	)	$	(791	)	$	(1,805	)	$	83,425		$	(80,832	)

30

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2007

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	490,460		$	89,619		$	96,636		$	(17,342	)	$	659,373
Management fees		—			2,378			—			—			(2,378	)		—
		—			492,838			89,619			96,636			(19,720	)		659,373
Operating costs
Cost of sales		—			(434,375	)		(70,916	)		(77,694	)		19,720			(563,265	)
Impairment loss on real estate assets		—			(146,666	)		—			—			—			(146,666	)
Sales and marketing		—			(34,964	)		(5,042	)		(5,581	)		—			(45,587	)
General and administrative		—			(30,069	)		(304	)		(14	)		—			(30,387	)
Other		—			(414	)		(104	)		—			—			(518	)
		—			(646,488	)		(76,366	)		(83,289	)		19,720			(786,423	)
Equity in income (loss) of unconsolidated joint ventures		—			74			(372	)		—			—			(298	)
(Loss) income from subsidiaries		(163,468	)		15,911			20			—			147,537			—
Minority equity in income of consolidated entities		—			—			—			—			(9,982	)		(9,982	)
Operating (loss) income		(163,468	)		(137,665	)		12,901			13,347			137,555			(137,330	)
Other income, net		—			1,163			2,537			336			—			4,036
Income (loss) before provision for income taxes		(163,468	)		(136,502	)		15,438			13,683			137,555			(133,294	)
Provision for income taxes		—			(30,174	)		—			—			—			(30,174	)
Net (loss) income	$	(163,468	)	$	(166,676	)	$	15,438		$	13,683		$	137,555		$	(163,468	)

31

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities
Net loss	$	(80,832	)	$	(80,829	)	$	(791	)	$	(1,805	)	$	83,425		$	(80,832	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			632			1,044			—			—			1,676
Impairment loss on real estate assets		—			68,028			—			—			—			68,028
Equity in loss of unconsolidated joint ventures		—			1,626			—			—			—			1,626
Distribution of income from unconsolidated joint ventures		—			816			—			—			—			816
Minority equity in loss of consolidated entities		—			—			—			—			(1,087	)		(1,087	)
Equity in earnings (loss) of subsidiaries		80,832			1,512			(6	)		—			(82,338	)		—
Benefit from income taxes		—			(41,592	)		—			—			—			(41,592	)
Net changes in operating assets and liabilities:
Restricted cash		—			(5,000	)		—			—			—			(5,000	)
Receivables		—			14,654			785			21			—			15,460
Intercompany receivables/payables		—			—			(3,294	)		1,590			1,704			—
Real estate inventories — owned		—			103,876			—			(4,295	)		—			99,581
Deferred loan costs		—			2,088			—			—			—			2,088
Other assets		—			6,218			721			—			—			6,939
Accounts payable		—			(22,612	)		(147	)		(3,033	)		—			(25,792	)
Accrued expenses		—			5,469			(1,868	)		(2,032	)		—			1,569
Net cash provided by (used in) operating activities		—			54,886			(3,556	)		(9,554	)		1,704			43,480
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		—			(505	)		(7	)		—			—			(512	)
Investments in subsidiaries		—			515			1			—			(516	)		—
Advances to affiliates		—			2,572			—			—			(2,572	)		—
Net cash provided by (used in) investing activities		—			2,754			(6	)		—			(3,088	)		(340	)
Financing activities
Proceeds from borrowings on notes payable		—			269,341			197,130			6,987			—			473,458
Principal payments on notes payable		—			(273,132	)		(197,766	)		—			—			(470,898	)
Minority interest distributions, net		—			—			—			—			(3,892	)		(3,892	)
Advances to affiliates		—			—			(75	)		(5,201	)		5,276			—
Net cash (used in) provided by financing activities		—			(3,791	)		(711	)		1,786			1,384			(1,322	)
Net increase (decrease) in cash and cash equivalents		—			53,849			(4,273	)		(7,768	)		—			41,808
Cash and cash equivalents at beginning of period		—			55,412			6,931			10,854			—			73,197
Cash and cash equivalents at end of period	$	—		$	109,261		$	2,658		$	3,086		$	—		$	115,005

32

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2007

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net (loss) income	$	(163,468	)	$	(166,676	)	$	15,438		$	13,683		$	137,555		$	(163,468	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			1,115			740			—			—			1,855
Equity in (income) loss of unconsolidated joint ventures		—			(74	)		372			—			—			298
Minority equity in income of consolidated entities		—			—			—			—			9,982			9,982
Equity in loss (earnings) of subsidiaries		163,468			(15,911	)		(20	)		—			(147,537	)		—
Impairment loss on real estate asset		—			146,666			—			—			—			146,666
Provision for income taxes		—			30,174			—			—			—			30,174
Net changes in operating assets and liabilities:
Receivables		—			46,167			41,472			519			—			88,158
Intercompany receivables/payables		—			—			(18,692	)		(2,141	)		20,833			—
Real estate inventories owned		—			(179,239	)		1,785			21,478			—			(155,976	)
Real estate inventories not owned		—			27,336			—			—			—			27,336
Deferred loan costs		—			862			—			—			—			862
Other assets		—			(8,246	)		768			—			—			(7,478	)
Accounts payable		—			31			(713	)		(637	)		—			(1,319	)
Accrued expenses		—			(39,205	)		(5,113	)		(10	)		—			(44,328	)
Net cash (used in) provided by operating activities		—			(157,000	)		36,037			32,892			20,833			(67,238	)
Investing activities:
Net change in investment in unconsolidated joint ventures		—			(4,264	)		(372	)		—			—			(4,636	)
Net cash paid for purchase of partner’s interest in unconsolidated joint venture		—			(1,484	)		—			—			—			(1,484	)
Purchases of property and equipment		—			(487	)		(255	)		—			—			(742	)
Investments in subsidiaries		—			23,874			(1	)		—			(23,873	)		—
Advances (to) from affiliates		—			(14,341	)		—			—			14,341			—
Net cash used in investing activities		—			3,298			(628	)		—			(9,532	)		(6,862	)
Financing activities:
Proceeds from borrowings on notes payable		—			737,534			554,086			(5,607	)		—			1,286,013
Principal payments on notes payable		—			(573,886	)		(595,085	)		—			—			(1,168,971	)
Minority interest distributions, net		—			—			—			(47,218	)		—			(47,218	)
Advances (to) from affiliates		—			—			(916	)		12,217			(11,301	)		—
Net cash provided by (used in) financing activities		—			163,648			(41,915	)		(40,608	)		(11,301	)		69,824
Net (decrease) increase in cash and cash equivalents		—			9,946			(6,506	)		(7,716	)		—			(4,276	)
Cash and cash equivalents at beginning of period		—			12,253			11,222			15,257			—			38,732
Cash and cash equivalents at end of period	$	—		$	22,199		$	4,716		$	7,541		$	—		$	34,456

33

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

Note 7 — 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 provided 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 were 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. 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 September 30, 2008 and 2007, the Company incurred reimbursable on-site labor costs of $51,000 and $42,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon, of which $32,000 and $89,000 was due to the Company at September 30, 2008 and December 31, 2007, respectively. For the nine months ended September 30, 2008 and 2007, the Company incurred reimbursable on-site labor costs of $146,000 and $121,000, 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 September 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 nine months ended September 30, 2008 and 2007, the Company incurred charges of $582,000 and $566,000, 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 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

34

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

amounted to $684,000 and $406,000 for the three months ended September 30, 2008 and 2007, respectively, and $1,331,000 and $1,022,000, for the nine months ended September 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 $60,000 and $263,000 for charter services provided to William Lyon personally, during the three months ended September 30, 2008 and 2007, respectively, and $64,000 and $337,000 was due to the Company at September 30, 2008 and December 31, 2007, respectively. For the nine months ended September 30, 2008 and 2007, the Company had earned revenue of $283,000 and $461,000, 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 8 — 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 flowed through to and was reported on the personal tax returns of its shareholders. The shareholders were responsible for paying the appropriate taxes based on this election. The Company did not pay any federal taxes under this election and was 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 nine months ended September 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 not be able to elect “S” corporation status for at least five years. The revocation of the “S” corporation election

35

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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. 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 September 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 9 — 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 merged with and into the Company under the “short-form” merger provisions of Delaware law, with the

36

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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

Note 10 — Commitments and Contingencies

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

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. Pursuant to the MOU, General Lyon increased his offer of $93 per share to $100 per share, extended the closing

37

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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.

As of September 30, 2008, the Company had $18,144,000 of outstanding irrevocable standby letters of credit to guarantee the Company’s financial obligations under certain land banking arrangements, joint venture

38

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(unaudited)

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 $208,332,000 at September 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 Note 6 for additional information relating to the Company’s guarantee arrangements.

