SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2008

OR

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

For the transition period from                      to                     

Commission File Number 001-31625

WILLIAM LYON HOMES

(Exact name of registrant as specified in its charter)

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

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

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

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

None

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

None

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The number of shares of Common Stock outstanding as of March 20, 2009 was 1,000.

DOCUMENTS INCORPORATED BY REFERENCE

None

WILLIAM LYON HOMES

INDEX

		Page No.
	PART I
Item 1.	Business	2
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	23
Item 3.	Legal Proceedings	23
Item 4.	Submission of Matters to a Vote of Security Holders	24
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
Item 6.	Selected Financial Data	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 8.	Financial Statements and Supplementary Data	60
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	60
Item 9A.	Controls and Procedures	60
Item 9B.	Other Information	62
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	63
Item 11.	Executive Compensation	66
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	72
Item 13.	Certain Relationships and Related Transactions, and Director Independence	73
Item 14.	Principal Accountant Fees and Services	75
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	77
	Index to Financial Statements	86

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

Investors are cautioned that certain statements contained in this Annual Report on Form 10-K, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts 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, worsening in general economic conditions either nationally or in regions in which the Company operates, worsening in the markets for residential housing, further decline in real estate values resulting in further impairment of the company’s real estate assets, volatility in the banking industry and credit markets, 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 obligations at their maturity, the timing of receipt of regulatory approvals and the opening of projects and the availability and cost of land for future growth. These and other risks and uncertainties are more fully described in Item 1A. “Risk Factors”. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those factors or conditions described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company’s past performance or past or present economic conditions in the Company’s housing markets are not indicative of future performance or conditions. Investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to projections over time unless required by federal securities law.

1

PART I

Item 1.    Business

General

William Lyon Homes, a Delaware corporation, and subsidiaries (the “Company”) are primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of the Company’s predecessor in 1956, the Company and its joint ventures have sold over 72,000 homes. The Company conducts its homebuilding operations through four reportable operating segments (Southern California, Northern California, Arizona and Nevada). For 2008, approximately 66% of the home closings of the Company and its joint ventures were derived from its California operations. For the year ended December 31, 2008, on a consolidated basis the Company had revenues from home sales of $468.5 million and delivered 1,260 homes, which includes $22.3 million of revenue and 64 homes from consolidated joint ventures (see Note 2 of “Notes to Consolidated Financial Statements”).

The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets, although it primarily emphasizes sales to the entry-level and move-up home buyer markets. At December 31, 2008, the Company marketed its homes through 28 sales locations. In 2008, the average sales price for consolidated homes delivered was $371,800. Base sales prices for actively selling projects in 2008, including affordable projects, ranged from $95,000 to $1,725,000.

As of December 31, 2008, the Company and its consolidated joint ventures owned approximately 11,605 lots and had options to purchase an additional 727 lots. As used in this Annual Report on Form 10-K, “entitled” land has a development agreement and/or vesting tentative map, or a final recorded plat or map from the appropriate county or city government. Development agreements and vesting tentative maps generally provide for the right to develop the land in accordance with the provisions of the development agreement or vesting tentative map unless an issue arises concerning health, safety or general welfare. The Company’s sources of developed lots for its homebuilding operations are (1) development of master-planned communities, primarily through both consolidated and unconsolidated joint ventures at the current time, and (2) purchase of smaller projects with shorter life cycles (merchant homebuilding). The Company estimates that its current inventory of lots owned and controlled is adequate to supply its homebuilding operations at current operating levels (including future land sales) for approximately six to eight years.

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

The Company had total consolidated revenues from operations of $526.1 million, $1.105 billion and $1.492 billion for the years ended December 31, 2008, 2007 and 2006, respectively. Homes closed by the Company, including its joint ventures, were 1,260, 2,182 and 2,887 for the years ended December 31, 2008, 2007 and 2006, respectively. Including its joint ventures, the Company’s dollar amount of backlog of homes sold but not closed as of December 31, 2008, was $80.8 million, a 25% decrease over the $107.9 million as of December 31, 2007. The cancellation rate of buyers who contracted to buy a home but did not close escrow was approximately 28% during 2008 and 33% during 2007.

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 receives fees and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved.

2

The Company’s operations are dependent to a significant extent on debt financing and, to a lesser extent, on joint venture financing. The Company’s principal credit sources are its 7 ⁵/8% Senior Notes, 10 ³/4% Senior Notes, 7 ¹/ 2% Senior Notes (collectively the “Senior Notes”), secured revolving credit facilities, construction notes payable, and land banking transactions. At December 31, 2008, the outstanding principal amount of the 7 ⁵/8% Senior Notes was $133.8 million, the outstanding principal amount of the 10 ³/4% Senior Notes was $218.2 million and the outstanding principal amount of the 7 ¹/2% Senior Notes was $124.3 million. In October 2008, the Company purchased, in privately negotiated transactions, $71.9 million principal amount of its outstanding Senior Notes at a cost of $16.7 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $54.0 million. The secured revolving credit facilities are revolving lines of credit which have a maximum loan commitment of $185.0 million. The credit facilities have limitations on the amounts that can be borrowed at any time based on assets which are included in the credit facilities and the specified borrowings permitted under borrowing base calculations. The secured revolving credit facilities are secured by certain of the Company’s assets. At December 31, 2008, the outstanding principal amount under the secured revolving credit facilities was $72.0 million. The Company’s mortgage subsidiary has two revolving credit facilities to fund its mortgage operations, of which an aggregate $6.3 million was outstanding at December 31, 2008. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity” and Note 6 of “Notes to Consolidated Financial Statements” for more information relating to the revolving credit facilities of the Company and its mortgage subsidiary.

Beginning in 2006 and continuing through 2008, the homebuilding industry has experienced continued decreased demand for housing. These conditions were the result of a continued erosion of homebuyer confidence which was driven by increases in unemployment, limited availability of mortgage financing due to stress in the mortgage and credit markets, price instability, increasing foreclosures and increased levels of housing inventory in the market. The decline in demand has resulted in a decrease in new home orders, home closings, home sales revenue, average sales prices and gross margins for the Company. During 2008, the Company incurred impairment losses on real estate assets amounting to $135.3 million. The impairments were primarily attributable to slower than anticipated homes sales and lower than anticipated net revenue due to the decline in the homebuilding industry. The Company was required to write-down the book value of certain real estate assets in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”), as defined in Note 5 of “Notes to Consolidated Financial Statements”. During 2008, in response to the declining demand for housing in the homebuilding industry, management of the Company shifted its strategy to focus on generating positive cash flow, reducing overall debt levels and improving liquidity. Management of the Company intends to manage cash flow by reducing inventory levels, expenditures for speculative construction and land development activities.

In 2008, the Company temporarily suspended all development, sales and marketing activities at thirteen of its projects which are in various 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 ability of the Company to meet its obligations on its indebtedness will depend to a large degree on its future performance which in turn will be subject, in part, to factors beyond its control, such as prevailing economic conditions, mortgage and other interest rates, weather, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements, availability of labor and homebuilding materials, changes in governmental laws and regulations, and the availability and cost of land for future development.

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

3

The Company’s Markets

The Company is currently operating in four reportable operating segments: Southern California, Northern California, Arizona, and Nevada. Each of the segments has responsibility for the management of the Company’s homebuilding and development operations within its geographic boundaries.

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

	Total Revenue
	Year Ended December 31,
	2008		2007		2006
	(in thousands)
	(note 1)
Consolidated
Southern California(2)	$	323,446	$	780,213	$	852,528
Northern California(3)		95,084		102,432		232,101
Arizona(4)		49,187		134,153		208,083
Nevada(5)		58,361		88,559		199,509
	$	526,078	$	1,105,357	$	1,492,221
Unconsolidated joint ventures
Nevada(5)	$	—	$	—	$	17,046
	$	—	$	—	$	17,046

(1) The Company has organized its operations into geographic segments. Each segment has a management team led by a divisional president.

(2) The Southern California Segment consists of operations in Orange, Los Angeles, Riverside, San Bernardino and San Diego counties.

(3) The Northern California Segment consists of operations in Contra Costa, Sacramento, Placer, Monterey and Stanislaus counties.

(4) The Arizona Segment consists of operations in Maricopa county.

(5) The Nevada Segment consists of operations in Clark and Nye counties.

For financial information concerning segments, see the “Consolidated Financial Statements” and Note 3 of “Notes to Consolidated Financial Statements.”

LAND ACQUISITION AND DEVELOPMENT

As of December 31, 2008, the Company and its consolidated joint ventures owned approximately 11,605 lots and had options to purchase an additional 727 lots.

The Company estimates that its current inventory of lots owned and controlled is adequate to supply its homebuilding operations at current operating levels (including future land sales) for approximately six to eight years.

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

• Completing due diligence prior to committing to acquire land;

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

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

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

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

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

• Employing centralized control of approval over all land transactions;

• Homebuilding operations in the Southwest, particularly in the Company’s long established markets of California, Arizona and Nevada; and

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

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

HOMEBUILDING AND MARKET STRATEGY

The Company currently has a wide variety of product lines which enables it to meet the specific needs of each of its markets. Although the Company primarily emphasizes sales to the entry-level and move-up home markets, it believes that this diversified product strategy enables it to best serve a wide range of buyers and adapt quickly to a variety of market conditions. In order to reduce exposure to local market conditions, the Company’s sales locations are geographically dispersed. At December 31, 2008, the Company and its joint ventures had 28 sales locations and 13 locations that are temporarily suspended.

Because the decision as to which product to develop is based on the Company’s assessment of market conditions and the restrictions imposed by government regulations, homestyles and sizes vary from project to project. The Company’s attached housing ranges in size from 957 to 3,050 square feet, and the detached housing ranges from 1,157 to 5,485 square feet.

Due to the Company’s product and geographic diversification strategy, the prices of the Company’s homes also vary substantially. During 2008, base sales prices for the Company’s attached housing range from approximately $95,000 to $980,000 and base sales prices for detached housing range from approximately $139,000 to $1,725,000. On a consolidated basis, the average sales price of homes closed for the year ended December 31, 2008 was $371,800.

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

The Company contracts with a number of architects and other consultants who are involved in the design process of the Company’s homes. Designs are constrained by zoning requirements, building codes, energy

5

efficiency laws and local architectural guidelines, among other factors. Engineering, landscaping, master-planning and environmental impact analysis work are subcontracted to independent firms which are familiar with local requirements.

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

6

Description of Projects and Communities Under Development

The Company’s homebuilding projects usually take two to five years to develop. The following table presents project information relating to each of the Company’s homebuilding operating segments as of December 31, 2008 and only includes projects with lots owned as of December 31, 2008, lots consolidated in accordance with certain accounting principles as of December 31, 2008 or homes closed for the year ended December 31, 2008.

Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Cumulative Units Closed as of Dec 31, 2008	Backlog at Dec31, 2008(2)(3)	Lots Owned as of Dec 31, 2008(4)	Homes Closed for the Year Ended Dec 31, 2008	Sales Price Range(5)
SOUTHERN CALIFORNIA
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	25	0	20	25	0	$	535,000 - 575,000
Maybeck	2006	51	51	0	0	13	$	620,000 - 710,000
Sunset Cove	2007	35	35	0	0	6	$	420,000 - 460,000
Ravenna	2005	199	199	0	0	1	$	453,000 - 513,000
Treviso	2005	186	186	0	0	32	$	300,000 - 435,000
Santee:
Altair	2008	85	31	10	54	31	$	320,000 - 355,000
Riverside County:
Parkside, Corona	2007	122	120	2	2	51	$	436,000 - 529,000
Serafina, North Corona	2007	314	254	2	60	64	$	265,000 - 349,000
Bridle Creek, Corona	2003	264	259	5	5	24	$	436,000 - 560,000
Savannah at Harveston Ranch, Temecula	2005	162	154	7	8	21	$	254,000 - 306,000
San Bernardino County:
Adelina, Fontana	2008	109	18	13	91	18	$	230,000 - 255,000
Rosabella, Fontana	2007	114	26	12	88	22	$	240,000 - 270,000
Amador, Rancho Cucamonga	2007	69	38	2	31	21	$	235,000 - 285,000
Vintner's Grove, Rancho Cucamonga
Sollara SFD	2007	45	21	10	24	12	$	365,000 - 395,000
Canela Triplex	2007	63	28	3	35	15	$	255,000 - 310,000
Chapman Heights, Yucaipa
Braeburn	2005	113	113	0	0	21	$	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
Irvine:
San Carlos	2007	143	48	9	2	28	$	380,000 - 545,000
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	125	17	31	34	$	95,000 - 500,000
Ciara	2007	67	57	9	10	18	$	1,000,000 - 1,200,000
Verandas	2007	44	44	0	0	18	$	650,000 - 705,000
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

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Cumulative Units Closed as of Dec 31, 2008	Backlog at Dec31, 2008(2)(3)	Lots Owned as of Dec 31, 2008(4)	Homes Closed for the Year Ended Dec 31, 2008	Sales Price Range(5)
Los Angeles:
Arboreta at Rainbird
Vintage	2008	87	16	8	71	16	$	360,000 - 473,000
Tradition	2008	53	39	5	14	39	$	600,000 - 689,000
Hawthorne:
360 South Bay (6):
The Flats	2010	188	0	0	188	0	$	495,000 - 700,000
The Lofts	2010	123	0	0	123	0	$	525,000 - 775,000
The Rows	2010	94	0	0	94	0	$	700,000 - 810,000
The Courts	2010	118	0	0	118	0	$	635,000 - 790,000
The Gardens	2010	102	0	0	102	0	$	755,000 - 980,000
Azusa:
Rosedale (6):
Gardenia	2010	147	0	0	81	0	$	455,000 - 550,000
Sage Court	2010	176	0	0	64	0	$	420,000 - 515,000
SOUTHERN CALIFORNIA TOTAL		4,546	2,668	134	1,607	594
NORTHERN CALIFORNIA
Contra Costa County:
Seagate at Bayside, Hercules	2005	96	96	0	0	1	$	615,000 - 727,000
Rivergate I & II, Antioch	2006	167	141	11	26	24	$	300,000 - 380,000
Vista Del Mar, Pittsburgh
Villages	2007	102	40	3	62	16	$	303,000 - 354,000
Venue	2007	132	41	3	91	15	$	363,000 - 410,000
Vineyard (6)	2007	155	17	0	138	16	$	650,000 - 710,000
Victory (6)	2008	129	13	1	116	13	$	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	69	7	27	27	$	365,000 - 391,000
Twin Oaks	2006	92	37	6	55	12	$	400,000 - 470,000
Sacramento County:
Big Horn, Elk Grove
Plaza Walk	2005	106	90	8	16	24	$	250,000 - 300,000
Gallery Walk	2005	149	117	9	32	22	$	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	21	0	0	13	$	250,000 - 360,000
Monterey County:
East Garrison	2011	603	0	0	603	0	$	239,000 - 780,000
NORTHERN CALIFORNIA TOTAL		2,046	880	48	1,166	233
ARIZONA
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	$	139,000 - 179,000
Lehi Crossing, Mesa	2014	880	0	0	559	0	$	199,000 - 278,000
Rancho Mercado, Phoenix	2012	1,826	0	0	1,826	0	$	179,000 - 268,000
Hastings Property, Queen Creek	2011	631	0	0	631	0	$	223,000 - 397,000
Circle G at the Church Farm North	2011	1,745	0	0	1,745	0

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Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Cumulative Units Closed as of Dec 31, 2008	Backlog at Dec 31, 2008(2)(3)	Lots Owned as of Dec 31, 2008(4)	Homes Closed for the Year Ended Dec 31, 2008	Sales Price Range(5)
Lyon's Gate, Gilbert:
Pride	2006	650	339	17	311	74	$	173,000 - 188,000
Savanna	2006	174	152	3	22	40	$	200,000 - 245,000
Sahara	2006	169	141	2	28	39	$	234,000 - 300,000
Acacia	2007	365	75	12	290	53	$	190,000 - 252,000
Future Products	2009	213	0	0	213	0
ARIZONA TOTAL		7,437	1,123	34	5,993	216
NEVADA
Clark County
Summerlin, Las Vegas
Kingwood Crossing	2006	100	92	4	8	32	$	385,000 - 471,000
North Las Vegas
The Cottages	2004	360	307	1	53	10	$	152,000 - 179,000
La Tierra	2006	67	61	3	6	8	$	230,000 - 260,000
Tierra Este	2008	126	6	0	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	71	3	32	21	$	265,000 - 300,000
East Series II	2007	58	22	1	36	15	$	299,000 - 361,000
West Park, Las Vegas
Villas	2006	191	80	3	111	36	$	283,000 - 325,000
Courtyards	2006	113	61	4	52	24	$	330,000 - 380,000
Mesa Canyon, Las Vegas	2011	49	0	0	49	0	$	410,000 - 446,000
The Lyon Estates, Las Vegas	2012	129	0	0	129	0	$	635,000 - 700,000
Nye County
Mountain Falls, Pahrump:
Cascata	2005	147	137	0	10	0	$	216,000 - 238,000
Tramonto	2005	212	166	2	46	13	$	256,000 - 291,000
Move up Product	2011	91	0	0	91	0
Bella Sera	2005	129	106	2	23	14	$	262,000 - 301,000
Cascata Ancora	2007	118	56	1	62	19	$	161,000 - 183,000
Entrata	2007	99	23	0	76	17	$	142,000 - 164,000
Future Projects	2010	1,925	0	0	1,925	0
NEVADA TOTAL		4,147	1,308	24	2,839	217
GRAND TOTALS		18,176	5,979	240	11,605	1,260

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

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

(3) Of the total homes subject to pending sales contracts as of December 31, 2008, 217 represent homes completed or under construction and 23 represent homes not yet under construction.

(4) Lots owned as of December 31, 2008 include lots in backlog at December 31, 2008.

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

(6) All or a portion of the lots in this project are not owned as of December 31, 2008. The Company consolidated the purchase price of the lots in accordance with certain accounting principles, and considers the lots owned at December 31, 2008.

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Sales and Marketing

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

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

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

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

The Company’s homes are typically sold before or during construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain contingencies such as the buyer’s ability to qualify for financing. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company and its joint ventures’ projects was approximately 28% during 2008. Cancellation rates are subject to a variety of factors beyond the Company’s control such as the downturn in the homebuilding industry and current economic conditions. The Company’s and its joint ventures’ inventory of completed and unsold homes was 80 homes as of December 31, 2008.

Warranty

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

In connection with the limited warranty covering construction defects, the Company obtained an insurance policy which expires on December 31, 2010, unless amended or renewed. The Company has been informed by the insurance carrier that this insurance policy will respond to construction defect claims on homes that close

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

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

Sale of Lots and Land

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

Customer Financing — William Lyon Financial Services

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

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

In January 2009, the Company implemented a strategy to cease operations at William Lyon Financial Services, in which it will discontinue originating and funding homebuyer mortgage loans. In March 2009, the Company entered into a joint venture operating agreement with a lending institution, in which the Company would receive approximately 50% of the earnings of the joint venture. The joint venture was created to service the Company’s homebuyers by having access to a larger mortgage portfolio with the lending institution.