39

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 September 30,
	2008									2007
	Wholly-Owned			Joint Ventures			Consolidated Total			Wholly-Owned			Joint Ventures			Consolidated Total
Selected Financial Information (dollars in thousands)
Homes closed		221			9			230			375			41			416
Home sales revenue	$	81,707		$	3,093		$	84,800		$	166,634		$	15,610		$	182,244
Cost of sales		(78,160	)		(2,030	)		(80,190	)		(147,463	)		(12,304	)		(159,767	)
Gross margin	$	3,547		$	1,063		$	4,610		$	19,171		$	3,306		$	22,477
Gross margin percentage		4.3	%		34.4	%		5.4	%		11.5	%		21.2	%		12.3	%
Number of homes closed
California		109			9			118			234			41			275
Arizona		52			—			52			90			—			90
Nevada		60			—			60			51			—			51
Total		221			9			230			375			41			416
Average sales price
California	$	497,900		$	343,700		$	486,100		$	550,000		$	380,700		$	524,700
Arizona		222,400			—			222,400			249,800			—			249,800
Nevada		264,600			—			264,600			303,100			—			303,100
Total	$	369,700		$	343,700		$	368,700		$	444,400		$	380,700		$	438,100
Number of net new home orders
California		173			14			187			216			31			247
Arizona		34			—			34			62			—			62
Nevada		43			—			43			28			—			28
Total		250			14			264			306			31			337
Average number of sales locations during period
California		21			3			24			36			5			41
Arizona		4			—			4			5			—			5
Nevada		11			—			11			11			—			11
Total		36			3			39			52			5			57

40

	As of September 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		342		31		373		464		64		528
Arizona		59		—		59		138		—		138
Nevada		48		—		48		51		—		51
Total		449		31		480		653		64		717
Dollar amount of homes sold but not closed at end of period (dollars in thousands)
California	$	130,296	$	10,088	$	140,384	$	269,582	$	24,494	$	294,076
Arizona		11,165		—		11,165		32,195		—		32,195
Nevada		13,536		—		13,536		17,069		—		17,069
Total	$	154,997	$	10,088	$	165,085	$	318,846	$	24,494	$	343,340
Lots controlled at end of period
Owned lots
California		2,289		786		3,075		4,267		978		5,245
Arizona		4,310		1,745		6,055		4,587		1,745		6,332
Nevada		2,900		—		2,900		3,146		—		3,146
Total		9,499		2,531		12,030		12,000		2,723		14,723
Optioned lots(1)
California						489						1,122
Arizona						328						2,728
Nevada						—						—
Total						817						3,850
Total lots controlled
California						3,564						6,367
Arizona						6,383						9,060
Nevada						2,900						3,146
Total						12,847						18,573

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

41

	Nine Months Ended September 30,
	2008									2007
	Wholly-owned			Joint Ventures			Combined Total			Wholly-owned			Joint Ventures			Combined Total
Selected Financial Information (dollars in thousands)
Homes closed		818			34			852			1,229			156			1,385
Home sales revenue	$	318,161		$	12,596		$	330,757		$	565,088		$	66,756		$	631,844
Cost of sales		(303,055	)		(12,221	)		(315,276	)		(487,374	)		(50,270	)		(537,644	)
Gross margin	$	15,106		$	375		$	15,481		$	77,714		$	16,486		$	94,200
Gross margin percentage		4.7	%		3.0	%		4.7	%		13.8	%		24.7	%		14.9	%
Number of homes closed
California		491			34			525			738			156			894
Arizona		171			—			171			314			—			314
Nevada		156			—			156			177			—			177
Total		818			34			852			1,229			156			1,385
Average sales price
California	$	482,000		$	370,500		$	474,800		$	564,900		$	427,900		$	541,000
Arizona		232,300			—			232,300			281,300			—			281,300
Nevada		267,900			—			267,900			338,100			—			338,100
Total	$	388,900		$	370,500		$	388,200		$	459,800		$	427,900		$	456,200
Number of net new home orders
California		658			55			713			899			168			1,067
Arizona		163			—			163			261			—			261
Nevada		177			—			177			168			—			168
Total		998			55			1,053			1,328			168			1,496
Average number of sales locations during period
California		28			3			31			31			6			37
Arizona		4			—			4			5			—			5
Nevada		11			—			11			10			—			10
Total		43			3			46			46			6			52

On a consolidated basis, the number of net new home orders for the three months ended September 30, 2008 decreased 21.7% to 264 homes from 337 homes for the three months ended September 30, 2007. The number of homes closed on a consolidated basis for the three months ended September 30, 2008, decreased 44.7% to 230 homes from 416 homes for the three months ended September 30, 2007. On a consolidated basis, the backlog of homes sold but not closed as of September 30, 2008 was 480, down 33.1% from 717 homes a year earlier, and up 7.6% from 446 homes at June 30, 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 September 30, 2008 was $165.1 million, down 51.9% from $343.3 million as of September 30, 2007 and up 2.9% from $160.4 million as of June 30, 2008. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 33% during the three months ended September 30, 2008 compared to 42% during the three months ended September 30, 2007. The inventory of completed and unsold homes was 30 homes as of September 30, 2008, down from 32 homes at June 30, 2008.

The average number of sales locations during the quarter ended September 30, 2008 was 39, down 31.6% from 57 in the comparable period a year ago. The Company’s number of new home orders per average sales location increased to 6.8 for the quarter ended September 30, 2008 as compared to 5.9 for the quarter ended September 30, 2007.

42

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

Consolidated operating revenue for the three months ended September 30, 2008 was $102.2 million, a decrease of $80.0 million, or 43.9% from consolidated operating revenue of $182.2 million for the three months ended September 30, 2007. Revenue from sales of wholly-owned homes decreased $84.9 million, or 51.0%, to $81.7 million in the 2008 period from $166.6 million in the 2007 period. This decrease was comprised of (i) a decrease of $68.4 million due to a decrease in the number of wholly-owned homes closed to 221 in 2008 from 375 in 2007 and (ii) a decrease of $16.5 million due to a decrease in the average sales price of wholly-owned homes closed to $369,700 in the 2008 period from $444,400 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 $12.5 million, or 80.1%, to $3.1 million in the 2008 period from $15.6 million in the 2007 period. This decrease was comprised of (i) a decrease of $0.3 million due to a decrease in the average sales price of joint venture homes closed to $343,700 in the 2008 period from $380,700 in the 2007 period and (ii) a decrease of $12.2 million due to a decrease in the number of joint venture homes closed to 9 in the 2008 period from 41 in the 2007 period. Revenue from sales of lots, land and other was $7.9 million in the 2008 period with no comparable amount in the 2007 period, due to the bulk sale of land in California in 2008.

Total operating loss decreased to $33.4 million in the 2008 period compared to operating loss of $62.8 million in the 2007 period. The excess of revenue from sales of homes over the related cost of sales (gross margin) decreased by $17.9 million to $4.6 million in the 2008 period from $22.5 million in the 2007 period primarily due to (i) a decrease in the number of homes closed to 230 in the 2008 period from 416 in the 2007 period, (ii) a decrease the average sales price of homes closed to $368,700 in the 2008 period from $438,100 in the 2007 period and (iii) a decrease in gross margin percentages to 5.4% in the 2008 period from 12.3% in the 2007 period. The decrease in period-over-period gross margin percentages primarily reflects the close out of projects with higher average gross margin percentages in 2007, a shift in product mix and the decrease in average sales prices in certain of the Company’s markets due to depressed market conditions. The excess of revenue from sales of lots, land and other over the related cost of sales (gross margin) decreased to $(0.7) million in the 2008 period from $(0.9) million in the 2007 period primarily due to the bulk sale of land in California in 2008 with no comparable sale in the 2007 period. Costs of approximately $0.9 million were incurred in the 2007 period related to the abandonment and write-off of project pre-acquisition costs for certain of the Company’s potential projects.

Operating costs for the three months ended September 30, 2008 include a non-cash charge of $21.9 million to record impairment loss on real estate assets held by the Company at certain of its homebuilding projects compared to $59.0 million for the three months ended September 30, 2007. The impairment was primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to continued deterioration of 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.

In 2008, the Company entered into construction management agreements with various affiliates of one of its joint venture equity partners to build and market homes on behalf of the affiliates in 5 separate communities. For such services, the Company will receive fees (generally 5 percent of the sales price, as defined) and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved. Construction services revenue was $9.4 million in the 2008 period and construction services expenses were $8.1 million. See Note 3 of “Notes to Consolidated Financial Statements” for further discussion.

Sales and marketing expense decreased $6.2 million to $8.7 million in the 2008 period from $14.9 million in the 2007 period primarily due to (i) a decrease of $3.4 million in advertising costs to $2.7 million in the 2008 period from $6.1 million in the 2007 period, (ii) a decrease of $1.0 million in outside broker expenses to $1.7

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million in the 2008 period from $2.7 million in the 2007 period and (iii) a decrease of $1.2 million in sales office and model home operation costs to $1.7 million in the 2008 period from $2.9 million in the 2007 period.

General and administrative expenses decreased by $3.3 million to $6.4 million in the 2008 period from $9.7 million in the 2007 period, primarily as a result of (i) a decrease of $2.5 million in salaries and benefits expense to $4.0 million in the 2008 period from $6.5 million in the 2007 period primarily as a result of a reduction in the number of the Company’s employees and (ii) other cost reduction measures implemented by management due to softening market conditions. Other operating costs consist of operating losses realized by golf course operations at certain of the Company’s projects which decreased to $0.2 million in the 2008 period compared to $0.4 million in the 2007 period. Equity in (loss) income of unconsolidated joint ventures decreased to $(0.8) million in the 2008 period from $0.3 million in the 2007 period. Minority equity in (income) loss of consolidated entities decreased to $(0.6) million in the 2008 period from $(0.8) million in the 2007 period, primarily due to a decrease in the number of joint venture homes closed to 9 in the 2008 period from 41 in the 2007 period, offset by an increase in gross margin percentage to 34.4% in the 2008 period from 21.2% in the 2007 period.

Interest incurred decreased to $16.6 million in the 2008 period from $20.0 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 $7.1 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 during the three months ended September 30, 2007 was a benefit of $1.3 million based on operating losses during the period with no comparable amount in the 2008 period.

As a result of the factors outlined above, net loss is $41.1 million in the 2008 period compared to net loss of $60.0 million in the 2007 period.

Comparison of Nine Months Ended September 30, 2008 to September 30, 2007

Consolidated operating revenue for the nine months ended September 30, 2008 was $379.7 million, a decrease of $279.7 million, or 42.4%, from consolidated operating revenue of $659.4 million for the nine months ended September 30, 2007. Revenue from sales of wholly-owned homes decreased $246.9 million, or 43.7%, to $318.2 million in the 2008 period from $565.1 million in the 2007 period. This decrease was comprised of (i) a decrease of $189.0 million due to a decrease in the number of wholly-owned homes closed to 818 in 2008 from 1,229 in 2007 and (ii) a decrease of $57.9 million due to a decrease in the average sales price of wholly-owned homes closed to $388,900 in the 2008 period from $459,800 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 $54.2 million, or 81.1%, to $12.6 million in the 2008 period from $66.8 million in the 2007 period. This decrease was comprised of (i) a decrease of $2.0 million due to a decrease in the average sales price of joint venture homes closed to $370,500 in the 2008 period from $427,900 in the 2007 period and (ii) a decrease of $52.2 million due to a decrease in the number of joint venture homes closed to 34 in 2008 from 156 in 2007. Revenue from sales of lots, land and other increased to $39.5 million in the 2008 period from $27.5 million in the 2007 period, due to the timing of 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.

Total operating loss decreased to $105.8 million in the 2008 period compared to operating loss of $137.3 million in the 2007 period. The excess of revenue from sales of homes over the related costs of sales (gross margin) decreased by $78.7 million to $15.5 million in the 2008 period from $94.2 million in the 2007 period primarily due to (i) a decrease in the number of homes closed to 852 in the 2008 period from 1,385 in the 2007 period, (ii) a decrease in the average sales price to $388,200 in the 2008 period compared to $456,200 in the 2007 period and (iii) a decrease in the gross margin percentages to 4.7% in the 2008 period from 14.9% in the 2007 period. The decrease in period-over-period gross margin percentage primarily reflects the close out of projects with higher average gross margin percentages in 2007, a shift in product mix and the decrease in average

44

sales prices in certain of the Company’s markets due to depressed market conditions. The excess of revenue from sales of lots, land and other over the related cost of sales (gross margin) decreased to $(1.4) million in the 2008 period from $1.9 million in the 2007 period primarily due to the timing of 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. In addition, $2.8 million of costs were incurred related to the abandonment and write-off of project pre-acquisition costs and land option deposits in the 2007 period.

Operating costs for the nine months ended September 30, 2008 include a non-cash charge of $68.0 million to record impairment loss on real estate assets held by the Company at certain of its homebuilding projects compared to $146.7 million for the nine months ended September 30, 2007. The impairment was primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to continued deterioration of 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.

In 2008, the Company entered into construction management agreements with various affiliates of one of its joint venture equity partners to build and market homes on behalf of the affiliates in 5 separate communities. For such services, the Company will receive fees (generally 5 percent of the sales price, as defined) and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved. Construction services revenue was $9.4 million in the 2008 period and construction services expenses were $8.1 million. See Note 3 of “Notes to Consolidated Financial Statements” for further discussion.

Sales and marketing expense decreased $14.8 million to $30.8 million in the 2008 period from $45.6 million in the 2007 period primarily due to (i) a decrease of $6.1 million in advertising costs to $10.0 million in the 2008 period from $16.1 million in the 2007 period, (ii) a decrease of $4.9 million in outside broker expenses to $6.4 million in the 2008 period from $11.3 million in the 2007 period, (iii) a decrease in seller closing costs of $1.6 million to $1.0 million in the 2008 period from $2.6 million in the 2007 period and (iv) a decrease in salesperson commissions of $0.9 million to $5.5 million in the 2008 period from $6.4 million in the 2007 period due to the reduction in units closed and revenue from home sales in 2008 as compared to 2007.

General and administrative expenses decreased by $10.5 million to $19.9 million in the 2008 period from $30.4 million in the 2007 period, primarily as a result of (i) a decrease of $8.7 million in salaries and benefits expense to $12.7 million in the 2008 period from $21.4 million in the 2007 period due to a reduction in the Company’s number of employees, (ii) a decrease of $1.1 million in bonus expense to $2.3 million in the 2008 period from $3.4 million in the 2007 period and (iii) other cost reduction measures implemented by management due to the weak housing market. Other operating costs consist of (i) operating losses realized by golf course operations at certain of the Company’s divisions which increased to $0.9 million in the 2008 period compared to $0.5 million in the 2007 period and (ii) nonrecurring items of approximately $1.1 million incurred by the Company during the 2008 period. Equity in (loss) income of unconsolidated joint ventures increased to loss of $(1.6) million in the 2008 period from a loss of $(0.3) million in the 2007 period. Minority equity in (income) loss of consolidated entities decreased to a loss of $1.1 million in the 2008 period from income of $(10.0) million in the 2007 period primarily due to a decrease in the number of joint venture homes closed to 34 in the 2008 period from 156 in the 2007 period.

Total interest incurred decreased to $51.8 million in the 2008 period from $56.2 million in the 2007 period, primarily as a result of a decrease in the average principal balance of debt outstanding, offset by slightly higher average interest rates. Interest expense, net of amounts capitalized was $16.4 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.

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The benefit (provision) for income taxes was a benefit of $41.6 million in the 2008 period compared to a provision of $30.2 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 8 of “Notes to Consolidated Financial Statements” for further discussion.

As a result of the factors outlined above, net loss decreased to $80.8 million in the 2008 period compared to net loss of $163.5 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 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 nine months ended September 30, 2008, the Company incurred impairment losses on real estate assets in the amount of $21.9 million and $68.0 million, respectively. The impairments were primarily attributable to slower than anticipated homes sales and lower than anticipated net revenue due to the continued deterioration of 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

46

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.

Under the modified Revolving Credit Facilities, the aggregate loan commitment is $250.0 million at September 30, 2008 (including two facilities of $50.0 million each, one of $40.0 million, one of $35.0 million, one of $30.0 million, one of $25.0 million and one of $20.0 million), with maturities at various dates as follows:

Loan Commitment Amount (in millions)		Balance Outstanding at September 30, 2008 (in millions)		Initial Maturity Date(1)
$	50.0	$	26.2	December 2008
	35.0		16.6	April 2009
	25.0		9.1	May 2009
	40.0		32.9	June 2009
	50.0		16.8	July 2009
	30.0		27.2	September 2009
	20.0		5.2	September 2009(2)
$	250.0	$	134.0

(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.

(2) The initial maturity date of this facility was September 2008. The facility was not extended by the Company; therefore the final maturity date is September 2009. In addition, in October 2008, the loan commitment amount was reduced from $20.0 million to $6.0 million.

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Under the modified revolving credit facilities, 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.

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

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, volatility in the banking industry and credit markets, 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 flowed through to and was reported on the personal tax returns of its shareholders. The shareholders were responsible for paying the appropriate taxes based on this election. The Company did not pay any federal taxes under this election and was 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 nine months ended September 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 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. 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.

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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 was exchanged for new notes in October 2008. 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 principal amount of the 7 ⁵/8% Senior Notes outstanding at September 30, 2008, 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.

In October 2008, the Company purchased, in privately negotiated transactions, $16.2 million principal amount of its outstanding 7 ⁵/8% Senior Notes at a cost of $3.6 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $12.5 million. Upon settlement of the transaction, the Company authorized these notes to be cancelled, leaving $133.8 million in principal outstanding.

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 principal amount of the 10 ³/4% Senior Notes outstanding at September 30, 2008, the Company’s semi-annual interest payments are $13.4 million.

Except as set forth in the Indenture governing the 10 ³/4% Senior Notes, 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.