Information Systems and Controls

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

Regulation

The Company and its competitors are subject to various local, state and Federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation

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which imposes restrictive zoning and density requirements in order to limit the number of homes that can ultimately be built within the boundaries of a particular project. The Company and its competitors may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be implemented in the future in the states in which it operates. Because the Company usually purchases land with entitlements, the Company believes that the moratoriums would adversely affect the Company only if they arose from unforeseen health, safety and welfare issues such as insufficient water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. However, these are normally locked-in when the Company receives entitlements.

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

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

Competition

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

Corporate Organization and Personnel

The Company has organized its operations into geographic divisions — Southern California, Northern California, Arizona and Nevada. Each region has a management team led by a divisional president. Each of the Company’s operating divisions has responsibility for the Company’s homebuilding and development operations within the geographical boundaries of that division.

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

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As of December 31, 2008, the Company employed 391 full-time and 30 part-time employees, including corporate staff, supervisory personnel of construction projects, maintenance crews to service completed projects, as well as persons engaged in administrative, finance and accounting, mortgage, engineering, land acquisition, golf course operations, sales and marketing activities. In January 2009, the Company reduced its staffing levels to 287 full-time and 26 part-time employees.

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

Available Information

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

Item 1A.    Risk Factors

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

HOMEBUILDING OPERATIONS

Adverse changes in general economic conditions could reduce the demand for homes and, as a result, could negatively impact the Company’s results of operations.

The homebuilding industry continues to experience uncertainty and reduced demand for new homes, which negatively impacted the Company’s financial and operating results during the year ending December 31, 2008. Increased instability in the credit markets has contributed to the decline in demand for new housing. The conditions experienced during 2008 include, among other things: the announced existence of a national recession; increases in unemployment levels; continuing concerns over the effects of asset valuations on the banking system and credit markets; reduced availability of mortgage loan financing; reduced consumer confidence; the absence of home price stability; and continued declines in the value of new homes.

If the downturn in the homebuilding and mortgage lending industries continues or intensifies, or if the national economy weakens further and the recession continues or intensifies, the Company could continue to experience declines in the market value of the Company’s inventory and demand for the Company’s homes, which could have a significant negative impact on the Company’s gross margins and financial and operating results. Additionally, if energy costs should increase, demand for the Company’s homes could be adversely impacted, and the cost of building homes may increase, both of which could have a significant negative impact on the Company’s results of operations.

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

The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions such as levels of employment, consumer confidence and income, availability of financing for

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acquisitions, construction and permanent mortgages, interest rate levels, inflation, in-migration trends and demand for housing. An important segment of the Company’s customer base consists of move-up buyers, who often purchase homes subject to contingencies related to the sale of their existing homes. The difficulties facing these buyers in selling their homes during recessionary periods may adversely affect home sales. Moreover, during such periods, the Company may need to reduce sales prices and offer greater incentives to buyers to compete for sales that may result in reduced margins. Increases in the rate of inflation could adversely affect gross margins by increasing costs and expenses. In times of high inflation, demand for housing may decline and the Company may be unable to recover increased costs through higher sales.

In 2008, the homebuilding industry experienced continued decreased demand for housing, which has resulted in a decrease in new home orders, home closings, and average sales prices for the Company compared to the 2007 period. The Company has reduced sales prices and offered greater incentives to buyers to compete for sales that have resulted in reduced margins. If the decreased demand for housing continues, the Company may need to continue the trend of reducing sales prices to meet competitive and market pressures.

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. Continued softness or 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.

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

The Company is highly leveraged and, subject to restrictions, the Company may incur substantial additional indebtedness. The Company’s high level of indebtedness could have detrimental consequences, including the following:

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

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

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

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

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

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

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

In general, housing demand is negatively impacted by increases in interest rates and housing costs and the unavailability of mortgage financing as a result of declining customer credit quality, tightening of mortgage loan underwriting standards, or other factors. Most buyers finance their home purchases through third-party lenders providing mortgage financing. Over the last several months, many third-party lenders have significantly increased underwriting standards, mortgage interest rates have increased, and many subprime and other alternate mortgage products are no longer available in the marketplace. If these trends continue and mortgage loans continue to be difficult to obtain, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes will be adversely affected, which will adversely affect the Company’s results of operations through reduced home sales revenue, gross margin and cash flow, and the impact may be material.

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

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

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

In 2008, the Company incurred impairment losses on real estate assets in the amount of $135.3 million. The impairments were primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to the decline 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 5 of “Notes to Consolidated Financial Statements”. The impairment losses have a material adverse effect on the Company’s financial position. A continued slump in the housing market could result in additional writedowns. Any additional material write-downs of assets could have a material adverse effect on the Company’s financial condition and earnings.

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Increases in the Company’s cancellation rate could have a negative impact on the Company’s home gross margins and home sales revenue.

During the years ended December 31, 2008, 2007 and 2006, the Company’s cancellation rates remained high (28%, 33% and 33%) relative to the Company’s cancellation rates during 2005 and 2004 (16% and 17%), which has negatively impacted the number of closed homes, net home orders, home sales revenue and the Company’s results of operations, as well as the number of homes in backlog. Home order cancellations can result from a number of factors, including declines, and/or slow appreciation, in the market value of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, homebuyers’ inability to sell their existing homes, homebuyers’ inability to obtain suitable financing, including providing sufficient down payments, and adverse changes in economic conditions. Continued high levels of home order cancellations would have a negative impact on the Company’s home sales revenue and financial and operating results in future reporting periods.

The Company may be unable to maintain compliance with the financial covenants contained in credit facilities.

The Company’s credit facilities impose restrictions on operations, limit the amount of borrowings under the credit facilities and other sources, and require the Company to comply with various financial covenants. The financial covenants include a minimum net worth requirement and a minimum liquidity requirement.

Certain of these financial ratios are being negatively impacted by current market conditions, specifically reduced homebuilding gross margins, impairment losses on real estate assets and losses realized on the bulk sales of land. (See Item 7, “Management’s Discussion and Analysis of Financial Condition, Financial Condition and Liquidity, Revolving Credit Facilities” for further discussion).

There can be no assurance that the Company will remain in compliance with the financial covenants contained in the credit facilities if slowing market conditions continue. If the Company is unable to comply with any one or more of these financial covenants, and is unable to obtain a waiver for the noncompliance, the Company could be precluded from incurring additional borrowings under the credit facilities. In addition, the Company’s obligations to repay indebtedness outstanding under the credit facilities could be accelerated in full. Any of these events could materially impact the Company’s liquidity and ability to conduct its operations.

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

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

Any difficulty in obtaining sufficient capital for planned development expenditures could cause project delays and any such delay could result in cost increases and may adversely affect the Company’s sales and future results of operations and cash flows.

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If land is not available at reasonable prices, the Company’s homes sales revenue and results of operations could be negatively impacted and/or the Company could be required to scale back the Company’s operations in a given market.

The Company’s operations depend on the Company’s ability to obtain land for the development of the Company’s residential communities at reasonable prices and with terms that meet the Company’s underwriting criteria. The Company’s ability to obtain land for new residential communities may be adversely affected by changes in the general availability of land, the willingness of land sellers to sell land at reasonable prices given the deterioration in market conditions, competition for available land, availability of financing to acquire land, zoning, regulations that limit housing density, and other market conditions. If the supply of land appropriate for development of residential communities continues to be limited because of these factors, or for any other reason, the number of homes that the Company’s homebuilding subsidiaries build and sell may continue to decline. Additionally, the ability of the Company to open new projects could be impacted if the Company elects not to purchase lots under option contracts. To the extent that the Company is unable to purchase land timely or enter into new contracts for the purchase of land at reasonable prices, due to the lag time between the time the Company acquires land and the time the Company begins selling homes, the Company’s home sales revenue and results of operations could be negatively impacted and/or the Company could be required to scale back the Company’s operations in a given market.

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

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

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

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

The Company presently conducts all of its business in four geographic regions: Southern California, Northern California, Arizona and Nevada. Because the Company’s operations are concentrated in these geographic areas, the current economic downturn in these markets has caused housing prices and sales to decline, which has caused a material adverse effect on the Company’s business, results of operations, and financial condition.

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

The homebuilding industry is highly competitive. Homebuilders compete for, among other things, homebuying customers, desirable properties, financing, raw materials and skilled labor. The Company competes

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

The Company’s operating results are variable.

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

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

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

• product mix;

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

• inventory impairment charges due to market impact on sales prices;

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

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

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

• costs of material and labor.

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

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

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

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

California law provides that consumers can seek redress for patent (i.e., observable) defects in new homes within three or four years (depending on the type of claim asserted) from when the defect is discovered or should have been discovered. If the defect is latent (i.e., non-observable), consumers must still seek redress within three or four years from the date when the defect is discovered or should have been discovered, but in no event later than ten years after the date of substantial completion of the work on the construction. Consumers purchasing homes in Arizona and Nevada may also be able to obtain redress under state laws for either patent or latent defects in their new homes. Although the Company has obtained insurance for construction defect and subsidence claims, the Company may still be liable for damages, the cost of repairs, and/or the expense of

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litigation surrounding possible claims, including claims that arise out of uninsurable events, such as landslides or earthquakes, or other circumstances not covered by insurance and not subject to effective indemnification agreements with subcontractors.

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

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

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

The Company is also subject to a variety of local, state, federal and other statutes, ordinances, rules and regulations concerning the environment. The particular environmental laws which apply to any given homebuilding site vary according to the site’s location, its environmental conditions and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas, which could negatively affect the Company’s results of operations. Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties, may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs incurred by such parties in connection with the contamination. In addition, in those cases where an endangered species is involved, environmental rules and regulations can result in the elimination of development in identified environmentally sensitive areas.

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

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

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

Substantially all construction work is done by subcontractors with the Company acting as the general contractor. Accordingly, the timing and quality of construction depends on the availability and skill of the

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Company’s subcontractors. While the Company has been able to obtain sufficient materials and subcontractors during times of material shortages and believes that its relationships with suppliers and subcontractors are good, the Company does not have long-term contractual commitments with any subcontractors or suppliers. The inability to contract with skilled subcontractors at reasonable costs on a timely basis could have a material adverse effect on the Company’s business and results of operations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• incur additional indebtedness;

• pay dividends or make other distributions;

• make investments;

• sell assets;

• incur liens;

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

• enter into transactions with affiliates; and

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

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

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

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

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

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

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

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 the Company’s 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.

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These factors can result in a reduction in the supply of suitable projects, increased competition and reduced margins on construction contracts.

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.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Headquarters

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

Item 3.    Legal Proceedings

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 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 name the Company and the then directors of the Company as defendants. These complaints allege, 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 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.” A special committee of the Company’s Board of Director’s also

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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. Thereafter, the Delaware Supreme Court remanded the matter to the Chancery Court for further proceedings and, on December 1, 2008, the Chancery Court heard oral argument and reserved decision regarding the fee award to Plaintiffs’ counsel, which is 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 then 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 pending final resolution of all matters in the Delaware Action.

Other Legal Proceedings

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

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

Not applicable.

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PART II

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

The Company’s Common Stock was delisted from the NYSE in conjunction with the Tender Offer and Merger. The Company is now a privately held company. See Note 9 of “Notes to Consolidated Financial Statements.”

The Company has not paid any cash dividends on its Common Stock during the last three fiscal years and expects that for the foreseeable future it will follow a policy of retaining earnings in order to help finance its business. Payment of dividends is within the discretion of the Company’s Board of Directors and will depend upon the earnings, capital requirements, general economic conditions and operating and financial condition of the Company, among other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity” and Note 9 of “Notes to Consolidated Financial Statements.”

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Item 6.    Selected Financial Data

The following table sets forth certain of the Company’s historical financial data. The selected historical consolidated financial data as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006 have been derived from the Company’s audited consolidated financial statements and the related notes included elsewhere herein. The selected historical consolidated financial data as of December 31, 2006, 2005 and 2004 and for the years ended December 31, 2005 and 2004 have been derived from the Company’s audited financial statements for such years, which are not included herein. The selected historical consolidated financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical consolidated financial statements and accompanying notes included elsewhere herein.

	As of and for the Year Ended December 31,
	2008			2007			2006			2005			2004
	(dollars in thousands)
	(note 8)
Statement of Operations Data:
Operating revenue
Home sales	$	468,452		$	1,002,549		$	1,478,694		$	1,745,067		$	1,785,589
Lots, land and other sales(1)		39,512			102,808			13,527			111,316			36,258
Construction services(2)		18,114			—			—			—			—
		526,078			1,105,357			1,492,221			1,856,383			1,821,847
Operating costs
Cost of sales—homes		(439,276	)		(873,228	)		(1,160,614	)		(1,307,027	)		(1,327,057	)
Cost of sales—lots, land and other(1)		(47,599	)		(205,603	)		(16,524	)		(44,774	)		(23,173	)
Impairment loss on real estate assets(3)		(135,311	)		(231,120	)		(39,895	)		(4,600	)		—
Impairment loss on goodwill(4)		(5,896	)		—			—			—			—
Construction services(2)		(15,431	)		—			—			—			—
Sales and marketing		(40,441	)		(66,703	)		(72,349	)		(59,422	)		(58,792	)
General and administrative		(27,645	)		(37,472	)		(61,390	)		(90,045	)		(80,784	)
Other		(4,461	)		(903	)		(6,502	)		(2,450	)		(2,105	)
		(716,060	)		(1,415,029	)		(1,357,274	)		(1,508,318	)		(1,491,911	)
Equity in (loss) income of unconsolidated joint ventures		(3,877	)		304			3,242			4,301			(699	)
Minority equity in loss (income) of consolidated entities		10,446			(11,126	)		(16,914	)		(37,571	)		(49,661	)
Operating (loss) income		(183,413	)		(320,494	)		121,275			314,795			279,576
Gain on retirement of debt(5)		54,044			—			—			—			—
Interest expense, net of amounts capitalized(6)		(24,440	)		—			—			—			—
Financial advisory expenses		—			—			(3,165	)		(2,191	)		—
Other income, net		579			3,744			5,599			2,176			5,572
(Loss) income before benefit (provision) for income taxes		(153,230	)		(316,750	)		123,709			314,780			285,148
Benefit (provision) for income taxes		41,592			(32,658	)		(48,931	)		(124,149	)		(113,499	)
Net (loss) income	$	(111,638	)	$	(349,408	)	$	74,778		$	190,631		$	171,649
Balance Sheet Data:
Cash and cash equivalents	$	67,017		$	73,197		$	38,732		$	52,369		$	96,074
Real estate inventories
Owned(3)		754,489			1,061,660			1,431,753			1,303,476			1,059,173
Not owned		107,763			144,265			200,667			115,772			—
Investments in and advances to unconsolidated joint ventures		2,769			4,671			3,560			397			17,911
Total assets		1,044,843			1,375,328			1,878,595			1,691,002			1,274,562
Total debt		670,905			814,485			851,314			672,536			595,219
Minority interest		43,416			56,009			109,859			227,178			142,096
Stockholders’ equity		171,125			282,763			625,395			542,894			347,109
Operating Data (including unconsolidated joint ventures) (unaudited):
Number of net new home orders		1,221			1,855			2,202			3,321			3,371
Number of homes closed		1,260			2,182			2,887			3,196			3,471
Average sales price of homes closed	$	372		$	460		$	512		$	546		$	514
Cancellation rates		28	%		33	%		33	%		16	%		17	%
Backlog at end of period, number of homes(7)		240			279			606			1,291			1,166
Backlog at end of period, aggregate sales value(7)	$	80,750		$	107,893		$	295,505		$	691,627		$	623,578

(1) 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

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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. The loss of $40.3 million related to the portion of the land sales which closed in January 2008 has been reflected in the Consolidated Statement of Operations as Impairment Loss on Real Estate Assets for the year ended December 31, 2007.

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 two trusts 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 disinterested 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.

(2) The Company accounts for 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 $18,114,000 and $15,431,000, respectively, for the year ended December 31, 2008, in the accompanying consolidated statement of operations. The Company entered into construction management agreements to build and market homes 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.

(3) The results of operations for the years ended December 31, 2008, 2007, 2006 and 2005, include non-cash charges of $135.3 million, $231.1 million, $39.9 million and $4.6 million 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. 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 charge is reflected in impairment loss on real estate assets in the accompanying consolidated statements of operations. 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 is described more fully below in the section entitled “Impairment on Real Estate Inventories.”

(4) The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill, which is subject to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”). The Company reviews goodwill for impairment on an annual basis or when indicators of impairment exist. Evaluating goodwill for impairment involves the determination of the fair value of the Company’s reporting units in which the Company has recorded goodwill. A reporting unit is a component of an operating segment for which discrete financial information is available and reviewed by the Company’s management on a regular basis. Inherent in the determination of fair value are judgments and assumptions, including the interpretation of current economic conditions and market valuations. Due to continued deterioration in market conditions, the Company recorded an impairment charge on goodwill of $5,896,000 during the year ended December 31, 2008. The Company did not incur impairment charges on goodwill during the years ended December 31, 2007, 2006, 2005 and 2004.

(5) In October 2008, the Company purchased, in privately negotiated transactions, $71.9 million principal amount of its outstanding Senior Notes at a cost of $16.7 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $54.0 million.

(6) During the year ended December 31, 2008, the Company reported interest expense, due to a decrease in real estate assets which qualify for interest capitalization during the 2008 period.

(7) Backlog consists of homes sold under pending sales contracts that have not yet closed, some of which are subject to contingencies, including mortgage loan approval and the sale of existing homes by customers. There can be no assurance that homes sold under pending sales contracts will close. Of the total homes sold subject to pending sales contracts as of December 31, 2008, 217 represent homes completed or under construction and 23 represent homes not yet under construction. Backlog as of all dates is unaudited.

(8) 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. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements for the periods presented. The adoption of Interpretation No. 46 has not affected the Company’s consolidated net income.

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

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

The Company is primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of its predecessor in 1956, on a combined basis the Company has sold over 72,000 homes. The Company conducts its homebuilding operations through four reportable operating segments: Southern California, Northern California, Arizona and Nevada. For the year ended December 31, 2008, on a consolidated basis the Company had revenues from home sales of $468.5 million and delivered 1,260 homes, which includes $22.3 million of revenue and 64 delivered homes from consolidated 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. As described more fully in “Critical Accounting Policies—Variable Interest Entities” certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements as of and for the years ended December 31, 2008 and 2007. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of the accounting for variable interest entities did not affect the Company’s consolidated net income. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Income allocations and cash distributions to the Company from the unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements.