In October 2008, the Company purchased, in privately negotiated transactions, $30.0 million principal amount of its outstanding 10 ³/4% Senior Notes at a cost of $7.5 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs and unamortized discount costs was $21.8 million. Upon settlement of the transaction, the Company authorized these notes to be cancelled, leaving $220.0 million in principal outstanding.

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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 principal amount of 7 ¹/2% Senior Notes outstanding at September 30, 2008, 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.

In October 2008, the Company purchased, in privately negotiated transactions, $25.7 million principal amount of its outstanding 7 ¹/2% Senior Notes at a cost of $5.7 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $19.7 million. Upon settlement of the transaction, the Company authorized these notes to be cancelled, leaving $124.3 million in principal outstanding.

*  *  *  *  *

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 September 30, 2008, the Company had approximately $186.1 million of secured indebtedness, (excluding approximately $83.4 million of secured indebtedness of consolidated entities) and approximately $9.7 million of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas.

Revolving Credit Facilities

As of September 30, 2008, the Company has seven revolving credit facilities which have an aggregate maximum loan commitment of $250.0 million, (including two facilities of $50.0 million each, one of $40.0 million, one of $35.0 million, one of $30.0 million, one of $25.0 million and one of $20.0 million), with maturities at various dates as follows:

Loan Commitment Amount (in millions)		Balance Outstanding at September 30, 2008 (in millions)		Initial Maturity Date(1)
$	50.0	$	26.2	December 2008
	35.0		16.6	April 2009
	25.0		9.1	May 2009
	40.0		32.9	June 2009
	50.0		16.8	July 2009
	30.0		27.2	September 2009
	20.0		5.2	September 2009(2)
$	250.0	$	134.0

(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.

(2) The initial maturity date of this facility was September 2008. The facility was not extended by the Company; therefore the final maturity date is September 2009. In addition, in October 2008, the loan commitment amount was reduced from $20.0 million to $6.0 million.

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.

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Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration limitations further restrict availability under the credit facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Company’s investment in a project, with higher percentages of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real property and improvements thereon owned by the Company in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes financial covenants, which may limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of September 30, 2008, $134.0 million was outstanding under these credit facilities, with a weighted-average interest rate of 5.985%, and the undrawn availability was $9.7 million as limited by the borrowing base formulas. Interest on the revolving credit facilities is calculated on the average, outstanding daily balance and is paid following the end of each month. During the three and nine months ended September 30, 2008, the Company borrowed $97.8 million and $257.4 million, respectively, and repaid $59.7 million and $263.2 million, respectively, under these facilities. The maximum amount outstanding was $134.0 million and the weighted average borrowings were $116.6 million during the three months ended September 30, 2008. Interest incurred on the revolving credit facilities for the three and nine months ended September 30, 2008 was $1.4 million and $5.6 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 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.

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

Construction Notes Payable

At September 30, 2008, the Company had construction notes payable on certain consolidated entities amounting to $124.7 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 September 30, 2008. Interest is calculated on the average daily balance and is paid following the end of each month.

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 October 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 November 2008. 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 September 30, 2008 the outstanding balance under these facilities was $10.8 million.

Land Banking Arrangements

The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers 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 September 30, 2008, real estate inventories of $27.7 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 VIE’s 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 $82.0 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 September 30, 2008 (dollars in thousands):

Total number of land banking projects		4
Total number of lots		1,054
Total purchase price	$	231,448
Balance of lots still under option and not purchased:
Number of lots		605
Purchase price	$	109,696
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 5 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.

As of September 30, 2008, the Company’s investment in and advances to unconsolidated joint ventures was $2.1 million and the venture partners’ investment in such joint ventures was $3.2 million. As of September 30, 2008, one of these joint ventures had obtained financing from a construction lender which amounted to $7.4 million of outstanding indebtedness. As of September 30, 2008, the Company was not in compliance with the ratio of indebtedness to tangible net worth covenant under the loan documents. The Company and its joint venture partner have agreed to repay the $7.4 million of outstanding indebtedness in December 2008, which would require a cash expenditure of approximately $3.7 million (plus accrued and unpaid interest) from the Company.

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 Nine Months Ended September 30, 2008 to Nine Months Ended September 30, 2007

Net cash provided by (used in) operating activities increased to a source of $43.5 million in the 2008 period from a use of $94.6 million in the 2007 period. The change was primarily as a result of (i) a decrease in real estate inventories-owned of $99.6 million in the 2008 period from an increase of $156.0 million in the 2007 period, (ii) an increase in accrued expenses of $1.6 million in the 2008 period compared to a decrease of $44.3 million in the 2007 period, (iii) a decrease in receivables of $15.5 million in the 2008 period compared to a decrease of $88.2 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 $30.2 million in the 2007 period, (v) impairment loss on real estate assets of $68.0 million in the 2008 period compared to $146.7 million in the 2007 period and (vi) net loss of $80.8 million in the 2008 period compared to net loss of $163.5 million in the 2007 period.

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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. The decrease in accrued expenses is partially attributable to (i) 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 increase in accrued interest of $8.3 million during the 2008 period from a balance of $13.7 million as of December 31, 2007 compared to $22.0 million as of September 30, 2008. Comparatively, during the 2007 period, the net change in accrued expenses consisted of a net decrease in accrued bonus expense of $28.9 million during the 2007 period from a balance of $39.4 million as of December 31, 2006 compared to $10.5 million as of September 30, 2007 and (ii) a net decrease in income taxes payable of $7.3 million during the 2007 period from a balance of $4.1 million as of December 31, 2006 compared to $(3.2) million as of September 30, 2007. The changes identified above during the nine months of the periods ending September 30, 2008 and 2007 are recurring in nature and are attributable to the timing of interest and 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 $15.9 million during the 2008 period from a balance of $19.2 million as of December 31, 2007 to a balance of $3.3 million as of September 30, 2008, compared to a decrease of $42.3 million during the 2007 period, from a balance of $47.3 million as of December 31, 2006 to a balance of $5.0 million as of September 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 differences in (i) impairment loss on real estate assets, (ii) (benefit) provision for income taxes and (iii) net loss from the 2007 period to the 2008 period are discussed above in Item 2 — Results of Operations.

The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. Thus, the Company may have bought and developed land on which it cannot profitably build and sell homes. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, the Company may have to sell homes at significantly lower margins or at a loss.

Net cash used in investing activities decreased to $0.3 million in the 2008 period from $6.9 million in the 2007 period. The change was a result of (i) 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 and (ii) the net cash paid for the purchase of partner’s interest in unconsolidated joint ventures of $1.5 million in the 2007 period.

Net cash (used in) provided by financing activities decreased to a use of $1.3 million in the 2008 period from a source of $97.2 million in the 2007 period, primarily as a result of minority interest distributions of $3.9 million in the 2008 period compared to $19.9 million in the 2007 period and net borrowings on notes payable of $2.6 million in the 2008 period compared to net borrowings on notes payable of $117.0 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.

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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 Sept 30, 2008	Backlog at Sept 30, 2008(2)(3)	Lots Owned as of Sept 30, 2008(4)	Homes Closed for the Year Ended Sept 30, 2008	Sales Price Range(5)
SOUTHERN CALIFORNIA REGION
SAN DIEGO/INLAND EMPIRE DIVISION
Wholly-Owned:
San Diego:
Promenade	2006	168	80	0	88	14	$370,000 - 480,000
Alcala Del Sur	2005	83	83	0	0	2	$660,000 - 710,000
Pasado Del Sur	2009	89	0	20	25	0	$535,000 - 575,000
Maybeck	2006	51	51	0	0	13	$630,000 - 710,000
Sunset Cove	2007	35	35	0	0	6	$420,000 - 460,000
Santee:
Altair	2008	85	17	23	68	17	$277,000 - 338,000
Riverside County:
Parkside, Corona	2007	122	94	24	28	25	$441,000 - 559,000
Serafina, North Corona	2007	314	221	24	93	31	$265,000 - 319,000
Bridle Creek, Corona	2003	274	241	20	33	6	$436,000 - 560,000
Savannah at Harveston Ranch, Temecula	2005	162	136	26	26	3	$257,000 - 220,000
San Bernardino County:
Adelina, Fontana	2008	109	18	13	91	18	$265,000 - 295,000
Rosabella, Fontana	2007	114	26	7	88	22	$249,000 - 286,000
Amador, Rancho Cucamonga	2007	69	27	9	42	10	$278,000 - 335,000
Vintner's Grove, Rancho Cucamongo
Sollara SFD	2007	45	11	14	34	2	$375,000 - 405,000
Canela Triplex	2007	63	15	14	48	2	$260,000 - 321,000
Chapman Heights, Yucaipa
Braeburn	2005	113	107	6	6	15	$425,000 - 515,000
Crofton	2005	140	140	0	0	4	$403,000 - 433,000
Vista Bella	2012	108	0	0	108	0	$255,000 - 286,000
Redcort	2012	90	0	0	90	0	$284,000 - 309,000
Total Wholly-Owned:		2,234	1,302	200	868	190
Joint Ventures:
San Diego:
Ravenna	2005	199	199	0	0	1	$453,000 - 513,000
Treviso	2005	186	164	20	22	10	$300,000 - 435,000
Total Joint Ventures:		385	363	20	22	11
TOTAL SAN DIEGO/INLAND EMPIRE DIVISION		2,619	1,665	220	890	201
ORANGE COUNTY/LOS ANGELES DIVISION
Wholly-Owned:
Irvine:
San Carlos	2007	143	39	12	1	19	$380,000 - 525,000
Ivy	2010	135	0	0	0	0	$390,000 - 445,000
Columbus Grove:
Lantana	2006	102	102	0	0	14	$765,000 - 840,000
Kensington	2006	63	63	0	0	11	$640,000 - 775,000
Tustin:
Columbus Grove/Columbus Square:
Clarendon	2007	102	102	0	0	2	$270,000 - 650,000
Astoria	2007	38	38	0	0	12	$725,000 - 850,000
Cambridge Lane	2007	156	99	37	57	8	$ 95,000 - 500,000
Ciara	2007	67	54	6	13	15	$1,000,000 - 1,200,000
Verandas	2007	44	44	0	0	18	$650,000 - 705,000

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Cumulative Units Closed as of Sept 30, 2008	Backlog at Sept 30, 2008(2)(3)	Lots Owned as of Sept 30, 2008(4)	Homes Closed for the Year Ended Sept 30, 2008	Sales Price Range(5)
San Clemente:
Alora	2008	13	13	0	0	13	$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	17	87	0	$395,000 - 505,000
Tradition	2008	53	22	16	31	22	$600,000 - 689,000
Hawthorne:
360 South Bay(6):
The Flats	2010	188	0	0	188	0	$435,000 - 615,000
The Lofts	2010	123	0	0	123	0	$460,000 - 680,000
The Rows	2010	94	0	0	94	0	$615,000 - 715,000
The Courts	2010	118	0	0	118	0	$560,000 - 695,000
The Gardens	2010	102	0	0	102	0	$665,000 - 860,000
Azusa:
Rosedale(6):
Gardenia	2010	147	0	0	81	0	$435,000 - 530,000
Sage Court	2010	176	0	0	64	0	$405,000 - 495,000
TOTAL ORANGE COUNTY/LOS ANGELES DIVISION		2,136	761	88	959	151
SOUTHERN CALIFORNIA REGION COMBINED TOTAL
Wholly-Owned		4,370	2,063	288	1,827	341
Joint Ventures		385	363	20	22	11
		4,755	2,426	308	1,849	352
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	128	15	39	11	$350,000 - 430,000
Vista Del Mar, Pittsburgh
Vineyard(6)	2007	155	14	2	141	13	$650,000 - 710,000
Victory(6)	2008	129	11	2	118	11	$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	55	14	41	13	$365,000 - 391,000
Twin Oaks	2006	92	34	5	58	9	$400,000 - 470,000
Sacramento County:
Big Horn, Elk Grove
Plaza Walk	2005	106	81	10	25	15	$250,000 - 300,000
Gallery Walk	2005	149	112	6	37	17	$200,000 - 235,000
Verona at Anatolia, Rancho Cordova	2005	79	79	0	0	12	$400,000 - 425,000
Marquee at Fair Oaks	2007	21	18	0	3	10	$250,000 - 360,000
Total Wholly-Owned		1,209	747	54	462	150

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Cumulative Units Closed as of Sept 30, 2008	Backlog at Sept 30, 2008(2)(3)	Lots Owned as of Sept 30, 2008(4)	Homes Closed for the Year Ended Sept 30, 2008	Sales Price Range(5)
Joint Ventures:
Contra Costa County:
Vista Del Mar, Pittsburgh
Villages	2007	102	36	7	66	12	$303,000 -375,000
Venue	2007	132	37	4	95	11	$363,000 -430,000
Monterey County:
East Garrison	2011	603	0	0	603	0	$239,000 -780,000
Total Joint Ventures:		837	73	11	764	23
NORTHERN CALIFORNIA REGION COMBINED TOTAL
Wholly-Owned		1,209	747	54	462	150
Joint Ventures		837	73	11	764	23
		2,046	820	65	1,226	173
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	$141,000 -183,000
Lehi Crossing, Mesa	2012	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	$245,000 -436,000
Lyon’s Gate, Gilbert:
Pride	2006	650	319	34	331	54	$158,000 -188,000
Savanna	2006	174	144	4	30	32	$200,000 -241,000
Sahara	2006	169	136	6	33	34	$236,000 -290,000
Acacia	2007	365	63	15	302	41	$189,000 -245,000
Future Products	2009	213	0	0	213	0
Total Wholly-Owned:		5,716	1,078	59	4,310	171
Joint Ventures:
Maricopa County
Circle G at the Church Farm North		1,745	0	0	1,745	0
Total Joint Ventures:		1,745	0	0	1,745	0
ARIZONA REGION TOTAL		7,461	1,078	59	6,055	171
NEVADA REGION
Wholly-Owned:
Clark County
Summerlin, Las Vegas
Kingwood Crossing	2006	100	79	12	21	19	$385,000 -471,000
North Las Vegas
The Cottages	2004	360	305	2	55	8	$172,000 -199,000
La Tierra	2006	67	60	0	7	7	$315,000 -345,000
Tierra Este	2008	126	6	2	120	6	$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	63	5	40	13	$305,000 -340,000
East Series II	2007	58	15	3	43	8	$299,000 -361,000
West Park, Las Vegas
Villas	2006	191	71	6	120	27	$283,000 -325,000
Courtyards	2006	113	56	7	57	19	$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	$610,000 -682,000

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Cumulative Units Closed as of Sept 30, 2008	Backlog at Sept 30, 2008(2)(3)	Lots Owned as of Sept 30, 2008(4)	Homes Closed for the Year Ended Sept 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	164	2	48	11	$	256,000 - 291,000
Move up Product	2011	91	0	0	91	0
Bella Sera	2005	129	101	5	28	9	$	312,000 - 352,000
Cascata Ancora	2007	118	53	2	65	16	$	196,000 - 218,000
Entrata	2007	99	17	2	82	11	$	177,000 - 199,000
Future Projects	2010	1,925	0	0	1,925	0
NEVADA REGION TOTAL		4,147	1,247	48	2,900	156
GRAND TOTALS:
Wholly-Owned		15,442	5,135	449	9,499	818
Joint Ventures		2,967	436	31	2,531	34
		18,409	5,571	480	12,030	852

(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 September 30, 2008, 456 represent homes completed or under construction and 24 represent homes not yet under construction.

(4) Lots owned as of September 30, 2008 include lots in backlog at September 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 September 30, 2008. The Company consolidated the purchase price of the lots in accordance with Interpretation No. 46, and considers the lots owned at September 30, 2008.

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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 flowed through to and was reported on the personal tax returns of its shareholders. The shareholders were responsible for paying the appropriate taxes based on this election. The Company did not pay any federal taxes under this election and was 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 nine months ended September 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. 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 September 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 7 of the Notes to Consolidated Financial Statements for a description of the Company’s transactions with related parties.

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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 requirement that 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.

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In February 2008, the FASB issued FSP No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP 140-3”). FSP 140-3 provides guidance on the accounting for a purchase of a financial asset from a counterparty and contemporaneous financing of the acquisition through repurchase agreements with the same counterparty. Under this guidance, the purchase and related financing are linked, unless all of the following conditions are met at the inception of the transaction: (i) the purchase and corresponding financing are not contractually contingent; (ii) the repurchase financing provides recourse; (iii) the financial asset and repurchase financing are readily obtainable in the marketplace and are executed at market rates; and (iv) the maturity of financial asset and repurchase are not coterminous. A linked transaction would require an analysis under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) to determine whether the transaction meets the requirements for sale accounting. If the linked transaction does not meet sale accounting requirements, the net investment in the linked transaction is to be recorded as a derivative with the corresponding change in fair value of the derivative being recorded through earnings. The value of the derivative would reflect changes in the value of the underlying debt investments and changes in the value of the underlying credit provided by the counterparty. The Company currently presents these transactions gross, with the acquisition of the financial assets in total assets and the related repurchase agreements as financings in total liabilities on the consolidated balance sheet. The interest income earned on the debt investments and interest expense incurred on the repurchase obligations are reported gross on the consolidated income statements. FSP 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the effect that this pronouncement will have on its 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.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with GAAP. This statement will be effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not anticipate the adoption of SFAS 162 will have a significant effect on its consolidated financial statements.