The Company evaluates homebuilding assets for impairments when indicators of potential impairments are present. Indicators of potential impairment include but are not limited to a decrease in housing market values and sales absorption rates. Given the current market conditions in the homebuilding industry, the Company evaluates all homebuilding assets for impairments each quarter. Comparing the 2008 period to the 2007 period, homebuilding revenues decreased 53% to $468.5 million in the 2008 period from $1.002 billion in the 2007 period, the average sales price for homes closed decreased 19% to $371,800 in the 2008 period from $459,500 in the 2007 period and net new home orders decreased 34% to 1,221 in the 2008 period from 1,855 in the 2007 period. During 2008, the Company recorded impairment losses on real estate assets of $135.3 million. If the Company continues to experience reduced absorption rates and reduced sales prices, the potential for additional inventory impairment will increase.

Results of Operations

Beginning in 2006 and continuing through 2008, the homebuilding industry has experienced continued decreased demand for housing. These conditions were the result of a continued erosion of homebuyer confidence which was driven by increases in unemployment, limited availability of mortgage financing due to stress in the mortgage and credit markets, price instability, increasing foreclosures and increased levels of housing inventory in the market. The decline in demand has resulted in a decrease in new home orders, home closings, home sales revenue, average sales prices and gross margins for the Company.

Comparisons of Years Ended December 31, 2008 and 2007

On a combined basis, the number of net new home orders for the year ended December 31, 2008 decreased 34% to 1,221 homes from 1,855 homes for the year ended December 31, 2007. The number of homes closed on a

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combined basis for the year ended December 31, 2008 decreased 42% to 1,260 homes from 2,182 homes for the year ended December 31, 2007. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 28% during 2008 and 33% during 2007. The inventory of completed and unsold homes was 80 homes as of December 31, 2008.

On a combined basis, the backlog of homes sold but not closed as of December 31, 2008 was 240 homes, down 14% from 279 homes as of December 31, 2007. Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed on a combined basis as of December 31, 2008 was $80.8 million, down 25% from $107.9 million as of December 31, 2007.

The Company’s average number of sales locations decreased to 44 for the year ended December 31, 2008, compared to 57 for the year ended December 31, 2007. The Company’s number of new home orders per average sales location decreased from 32.5 for the year ended December 31, 2007 to 27.8 for the year ended December 31, 2008.

	Year Ended December 31,				Increase (Decrease)
	2008		2007		Amount		%
Number of Net New Home Orders
Southern California	586		1,069		(483	)	(45	%)
Northern California	238		256		(18	)	(7	%)
Arizona	183		296		(113	)	(38	%)
Nevada	214		234		(20	)	(9	%)
Total	1,221		1,855		(634	)	(34	%)
Cancellation Rate	28	%	33	%	(5	)%

Each of the Company’s homebuilding segments experienced declines in net new home orders during the year ended December 31, 2008 and most notably in Southern California and Arizona. Net new home orders during the year ended December 31, 2008 in each of the Company’s segments were negatively impacted by the unstable economic conditions and continued down-turn in the homebuilding industry. Net new home orders during the twelve months ended December 31, 2008 decreased 34% on a consolidated basis, mostly due to the decline in housing demand as discussed previously.

Cancellation rates during the year ended December 31, 2008 decreased to 28% in the 2008 period from 33% during the 2007 period. The decline resulted from a decrease in the cancellation rate in Southern California to 30% in the 2008 period from 31% in the 2007 period, in Northern California to 29% in the 2008 period from 38% in the 2007 period, in Arizona to 22% in the 2008 period from 33% in the 2007 period and in Nevada to 28% in the 2008 period from 33% in the 2007 period. Although the cancellation rates declined in each operating segment, the rates continue to reflect the impact of the uncertain economic conditions and the lack of homebuyer confidence is consistent in all markets.

	Year Ended December 31,		Increase (Decrease)
	2008	2007	Amount		%
Average Number of Sales Locations
Southern California	19	29	(10	)	(34	)%
Northern California	10	13	(3	)	(23	)%
Arizona	4	5	(1	)	(20	)%
Nevada	11	10	1		10	%
Total	44	57	(13	)	(23	)%

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The average number of sales locations decreased in each homebuilding segment during the year ended December 31, 2008, primarily due to (i) management’s on-going efforts to manage cash outflows through, among other things, limiting the purchase of new lots, (ii) temporarily suspending the development of thirteen projects throughout the Company and (iii) the close-out of projects.

	December 31,		Increase (Decrease)
	2008	2007	Amount		%
Backlog (units)
Southern California	134	142	(8	)	(6	)%
Northern California	48	43	5		12	%
Arizona	34	67	(33	)	(49	)%
Nevada	24	27	(3	)	(11	)%
Total	240	279	(39	)	(14	)%

The Company’s backlog at December 31, 2008 decreased 14% from levels at December 31, 2007, primarily resulting from a deterioration in demand for new homes. The decrease in backlog during this period reflects a decrease in net new order activity of 34% to 1,221 homes in the 2008 period compared to 1,855 homes in the 2007 period and a decrease in number of homes closed by 42% to 1,260 in the 2008 period from 2,182 in the 2007 period.

	December 31,				Increase (Decrease)
	2008		2007		Amount			%
Backlog (dollars)
Southern California	$	55,065	$	71,792	$	(16,727	)	(23	)%
Northern California		13,669		13,674		(5	)	—	%
Arizona		6,177		15,627		(9,450	)	(61	)%
Nevada		5,839		6,800		(961	)	(14	)%
Total	$	80,750	$	107,893	$	(27,143	)	(25	)%

The dollar amount of backlog of homes sold but not closed on a combined basis as of December 31, 2008 was $80.8 million, down 25% from $107.9 million as of December 31, 2007. The significant decrease in backlog during this period reflects a decrease in net new order activity of 34% to 1,221 homes in the 2008 period compared to 1,855 homes in the 2007 period. In addition, the dollar amount of backlog is affected by recent average sales prices for new home orders, and the Company experienced a decrease of 13% in the average sales price of homes in backlog to $336,400 as of December 31, 2008 compared to $386,700 as of December 31, 2007. An increase in the Company’s cancellation rates generally has an adverse effect on the Company’s backlog.

In Southern California, the dollar amount of backlog decreased 23% to $55.1 million as of December 31, 2008 from $71.8 million as of December 31, 2007, which is attributable to a decrease of 45% in net new home orders in Southern California to 586 homes in the 2008 period compared to 1,069 homes in the 2007 period, and a decrease of 19% in the average sales price of homes in backlog to $410,900 as of December 31, 2008 compared to $505,600 as of December 31, 2007. In Southern California, the cancellation rate decreased to 30% for the period ended December 31, 2008 from 31% for the period ended December 31, 2007.

In Northern California, the dollar amount of backlog was unchanged at $13.7 million as of December 31, 2008 and $13.7 million as of December 31, 2007, which is attributable to a (i) decrease of 7% in net new home orders in Northern California to 238 homes in the 2008 period compared to 256 homes in the 2007 period, (ii) a decrease of 10% in the average sales price of homes in backlog to $284,800 as of December 31, 2008 compared to $318,000 as of December 31, 2007 and (iii) an increase in homes in backlog to 48 homes at December 31, 2008 from 43 homes at December 31, 2007. In Northern California the cancellation rate decreased to 29% for the period ended December 31, 2008 from 38% for the period ended December 31, 2007.

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In Arizona, the dollar amount of backlog decreased 61% to $6.2 million as of December 31, 2008 from $15.6 million as of December 31, 2007, which is attributable to a decrease of 38% in net new home orders in Arizona to 183 homes in the 2008 period compared to 296 homes in the 2007 period, and a decrease of 22% in the average sales price of homes in backlog to $181,700 as of December 31, 2008 compared to $233,200 as of December 31, 2007. In Arizona, the cancellation rate decreased to 22% for the period ended December 31, 2008 from 33% for the period ended December 31, 2007.

In Nevada, the dollar amount of backlog decreased 14% to $5.8 million as of December 31, 2008 from $6.8 million as of December 31, 2007, which is attributable to a decrease of 9% in net new home orders in Nevada to 214 homes in the 2008 period compared to 234 homes in the 2007 period, and a decrease of 3% in the average sales price of homes in backlog to $243,300 as of December 31, 2008 compared to $251,900 as of December 31, 2007. In Nevada, the cancellation rate decreased to 28% for the period ended December 31, 2008 from 33% for the period ended December 31, 2007.

The decrease in the dollar amount of backlog of homes sold but not closed as described above generally results in a reduction in operating revenues in the subsequent period as compared to the previous period. Revenue from sales of homes decreased 53% to $468.5 million during the period ended December 31, 2008 from $1.002 billion during the period ended December 31, 2007. A decrease in homebuilding revenues on a project basis is a potential indicator for impairment. If current market prices and home values continue to decrease and cancellation rates increase in the future, the Company’s revenue and liquidity would likely be negatively impacted, and the Company may be required to assess its homebuilding assets for further impairment.

	Year Ended December 31,		Increase (Decrease)
	2008	2007	Amount		%
Number of Homes Closed
Southern California	594	1,242	(648	)	(52	)%
Northern California	233	253	(20	)	(8	)%
Arizona	216	420	(204	)	(49	)%
Nevada	217	267	(50	)	(19	)%
Total	1,260	2,182	(922	)	(42	)%

During the year ended December 31, 2008, the number of homes closed decreased 42%, with the largest decrease in the Southern California and Arizona segments. The number of homes closed during the year was impacted by the uncertain economic conditions and continued down-turn in the homebuilding industry.

	Years Ended December 31,				Increase (Decrease)
	2008		2007		Amount			%
Home Sales Revenue
Southern California	$	280,611	$	696,655	$	(416,044	)	(60	)%
Northern California		80,292		102,432		(22,140	)	(22	)%
Arizona		49,188		114,903		(65,715	)	(57	)%
Nevada		58,361		88,559		(30,198	)	(34	)%
Total	$	468,452	$	1,002,549	$	(534,097	)	(53	)%

The decrease in homebuilding revenue of 53% to $468.5 million during the year ended December 31, 2008 from $1.002 billion during the year ended December 31, 2007 is primarily attributable to a decrease in the number of homes closed to 1,260 during the 2008 period from 2,182 during the 2007 period and a decrease in the average sales price of homes closed to $371,800 during the 2008 period from $459,500 during the 2007 period.

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	Year Ended December 31,				Increase (Decrease)
	2008		2007		Amount			%
Average Sales Price of Homes Closed
Southern California	$	472,400	$	560,900	$	(88,500	)	(16	)%
Northern California		344,600		404,900		(60,300	)	(15	)%
Arizona		227,700		273,600		(45,900	)	(17	)%
Nevada		268,900		331,700		(62,800	)	(19	)%
Total	$	371,800	$	459,500	$	(87,700	)	(19	)%

The average sales price of homes closed during the year ending December 31, 2008 decreased in each segment due to increased levels of sales incentives in response to lower demand for new homes, increased levels of competition, and increased home foreclosure levels.

	Year Ended December 31,				Increase (Decrease)
	2008		2007
Homebuilding Gross Margin Percentage
Southern California	7.5	%	11.5	%	(4.0	)%
Northern California	(2.6	)%	11.0	%	(13.6	)%
Arizona	12.7	%	24.6	%	(11.9	)%
Nevada	7.0	%	10.6	%	(3.6	)%
Total	6.2	%	12.9	%	(6.7	)%

Homebuilding gross margin percentage during the year ended December 31, 2008 decreased to 6.2% from 12.9% during the year ended December 31, 2007 which is primarily attributable to a decrease in the average sales price of homes closed of 19% from $459,500 in the 2007 period to $371,800 in the 2008 period offset by a 13% decrease in the average cost per home closed to $349,000 in the 2008 period from $400,000 in the 2007 period.

Homebuilding gross margins may be negatively impacted by a weak economic environment, which includes homebuyers’ reluctance to purchase new homes, increase in foreclosure rates, tightening of mortgage loan origination requirements, continued high cancellation rates, which could affect our ability to maintain existing home prices and/or home sales incentive levels and continued deterioration in the demand for new homes in our markets, among other things.

Lots, Land and Other

Land sales revenue was $39.5 million during the year ended December 31, 2008, compared with $102.8 million for the year ended December 31, 2007. 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 separate agreements with various affiliates of one of its joint venture equity partners (the “Equity Partner Agreements”). Pursuant to the Equity Partner Agreements, the Company agreed to sell to the 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. During the years ended December 31, 2008 and 2007, the Company recorded gross margin related to land sales of $(8.1) million and $(102.8) million, respectively. Included in these amounts are the write-off of land deposits and pre-acquisition costs of $6.6 million and $19.8 million, respectively, related to future projects which the Company has concluded are not currently economically viable.

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Construction Services Revenue.

Construction services revenue, which is all recorded in Southern California, was $18.1 million in the 2008 period with no comparable amount in the 2007 period. See Note 1 to “Notes to Consolidated Financial Statements” for further discussion.

	Year Ended December 31,				Increase (Decrease)
	2008		2007
Impairment Loss on Real Estate Assets
Land under development and homes completed and under construction
Southern California	$	39,925	$	105,480	$	(65,555	)
Northern California		24,063		35,653		(11,590	)
Arizona		1,086		—		1,086
Nevada		18,100		43,586		(25,486	)
Total	$	83,174	$	184,719	$	(101,545	)
Land Held-for-Sale or Sold
Southern California	$	—	$	41,145	$	(41,145	)
Northern California		27,394		5,256		22,138
Arizona		13,170		—		13,170
Nevada		11,573		—		11,573
Total		52,137		46,401		5,736
Total Impairment Loss on Real Estate Assets	$	135,311	$	231,120	$	(95,809	)

The impairment loss related to land under development and homes completed and under construction incurred during the year ended December 31, 2008, primarily resulted from decreases in home sales prices, due to increased sales incentives, and the continued deterioration in the homebuilding industry. In addition, during the 2008 period, the Company increased the discount rates used in the estimated discounted cash flow assessments from a range of 14% to 20% to a range of 17% to 23%. This change resulted from an increase in risks and uncertainties in the homebuilding industry due to the on-going deterioration in the market value of land and homes as well as homebuyer confidence in the economy.

The impairment loss related to land held-for-sale or sold primarily resulted from significant decreases in the fair market values of new homes being sold, as this has caused corresponding declines in the fair market values of land held by the Company. Also contributing to these impairments was the decision that the best economic value to the Company of these lots was to sell them in their current condition as opposed to holding the lots and eventually building and selling homes. The Company continues to evaluate land values to determine whether to hold for development or to sell at current prices, which may lead to additional impairment on real estate assets.

	Year Ended December 31,				Increase (Decrease)
	2008		2007		Amount			%
Sales and Marketing Expenses
Homebuilding
Southern California	$	23,909	$	40,165	$	(16,256	)	(41	)%
Northern California		8,742		11,650		(2,908	)	(25	)%
Arizona		3,265		8,074		(4,809	)	(60	)%
Nevada		4,525		6,814		(2,289	)	(34	)%
Total	$	40,441	$	66,703	$	(26,262	)	(39	)%

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Sales and marketing expense decreased $26.3 million to $40.4 million in the 2008 period from $66.7 million in the 2007 period primarily due to (i) a decrease of $2.3 million in sales model operating costs and (ii) a decrease of $9.6 million in advertising, due to the decrease in the number of models and a decrease in the average number of sales locations to 44 in the 2008 period from 57 in the 2007 period. In addition, direct selling expenses decreased approximately $14.4 million, including $3.5 million in sales commissions due to the reduction in units closed and reduction in revenue from home sales in 2008 as compared to 2007 and a decrease of $7.9 million in commissions paid to outside brokers in 2008 as compared to 2007.

	Year Ended December 31,				Increase (Decrease)
	2008		2007		Amount			%
General and Administrative Expenses
Homebuilding
Southern California	$	5,694	$	8,841	$	(3,147	)	(36	)%
Northern California		3,704		5,677		(1,973	)	(35	)%
Arizona		3,672		4,904		(1,232	)	(25	)%
Nevada		2,708		3,854		(1,146	)	(30	)%
Corporate		11,867		14,196		(2,329	)	(16	)%
Total	$	27,645	$	37,472	$	(9,827	)	(26	)%

General and administrative expenses decreased $9.8 million, or 26%, in the 2008 period to $27.6 million from $37.5 million in the 2007 period primarily as a result of a decrease in salaries and benefits expense of $11.8 million, offset by an increase in bonus expense of $1.4 million. As the number of active projects and the number of sales orders continues to decline, the Company has reduced staffing levels to support current operations. The bonus expense incurred in the 2008 period was a decision by management to award bonuses to employees in order to encourage employee retention, which were determined on a subjective basis.

Other Items

Other operating costs increased to $4.5 million in the 2008 period compared to $0.9 million in the 2007 period. The increase is due to property tax expense incurred on projects in which development is temporarily suspended of $2.0 million in the 2008 period, with no comparable amount in the 2007 period. In addition, operating losses realized by golf course operations increased to $1.3 million in the 2008 period from $0.9 million in the 2007 period.

Equity in loss of unconsolidated joint ventures increased to $3.9 million in the 2008 period from $0.3 million in the 2007 period, primarily due to an impairment loss on real estate assets of $4.5 million recorded at one of the Company’s joint venture projects, of which $2.25 million was allocated to the Company and to the other member of the joint venture.

Minority equity in loss (income) of consolidated entities decreased to minority equity in loss of $10.4 million in the 2008 period compared to minority equity in income of $(11.1) million in the 2007 period, primarily due to a decrease in the number of joint venture homes closed to 64 in the 2008 period from 219 in 2007. The minority equity in loss was attributable to impairment loss on real estate assets of $23.6 million recorded at two consolidated entities, of which $10.4 million was allocated to the minority member and $13.2 million was allocated to the Company.

In October 2008, the Company purchased, in privately negotiated transactions, $71.9 million principal amount of its outstanding Senior Notes at a cost of $16.7 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $54.0 million.

During the year ended December 31, 2008, the Company incurred interest related to its outstanding debt of $66,749,000 and capitalized $42,309,000, resulting in net interest expense of $24,440,000, with no comparable amount in the 2007 period, due to a decrease in real estate assets which qualify for interest capitalization during the 2008 period.

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	Years Ended December 31,						Increase (Decrease)
	2008			2007			Amount			%
(Loss) Income Before Benefit (provision) for Income Taxes
Homebuilding
Southern California	$	(79,966	)	$	(222,849	)	$	142,883		64	%
Northern California		(59,518	)		(55,243	)		(4,275	)	(8	)%
Arizona		(17,746	)		19,639			(37,385	)	(190	)%
Nevada		(37,225	)		(46,340	)		9,115		20	%
Corporate		41,225			(11,957	)		53,182		445	%
Total	$	(153,230	)	$	(316,750	)	$	163,520		52	%

In Southern California, (loss) income before benefit (provision) for income taxes decreased 64% to $(80.0) million in the 2008 period from $(222.8) million in the 2007 period. The decrease in loss is primarily attributable to (i) a decrease in impairment loss on real estate assets to $39.9 million in the 2008 period, from $146.6 million in the 2007 period, (ii) a decrease in revenues from home sales to $280.6 million in the 2008 period, from $696.7 million in the 2007 period, (iii) a decrease in sales and marketing expense to $23.9 million in the 2008 period from $40.2 million in the 2007 period and (iv) a decrease in general and administrative expenses to $5.7 million in the 2008 period from $8.8 million in the 2007 period.