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

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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

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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 December 31, 2007, except as stated below:

HOMEBUILDING OPERATIONS

Recent Disruptions in the Financial Markets Could Adversely Affect Demand for the Company’s Products or Access to Capital

The home building industry can be greatly affected by macro economic factors, including changes in national, regional, and local economic conditions, as well as potential home buyers’ perceptions of such economic factors. These factors, including employment levels, income, prices, and credit availability and interest rates affecting homeowners, can adversely affect the residential real estate market. As discussed in this and prior reports, the residential real estate market has been particularly challenging over the last several quarters. The recent disruptions in the overall economy and, in particular, the credit and financial markets, have further deteriorated this environment and could further reduce consumer income, liquidity, credit and confidence in the economy, and result in further reductions in new and existing home sales. Further deterioration of the credit markets or the residential real estate market could be severely harmful to the Company’s financial position and results of operations and could adversely affect the Company’s liquidity or its ability to comply with the covenants under its indentures and credit facilities. There can be no assurances that recent or future government responses to the disruptions in the financial markets will restore consumer confidence, stabilize such markets or increase liquidity and the availability of credit to consumers and businesses.

CONSTRUCTION SERVICES

Supply and labor shortages and other risks could increase costs and delay completion.

Construction services operations could be adversely affected by fluctuating prices and limited supplies of building materials as well as the cost and availability of trades personnel. These prices and supplies may be adversely affected by natural disasters and adverse weather conditions, which could cause increased costs and delays in construction that could have an adverse effect upon our construction services operations.

The Company is subject to changes in the demand for construction projects.

Individual markets can be sensitive to overall capital spending trends in the economy, financing and capital availability for real estate and competitive pressures on the availability and pricing of construction projects. These factors can result in a reduction in the supply of suitable projects, increased competition and reduced margins on construction contracts.

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The timing and funding of contracts and other factors could lead to unpredictable operating results.

Construction services operations are also subject to other risks and uncertainties, including the timing of new contracts and the funding of such awards; the length of time over which construction contracts are to be performed; cancellations of, or changes in the scope of, existing contracts; and the ability to meet performance or schedule guarantees and cost overruns.

Items 2, 3, 4 and 5.

Not applicable.

Item 6.    Exhibits

Exhibit No.	Description
10.1	Second Amendment Agreement dated as of September 2, 2008, by and between William Lyon Homes, Inc., a California Corporation (“Borrower”), and Comerica Bank (“Lender”).
10.2	Sixth Amendment to Amended and Restated Revolving Line of Credit Agreement dated as of September 17, 2008, by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California Banking Corporation (incorporated herein by reference to Exhibit 10.1 filed with the registrant’s Current Report on Form 8-K filed on September 24, 2008).
10.3	Ninth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of September 25, 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:  November 10, 2008	By:	/s/    MICHAEL D. GRUBBS
		MICHAEL D. GRUBBS Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)
Date:  November 10, 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	Second Amendment Agreement dated as of September 2, 2008, by and between William Lyon Homes, Inc., a California Corporation (“Borrower”), and Comerica Bank (“Lender”).
10.2	Sixth Amendment to Amended and Restated Revolving Line of Credit Agreement dated as of September 17, 2008, by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California Banking Corporation (incorporated herein by reference to Exhibit 10.1 filed with the registrant’s Current Report on Form 8-K filed on September 24, 2008).
10.3	Ninth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of September 25, 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

SECOND AMENDMENT AGREEMENT

This Second Amendment Agreement (this “Second Amendment Agreement”) is entered into as of September 2, 2008, by and between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), and COMERICA BANK (“Lender”). This Second Amendment Agreement is made with reference to the following facts:

RECITALS

A. Lender has made a revolving line of credit available to Borrower in the initial maximum outstanding principal amount of $50,000,000 (the “Loan”), pursuant to the terms of that certain Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of March 8, 2006 (as amended by the First Amendment Agreement described below and by this Second Amendment Agreement, the “Loan Agreement”). Capitalized terms used in this Second Amendment Agreement and not defined shall have the meanings assigned to such terms in the Loan Agreement.

B. Pursuant to that certain Amendment Agreement dated as of February 28, 2008, by and between Borrower and Lender (the “First Amendment Agreement”), the maximum available outstanding principal amount of the Loan was reduced to $35,000,000.

C. Subject to the terms and conditions contained in this Second Amendment Agreement, Borrower and Lender have agreed to modify the Loan Agreement and other Loan Documents as set forth herein.

D. As used in this Second Amendment Agreement, the term “Loan Documents” means the Loan Agreement, the Note, the Deeds of Trust, the other Security Documents, the Environmental Indemnity, the Guaranty, and the other “Loan Documents” described in the Loan Agreement. This Second Amendment Agreement and the “Short Forms,” “Additional Deeds of Trust” and “Additional Environmental Indemnities” described below shall also constitute Loan Documents.

AGREEMENT

NOW, THEREFORE, with reference to the foregoing Recitals and information, and in consideration of the mutual covenants and agreements contained in this Second Amendment Agreement, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender agree as follows:

1.    Recitals; Representations and Warranties. The above statement of facts set forth in the Recitals is true and correct, and the Recitals hereby are incorporated herein as an agreement of Borrower and Lender. Borrower hereby represents and warrants to Lender that (a) no Event of Default or Unmatured Event of Default has occurred or exists, and (b) all representations and warranties of Borrower contained in the Loan Agreement or in any of the other Loan Documents (as the Loan Agreement and such other Loan Documents are amended hereby) are true and correct as of the date hereof.

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2.    Amendments to Loan Agreement. Borrower and Lender hereby amend the Loan Agreement as follows:

2.1    The definition of “Home Advance Maturity Date(s)” set forth in Section 1.1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

“‘Home Advance Maturity Date(s)’ shall mean the applicable period of time during which a Home may remain in the Borrowing Base for the purposes of calculating the Borrowing Availability, as follows:

(a) With respect to Presold, High End Presold, Spec or High End Spec Homes, twelve (12) Calendar Months after the initial entry of such Presold, High End Presold, Spec or High End Spec Home into the Borrowing Base;

(b) With respect to High End Model Homes, thirty (30) Calendar Months after the initial entry of such High End Model Home into the Borrowing Base;

(c) With respect to Model Homes for all Qualified Projects other than the Qualified Projects commonly known as ‘Gallery Walk’ in Elk Grove, California, and ‘Plaza Walk’ in Elk Grove, California, thirty (30) Calendar Months after the initial entry of such Model Home into the Borrowing Base; and

(d) With respect to Model Homes for the Qualified Projects commonly known as ‘Gallery Walk’ in Elk Grove, California, and ‘Plaza Walk’ in Elk Grove, California, twenty-four (24) Calendar Months after the initial entry of such Model Home or High End Model Home into the Borrowing Base.”

2.2    The definition of “Maximum Aggregate Borrowing Base Concentrations” set forth in Section 1.1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

“‘Maximum Aggregate Borrowing Base Concentration(s)’ shall mean shall mean each and every one of the following:

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

(i) The aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Zoned Land, Lots and/or Homes for Qualified Projects located in the State of Arizona shall not exceed the lesser of (1) Twelve Million Two Hundred Fifty Thousand Dollars ($12,250,000.00), or (2) thirty-five percent (35%) of the then existing Commitment Amount; and

(ii) The aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Zoned Land, Lots and/or Homes for Qualified Projects located in the State of Nevada shall not exceed the lesser of

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(1) Twelve Million Two Hundred Fifty Thousand Dollars ($12,250,000.00), or (2) thirty-five percent (35%) of the then existing Commitment Amount.

(b) With respect to all Zoned Land and Lots to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Zoned Land, Entitled Land, High End Entitled Land, Lots Under Development and High End Lots Under Development for all Qualified Projects shall not exceed the lesser of (i) Twenty Million Dollars ($20,000,000.00), or (ii) sixty percent (60%) of the then existing Commitment Amount (‘Land Concentration Limitation’).

(c) With respect to all Zoned Land to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Zoned Land for all Qualified Projects shall not exceed the lesser of (i) Five Million Dollars ($5,000,000.00), or (ii) fifteen percent (15%) of the then existing Commitment Amount (‘Zoned Land Concentration Limitation’).

(d) With respect to all Entitled Land to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Entitled Land for all Qualified Projects shall not exceed the lesser of (i) Ten Million Dollars ($10,000,000.00), or (ii) thirty percent (30%) of the then existing Commitment Amount (‘Entitled Land Concentration Limitation’).

(e) With respect to all High End Entitled Land to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all High End Entitled Land for all Qualified Projects shall not exceed the lesser of (i) Seven Million Five Hundred Thousand Dollars ($7,500,000.00), or (ii) twenty-two percent (22%) of the then existing Commitment Amount (‘High End Entitled Land Concentration Limitation’).

(f) With respect to all Lots Under Development to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Lots Under Development for all Qualified Projects shall not exceed the lesser of (i) Twenty Million Dollars ($20,000,000.00), or (ii) sixty percent (60%) of the then existing Commitment Amount (‘Lots Under Development Concentration Limitation’).

(g) With respect to all High End Lots Under Development to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all High End Lots Under Development for all Qualified Projects shall not exceed the lesser of (i) Fifteen Million Dollars ($15,000,000.00), or (ii) forty-five percent (45%) of the then existing Commitment Amount (‘High End Lots Under Development Concentration Limitation’).