In Northern California, (loss) income before benefit (provision) for income taxes increased 8% to $(59.5) million in the 2008 period from $(55.2) million in the 2007 period. The increase in loss is primarily attributable to (i) an increase in impairment loss on real estate assets to $51.5 million in the 2008 period from $40.9 million in the 2007 period, (ii) a decrease in revenues from home sales to $80.3 million in the 2008 period from $102.4 million in the 2007 period, (iii) a decrease in sales and marketing expense to $8.7 million in the 2008 period from $11.7 million in the 2007 period and (iv) a decrease in general and administrative expenses to $3.7 million in the 2008 period from $5.7 million in the 2007 period.

In Arizona, (loss) income before benefit (provision) for income taxes decreased to a loss of $(17.7) million in the 2008 period from income of $19.6 million in the 2007 period. The change is primarily attributable to (i) an increase in impairment loss on real estate assets to $14.3 million in the 2008 period with no comparable amount in the 2007 period, (ii) a decrease in revenues from home sales to $49.2 million in the 2008 period from $114.9 million in the 2007 period, offset by (i) a decrease in sales and marketing expense to $3.3 million in the 2008 period from $8.1 million in the 2007 period, and (ii) a 25% decrease in general and administrative expense to $3.7 million in the 2008 period compared to $4.9 million in the 2007 period.

In Nevada, (loss) income before benefit (provision) for income taxes decreased 20% to $(37.2) million in the 2008 period from $(46.3) million in the 2007 period. The decrease in loss is primarily attributable to (i) a decrease in impairment loss on real estate assets to $29.7 million in the 2008 period from $43.6 million in the 2007 period, (ii) a decrease in revenues from home sales to $58.4 million in the 2008 period from $88.6 million in the 2007 period, (iii) a decrease in sales and marketing expense to $4.5 million in the 2008 period from $6.8 million in the 2007 period and (iv) a decrease in general and administrative expense to $2.7 million in the 2008 period from $3.9 million in the 2007 period.

Income Taxes.

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 $41,602,000 as

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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. In January 2009, the Company received a tax refund for the amount of the deferred tax asset and related tax benefit. As of and during the year ended December 31, 2008, the deferred tax asset was reclassified to income tax refunds receivable and the tax benefit was recorded as benefit from provision for income taxes in the accompanying consolidated balance sheet and statement of operations.

Effective January 1, 2007, the Company made an election in accordance with federal and state regulations to be taxed as an “S” corporation rather than a “C” corporation. Under this election, the Company’s taxable income flows through to and is reported on the personal tax returns of its shareholders. The shareholders are responsible for paying the appropriate taxes based on this election. The Company does not pay any federal taxes under this election and is only required to pay certain state taxes based on a rate of approximately 1.5% of taxable income. As a result of this election, the Company’s provision for income taxes for the year ended December 31, 2007 includes 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, the provision reflects a valuation allowance of $771,000.

Net Loss.

As a result of the foregoing factors, net loss for the year ended December 31, 2008 was $111.6 million compared to net loss for the year ended December 31, 2007 of $349.4 million.

	December 31,		Increase (Decrease)
	2008	2007	Amount		%
Lots Owned and Controlled
Lots Owned
Southern California	1,607	2,579	(972	)	(38	)%
Northern California	1,166	1,763	(597	)	(34	)%
Arizona	5,993	6,226	(233	)	(4	)%
Nevada	2,839	3,056	(217	)	(7	)%
Total	11,605	13,624	(2,019	)	(15	)%
Lots Controlled(1)
Southern California	406	534	(128	)	(24	)%
Arizona	321	303	18		6	%
Total	727	837	(110	)	(13	)%
Total Lots Owned and Controlled	12,332	14,461	(2,129	)	(15	)%

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

Total lots owned and controlled has decreased 15% from 14,461 lots owned and controlled at December 31, 2007 to 12,332 lots at December 31, 2008. The decrease is primarily due to the closing of 1,260 homes during the 2008 period and the strategic sale of land in California during the period, offset by certain lot acquisitions during the period. The Company has implemented a strategy to limit the number of new land acquisitions due to the uncertainty regarding future demand for new homes.

Comparisons of Years Ended December 31, 2007 and 2006

On a combined basis, the number of net new home orders for the year ended December 31, 2007 decreased 15.8% to 1,855 homes from 2,202 homes for the year ended December 31, 2006. The number of homes closed on a combined basis for the year ended December 31, 2007 decreased 24.4% to 2,182 homes from 2,887 homes for the year ended December 31, 2006. On a combined basis, the backlog of homes sold but not closed as of December 31, 2007 was 279 homes, down 54.0% from 606 homes as of December 31, 2006.

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Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed on a combined basis as of December 31, 2007 was $107.9 million, down 63.5% from $295.5 million as of December 31, 2006. 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 2007 and 33% during 2006. The inventory of completed and unsold homes was 146 homes as of December 31, 2007.

The Company’s average number of sales locations increased to 57 for the year ended December 31, 2007, compared to 52 for the year ended December 31, 2006. The Company’s number of new home orders per average sales location decreased from 42.3 for the year ended December 31, 2006 to 32.5 for the year ended December 31, 2007.

	Year Ended December 31,				Increase (Decrease)
	2007		2006		Amount		%
Number of net new home orders
Southern California	1,069		1,096		(27	)	(3	)%
Northern California	256		306		(50	)	(16	)%
Arizona	296		388		(92	)	(24	)%
Nevada	234		412		(178	)	(43	)%
Total	1,855		2,202		(347	)	(16	)%
Cancellation Rate	33	%	33	%	—

Net new home orders during the year ended December 31, 2007 in each of the Company’s segments were impacted by declining demand for new housing. Cancellation rates during the year ended December 31, 2007 were unchanged at 33% in the 2007 period and the 2006 period. Although the cancellation rates are unchanged, the rates show the impact of the uncertain economic conditions and the lack of homebuyer confidence is consistent in all markets.

	Year Ended December 31,		Increase (Decrease)
	2007	2006	Amount		%
Average Number of Sales Locations
Southern California	29	23	6		26	%
Northern California	13	11	2		18	%
Arizona	5	6	(1	)	(17	)%
Nevada	10	12	(2	)	(17	)%
Total	57	52	5		10	%

The average number of sales locations increased in most segments during the year ended December 31, 2007, primarily due to the timing of the Company bringing new communities to the market.

	December 31,		Increase (Decrease)
	2007	2006	Amount		%
Backlog (units)
Southern California	142	315	(173	)	(55	)%
Northern California	43	40	3		8	%
Arizona	67	191	(124	)	(65	)%
Nevada	27	60	(33	)	(55	)%
Consolidated Total	279	606	(327	)	(54	)%

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The Company’s backlog at December 31, 2007 decreased 54% from levels at December 31, 2006, primarily resulting from deterioration in demand for new homes. The decrease in backlog during the period reflects a decrease in net new order activity of 16% to 1,855 in the 2007 period from 2,202 in the 2006 period and a decrease in number of homes closed by 24% to 2,182 in the 2007 period from 2,887 in the 2006 period.

	December 31,				Increase (Decrease)
	2007		2006		Amount			%
Backlog (dollars)
Southern California	$	71,792	$	200,273	$	(128,481	)	(64	)%
Northern California		13,674		20,972		(7,298	)	(35	)%
Arizona		15,627		51,852		(36,225	)	(70	)%
Nevada		6,800		22,408		(15,608	)	(70	)%
Total	$	107,893	$	295,505	$	(187,612	)	(64	)%

The dollar amount of backlog of homes sold but not closed on a combined basis as of December 31, 2007 was $107.9 million, down 64% from $295.5 million as of December 31, 2006. The significant decrease in backlog during this period reflects a decrease in net new order activity of 16% to 1,855 homes in the 2007 period compared to 2,202 homes in the 2006 period. In addition, the dollar amount of backlog is affected by recent average sales prices for new home orders, and the Company experienced a decrease of 21% in the average sales price of homes in backlog to $386,700 as of December 31, 2007 compared to $487,600 as of December 31, 2006. An increase in the Company’s cancellation rates generally has an adverse effect on the Company’s backlog. Cancellation rates were 33% in the 2007 period and 33% in the 2006 period.

In Southern California, the dollar amount of backlog decreased 64% to $71.8 million as of December 31, 2007 from $200.3 million as of December 31, 2006, which is attributable to a decrease in net new home orders in Southern California of 3% to 1,069 homes in the 2007 period compared to 1,096 homes in the 2006 period, and a decrease of 20% in the average sales price of homes in backlog to $506,000 as of December 31, 2007 compared to $636,000 as of December 31, 2006. In Southern California, the cancellation rate increased to 31% for the period ended December 31, 2007 from 30% for the period ended December 31, 2006.

In Northern California, the dollar amount of backlog decreased 35% to $13.7 million as of December 31, 2007 from $21.0 million as of December 31, 2006, which is attributable to a decrease in net new home orders in Northern California of 16% to 256 homes in the 2007 period compared to 306 homes in the 2006 period, and a decrease of 39% in the average sales price of homes in backlog to $318,000 as of December 31, 2007 compared to $524,000 as of December 31, 2006. In Northern California, the cancellation rate increased to 38% for the period ended December 31, 2007 from 35% for the period ended December 31, 2006.

In Arizona, the dollar amount of backlog decreased 70% to $15.6 million as of December 31, 2007 from $51.9 million as of December 31, 2006. The decrease is attributable to a decrease in net new home orders in Arizona of 24% to 296 homes in the 2007 period compared to 388 homes in the 2006 period, and a decrease of 14% in the average sales price of homes in backlog to $233,000 as of December 31, 2007 compared to $272,000 as of December 31, 2006. In Arizona, the cancellation rate decreased to 33.2% for the period ended December 31, 2007 from 46.0% for the period ended December 31, 2006.

In Nevada, the dollar amount of backlog decreased 70% to $6.8 million as of December 31, 2007 from $22.4 million as of December 31, 2006, which is attributable to a decrease in net new home orders in Nevada of 43% to 234 homes in the 2007 period compared to 412 homes in the 2006 period, and a decrease of 33% in the average sales price of homes in backlog to $252,000 as of December 31, 2007 compared to $374,000 as of December 31, 2006. In Nevada, the cancellation rate increased to 33% for the period ended December 31, 2007 from 24% for the period ended December 31, 2006.

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The decrease in the dollar amount of backlog of homes sold but not closed as described above generally results in a reduction in operating revenues in the subsequent period as compared to the previous period. Revenue from sales of homes, on a consolidated basis, decreased 32.2% to $1.002 billion during the period ended December 31, 2007 from $1.479 billion during the period ended December 31, 2006. A decrease in homebuilding revenues on a project basis is a potential indicator for impairment. If current market prices and home values continue to decrease and cancellation rates increase in the future, the Company’s revenue and liquidity would likely be negatively impacted requiring the Company to assess its homebuilding assets for further impairment.

	Year Ended December 31,		Increase (Decrease)
	2007	2006	Amount		%
Number of Homes Closed
Southern California	1,242	1,352	(110	)	(8	)%
Northern California	253	426	(173	)	(41	)%
Arizona	420	593	(173	)	(29	)%
Nevada	267	516	(249	)	(48	)%
Total	2,182	2,887	(705	)	(24	)%

The number of homes closed decreased 24%, during the year ended December 31, 2007, from 2,887 homes in the 2006 period to 2,182 in the 2007 period. The significant decrease occurred in Northern California, a 41% decrease from 426 homes in the 2006 period to 253 homes in the 2007, and in Nevada, a 48% decrease from 516 homes in the 2006 period to 267 in the 2007 period.

	Years Ended December 31,				Increase (Decrease)
	2007		2006		Amount			%
Home Sales Revenue
Homebuilding
Southern California	$	696,655	$	851,958	$	(155,303	)	(18	)%
Northern California		102,432		225,131		(122,699	)	(55	)%
Arizona		114,903		205,660		(90,757	)	(44	)%
Nevada		88,559		195,945		(107,386	)	(55	)%
Total	$	1,002,549	$	1,478,694	$	(476,145	)	(32	)%

The decrease in consolidated homebuilding revenue of 32% to $1.002 billion during the year ended December 31, 2007 from $1.479 billion during the year ended December 31, 2006 is primarily attributable to a decrease in the number of homes closed to 2,182 during the 2007 period from 2,887 during the 2006 period and a decrease in the average sales price of homes closed to $459,500 during the 2007 period from $512,200 during the 2007 period. In Nevada, homebuilding revenue decreased 55% to $88.6 million in the 2007 period from $195.9 million in the 2006 period, primarily attributable to a decrease in the number of homes closed of 48% to 267 in the 2007 period from 516 in the 2006 period and the average sales price decreased 13% to $331,700 during the 2007 period from $379,700 in the 2006 period.

	Year Ended December 31,				Increase (Decrease)
	2007		2006		Amount			%
Average Sales Price of Home Closed
Southern California	$	560,900	$	630,100	$	(69,200	)	(11	)%
Northern California		404,900		528,500		(123,600	)	(23	)%
Arizona		273,600		346,800		(73,200	)	(21	)%
Nevada		331,700		379,700		(48,000	)	(13	)%
Total	$	459,500	$	512,200	$	(52,700	)	(10	)%

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The average sales price of homes closed decreased 10% during the year ended December 31, 2007 primarily due to increased sales incentives in an attempt to increase sales absorption rates, lower demand for homes and increased pricing pressure.

	Year Ended December 31,				Increase (Decrease)
	2007		2006
Homebuilding Gross Margin Percentage
Southern California	11.5	%	19.1	%	(7.6	)%
Northern California	11.0	%	22.4	%	(11.4	)%
Arizona	24.6	%	32.4	%	(7.8	)%
Nevada	10.6	%	19.4	%	(8.8	)%
Total	12.9	%	21.5	%	(8.6	)%

Homebuilding Gross Margin Percentage during the year ended December 31, 2007, decreased to 12.9% from 21.5% during the year ended December 31, 2006. In Southern California, gross margin percentage decreased to 11.5% during the year ended December 31, 2007 from 19.1% during the year ended December 31, 2006. The decrease is primarily attributable to a decrease in average sales prices of 11% to $560,900 in the 2007 period from $630,100 in the 2006 period. In Arizona, gross margin percentage decreased to 24.6% in the 2007 period compared to 32.4% in the 2006 period, due to a decrease in average sales price of 21% from $346,800 in the 2006 period to $273,600 in the 2007 period. In Nevada, gross margin percentage decreased to 10.6% in the 2007 period from 19.4% in the 2006 period.

Homebuilding gross margins may be negatively impacted by, among other things, a weakening economic environment, which includes lack of homebuyers’ confidence in the economy, increase in foreclosure rates, tightening of mortgage loan origination requirements, continued high cancellation rates, which could affect our ability to maintain existing home prices and/or home sales incentive levels and continued deterioration in the demand for new homes in our markets.

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Lots, Land and Other

Lots, land and other sales revenue was $102.8 million during the year ended December 31, 2007, compared with $13.5 million for the year ended December 31, 2006. The significant land sales transaction in the 2007 period was discussed in the section titled, “Comparison of Years Ended December 31, 2008 and 2007.” The land sales transactions in the 2006 period were opportunistic in nature and related to the sale of a golf course in one of the Company’s markets and other bulk sales of land in Nevada and Arizona. During the years ended December 31, 2007 and 2006, the Company recorded gross margin related to land sales of $(102.8) million and $(3.0) million, respectively. Included in these amounts are the write-off of land deposits and preacquisition costs of $19.8 million in the 2007 period and $10.8 million in the 2006 period related to future projects which the Company has concluded are not currently economically viable.

	Year Ended December 31,				Increase (Decrease)
	2007		2006
Impairment Loss on Real Estate Assets
Land under development and homes completed and under construction
Southern California	$	105,480	$	12,261	$	93,219
Northern California		35,653		17,535		18,118
Nevada		43,586		10,099		33,487
Total		184,719		39,895		144,824
Land Held-for-Sale or Sold
Southern California		41,145		—		41,145
Northern California		5,256		—		5,256
Total		46,401		—		46,401
Total Impairment Loss on Real Estate Assets	$	231,120	$	39,895	$	191,225

The impairments recorded during the years ended December 31, 2007 and 2006, primarily resulted from decreases in homebuyer demand and decreasing net sales prices.

	Year Ended December 31,				Increase (Decrease)
	2007		2006		Amount			%
Sales and Marketing Expenses
Homebuilding
Southern California	$	40,165	$	36,471	$	3,694		10	%
Northern California		11,650		13,249		(1,599	)	(12	)%
Arizona		8,074		9,530		(1,456	)	(15	)%
Nevada		6,814		13,099		(6,285	)	(48	)%
Consolidated Total	$	66,703	$	72,349	$	(5,646	)	(8	)%

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Sales and marketing expense decreased $5.6 million to $66.7 million in the 2007 period from $72.3 million in the 2006 period primarily due to (i) a decrease of $2.7 million in sales commissions due to the reduction in units closed and reduction in revenue from home sales in 2007 as compared to 2006, and (ii) a decrease of $2.9 million in commissions paid to outside brokers in 2007 as compared to 2006.

	Year Ended December 31,				Increase (Decrease)
	2007		2006		Amount			%
General and Administrative Expenses
Homebuilding
Southern California	$	8,841	$	13,686	$	(4,845	)	(35	)%
Northern California		5,677		7,799		(2,122	)	(27	)%
Arizona		4,904		7,433		(2,529	)	(34	)%
Nevada		3,854		2,711		1,143		42	%
Corporate		14,196		29,761		(15,565	)	(52	)%
Consolidated Total	$	37,472	$	61,390	$	(23,918	)	(39	)%

General and administrative expenses decreased $23.9 million in the 2007 period to $37.5 million from $61.4 million in the 2006 period primarily as a result of a decrease in bonus expense of $25.4 million to $1.9 million in the 2007 period from $27.3 million in the 2006 period.

Other Items

Other operating costs consist of operating losses realized by golf course operations in certain of the Company’s divisions which decreased $5.6 million to $0.9 million in the 2007 period from $6.5 million in the 2006 period. Equity in income of unconsolidated joint ventures decreased to $0.3 million in the 2007 period from $3.2 million in the 2006 period.

Minority equity in income of consolidated entities decreased to $11.1 million in the 2007 period from $16.9 million in the 2006 period, primarily due to a decrease in the number of joint venture homes closed to 219 in 2007 from 347 in 2006.

The Company incurred financial advisory expenses of $3.2 million in the 2006 period with no comparable amount in the 2007 period due to a transaction which was completed in 2006. See “Tender Offer and Merger”.

(Loss) Income Before Income Taxes. The table below summarizes our (loss)/income before income taxes by reportable segment (dollars in thousands).

	Years Ended December 31,						Increase (Decrease)
	2007			2006			Amount		%
Homebuilding
Southern California	$	(222,849	)	$	73,309		(296,158	)	(404	)%
Northern California		(55,243	)		14,040		(69,283	)	(494	)%
Arizona		19,639			50,994		(31,355	)	(61	)%
Nevada		(46,340	)		14,137		(60,477	)	(428	)%
Corporate		(11,957	)		(28,771	)	16,814		(58	)%
Consolidated	$	(316,750	)	$	123,709		(440,459	)	(356	)%

In Southern California, (loss) income before benefit (provision) for income taxes decreased 404% to a loss of $(222.8) million in the 2007 period from income of $73.3 million in the 2006 period. The loss in the 2007

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period is primarily attributable to (i) an increase in impairment loss on real estate assets to $146.6 million in the 2007 period compared to $12.3 million in the 2006 period, (ii) a decrease in revenues from home sales to $696.7 million in the 2007 period from $852.0 million in the 2006 period and (iii) a decrease in gross margin percentage to 11.5% in the 2007 period from 19.1% in the 2006 period.

In Northern California, (loss) income before benefit (provision) for income taxes decreased 494% to a loss of $(55.2) million in the 2007 period from income of $14.0 million in the 2006 period. The loss in the 2007 period is primarily attributable to (i) an increase in impairment loss on real estate assets to $40.9 million in the 2007 period compared to $17.5 million in the 2006 period, (ii) a decrease in revenues from home sales to $102.4 million in the 2007 period from $225.1 million in the 2006 period and (iii) a decrease in gross margin percentage to 11.0% in the 2007 period from 22.4% in the 2006 period.

In Arizona, (loss) income before benefit (provision) for income taxes decreased to income of $19.6 million in the 2007 period from income of $51.0 million in the 2006 period. The decrease is primarily attributable to (i) a decrease in revenues from home sales to $114.9 million in the 2007 period from $205.7 million in the 2006 period and (ii) a decrease in gross margin percentage to 24.6% in the 2007 period from 32.4% in the 2006 period.

In Nevada, (loss) income before benefit (provision) for income taxes decreased to a loss of $(46.3) million in the 2007 period from income of $14.1 million in the 2006 period. The loss in the 2007 period is primarily attributable to (i) an increase in impairment loss on real estate assets to $43.6 million in the 2007 period from $10.1 million in the 2006 period, (ii) a decrease in revenues from home sales to $88.6 million in the 2007 period from $196.0 million in the 2006 period and (iii) a decrease in homebuilding gross margins to 10.6% in the 2007 period from 19.4% in the 2006 period.

Income Taxes.

Effective January 1, 2007, the Company made an election in accordance with federal and state regulations to be taxed as an “S” corporation rather than a “C” corporation. Under this election, the Company’s taxable income flows through to and is reported on the personal tax returns of its shareholders. The shareholders are responsible for paying the appropriate taxes based on this election. The Company does not pay any federal taxes under this election and is only required to pay certain state taxes based on a rate of approximately 1.5% of taxable income. As a result of this election, the Company’s provision for income taxes for the year ended December 31, 2007 includes a reduction of deferred tax assets and related income tax provision of $31.9 million due to the elimination of any future tax benefit by the Company from such assets. In addition, the provision reflects a valuation allowance of $0.8 million. Also, due to the “S” corporation election, unused recognized built in losses in the amount of $19.4 million are no longer available to the Company.

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Net (Loss) Income.

As a result of the foregoing factors, net (loss) income was a net loss of $(349.4) million in the 2007 period compared to net income of $74.8 million in the 2006 period.

	December 31,		Increase (Decrease)
	2007	2006	Amount		%
Lots Owned and Controlled
Lots Owned
Southern California	2,579	4,003	(1,424	)	(36	)%
Northern California	1,763	1,422	341		24	%
Arizona	6,226	6,564	(338	)	(5	)%
Nevada	3,056	1,299	1,757		135	%
Total	13,624	13,288	336		3	%
Lots Controlled(1)
Southern California	534	1,873	(1,339	)	(72	)%
Northern California	—	999	(999	)	(100	)%
Arizona	303	3,492	(3,189	)	(91	)%
Nevada	—	1,013	(1,013	)	(100	)%
Total	837	7,377	(6,540	)	(89	)%
Total Lots Owned and Controlled	14,461	20,665	(6,204	)	(30	)%

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

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 (collectively “the Senior Notes”) 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, income tax refund receivable 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 and run its day-to-day operations.

Beginning in 2006 and continuing through 2008, the homebuilding industry has experienced continued decreased demand for housing. These conditions were the result of a continued erosion of homebuyer confidence which was driven by increases in unemployment, limited availability of mortgage financing due to stress in the mortgage and credit markets, price instability, increasing foreclosures and increased levels of housing inventory in the market. The decline in demand has resulted in a decrease in new home orders, home closings, home sales revenue, average sales prices and gross margins for the Company. During the years ended December 31, 2008, 2007 and 2006, the Company incurred impairment losses on real estate assets amounting to $135.3 million, $231.1 million and $39.9 million, respectively. 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 5 of “Notes to Consolidated Financial Statements”.

In response to the declining demand for housing in the homebuilding industry, and the resulting decrease in homebuilding revenues of 53% from the year ended December 31, 2007 to the year ended December 31, 2008,

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the management of the Company shifted its strategy to focus on generating positive cash flow, reducing overall debt levels and improving liquidity. The management of the Company intends to manage cash flow by reducing inventory levels and expenditures for temporarily suspended projects. For the year ended December 31, 2008, the Company generated $80.4 million of cash flows from operations and repaid a net $67.6 million of notes payable. In addition, the Company repurchased $71.9 million of principal outstanding Senior Notes for a net purchase price of $16.7 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $54.0 million. This repurchase will reduce future interest payments by approximately $6.4 million per year.

The undrawn available borrowings on the Company’s Revolving Credit Facilities decreased to $37.8 million at December 31, 2008, down from $169.9 million as of December 31, 2007. The Company expects that the availability under the Revolving Credit Facilities will fluctuate in the future as a result of paydowns when homes close and as new phases of construction are started and added to the borrowing base. In addition, as the credit and capital markets stabilize in the future, the Company would expect to utilize a portion of its cash on hand to fund future construction which would cause the availability under the Revolving Credit Facilities to increase. Further, the Company received a federal income tax refund of approximately $41.6 million in January 2009 as a result of the carryback of estimated 2008 tax losses to 2006.

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 Company suspended all development, sales and marketing activities at thirteen of its projects which are in the early stages of development. The Company has concluded that this strategy was necessary under the prevailing market conditions and believes that it will allow the Company to market the properties at some future time when market conditions may have improved.

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

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 issued at par, resulting in net proceeds to the Company of approximately $148.5 million. 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,

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leaving $133.8 million in principal outstanding. Interest on the 7 ⁵/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount of the 7 ⁵/8% Senior Notes, the Company’s semi-annual interest payments are $5.1 million.

The 7 ⁵/8% 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.

As of December 31, 2008, the outstanding 7 ⁵/8% Senior Notes with a face value of $133.8 million had a fair value of approximately $28.1 million, based on quotes from industry sources.

10 ³/4% Senior Notes

California Lyon filed a Registration Statement on Form S-3 with the Securities and Exchange Commission for the sale of $250.0 million of 10 ³/4% Senior Notes due 2013 (the “10 ³/4% Senior Notes”) which became effective on March 12, 2003. The offering closed on March 17, 2003 and was fully subscribed and issued. The notes were issued at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately $246.2 million. The purchase price reflected a discount to yield 11% under the effective interest method and the notes have been reflected net of the unamortized discount in the consolidated balance sheet. 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. Interest on the 10 ³/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding principal amount of the 10 ³/4% Senior Notes, the Company’s semi-annual interest payments are $11.8 million.

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.

As of December 31, 2008, the outstanding 10 ³/ 4% Senior Notes with a face value of $218.2 million had a fair value of approximately $47.3 million, based on quotes from industry sources.

7 ¹/2% Senior Notes

On February 6, 2004, California Lyon closed its offering of $150.0 million principal amount of 7 ¹/2% Senior Notes due 2014 (the “7 ¹/2% Senior Notes”). The notes were issued at par, resulting in net proceeds to the Company of approximately $147.6 million. 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. Interest on the 7 ¹/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal amount of 7 ¹/2% Senior Notes the Company’s semi-annual interest payments are $4.7 million.

The 7 ¹/2% 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.

As of December 31, 2008, the outstanding 7 ¹/ 2% Senior Notes with a face value of $124.3 million had a fair value of $24.9 million, based on quotes from industry sources.

* * * * *

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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.

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.

At December 31, 2008, the Company had approximately $119.6 million of secured indebtedness, (excluding approximately $75.0 million of secured indebtedness of consolidated entities) and approximately $37.8 million of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas.

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Revolving Credit Facilities

The Company has six revolving credit facilities which have an aggregate maximum loan commitment of $185.0 million, with maturities at various dates as follows:

Loan Commitment Amount (in millions)		Balance Outstanding at December 31, 2008 (in millions)		Undrawn Availability at December 31, 2008 (in millions)		Initial Maturity Date(1)
$	30.0	$	8.0	$	6.4	April 2009
	40.0		24.8		8.4	May 2009(2)
	25.0		8.2		4.1	May 2009
	30.0		15.7		6.1	June 2009
	30.0		3.1		11.6	July 2009
	30.0		12.2		1.2	September 2009(3)
$	185.0	$	72.0	$	37.8

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

(2) In March 2009, the commitment amount of this facility was reduced to $30.0 million and the initial maturity date was extended to December 2009.

(3) In March 2009, the commitment amount of this facility was reduced to $20.0 million.

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

Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases 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 (as discussed below), which may limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, determined by adding an interest rate spread to LIBOR or the prime rate, as defined. Certain facilities have an interest rate floor of 5.5%. As of December 31, 2008, $72.0 million was outstanding under these credit facilities, with a weighted-average interest rate of 5.12%, and the undrawn availability was $37.8 million as limited by the borrowing base formulas. Interest on the revolving credit facilities is calculated on the average, outstanding daily balance and is paid following the end of each month. During the year ended December 31, 2008, the Company borrowed $291.8 million and repaid $359.4 million under these facilities. The maximum amount outstanding was $170.6 million and the weighted average borrowings were $123.6 million during the year ended December 31, 2008. Interest incurred on the

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revolving credit facilities for the year ended December 31, 2008 was $6.7 million. The Company routinely borrows under its revolving credit facilities in the ordinary course of business within the maximum aggregate loan commitment amounts to fund operations, land acquisition and home building activities, and repays such borrowings, as required by the credit facilities, with the net proceeds from sales of the real property, including homes, which secure the applicable credit facility.

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

• A tangible net worth, as defined, of $90.0 million; and

• Minimum liquidity, as defined, of at least $30.0 million.

As of and for the year ending December 31, 2008, the Company is in compliance with the covenants under its revolving credit facilities. Effective January 1, 2010, the Company will be required to maintain a ratio of total liabilities to tangible net worth, as defined under each credit facility.

If market conditions continue to deteriorate, the financial covenants contained in the Company’s Revolving Credit Facilities will continue to be negatively impacted. Under these circumstances, the lenders under the Revolving Credit Facilities would need to provide the Company with additional covenant relief if the Company is to avoid future noncompliance with these financial covenants. If the Company is unable to obtain requested covenant relief or is unable to obtain a waiver for any covenant non-compliance, the Company could be prohibited from making further borrowings under the Revolving Credit Facilities and the Company’s obligation to repay indebtedness under the Revolving Credit Facilities and the Senior Notes could be accelerated. The Company can give no assurance that in such an event, the Company would have, or be able to obtain, sufficient funds to pay all debt that the Company would be required to repay.

The Company’s covenant compliance for the Revolving Credit Facilities at December 31, 2008 is detailed in the table set forth below:

Covenant and Other Requirements	Actual at December 31, 2008		Covenant Requirements at December 31, 2008
Tangible Net Worth (1)	$	164.9	³ $90.0
Minimum Liquidity	$	104.8	³ $30.0

(1) Tangible Net Worth was calculated based on the stated amount of stockholders’ equity less intangible assets of $6.3 million as of December 31, 2008.

Construction Notes Payable

At December 31, 2008, the Company had construction notes payable amounting to $116.3 million, including $75.0 million on certain consolidated entities. The construction notes have various maturity dates through 2017 and bear interest at rates ranging from prime plus 0.25% to prime plus 1.0% at December 31, 2008. Interest is calculated on the average daily balance and is paid following the end of each month.

The Company is the sole member of Lyon East Garrison Company I, LLC which is a member with Woodman Development Company, LLC (the “Members”) in East Garrison Partners I, LLC (the “LLC”). The LLC has a non-recourse construction note payable with an outstanding balance of $56.2 million as of December 31, 2008 related to the acquisition and development of real estate in Monterey County, California. In addition to the non-recourse construction note payable, the Company and affiliates of the other Member entered into a completion guaranty. The construction note payable is secured by the underlying land parcel, which contains approximately 1,400 buildable lots, of which the Members had the right to purchase 600 lots each and 200 lots were to be sold to a third party.

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Based on current market and general economic conditions, the Members of the LLC and the construction note lender determined to temporarily suspend further entitlement and development of the project, at which time it was agreed that certain site improvements would be completed in order to prepare and protect the site for a delay of approximately two years. The Company and affiliates of the other Member of the LLC believed that the completion of these site improvements satisfied the obligation under the completion guaranty. The lender agreed to fund the revised budgeted site improvements which the LLC had completed. However the lender stopped funding for the improvements, which left the LLC with unpaid invoices. During this same period, the LLC received several letters from the lender alleging default under the construction loan agreement which the Members contended were invalid based on previous discussions.

In addition, under the terms of the construction loan agreement, the LLC was required to reduce the loan commitment from $75.0 million to $35.0 million by January 31, 2009, which required a $21.2 million pay down. The LLC did not make the required pay down on January 31, 2009 and is now in default under the construction loan agreement. The LLC assumes that the lender will continue to exercise its legal remedies. Due to the foregoing factors, the Company recorded an entry to reduce its interest in the LLC to zero.

Revolving Mortgage Warehouse Credit Facilities

The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matured in January 2009, provided for revolving loans of up to $22.5 million outstanding, $15.0 million of which was committed (lender obligated to lend if stated conditions are satisfied) and $7.5 million was not committed (lender advances are optional even if stated conditions are otherwise satisfied). At December 31, 2008, the outstanding balance under this facility was $1.6 million. The mortgage subsidiary and one of its unconsolidated joint ventures had an additional $20.0 million credit facility which matures in April 2009. At December 31, 2008, the outstanding balance under this facility was $4.7 million. In January 2009, the Company implemented a strategy to cease operations at its mortgage subsidiary, in which it will discontinue originating and funding homebuyer mortgage loans. Due to this strategy, the Company will not extend the revolving mortgage warehouse credit facilities beyond current maturity dates. 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. Effective March 13, 2009, the facilities have been paid down and the commitments reduced to zero.

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. 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

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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 December 31, 2008, real estate inventories of $27.7 million, which are included in real estate inventories not owned in the accompanying balance sheet.

In addition, the Company participates in two land banking arrangements, which are not VIEs 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 $80.1 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 land banking arrangements is as follows as of December 31, 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	$	107,763
Forfeited deposits (cash and letters of credit) if lots are not purchased	$	42,003

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 Critical Accounting Policies—Variable Interest Entities certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements as of and for the years ended December 31, 2008 and 2007. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 did not affect the Company’s consolidated net income. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). 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 6 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.

As of December 31, 2008, the Company’s investment in and advances to unconsolidated joint ventures was $2.8 million and the venture partners’ investment in such joint ventures was $4.6 million. As of December 31, 2008, these joint ventures had repaid all financing from construction lenders.

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Assessment District Bonds

In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable interest rates when compared to the Company’s other sources of funds and the fact that the bonds are sold, administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible for the assessments on its land. When the Company’s homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. See Note 13 of “Notes to Consolidated Financial Statements.”

Cash Flows — Comparison of Years Ended December 31, 2008 and 2007

Net cash provided by operating activities decreased to $80.4 million in the 2008 period from $134.5 million in the 2007 period. The decrease was primarily as a result of (i) a decrease in impairment loss on real estate assets of $95.8 million to $135.3 million in the 2008 period compared to $231.1 million in the 2007 period, (ii) minority equity in loss of $(10.4) million in the 2008 period compared to minority equity in income of $11.1 million in the 2007 period, (iii) gain on retirement of debt of $54.0 million in the 2008 period with no comparable amount in the 2007 period, (iv) income tax benefit of $41.6 million in the 2008 period compared to income tax provision of $32.7 million in the 2007 period, (v) an increase in receivables of $9.6 million in the 2008 period compared to an increase in receivables of $81.4 million in the 2007 period and (vi) net loss of $111.6 million in the 2008 period compared to $349.4 million in the 2007 period.

The decrease in impairment loss on real estate assets is described in “Results of Operations” above. The decrease in minority equity in (loss) income is primarily attributable to a decrease in the number of consolidated joint venture homes closed to 64 homes in the 2008 period from 219 in the 2007 period and an impairment charge on real estate assets in one of the Company’s consolidated joint ventures. In conjunction with the impairment charge, the minority loss allocation was approximately $10.0 million. The gain on retirement of debt is attributable to the repurchase transaction that occurred in October 2008. The details of the transaction are more fully detailed above. The difference between the benefit from income taxes in the 2008 period and the provision for income taxes in the 2007 period are described in detail in Note 11 to “Notes to Consolidated Financial Statements”.

The decrease in receivables is attributable to a decrease in escrow proceeds receivable of $10.6 million during the 2008 period from a balance of $19.2 million as of December 31, 2007 to a balance of $8.6 million as of December 31, 2008, compared to a decrease of $28.1 million during the 2007 period, from a balance of $47.3 million as of December 31, 2006 to a balance of $19.2 million as of December 31, 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.

Net cash used in investing activities decreased to $3.3 million in the 2008 period from $8.3 million in the 2007 period. The change was primarily a result of a decrease in investments in and advances to unconsolidated joint ventures of $3.0 million in the 2008 period compared to $7.1 million in the 2007 period.

Net cash used in financing activities decreased to a use of $83.3 million in the 2008 period from $91.8 million in the 2007 period, primarily as a result of minority interest contributions of $1.0 million in the 2008 period compared to distributions of $26.1 million in the 2007 period, offset by a net payments on notes payable of $67.6 million in the 2008 period compared to $65.7 million in the 2007 period.

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Cash Flows — Comparison of Years Ended December 31, 2007 and 2006

Net cash provided by (used in) operating activities increased to a source of $134.5 million in the 2007 period from a use of $90.0 million in the 2006 period. The change was primarily as a result of (i) a decrease in real estate inventories-owned of $174.3 million in the 2007 period from an increase of $147.8 million in the 2006 period, (ii) a decrease in net changes in accrued expenses to a decrease of $44.1 million in the 2007 period from a decrease of $112.7 million in the 2006 period, (iii) an increase in net changes in receivables to an increase of $81.4 million in the 2007 period from an increase of $24.0 million in the 2006 period, (iv) impairment loss on real estate assets of $231.1 million in the 2007 period compared to $39.9 million in the 2006 period and (v) net loss of $349.4 million in the 2007 period compared to net income of $74.8 million in the 2006 period.