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(h) With respect to all High End Entitled Land and High End Lots Under Development to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all High End Entitled Land and High End Lots Under Development for all Qualified Projects shall not exceed the lesser of (i) Fifteen Million Dollars ($15,000,000.00), or (ii) forty-five percent (45%) of the then existing Commitment Amount (‘High End Land Concentration Limitation’).

(i) With respect to all Spec Homes to be included in the Borrowing Base for each and every Qualified Project financed hereunder other than the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’ in Elk Grove, California, the total number of Spec Homes shall not exceed the lesser of (i) twenty-five (25) Spec Homes, (ii) five (5) months’ appraised absorption for the applicable Project, or (iii) five (5) months’ actual absorption for the applicable Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for the applicable Project (‘Non-Elk Grove Spec Home Concentration Limitation’).

(j) With respect to all Spec Homes to be included in the Borrowing Base for the Qualified Project commonly known as ‘Gallery Walk’ in Elk Grove, California, the total number of Spec Homes shall not exceed the lesser of (i) twelve (12) Spec Homes, (ii) six (6) months’ appraised absorption for the Gallery Walk Project, or (iii) six (6) months’ actual absorption for the Gallery Walk Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for the Gallery Walk Project (‘Gallery Walk Spec Home Concentration Limitation’).

(k) With respect to all Spec Homes to be included in the Borrowing Base for the Qualified Project commonly known as ‘Plaza Walk’ in Elk Grove, California, the total number of Spec Homes shall not exceed the lesser of (i) ten (10) Spec Homes, (ii) five (5) months’ appraised absorption for the Plaza Walk Project, or (iii) five (5) months’ actual absorption for the Walk Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for the Plaza Walk Project (‘Plaza Walk Spec Home Concentration Limitation’). The Non-Elk Grove Spec Home Concentration Limitation, the Gallery Walk Spec Home Concentration Limitation and the Plaza Walk Spec Home Concentration Limitation are collectively referred to herein as the ‘Spec Home Concentration Limitation.’

(l) With respect to all High End Spec Homes to be included in the Borrowing Base, for each and every Qualified Project financed hereunder, the total number of High End Spec Homes shall not exceed the lesser of (i) fifteen (15) High End Spec Homes, (ii) four (4) months’ appraised absorption for the applicable Project, or (iii) four (4) months’ actual absorption for the applicable Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for the applicable Project (‘High End Spec Home Concentration Limitation’).

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(m) With respect to all Model Homes or High End Model Homes to be included in the Borrowing Base, for each and every Qualified Project financed hereunder, the total number of Model Homes or High End Model Homes, as applicable, shall not exceed five (5) (‘Model Home Concentration Limitation’).

(n) With respect to any one Qualified Project, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for such Qualified Project shall not exceed Twenty-five Million Dollars ($25,000,000.00).

(o) With respect to all attached condominium Homes for all Qualified Projects other than the Qualified Projects commonly known as ‘Promenade North’ in San Diego, California, ‘Cambridge Lane’ in Tustin, California, and ‘Gallery Walk’ in Elk Grove, California, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all such attached condominium Homes shall not exceed the lesser of (i) Fifteen Million Dollars ($15,000,000.00), or (ii) forty-five percent (45%) of the then existing Commitment Amount.

(p) With respect to all attached condominium Homes in those Qualified Projects commonly known as ‘Promenade North’ in San Diego, California and ‘Cambridge Lane’ in Tustin, California, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all such attached condominium Homes (i) for each such Qualified Project shall not exceed the lesser of (A) Fifteen Million Dollars ($15,000,000.00), or (B) forty-five percent (45%) of the then existing Commitment Amount, and (ii) for both such Qualified Projects in the aggregate shall not exceed the lesser of (A) Twenty-Five Million Dollars ($25,000,000.00), or (B) seventy-two percent (72%) of the then existing Commitment Amount.

(q) With respect to all attached condominium Homes in the Qualified Project commonly known as ‘Gallery Walk’ in Elk Grove, California, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all such attached condominium Homes shall not exceed Three Million Dollars ($3,000,000.00).

(r) With respect to all Homes in the Qualified Project commonly known as ‘Plaza Walk’ in Elk Grove, California, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all such Homes shall not exceed Three Million Dollars ($3,000,000.00).

(s) With respect to all High End Homes to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all such High End Homes shall not exceed the lesser or (i) Twenty Million Dollars ($20,000,000.00), or (ii) sixty percent (60%) of the then existing Commitment Amount.”

2.3    The subheadings entitled “ZONED LAND”, “ENTITLED LAND”, “LOTS UNDER DEVELOPMENT” and “SPEC HOMES” within the definition of “Maximum

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Allowed Advance” set forth in Section 1.1 of the Loan Agreement are hereby deleted in their entirety and replaced with the following new subheadings:

“– ZONED LAND: The sum of all Advances for Zoned Land shall not exceed (a) for all Qualified Projects other than the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’ in Elk Grove, California, the lesser of (i) fifty percent (50%) of Total Project Costs, or (ii) fifty percent (50%) of the Appraised Value for Zoned Land, subject to Lender’s approval, and (b) for the Qualified Projects commonly known as ‘Gallery Walk’ ‘Plaza Walk’ in Elk Grove, California, $0.”

“– ENTITLED LAND: The sum of all Advances for Entitled Land shall not exceed (a) for all Qualified Projects other than the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’ in Elk Grove, California, the lesser of (i) sixty-five percent (65%) of Total Project Costs, or (ii) fifty percent (50%) of the Appraised Value for Entitled Land, subject to Lender’s approval, and (b) for the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’ in Elk Grove, California, $0.”

“– LOTS UNDER DEVELOPMENT: The sum of all Advances for Lots Under Development shall not exceed (a) for all Qualified Projects other than the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’ in Elk Grove, California, the lesser of (i) eighty percent (80%) of Total Project Costs, or (ii) sixty-five percent (65%) of the Bulk Finished Lot Value for Lots Under Development, subject to Lender’s approval, and (b) for the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’ in Elk Grove, California, $0.”

“– SPEC HOMES: The sum of all Advances for Spec Homes (including Model Homes) shall not exceed (a) for all Qualified Projects other than the Model Homes within the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’ in Elk Grove, California, the lesser of (i) ninety percent (90%) of Total Project Costs, or (ii) eighty percent (80%) of the Base Appraised Value for such Homes, subject to Lender’s approval, and (b) for the Model Homes within the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’ in Elk Grove, California, the lesser of (i) eighty percent (80%) of Total Project Costs, or (ii) seventy percent (70%) of the Base Appraised Value for such Homes, subject to Lender’s approval.”

2.4    Section 4.5.4(h) of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

“(h) For all Spec Homes (including any Model Homes), Borrower shall not be entitled to include in the Borrowing Base at any one time any Spec Homes in violation of the Spec Home Concentration Limitation, which shall mean (i) for each and every Project financed hereunder other than the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’

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in Elk Grove, California, more Spec Homes than the lesser of (A) five (5) months’ appraised absorption for the Project, (B) five (5) months’ actual absorption for the Project, as determined by Lender from time to time based upon the actual prior six-month Spec Home sales average for the Project, or (C) twenty-five (25) Spec Homes, (ii) for the Qualified Project commonly known as ‘Gallery Walk’ in Elk Grove, California, more Spec Homes than the lesser of (A) six (6) months’ appraised absorption for the Gallery Walk Project, (B) six (6) months’ actual absorption for the Gallery Walk Project, as determined by Lender from time to time based upon the actual prior six-month Spec Home sales average for the Gallery Walk Project, or (C) twelve (12) Spec Homes, and (iii) for the Qualified Project commonly known as ‘Plaza Walk’ in Elk Grove, California, more Spec Homes than the lesser of (A) five (5) months’ appraised absorption for the Plaza Walk Project, (B) five (5) months’ actual absorption for the Plaza Walk Project, as determined by Lender from time to time based upon the actual prior six-month Spec Home sales average for the Plaza Walk Project, or (C) ten (10) Spec Homes.”

3.    Maximum Starts Ahead of Closings.

3.1    Notwithstanding anything to the contrary in the Loan Agreement, for the Qualified Project Commonly known as ‘Gallery Walk’ in Elk Grove, California, at any given time Lender shall have no obligation to advance funds for the construction of more than sixteen (16) Homes that have not closed escrow, and no more than three (3) buildings within the Gallery Walk Project may be under construction at any one time. Additionally, once Borrower has commenced construction of a building within the Gallery Walk Project, Borrower may not commence construction of a second building within the Gallery Walk Project until Lender determines that at least 50% of the Homes in the first building have become Presold Homes, and Borrower may not commence construction of a third building within the Gallery Walk Project until Lender has determined that (a) 100% of the Homes in the first building have become Presold Homes, (b) at least 80% of the Homes in the first building have closed escrow and (c) at least 50% of the Homes in the second building have become Presold Homes.

3.2    Notwithstanding anything to the contrary in the Loan Agreement, for the Qualified Project Commonly known as ‘Plaza Walk’ in Elk Grove, California, at any given time Lender shall have no obligation to advance funds for the construction of more than fifteen (15) Homes that have not closed escrow.