The net change in real estate inventories is primarily attributable to (i) a decrease in land acquisitions and construction expenditures during the 2007 period compared to the 2006 period due to decreased demand for housing as described above and (ii) the bulk land sale described in “Item 1 – Business”, which reduced inventory approximately $210.7 million. The decrease in net changes in accrued expenses is primarily attributable to a net decrease in income taxes payable of $5.2 million during the 2007 period from a balance of $4.2 million as of December 31, 2006 compared to $(1.0) million as of December 31, 2007 and a net decrease in accrued bonus expense of $35.6 million during the 2007 period from a balance of $39.4 million as of December 31, 2006 compared to $7.1 million as of December 31, 2007. Comparatively, during the 2006 period, the net decrease in income taxes payable was $31.3 million during the 2006 period from a balance of $35.5 million as of December 31, 2005 compared to $4.2 million as of December 31, 2006 and a net decrease in accrued bonus expense of $32.4 million during the 2006 period, from a balance of $71.8 million as of December 31, 2005 compared to $39.4 million as of December 31, 2006. The changes identified above for the two periods in the year ending December 31, 2007 are recurring in nature and are attributable to the timing of bonus payments and estimated income tax payments made, offset by normal accruals for the period.

The increase in net changes in receivables is attributable to a decrease in escrow proceeds receivable of $28.1 million during the 2007 period, from a balance of $47.3 million as of December 31, 2006 to a balance of $19.2 million as of December 31, 2007 compared to a net increase of $37.0 million during the 2006 period, from a balance of $84.3 million as of December 31, 2005 to a balance of $47.3 million as of December 31, 2006. The balance in escrow proceeds receivable as of December 31, 2007 and 2006 is temporary in nature and primarily due to the 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 remaining increase in the change in receivables is primarily attributable to a net decrease in first trust deed mortgage notes receivables of $47.7 million during the 2007 period, from a balance of $59.7 million as of December 31, 2006 to a balance of $12.0 million as of December 31, 2007 compared to a net increase of $11.9 million during the 2006 period to $59.7 million as of December 31, 2006 from $47.8 million as of December 31, 2005. This decrease was also attributable to the decrease in the number of homes closed in the last week of the year in 2007 and 2006 as described above. Substantially all of the balance of first trust deed mortgage notes receivables was collected in the first few days of January 2008 and 2007 when the loans were sold to third party investors.

The successful issuance of the 10 ³/4 % Senior Notes in 2003 and the 7 ¹/2% Senior Notes and 7 ⁵/8% Senior Notes in 2004, offset by the repayment of the 12 ¹/2% Senior Notes, provided the Company with increased financial resources. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. Thus, the Company may have bought and developed land on which it cannot profitably build and sell homes. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, the Company may have to sell homes at significantly lower margins or at a loss.

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Net cash used in investing activities increased to a use of $8.3 million in the 2007 period from a use of $2.8 million in the 2006 period. The change was primarily as a result of an increase in investments in and advances to unconsolidated joint ventures of $7.1 million in the 2007 period compared to $2.0 million in the 2006 period.

Net cash (used in) provided by financing activities decreased to a use of $91.8 million in the 2007 period from a source of $79.1 million, primarily as a result of minority interest distributions of $26.1 million in the 2007 period compared to minority interest distributions of $79.2 million in the 2006 period, offset by a net payments on notes payable of $65.7 million in the 2007 period compared to net borrowings on notes payable of $157.9 million in the 2006 period.

Off-Balance Sheet Arrangements

The Company enters into certain off-balance sheet arrangements including joint venture financing, option agreements, land banking arrangements and variable interests in consolidated and unconsolidated entities. These arrangements are more fully described above and in Notes 2, 6 and 13 of “Notes to Consolidated Financial Statements”.

Contractual Obligations

The Company’s contractual obligations consisted of the following at December 31, 2008 (in thousands):

			Payments due by period
Contractual obligations (note 1)	Total		Less than 1 year (2009)		1-3 years (2010-2011)		3-5 years (2012-2013)		More than 5 years (2014 and beyond)
Revolving credit facilities	$	74,249	$	74,249	$	—	$	—	$	—
Other notes payable(2)		126,235		67,185		56,948		144		1,958
Senior Notes(3)		666,792		43,175		86,350		411,802		125,465
Operating leases		9,273		3,596		4,451		1,226		—
Purchase obligations
Land purchases and option commitments(4)		205,386		35,387		146,086		23,913		—
Project commitments(5)		292,344		231,148		40,797		20,399		—
Total	$	1,374,279	$	454,740	$	334,632	$	457,484	$	127,423

(1) The summary of contractual obligations above includes interest on all interest-bearing obligations. Interest on all fixed rate interest-bearing obligations is based on the stated rate and is calculated to the stated maturity date. Interest on all variable rate interest bearing obligations is based on the rates effective as of December 31, 2008 and is calculated to the stated maturity date.

(2) Amount includes $56.2 million of outstanding construction notes payable related to the East Garrison project. See “Construction Notes Payable” above for further discussion.

(3) Includes 7 ⁵/8% Senior Notes, 10 ³/4% Senior Notes and 7 ¹/2% Senior Notes combined.

(4) Represents the Company’s obligations in land purchases, lot option agreements and land banking arrangements. If the Company does not purchase the land under contract, it will forfeit its non-refundable deposit related to the land.

(5) Represents the Company’s homebuilding project purchase commitments for developing and building homes in the ordinary course of business.

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Inflation

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

Critical Accounting Policies

The Company’s financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and costs and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those which impact its most critical accounting policies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the following accounting policies are among the most important to a portrayal of the Company’s financial condition and results of operations and require among the most difficult, subjective or complex judgments:

Real Estate Inventories and Cost of Sales

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

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Impairment of Real Estate Inventories

The Company accounts for its real estate inventories under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”). Statement No. 144 requires impairment losses to be recorded on real estate inventories when indicators of impairment are present and the undiscounted cash flows estimated to be generated by real estate inventories are less than the carrying amount of such assets. Indicators of impairment include a decrease in demand for housing due to softening market conditions, competitive pricing pressures which reduce the average sales price of homes, which includes sales incentives for homebuyers, slowing sales absorption rates, a decrease in home values in the markets in which the Company operates, significant decreases in gross margins and a decrease in project cash flows for a particular project.

For land and land under development, homes completed and under construction and model homes, the Company estimates expected cash flows at the project level by maintaining current budgets using recent historical information and current market assumptions. The Company updates project budgets and cash flows of each real estate project on a quarterly basis to determine whether the estimated remaining undiscounted future cash flows of the project are more or less than the carrying amount (net book value) of the asset. If the undiscounted cash flows are more than the net book value of the project, then there is no impairment. If the undiscounted cash flows are less than the net book value of the asset, then the asset is deemed to be impaired and is written-down to its fair value.

Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties (i.e., other than a forced or liquidation sale). Management determines the estimated fair value of each project by determining the present value of estimated future cash flows at discount rates that are commensurate with the risk of each project. 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 future revenues and costs, current market yields as well as future events and conditions. As described more fully above in the section entitled “Real Estate Inventories and Cost of Sales”, estimates of revenues and costs are supported by the Company’s budgeting process.

Under the provisions of Statement No. 144, the Company is required to make certain assumptions to estimate undiscounted future cash flows of a project, which include: (i) estimated sales prices, including sales incentives, (ii) anticipated sales absorption rates and sales volume, (iii) project costs incurred to date and the estimated future costs of the project based on the project budget, (iv) the carrying costs related to the time a project is actively selling until it closes the final unit in the project, and (v) alternative strategies including selling the land to a third party or temporarily suspending development on the project. Each project has different assumptions and is based on management’s assessment of the current market conditions that exist in each project location. During the years ended December 31, 2008 and 2007. Interest incurred allocated to each project is included in future cash flows at effective borrowing rates of 7% and 9% for the 2007 and 2008 period, which would yield discount rates of 14% to 20% for the 2007 period and 17% to 23% for the 2008 period.

The assumptions and judgments used by the Company in the estimation process to determine the future undiscounted cash flows of a project and its fair value are inherently uncertain and require a substantial degree of judgment. The realization of the Company’s real estate inventories is dependent upon future uncertain events and market conditions. Due to the subjective nature of the estimates and assumptions used in determining the future cash flows of a project, the continued decline in the current housing market, the uncertainty in the banking and credit markets, actual results could differ materially from current estimates.

These estimates are dependent on specific market or sub-market conditions for each subdivision. While the Company considers available information to determine what it believes to be its best estimates as of the end of a reporting period, these estimates are subject to change in future reporting periods as facts and circumstances change. Local market-specific conditions that may impact these estimates for a subdivision include:

• historical subdivision results, and actual operating profit, base selling prices and home sales incentives;

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• forecasted operating profit for homes in backlog;

• the intensity of competition within a market or sub-market, including publicly available home sales prices and home sales incentives offered by our competitors;

• increased levels of home foreclosures;

• the current sales pace for active subdivisions;

• subdivision specific attributes, such as location, availability of lots in the sub-market, desirability and uniqueness of subdivision location and the size and style of homes currently being offered;

• changes by management in the sales strategy of a given subdivision; and

• current local market economic and demographic conditions and related trends and forecasts.

These and other local market-specific conditions that may be present are considered by personnel in the Company’s homebuilding divisions as they prepare or update the forecasted assumptions for each subdivision. Quantitative and qualitative factors other than home sales prices could significantly impact the potential for future impairments. The sales objectives can differ among subdivisions, even within a given sub-market. For example, facts and circumstances in a given subdivision may lead the Company to price its homes with the objective of yielding a higher sales absorption pace, while facts and circumstances in another subdivision may lead the Company to price its homes to minimize deterioration in home gross margins, even though this could result in a slower sales absorption pace. Furthermore, the key assumptions included in estimated future undiscounted cash flows may be interrelated. For example, a decrease in estimated base sales price or an increase in home sales incentives may result in a corresponding increase in sales absorption pace. Additionally, a decrease in the average sales price of homes to be sold and closed in future reporting periods for one subdivision that has not been generating what management believes to be an adequate sales absorption pace may impact the estimated cash flow assumptions of a nearby subdivision. Changes in key assumptions, including estimated construction and land development costs, absorption pace, selling strategies or discount rates could materially impact future cash flow and fair value estimates. Due to the number of possible scenarios that would result from various changes in these factors, the Company does not believe it is possible to develop a sensitivity analysis with a level of precision that would be meaningful to an investor.

Management assesses land deposits for impairment when estimated land values are deemed to be less than the agreed upon contract price. The Company considers changes in market conditions, the timing of land purchases, the ability to renegotiate with land sellers the terms of the land option contract in question, the availability and best use of capital, and other factors. If land values are determined to be less than the contract price, the future project will not be purchased. The Company records abandoned land deposits and related pre-acquisition costs to cost of sales-land in the consolidated statement of operations in the period that it is abandoned.

The following table summarizes inventory impairment charges recorded during the years ended December 31, 2008, 2007 and 2006:

	Year Ended December 31,
	2008		2007		2006
	(Dollars in thousands)
Inventory impairment charges related to:
Land under development and homes completed and under construction	$	83,174	$	184,719	$	39,895
Land held for sale or sold		52,137		46,401		—
Total inventory impairment charges	$	135,311	$	231,120	$	39,895
Number of projects impaired during the year		41		42		13
Number of projects assessed for impairment during the year		84		84		68

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These charges were included in impairment loss on real estate assets in the accompanying consolidated statements of operations (See Note 3—Notes to Consolidated Financial Statement for a detail of impairment by segment). The impairment charges recorded during the periods noted above stemmed from lower home prices which were driven by increased incentives and discounts resulting from weakened demand experienced during 2006 through 2008. The Company may incur further impairment on real estate inventories in the future, if the homebuilding industry continues to experience the deteriorating market conditions identified above. In addition, the Company may incur impairments in the future if it is unable to hold its temporarily suspended projects until market conditions improve.

Sales and Profit Recognition

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

Variable Interest Entities

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

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

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Related Party Transactions

See Item 13 and Note 12 of the “Notes to Consolidated Financial Statements” for a description of the Company’s transactions with related parties.

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 for financial assets and liabilities. The Company does not anticipate the adoption of the remaining provisions of FAS 157 will have a material impact on the Company’s consolidated financial position or results of operations. See Note 8 to “Notes to Consolidated Financial Statements” for further discussion.

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 141R on January 1, 2009 will require the Company to expense all transaction costs for business combinations. The Company does not expect the adoption of FAS 141R to have a significant impact on the Company’s 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 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.

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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.

In December 2008, the FASB issued FASB Staff Position (“FSP”) FAS 140-4 and FIN 46(R)-8, Disclosure by Public Entities (Enterprises) About Transfers of Financial Assets and Interests in Variable Interest Entities. The purpose of the FSP is to promptly improve disclosures by public companies until the pending amendments to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, (“SFAS 140”), and FIN 46R are finalized and approved by the FASB. The FSP amends SFAS 140 to require public companies to provide additional disclosures about transferor’s continuing involvement with transferred financial assets. It also amends FIN 46R by requiring public companies to provide additional disclosures regarding their involvement with variable interest entities. This FSP is effective for the Company’s fiscal year beginning after December 1, 2008. The Company does not expect the FSP to have a material effect on the consolidated financial statements.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk for changes in interest rates relates to the Company’s floating rate debt with a total outstanding balance at December 31, 2008 of $194.6 million where the interest rate is variable based upon certain bank reference or prime rates. The average prime rate during the year ended December 31, 2008 was 5.09%. If interest rates were to increase by 10%, the estimated impact on the Company’s consolidated financial statements would be an increase to loss before benefit from income taxes of $0.5 million, based on amounts outstanding and rates in effect during the year ended December 31, 2008, but would increase capitalized interest by approximately $0.9 million which would be amortized to cost of sales as home closings occur.

Item 8.    Financial Statements and Supplementary Data

The consolidated financial statements of William Lyon Homes and the reports of the independent registered public accounting firm, listed under Item 15, are submitted as a separate section of this report beginning on page 86 and are incorporated herein by reference.

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

None.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures.    An evaluation was performed under the supervision and with the participation of the Company’s management, including its principal executive officer and principal

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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, and solely as a result of the material weakness in internal control over financial reporting described below, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were not effective at the reasonable assurance level as of the end of the period covered by this Annual Report. Although the Company’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives, there can be no assurance that such disclosure controls and procedures will always achieve their stated goals under all circumstances.

A material weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, that creates a more than remote likelihood that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis. Management has concluded that the following material weakness existed at December 31, 2008.

During the year ended December 31, 2008, the Company reviewed all of its homebuilding projects and land held for development for indicators of impairment, both of which are included in real estate inventories on the Company’s consolidated balance sheets. The Company assesses projects for impairment in accordance with Statement No. 144, Accounting for the Impairment of Long-Lived Assets, which 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 the project are less than the carrying amount. The assumptions and judgments used by the Company in the estimation process to determine the future undiscounted cash flows of a project and its fair value are inherently uncertain and require a substantial degree of judgment. The Company’s assumptions include, but are not limited to: (i) estimated sales prices, including sales incentives, (ii) anticipated sales absorption rates and sales volume, (iii) project costs incurred to date and the estimated future costs of the project, (iv) the carrying costs related to the time a project is actively selling until it closes the final unit in the project, and (v) alternative strategies including selling the land to a third party or temporarily suspending development on the project. Each project has different assumptions and is based on management’s assessment of the current market conditions that exist in each project location.

Controls over the period-end financial reporting process for the validity of assumptions used for the estimated sales price on two projects were not effective. This resulted in a significant additional impairment adjustment to the Company’s consolidated financial statements at December 31, 2008. Specifically, controls were not effective to ensure accounting estimates based on these estimated sales prices were appropriately reviewed, analyzed and challenged by management on a timely basis. This adjustment is appropriately reflected in the Consolidated Financial Statements in this Annual Report on Form 10-K.

The Company is actively engaged in the development of a remediation plan to ensure that the controls related to this material weakness are strengthened and will operate effectively. The Company has prioritized its remediation efforts in this area, with the goal of remediating this material weakness during 2009.

Management’s Annual Report on Internal Control over Financial Reporting.    The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting and has designed internal controls and procedures to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment, our management concluded that solely as a result of the material weakness in internal control as described above, the Company did not maintain effective internal control over financial reporting as of December 31, 2008.

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

This annual report does not include an audit report of the Company’s registered public accounting firm regarding internal control over financial reporting. The Company’s internal controls were not subject to audit by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Item 9B.    Other Information

None.

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Information Regarding the Directors of William Lyon Homes

The following table lists the Directors of the Company and provides their respective ages and current positions with the Company as of March 20, 2009. Each director holds office until the Company’s next Annual Meeting and until his successor is duly elected and qualified. Except as described below, there are no family relationships between any director or executive officer and any other director or executive officer of William Lyon Homes. Biographical information for each Director is provided below.

Name	Age	Position
General William Lyon	86	Chairman of the Board of Directors and Chief Executive Officer
William H. Lyon	35	Director, President and Chief Operating Officer
Douglas K. Ammerman (a, b, c)	57	Director
Harold H. Greene (a, b, c)	70	Director
Gary H. Hunt (a, b, c)	60	Director
Alex Meruelo (a, b, c)	46	Director

(a) Member of the Audit Committee

(b) Member of the Compensation Committee

(c) Member of the Nominating and Corporate Governance Committee

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

WILLIAM H. LYON, President and Chief Operating Officer, son of Chairman William Lyon, worked full time with the former William Lyon Homes from November 1997 through November 1999 as an assistant project manager, has been employed by the Company since November 1999 and has been a member of the board of directors since January 25, 2000. Since joining the Company, Mr. Lyon has been employed as an assistant project manager and project manager and has participated in a training program designed to expose him to the many facets of real estate development. From February 2003 until February 2005, he served as the Company’s Director of Corporate Affairs. In February 2005, he was appointed Vice President and Chief Administrative Officer of the Company. Effective on March 1, 2007, Mr. Lyon was appointed as Executive Vice President and Chief Administrative Officer. Effective on March 18, 2009, Mr. Lyon was appointed as President and Chief Operating Officer of the Company. Mr. Lyon received a dual B.S. in Industrial Engineering and Product Design from Stanford University in 1997.

DOUGLAS K. AMMERMAN was appointed to the Board of Directors on February 27, 2007. Mr. Ammerman’s business career includes almost three decades of service with KPMG, independent public accountants, until his retirement in 2002. He was the Managing Partner of the Orange County office and was a National Partner in Charge — Tax. He is a certified public accountant and a member of the American Institute of Certified Public Accountants. Mr. Ammerman is a member of the Board of Directors of Fidelity National Financial (a company

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listed on the New York Stock Exchange), where he also serves as Chairman of the Audit Committee. He also is a member of the Board of Directors of Quiksilver (a company listed on the New York Stock Exchange), where he also serves as Chairman of the Audit Committee, a member of the Compensation Committee and a member of the Nominating and Corporate Governance Committee. He also is a member of the Board of Directors of El Pollo Loco, where he also serves as Chairman of the Audit Committee. Mr. Ammerman has served as a director of The Pacific Club for twelve years and is a past president. He also has served as a director of the UCI Foundation for fourteen years.

HAROLD H. GREENE joined the board of directors on October 17, 2005. Mr. Greene is a 40-year veteran of the commercial and residential real estate lending industry. He most recently served as the Managing Director for Bank of America’s California Commercial Real Estate Division from 1998 to 2001 where he was responsible for lending to commercial real estate developers in California and managed an investment portfolio of approximately $2.6 billion. From 1990 to 1998, Mr. Greene was the Executive Vice President of SeaFirst Bank in Seattle, Washington and prior to that he served as the Vice Chairman of MetroBank from 1989 to 1990 and in various positions, including Senior Vice President in charge of the Asset Based Finance Group, with Union Bank, where he worked for 27 years. Mr. Greene currently serves as a director of Gary’s and Company (men’s clothing retailer) and as a director and member of the audit committee of Paladin Realty Income Properties, Inc. (real estate investments). He also serves as a director and member of the audit committee and the corporate governance committee of Grubb & Ellis (real estate management).

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

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

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

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Information Regarding Executive Officers of William Lyon Homes

The executive officers of the Company are chosen annually by the Board of Directors and each holds office until his or her successor is chosen and qualified or until his or her death, resignation or removal. There are no family relationships between any director or executive officer and any other director or executive officer of the Company, except for William Lyon and William H. Lyon, who are father and son. The following table lists the Company’s executive officers and provides their respective ages as of March 20, 2009 and their current positions.

Name	Age	Position
General William Lyon	86	Chairman of the Board of Directors and Chief Executive Officer
William H. Lyon	35	President and Chief Operating Officer
Mary J. Connelly	57	Senior Vice President and Nevada Division President
W. Thomas Hickcox	56	Senior Vice President and Arizona Division President
Michael D. Grubbs	50	Senior Vice President and Chief Financial Officer
W. Douglass Harris	66	Senior Vice President, Corporate Controller and Corporate Secretary
Richard S. Robinson	62	Senior Vice President — Finance
Brian W. Doyle	45	Vice President and Southern California Division President
Gary L.Galindo	45	Vice President and Northern California Division President
Cynthia E. Hardgrave	60	Vice President — Tax and Internal Audit

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

MARY J. CONNELLY, Senior Vice President and Nevada Division President, joined The Presley Companies in May 1995, after eight years’ association with Gateway Development, six of which were served as Managing Partner in Nevada. Ms. Connelly was Vice President — Finance for the Company’s San Diego Division from 1985 to 1987, and she has more, than 25 years experience in the real estate development and homebuilding industry.

W. THOMAS HICKCOX, Senior Vice President and Arizona Division President, joined the Company in May 2000. Mr. Hickcox was previously President of Continental Homes in Phoenix, Arizona, with 16 years of service at that company. Mr. Hickcox has more than 25 years experience in the real estate development and homebuilding industry.

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

W. DOUGLASS HARRIS, Senior Vice President, Corporate Controller and Corporate Secretary joined The Presley Companies in June 1992 and has served the Company in that capacity since November 1999. Mr. Harris has served as the Corporate Secretary of the Company since October 2002. Previously, Mr. Harris spent seven years with Shapell Industries, Inc., another major California homebuilder, as its Vice President and Corporate Controller. Mr. Harris has been involved with the real estate development and homebuilding industry for more than 30 years. Mr. Harris has announced his intention to retire from the Company effective on April 3, 2009.

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

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BRIAN W. DOYLE, Vice President and Southern California Division President, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon Homes, where Mr. Doyle had served as Director of Sales and Marketing for the Southern California Division after his hire in November 1997. In January 2006, Mr. Doyle became Vice President and Division Manager for the San Diego Division. In January 2008, Mr. Doyle became Division President for the San Diego/Inland Division. In February 2009, Mr. Doyle became the Southern California Division President. Mr. Doyle has more than 10 years experience in the real estate development and homebuilding industry.

GARY L. GALINDO, Vice President and Northern California Division President, joined the Company in 2003 as Director of Land Acquisition for the Northern California Division. In January 2006, Mr. Galindo became Vice President and Division Manager for the Sacramento Division. In January 2008, Mr. Galindo became the Northern California Division President. Mr. Galindo has more than 10 years experience in the real estate development and homebuilding industry.

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

Section 16(a) Beneficial Ownership Reporting Compliance

During 2008, the Company had no class of equity securities registered under Section 12 of the Securities Exchange Act of 1934. Accordingly, no reports were required to be filed during or with respect to the year ended December 31, 2008 on Form 3, Form 4 and Form 5 by the Company’s directors, officers and 10% stockholders.

Code of Ethics

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

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

Item 11.    Executive Compensation

Compensation Discussion and Analysis

Attracting, retaining, and motivating well-qualified executives is essential to the success of any company. This is particularly the case with the Company, as the homebuilding industry is highly competitive and is subject to market fluctuations beyond the Company’s control. The goals of the Company’s compensation program are to provide significant rewards for successful performance, and to encourage retention of top executives who may have attractive opportunities at other companies. At the same time, the Company tries to keep its selling, general and administrative (“SG&A”) costs at competitive levels when compared with other major homebuilders.

The Company’s compensation decisions are made by the Compensation Committee, which is composed entirely of independent outside members of the Company’s Board of Directors. The Compensation Committee receives recommendations from the Company’s senior executives and consults with outside independent compensation consultants, such as Kenneth R. Abel, Ph.D, as it deems appropriate. The Compensation Committee and its consultants also consider publicly-available information on the executive compensation of

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other major homebuilders. Members of the Company’s executive team are involved in the compensation process by assembling data to present to the Compensation Committee and by working with the outside independent compensation consultants to give them the information necessary to enable them to complete their reports.

Internal Revenue Code Section 162(m) generally disallows a tax deduction to reporting companies for compensation over $1,000,000 paid to each of the Company’s chief executive officer and the four other most highly compensated officers, except for compensation that is “performance based.” Because the Company no longer has a class of publicly-traded equity securities outstanding, the Company is no longer subject to Section 162(m), and therefore it is not a factor in the Company’s compensation decisions.

Elements of Compensation

Salary

The Company’s Compensation Committee generally reviews the base salary of the Company’s named executive officers annually. In view of the Company’s desire to reward performance and loyalty while keeping SG&A costs competitive, the Company does not regard salary as the principal component of the compensation of its named executive officers. The Company believes that the salaries of its named executive officers are very conservative when compared with the salaries paid by other major homebuilders to similar officers.

Bonuses

Near the beginning of each year, the Compensation Committee sets objective performance criteria for the bonuses of named executive officers for that year. Although the Compensation Committee sets the objective performance criteria at the beginning of each year, in practice the objective performance criteria have been essentially the same for the past several years. The Company believes that the virtual uniformity of the objective performance criteria over the past several years has helped to reward productivity and loyalty by stabilizing the goalposts for bonuses over changing economic times. The objective performance criteria which the Compensation Committee has selected correlate each named executive officer’s bonus directly to the Company’s consolidated pre-tax, pre-bonus income (or, in the case of a division president, to his division’s pre-tax, pre-bonus income), thereby directly rewarding performance.

The Company believes that the bonus plan for its named executive officers is similar to the bonus plans at other major homebuilders. Application of the objective performance criteria can produce large bonuses in the event that the Company has (or the relevant division has) high pre-tax, pre-bonus income. The Company believes that large bonuses for its named executive officers are appropriate if the Company has (or the relevant division has) high pre-tax, pre-bonus income, particularly because in recent years the Company has not awarded any options or other equity compensation.

A named executive officer’s right to receive a bonus is conditioned on his being actively employed by the Company on the date of payment, except in the case of retirement, death or disability. Bonuses for a particular year will be paid out over two years, with 75% paid following the determination of the bonus, and 25% paid one year later, again conditioned on continued employment to the date of payment, except in the case of retirement, death or disability. These provisions help insure the loyalty and continued service of the Company’s named executive officers.

The Compensation Committee retains the discretion to increase the bonus of a named executive officer in the event of an extraordinary performance, or decrease it in the case of a substandard performance, and may make this determination on the basis of objective or subjective criteria, including, but not limited to, the pay levels of executives at other major homebuilders. In practice, the Compensation Committee has seldom exercised this discretion in recent years.

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Summary Compensation Table

The following table summarizes the annual and long-term compensation during 2008, 2007 and 2006 of the Company’s Principal Executive Officer and Principal Financial Officer and the three additional most highly compensated executive officers whose annual salaries and bonuses exceeded $100,000 in total during the fiscal year ended December 31, 2008 (collectively, the “Named Executive Officers”).

Name and Principal Position	Year	Salary ($)(1)		Bonus ($)(2)		Stock Awards ($)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)(1)(2)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)(3)		Total ($)
General William Lyon Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	2008 2007 2006	$	1,000,000 1,000,000 1,000,000	$	—       —   —	$	—       —   —	$	—       —   —	$	—   —   4,529,730	$	—       —   —	$	—   —   —	$	1,000,000 1,000,000 5,529,730
Michael D. Grubbs Senior Vice President and Chief Financial Officer (Principal Financial Officer)	2008 2007 2006		225,000 225,000 225,000		187,500 —   —		—   —   —		—   —   —		—   —   754,955		—   —   —		6,900 6,600 6,600		419,400 231,600 986,555
Douglas F. Bauer Former Director, President and Chief Operating Officer(4)	2008 2007 2006		500,000 500,000 275,000		450,000 —   —		—   —   —		—   —   —		—   —   1,542,893		—   —   —		6,900 6,600 6,600		956,900 506,600 1,824,493
Thomas J. Mitchell(5) Former Executive Vice President	2008 2007 2006		300,000 225,000 225,000		225,000 —   —		—   —   —		—   —   —		—   —   1,605,000		—   —   —		6,900 6,600 6,600		531,900 231,600 1,836,600
Mary J. Connelly Senior Vice President and Nevada Region President	2008 2007 2006		225,000 225,000 225,000		187,500 —   —		—   —   —		—   —   —		—   —   412,740		—   —   —		6,900 6,600 6,600		419,400 231,600 644,340

(1) Includes amounts which the executive would have been entitled to be paid, but which at the election of the executive were deferred by payment into the Company’s 401(k) plan and deferred compensation plans.

(2) The 2008 Senior Executive Bonus Plan (the “Plan”) provides that (i) the Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO) are each eligible to receive a bonus of 3% of the Company’s consolidated pre-tax, pre-bonus income; (ii) the Executive Vice President (“EVP”) is eligible to receive a bonus of ¾ of 1% of the Company’s consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (“CFO”) is eligible to receive a bonus of ½ of 1% of the Company’s consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Division President is eligible to receive a bonus of 3% of the division’s pre-tax, pre-bonus income, determined after allocation to the division of its allocable portion of corporate general and administrative expenses. Awards under the Plan will be paid over two years, with 75% paid following the determination of the bonus awards, and 25% paid one year later. The amounts payable one year later are conditioned upon continued employment to the date of payment, except in the case of retirement, death or disability. All awards under the Plan will be prorated downward if the sum of all calculated awards under the Plan and the Company’s 2008 bonus plans for other officers and employees of the Company and its subsidiaries would exceed 20% of the Company’s consolidated pre-tax, pre-bonus income. In addition, because the Company’s results of operations were expected to be in a loss position for the year ending December 31, 2008, and thus participants would receive no bonus income in 2008, the Plan provided for a 2008 Bonus Plan for all participants in various management bonus plans. Under this 2008 Bonus Plan, bonus ranges (defined as a percent of salary) are varied based on the level of position but range from a maximum of 25% to 100% of salary for managers. In addition, if the Company determined to apply a multiplier to the bonus percentage established for each participant, a multiplier factor would be established for each participant which would limit the total potential bonus that could be paid to each participant. In 2008 the Company determined not to apply a multiplier to the bonus percentage established for each participant.

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(3) Represents matching contributions made by the Company into each executive’s 401(k) plan account in an amount equal to 3% of each executive’s eligible earnings, up to the maximum permitted. Does not include perquisites or other personal benefits provided to the executive, since the aggregate incremental cost to the Company of such perquisites or other personal benefits provided to the executive is less than $10,000.

(4) Mr. Bauer resigned his positions as Director and as President and Chief Operating Officer effective on March 18, 2009. Mr. Bauer resigned from the Company effective on March 20, 2009.

(5) Mr. Mitchell resigned from the Company effective on February 27, 2009.

The Board of Directors approved the Company’s 2008 Senior Executive Bonus Plan (the “Plan”) on February 26, 2008. The Plan provides that the (i) Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO”) are each eligible to receive a bonus of 3% of the Company’s pre-tax, pre-bonus income; (ii) the Executive Vice President (“EVP”) is eligible to receive a bonus of ¾ of 1% of the Company’s consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (“CFO”) is eligible to receive a bonus of ½ of 1% of the Company’s consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Division President is eligible to receive a bonus of 3% of the division’s pre-tax, pre-bonus income, determined after allocation to the division of its allocable portion of corporate general and administrative expenses. All other participants under the Plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income. In addition, because the Company’s results of operations were expected to be in a loss position for the year ending December 31, 2008, and thus participants would receive no bonus income in 2008, the Plan provided for a 2008 Bonus Plan for all participants in various management bonus plans. Under this 2008 Bonus Plan, bonus ranges (defined as a percent of salary) are varied based on the level of position but range from a maximum of 25% to 100% of salary for managers. In addition, if the Company determined to apply a multiplier to the bonus percentage established for each participant, a multiplier factor would be established for each participant which would limit the total potential bonus that could be paid to each participant. In 2008 the Company determined not to apply a multiplier to the bonus percentage established for each participant. In addition, the Company’s board of directors has approved a cash bonus plan applicable in 2008 for all of its full-time, salaried employees who are not included in the Company’s 2008 Senior Executive Bonus Plan. All participants under this cash bonus plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.

The Compensation Committee retains the discretion to increase the bonus of a named executive officer in the event of an extraordinary performance, or decrease it in the case of a substandard performance, and may make this determination on the basis of objective or subjective criteria, including, but not limited to, the pay levels of executives at other major homebuilders.

For the CEO, COO, EVP, CFO, division presidents, executives and managers, awards under bonus plans are generally paid over two years, with 75% paid following the determination of bonus awards, and 25% paid one year later. The deferred amounts would be forfeited in the event of termination for any reason except retirement, death or disability. However, under the 2008 Bonus Plan, 100% of the bonuses awarded for 2008 were paid in January 2009.

Grants of Plan-Based Awards

Options/SAR Grants in Fiscal Year Ended December 31, 2008

No options were granted during 2008 to any director or Named Executive Officer. No options are outstanding as of December 31, 2008.

Option Exercises and Stock Vested Table

No exercises of stock options and no vesting of stock occurred during the fiscal year ended December 31, 2008 by any of the Named Executive Officers. No options are outstanding as of December 31, 2008.

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Nonqualified Deferred Compensation Table

The following table sets forth information concerning nonqualified deferred compensation during the fiscal year ended December 31, 2008 for each of the Named Executive Officers.

Name	Executive Contributions in Last Fiscal Year ($)		Registrant Contributions in Last Fiscal Year ($)		Aggregate Earnings in Last Fiscal Year ($)		Aggregate Withdrawals/ Distributions ($)		Aggregate Balance at Last Fiscal Year-End ($)(1)
General William Lyon	$	—	$	—	$	—	$	—	$	—
Michael D. Grubbs		—		—		—		661,284		—
Douglas F. Bauer		—		—		—		179,519		—
Thomas J. Mitchell		—		—		—		589,885		—
Mary J. Connelly		—		—		—		602,517		—

(1) The aggregate balance at December 31, 2007 was paid to the Named Executive Officers in cash on January 18, 2008 as a result of the termination of the Company’s Executive Deferred Plans as described above.

Executive Deferral Plan

Until December 2007, the Company maintained Executive Deferral Plans which gave its named executive officers the opportunity to defer a certain percentage of their base salary and bonus. Deferred salary and bonuses were deemed to be invested in one or more hypothetical investment options, which were individually chosen by each named executive officer from a list of investment alternatives. Each named executive officer’s deferred compensation account was adjusted to reflect the investment performance of the selected investment, including any appreciation or depreciation.

On December 26, 2007, the Board of Directors of the Company terminated the William Lyon Homes Executive Deferred Compensation Plan adopted as of February 11, 2002 (the “2002 Plan”), effective January 2, 2008. Upon termination of the 2002 Plan, all benefits thereunder were distributed in one lump sum on January 18, 2008.

In addition, on December 26, 2007, the Board of Directors of the Company amended the William Lyon Homes 2004 Executive Deferred Compensation Plan (the “2004 Plan”). Under this amendment (i) no further deferral elections were allowed under the 2004 Plan and (ii) each participant was deemed to have elected to receive the balance of his or her deferral account under the 2004 Plan in one lump sum distribution. All benefits thereunder were distributed in one lump sum on January 18, 2008.

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

Employees, including executive officers, enter into annual employment agreements which provide that their employment is at-will. The employment agreements with each of General William Lyon, Michael D. Grubbs, Douglas F. Bauer, Thomas J. Mitchell and Mary J. Connelly provide for an annual salary effective January 1, 2009 of $1,000,000, $225,000, $500,000, $300,000 and $225,000 respectively. Each employment agreement also provides for a monthly automobile allowance of $400, except for General William Lyon. The employment agreements do not provide for any severance or other payments on termination of employment, or in connection with a change in control of the Company. Mr. Bauer resigned his positions as Director and as President and Chief Operating Officer effective on March 18, 2009. Mr. Bauer resigned from the Company effective on March 20, 2009. Mr. Mitchell resigned from the Company effective February 27, 2009.

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

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Compensation Committee Interlocks and Insider Participation

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

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on that review and discussion, has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Compensation Committee

Gary H. Hunt, Chairman

Douglas K. Ammerman

Harold H. Greene

Alex Meruelo

Director Compensation

In 2008, outside directors received an annual fee of $60,000 per year, payable $15,000 per calendar quarter, and $2,500 for each board meeting attended in person and $1,500 for each meeting attended via teleconference. In addition, the chairperson of the Audit Committee of the Board of Directors received a fee of $10,000 per year, payable $2,500 per calendar quarter, to serve in such capacity, the chairperson of each other committee of the Board of Directors received a fee of $7,500 per year, payable $1,875 per calendar quarter, to serve in such capacity, and other committee members received a fee of $2,000 per year, payable $500 per calendar quarter, per committee for service on committees of the Board of Directors.