4.    Security Documents. Each Deed of Trust, and all other Security Documents, shall secure, in addition to all other indebtedness and obligations secured thereby, the payment and performance of all present and future indebtedness and obligations of Borrower under (a) this Second Amendment Agreement, (b) any and all amendments, modifications, renewals and/or extensions of the Loan Agreement, regardless of whether any such amendment, modification, renewal or extension is evidenced by a new or additional instrument, document or agreement, and (c) all other Loan Documents (other than the Guaranty and the Environmental Indemnity, the obligations under which continue to remain unsecured by each Deed of Trust), as amended by this Second Amendment Agreement and by the Short Forms.

5.    Definitions. Except as provided in this Second Amendment Agreement, all references in the Loan Agreement and in the other Loan Documents (a) to the Deeds of Trust shall mean the Deeds of Trust, as amended by this Second Amendment Agreement, (b) to the

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Loan shall mean the Loan, as the maximum principal amount thereof has been reduced pursuant to this Second Amendment Agreement, (c) to the Loan Agreement shall mean the Loan Agreement as amended by this Second Amendment Agreement, (d) to the Loan Documents shall mean the Loan Documents as such term is defined in this Second Amendment Agreement, and (e) to any particular Loan Document shall mean such Loan Document as modified by this Second Amendment Agreement or any document executed pursuant hereto.

6.    Conditions Precedent. Lender’s obligation to modify the terms of the Loan Agreement and the other Loan Documents as set forth herein is subject to the satisfaction of all of the following conditions precedent (any of which may be waived by Lender in its sole discretion):

6.1    Lender shall have received a fully-executed original of this Second Amendment Agreement (including an original of the executed Guarantor’s Consent attached hereto).

6.2    Lender have received an original of each Second Amendment Agreement (Short Form), each of even date herewith (collectively, the “Short Forms”), fully executed and acknowledged by Borrower and consented to by all applicable Subordinate Rights Holders.

6.3    For each of the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’ in Elk Grove, California, Lender have received an original Construction Deed of Trust, Security Agreement and Fixture Filing (With Assignment of Rents and Leases), each of even date herewith (collectively, the “Additional Deeds of Trust”), fully executed by Borrower and in recordable form.

6.4    For each of the Qualified Projects commonly known as ‘Gallery Walk’ and ‘Plaza Walk’ in Elk Grove, California, Lender have received an original Environmental Indemnity, each of even date herewith (collectively, the “Additional Environmental Indemnities”), fully executed by Borrower.

6.5    The Short Forms and the Additional Deeds of Trusts shall have been recorded in the official records of the counties in which each Project is located in accordance with Lender’s instructions to the Title Company, in addition to all other documents which Lender may reasonably request to be recorded.

6.6    Lender shall have received such endorsements to each existing Title Policy (or commitments by the Title Company to issue the same in form acceptable to Lender) as Lender shall reasonably request to insure the validity and continuing first position liens of the Deeds of Trust, as amended hereby, including without limitation a CLTA 110.5 endorsement (or its local equivalent).

6.7    Lender shall have received Title Policies (or commitments by the Title Company to issue the same in form acceptable to Lender) as Lender shall reasonably request to insure the validity and first position liens of the Additional Deeds of Trust.

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6.8    Lender shall have received current good standing certificates of Borrower issued by the California Secretary of State and the Secretary of State of each other state in which a Qualified Project included in the Borrowing Base is located.

6.9    No change shall have occurred in the financial condition of Borrower, Guarantor or any Project, which would have, in Lender’s sole judgment, a material adverse effect on such Project or on Borrower’s or Guarantor’s ability to repay the Loan or otherwise perform their respective obligations under the Loan Documents as of the date hereof.

6.10    No condemnation or adverse zoning or usage change proceeding shall have occurred or shall have been threatened against any Project; no Project shall have suffered any significant damage by fire or other casualty which has not been repaired; no law, regulation, ordinance, moratorium, injunctive proceeding, restriction, litigation, action, citation or similar proceeding or matter shall have been enacted, adopted, or threatened by any governmental authority, which would have, in Lender’s judgment, a material adverse effect on Borrower or any Project as of the date hereof.

6.11    The representations and warranties contained in the Loan Agreement and in all other Loan Documents shall remain true and correct as of the date hereof.

6.12    No Event of Default or Unmatured Event of Default shall have occurred and be continuing.

6.13    Borrower shall have reimbursed Lender for all costs and expenses incurred by Lender in connection with the transaction contemplated by this Second Amendment Agreement, including title insurance costs, recording fees, and attorneys’ fees and costs.

7.    Non-Impairment. Except as expressly provided herein, nothing in this Second Amendment Agreement shall alter or affect any provision, condition or covenant contained in the Loan Agreement or the other Loan Documents or affect or impair any rights, powers or remedies thereunder, and the parties hereto intend that the provisions of the Loan Agreement and the other Loan Documents shall continue in full force and effect except as expressly modified hereby.

8.    Miscellaneous. This Second Amendment Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflict of laws, and any applicable laws of the United States of America. The headings used in this Second Amendment Agreement are for convenience only and shall be disregarded in interpreting the substantive provisions of this Second Amendment Agreement. If any provision of this Second Amendment Agreement shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that portion shall be deemed severed herefrom and the remaining parts shall remain in full force as though the invalid, illegal or unenforceable provision had never been a part hereof. As used in this Second Amendment Agreement, the term “include(s)” shall mean “include(s), without limitation,” and the term “including” shall mean “including, but not limited to.”

9.    Integration; Interpretation. The Loan Documents, including this Second Amendment Agreement, contain or expressly incorporate by reference the entire agreement of

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the parties with respect to the matters contemplated therein, and supersede all prior negotiations. No reference to this Second Amendment Agreement is necessary in any instrument or document at any time referring to a Loan Document. Any reference to a Loan Document (including in any other Loan Document) shall be deemed a reference to such document as amended hereby.

10.    Counterparts. This Second Amendment Agreement may by executed in any number of counterparts, all of which shall be considered one in the same instrument. The original, executed signature pages of exact copies of this Second Amendment Agreement may be attached to one of such copies to form one document.

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IN WITNESS WHEREOF, Borrower and Lender have executed this Second Amendment Agreement as of the day and year first set forth above.

BORROWER: WILLIAM LYON HOMES, INC., a California corporation
By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President
LENDER: COMERICA BANK
By:	/s/ David Plattner
	Name:	David Plattner
	Its:	V.P.-West Market

S-1

GUARANTOR’S CONSENT

WILLIAM LYON HOMES, a Delaware corporation (“Guarantor”), hereby consents to the terms, conditions and provisions of the foregoing Second Amendment Agreement (“Second Amendment Agreement”) and the transactions contemplated by the Second Amendment Agreement. Guarantor hereby reaffirms the full force and effectiveness of its Guaranty dated as of March 8, 2006 (the “Guaranty”), in light of the Amendment, including without limitation all waivers, authorizations and agreements set forth therein. Guarantor hereby confirms and agrees that all references in the Guaranty to the Loan Agreement and other Loan Documents shall hereafter be deemed references to the Loan Agreement and other Loan Documents as amended by the Amendment. In addition, Guarantor acknowledges that its obligations under the Guaranty are separate and distinct from those of Borrower on the Loan.

Dated as of September 2, 2008

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

CONSENT

EX-10.3

Exhibit 10.3

NINTH MODIFICATION AGREEMENT TO BORROWING BASE REVOLVING LINE OF CREDIT AGREEMENT

DATE:	September 25, 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 Ninth 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, by a Seventh Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of March 12, 2008, and by an Eighth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of June 5, 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 Commitment Amount is hereby reduced from $50,000,000 to $40,000,000. 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    Section 2.8(a) of the Loan Agreement is hereby deleted in its entirety and restated to provide as follows:

“(a) Facility Fee. A facility fee at a per annum rate equal to one half of one percent (0.50%) of the full Commitment Amount shall be due and payable semi-annually in advance commencing on June 28, 2008 and on the same day of each December and June thereafter.

2.3    Notwithstanding any provision of any Loan Document or applicable law to the contrary, including, without limitation, Section 10.10 of the Loan Agreement, in no event shall Bank, whether with or without demand or notice to Borrower, exercise any right to set-off and apply deposits (whether certificates of deposit, demand, general, savings, special, time, or other, and whether provisional or final) held by Bank for Borrower or any other liabilities or other obligations of Bank to Borrower against or to the Obligations. By its signature below, Bank hereby waives any right it may have to set-off and apply such deposits or other liabilities against or to the Obligations.

2.4    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.

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

3.     RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.

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

4.     CONDITIONS PRECEDENT.

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

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

4.2    Bank shall have received 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]

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

CONSENT AND AGREEMENT OF GUARANTOR

With respect to that certain Ninth 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/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
	By:	/s/ Richard D. Robinson
	Name:	Richard D. Robinson
	Title:	Senior Vice President

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: November 10, 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: November 10, 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 September 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

November 10, 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 September 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

November 10, 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.