In 2009, outside directors will receive an annual fee of $30,000 per year, payable $7,500 per calendar quarter, and $1,250 for each board meeting attended in person. In addition, the chairperson of the Audit Committee of the Board of Directors receives a fee of $5,000 per year, payable $1,250 per calendar quarter, to serve in such capacity, the chairperson of each other committee of the Board of Directors receives a fee of $3,750 per year, payable $938 per calendar quarter, to serve in such capacity, and other committee members receive a fee of $1,000 per year, payable $250 per calendar quarter, per committee for service on committees of the Board of Directors.

The following table sets forth information concerning the compensation of the directors during the fiscal year ended December 31, 2008.

Name	Fees Earned or Paid in Cash ($)		Stock Awards ($)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)
Douglas K. Ammerman	$	78,500	—	—	—	—	—	$	78,500
Harold H. Greene		86,500	—	—	—	—	—		86,500
Gary H. Hunt		84,000	—	—	—	—	—		84,000
Alex Meruelo		84,000	—	—	—	—	—		84,000

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

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

The following table sets forth certain information as to the number of shares of Common Stock beneficially owned as of March 20, 2009. The following table includes information for (a) each person or group that is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (b) each of the directors and nominees of the Company, (c) each Named Executive Officer named in the Summary Compensation Table, and (d) all directors and executive officers of the Company as a group.

	As of March 20, 2009
	Shares Beneficially Owned		Percentage of All Common Stock
General William Lyon(1)	664		66.4	%
The William Harwell Lyon 1987 Trust(2)	282		28.2	%
The William Harwell Lyon Separate Property Trust(2)	54		5.4	%
William H. Lyon(1)	0	(3)	0.00	%
Douglas K. Ammerman(1)	0		0.00	%
Harold H. Greene(1)	0		0.00	%
Gary H. Hunt(1)	0		0.00	%
Alex Meruelo(1)	0		0.00	%
Michael D. Grubbs(1)	0		0.00	%
Thomas J. Mitchell(1)	0		0.00	%
Mary J. Connelly	0		0.00	%
All directors and executive officers as a group (14 persons)	664	(3)	66.4	%

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

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

(3) Does not include 282 shares of common stock held by The William Harwell Lyon 1987 Trust or 54 shares of common stock held by The William Harwell Lyon Separate Property Trust, of each of which William H. Lyon is the sole beneficiary. William H. Lyon does not have or share, directly or indirectly, the power to vote or to direct the vote of these shares, and thus, William H. Lyon disclaims beneficial ownership of these shares.

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

As of December 31, 2008, the Company had no securities authorized for issuance under compensation plans.

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Item 13.    Certain Relationships and Related Transactions, and Director Independence

Sale of Real Estate Project to Affiliate of General William Lyon and William H. Lyon.

On December 27, 2007, the Company sold certain land in San Diego County, California for $12,000,000 in cash to a limited liability company owned indirectly by Frank T. Suryan, Jr. as Trustee for 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, President and Chief Operating 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 $18,737,000 resulting in a loss on the transaction of $6,737,000. In October 2008, in a separately negotiated transaction from the sale of the land to the Company owned indirectly by the Suryan Family Trust (the “Owner”), the Company was contracted by and for the Owner to build apartment units for a contract price of $13,481,000, which includes the Company’s contractor fee of $529,000. As described in footnote 1 – Construction Services, the company accounts for this transaction based on the percentage of completion method, and recorded construction services revenue of $209,000 and construction services costs of $209,000 during the year ended December 31, 2008.

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

On October 26, 2000, the Company’s Board of Directors (with 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. In addition to the purchase price, one-half of the net profits in excess of six percent from the development are to be paid to the seller. As of December 31, 2004, all lots were purchased under this agreement. During the year ended December 31, 2007, $8,305,000 was paid to the seller and a total cumulative amount of $14,015,000 has been paid to the seller as of December 31, 2008.

Purchase of Land from Joint Ventures.

The Company purchased land for a total purchase price of $17,342,000 and $6,221,000 during the years ended December 31, 2007 and 2006, respectively, from certain of its joint ventures.

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

For the years ended December 31, 2008, 2007 and 2006, the Company incurred reimbursable on-site labor costs of $176,000, $224,000 and $133,000, respectively, for providing customer service to real estate projects developed by entities controlled by General William Lyon and William H. Lyon, of which $18,000 and $89,000 was due to the Company at December 31, 2008 and 2007, respectively. In addition, the Company earned fees of $64,000, $90,000 and $98,000, respectively, for tax and accounting services performed for entities controlled by General William Lyon and William H. Lyon during the years ended December 31, 2008, 2007 and 2006.

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

For the year ended December 31, 2008, the Company incurred charges of $778,000, and for each of the years ended December 31, 2007 and 2006, the Company incurred charges of $755,000 related to rent on the Company’s corporate office, from a trust of which William H. Lyon is the sole beneficiary.

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Charges Incurred Related to the Charter and Use of Aircraft.

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 General 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, inspection and repairs in effect at the time such work is completed. The total expenses incurred by the Company and paid to the Affiliate under the agreement amounted to $1,610,000, $1,423,000 and $1,488,000 during the years ended December 31, 2008, 2007 and 2006, respectively.

Effective July 1, 2006, 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 and the rates charged to General Lyon prior to the Agreement, the Company had earned revenue of $368,000, $564,000 and $524,000 for charter services provided to General William Lyon personally, for the years ended December 31, 2008, 2007 and 2006, respectively, of which $16,000 and $337,000 was due to the Company at December 31, 2008 and 2007.

Mortgage Loans.

In 2008, the Company offered home mortgage loans to its employees and directors through its mortgage company subsidiary, William Lyon Financial Services (formerly Duxford Financial, Inc.). These loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. These loans did not involve more than the normal risk of collectability or present other unfavorable features and were sold to investors typically within 7 to 15 days.

Finder’s Fee Agreement.

The Company and Alex Meruelo are parties to an agreement pursuant to which Mr. Meruelo is eligible to receive a finder’s fee based upon the cash distributions received by a subsidiary of the Company from a joint venture development project relating to a portion of the Fort Ord military base in Monterey County, California. 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. As of December 31, 2008, no amounts had been paid to Mr. Meruelo under this agreement.

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Certain Family Relationships.

William H. Lyon, one of the Company’s directors and the President and Chief Operating Officer of the Company, is the son of General William Lyon. General William Lyon is the Company’s Chairman of the Board of Directors and the Chief Executive Officer. In 2008, William H. Lyon received a base salary of $350,000 and a monthly car allowance of $400 from the Company. Mr. Lyon did not receive a bonus in 2008.

Terry A. Connelly, who is Senior Vice President and Director of Operations of the Company’s Nevada Division, is married to Mary J. Connelly, President of the Nevada Division. In 2008, Mr. Connelly received a base salary of $160,000 and a monthly car allowance of $400 from the Company. Mr. Connelly earned a bonus of $80,000 in 2008.

Director Independence.

The Board of Directors has determined that Douglas K. Ammerman, Harold H. Greene, Gary H. Hunt and Alex Meruelo are independent directors under standards established by the Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange (the “NYSE”).

Nominating and Corporate Governance Committee.    The Company has a standing Nominating and Corporate Governance Committee, which is chaired by Mr. Meruelo and consists of Messrs. Meruelo, Ammerman, Greene and Hunt. The Board has determined that all committee members are independent under standards established by the SEC and the NYSE.

Audit Committee.    The Company has a standing Audit Committee, which is chaired by Mr. Greene and consists of Messrs. Greene, Ammerman, Hunt and Meruelo. The Board has determined that all committee members are independent and financially literate under the standards established by the SEC and the NYSE. The Board has determined that Mr. Greene is an “audit committee financial expert” as defined by the SEC.

Compensation Committee.    The Company has a standing Compensation Committee, which is chaired by Mr. Hunt and consists of Messrs. Hunt, Ammerman, Greene, and Meruelo. The Board has determined that all committee members are independent under standards established by the SEC and the NYSE.

Item 14.    Principal Accountant Fees and Services

The fees for professional services provided by Ernst & Young LLP in fiscal years 2008 and 2007 were:

Type of Fees	2008		2007
Audit Fees	$	528,000	$	555,500
Audit-Related Fees		36,500		75,500
Tax Fees		95,000		111,500
Total Fees	$	659,500	$	742,500

In the above table, in accordance with the definitions of the SEC, “Audit Fees” include fees for the audit of the Company’s consolidated financial statements included in its Annual Report on Form 10-K, review of the unaudited financial statements included in its quarterly reports on Form 10-Q, comfort letters, consents, assistance with documents filed with the SEC, and accounting and reporting consultation in connection with the audit and/or quarterly reviews. “Tax Fees” include fees for tax compliance and tax planning. “Audit-Related Fees” are fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and includes fees for audits of separate financial statements of consolidated joint ventures.

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

The Audit Committee considered the compatibility of the provision of other services by Ernst & Young LLP with the maintenance of Ernst & Young LLP’s independence. The Audit Committee approved all audit and non-audit services provided by Ernst & Young LLP in 2008.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)(1)  Financial Statements

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

	Page
William Lyon Homes
Report of Independent Registered Public Accounting Firm	87
Consolidated Balance Sheets	88
Consolidated Statements of Operations	89
Consolidated Statements of Stockholders’ Equity	90
Consolidated Statements of Cash Flows	91
Notes to Consolidated Financial Statements	93

(2)  Financial Statement Schedules:

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

(3)  Listing of Exhibits:

Exhibit Number	Description
3.1(2)	Certificate of Incorporation of William Lyon Homes, a Delaware corporation.
3.2(1)	Certificate of Ownership and Merger.
3.3(30)	Certificate of Ownership and Merger.
3.4(30)	Certificate of Amendment of Certificate of Incorporation.
3.5(2)	Bylaws of William Lyon Homes, a Delaware corporation.
4.1(19)	Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.2(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.3(20)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.4(3)	Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.5(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).

77

Exhibit Number	Description
4.6(20)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.7(14)	Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.8(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.9(20)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
10.1(4)	Master Loan Agreement dated as of August 31, 2000 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Federal Bank, F.S.B., a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.2(34)	Amended and Restated Master Loan Agreement dated as of January 28, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.3(6)	Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.4(5)	Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.5(5)	Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.6(5)	Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.7(7)	Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.8(3)	Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.9(12)	Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.

78

Exhibit Number	Description
10.10(20)	Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated as of October 14, 2005 by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.11(29)	Agreement for Ninth Modification of Deeds of Trust and Other Loan Instruments dated as of October 31, 2006 by and between William Lyon Homes, Inc., a California corporation, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.12(37)	Amended and Restated Master Loan Agreement dated as of January 28, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.13(40)	First Modification of Amended and Restated Loan Agreement dated as of December 5, 2008, by and between William Lyon Homes, Inc., a California Corporation and Guaranty Bank, a federal savings bank.
10.14(4)	Revolving Line of Credit Loan Agreement (Borrowing Base Loan) by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation, dated as of September 21, 2000.
10.15(16)	Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.16(5)	Second Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of December 13, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.17(3)	Third Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of January 26, 2004, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.18(11)	Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.19(21)	First Amendment to Amended and Restated Revolving Line of Credit Loan Agreement, dated as of July 19, 2005, by and between William Lyon Homes, Inc. and California Bank & Trust.
10.20(26)	Second Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.21(34)	Third Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of December 28, 2007, by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California banking corporation.
10.22(34)	Fourth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of January 17, 2008 by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California banking corporation.
10.23(37)	Fifth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of May 20, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”), and California Bank & Trust, a California banking corporation (“Lender”).
10.24(38)	Sixth Amendment to Amended and Restated Revolving Line of Credit Loan 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.
10.25(40)	Side Letter Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of December 17, 2008, by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California Banking Corporation.

79

Exhibit Number	Description
10.26(24)	Mortgage Warehouse Loan and Security Agreement dated June 29, 2006 by and between Duxford Financial, Inc. dba William Lyon Financial Services and/or Bayport Mortgage, L.P. and/or California Pacific Mortgage, L.P., as Borrower and First Tennessee Bank as Lender.
10.27(8)	Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.28(3)	Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.29(15)	First Amendment to Credit Agreement dated as of August 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.30(13)	Amendment No. 2 to Credit Agreement dated as of November 15, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.31(9)	Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as borrower, and California Bank & Trust, a California banking corporation, and the other financial institutions named therein, as lenders.
10.32(9)	Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware corporation.
10.33(10)	Borrowing Base Revolving Line of Credit Agreement, dated as of June 28, 2004, by and between William Lyon Homes, Inc., a California corporation, and Bank One, NA, a national banking association.
10.34(15)	Modification Agreement, dated as of December 7, 2004, by and between William Lyon Homes, Inc., a California corporation, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA, a national banking association).
10.35(21)	Second Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, between William Lyon Homes, Inc. and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA).
10.36(28)	Third Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated October 23, 2006 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a National Banking Association.
10.37(31)	Fifth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated November 6, 2007 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a national banking association.
10.38(34)	Sixth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated February 20, 2008 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a national banking association.
10.39(37)	Seventh Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of March 12, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and JPMorgan Chase Bank, N.A., a national banking association (“Bank”).
10.40(37)	Eighth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of June 5, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and JPMorgan Chase Bank, N.A., a national banking association (“Bank”).
10.41(39)	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”).
10.42(40)	Tenth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated December 19, 2008, by and between JPMorgan Chase Bank, N.A., a national banking association, and William Lyon Homes, Inc., a California Corporation.
10.43(17)	Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.

80

Exhibit Number	Description
10.44(17)	Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective November 5, 1999.
10.45(17)	Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5, 1999.
10.46(4)	Option Agreement and Escrow Instructions between William Lyon Homes, Inc., a California corporation and Lathrop Investment, L.P., a California limited partnership, dated as of October 24, 2000.
10.47(30)	Description of 2006 Cash Bonus Plan.
10.48(30)	2006 Senior Executive Bonus Plan.
10.49(30)	Description of 2007 Cash Bonus Plan.
10.50(30)	2007 Senior Executive Bonus Plan.
10.51(18)	Standard Industrial/Commercial Single-Tenant Lease – Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.
10.52(5)	The Presley Companies Non-Qualified Retirement Plan for Outside Directors.
10.53(22)	Borrowing Base Revolving Line of Credit Agreement, dated as of February 14, 2006, by and between William Lyon Homes, Inc., a California corporation, and Wachovia Financial Services, Inc, a North Carolina corporation, by and through its Agent, Wachovia Bank, National Association, a national banking association.
10.54(27)	First Amendment to Borrowing Base Revolving Line of Credit Agreement dated September 29, 2006 by and between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association, a national banking association.
10.55(34)	Third Amendment to Borrowing Base Revolving Line of Credit Agreement dated January 23, 2008 between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association, a national banking association, formerly referenced as Agent for Wachovia Financial Services, Inc., a North Carolina corporation.
10.56(36)	Fourth Amendment to Borrowing Base Revolving Line of Credit Agreement, dated as of May 14, 2008, by and between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association.
10.57(40)	Fifth Amendment to Borrowing Base Revolving Line of Credit Agreement, dated as of December 15, 2008, between William Lyon Homes, Inc., a California Corporation, and Whitney Ranch Village 5, LLC, a Delaware limited liability company (individually and collectively as the context may require) and Wachovia Bank, National Association, a national banking association.
10.58(25)	Borrowing Base Revolving Line of Credit Agreement dated as of July 10, 2006 by and between William Lyon Homes, Inc., a California corporation, and California National Bank.
10.59(32)	Extension and Modification Agreement dated as of August 2, 2007 by and between William Lyon Homes, Inc., a California corporation, and California National Bank
10.60(35)	Second Extension and Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated May 21, 2008 by and between William Lyon Homes, Inc., a California corporation and California National Bank, a national banking association.
10.61(35)	Third Extension and Modification agreement dated May 19, 2008, by and between Circle G at the Church Farm North Joint Venture, LLC, an Arizona limited liability company, and California National Bank, a national banking association.
10.62(40)	Third Modification Agreement dated as of December 23, 2008, by and between William Lyon Homes, Inc., a California Corporation and California National Bank, a national banking association.
10.63(23)	Revolving Line of Credit Loan Agreement dated as of March 8, 2006 by and between William Lyon Homes, Inc., a California corporation, and Comerica Bank.
10.64(34)	Amendment Agreement entered into as of February 28, 2008, by and between William Lyon Homes, Inc., a California corporation and Comerica Bank

81

Exhibit Number	Description
10.65(39)	Second Amendment Agreement dated as of September 2, 2008, by and between William Lyon Homes, Inc., a California Corporation (“Borrower”), and Comerica Bank (“Lender”).
10.66(40)	Third Amendment Agreement dated as of December 22, 2008, by and between William Lyon Homes, Inc., a California Corporation, and Comerica Bank.
10.67(33)	Loan Agreement dated as of January 30, 2007, by and between East Garrison Partners I, a California limited liability company, and Residential Funding Company, LLC, a Delaware limited liability company.
10.68(33)	Completion Guaranty dated as of January 30, 2007, by and between William Lyon Homes, Inc., a California corporation, and other guarantors in favor of Residential Funding Company, LLC.
10.69(34)	First Amendment to Loan Agreement dated as of February 25, 2008, but effective as of December 31, 2007, by and between East Garrison Partners I, LLC, a California limited liability company, and RFC Construction Funding, LLC, a Delaware limited liability company, as successor in interest to and assignee of Residential Funding Company, LLC., a Delaware limited liability company.
12.1(41)	Statement of computation of ratio of earnings to fixed charges.
21.1(41)	List of Subsidiaries of William Lyon Homes, a Delaware corporation.
31.1(41)	Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2(41)	Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1(41)	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(41)	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

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

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

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

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

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

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

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

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

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

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

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

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

82

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

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

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

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

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

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

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

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

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

(22) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.

(23) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed April 3, 2006 and incorporated herein by reference.

(24) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed July 6, 2006 and incorporated herein by reference.

(25) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed August 1, 2006 and incorporated herein by reference.

(26) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed September 27, 2006 and incorporated herein by reference.

(27) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed October 17, 2006 and incorporated herein by reference.

(28) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed October 27, 2006 and incorporated herein by reference.

(29) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed December 11, 2006 and incorporated herein by reference.

(30) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

(31) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on November 15, 2007 and incorporated herein by reference.

(32) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on August 6, 2007 and incorporated herein by reference.

(33) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on February 2, 2007 and incorporated herein by reference.

(34) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.

(35) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on May 28, 2008 and incorporated herein by reference.

(36) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on July 10, 2008 and incorporated herein by reference.

(37) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008 and incorporated herein by reference.

83

(38) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on September 24, 2008 and incorporated herein by reference.

(39) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 and incorporated herein by reference.

(40) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on January 5, 2009 and incorporated herein by reference.

(41) Filed herewith.

84

SIGNATURES

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

	WILLIAM LYON HOMES
March 27, 2009	By:	/s/    MICHAEL D. GRUBBS
		Michael D. Grubbs
		Senior Vice President,
		Chief Financial Officer and Treasurer

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

Name	Title	Date
/S/    WILLIAM LYON       William Lyon	Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)	March 27, 2009
/S/    WILLIAM H. LYON       William H. Lyon	Director, President and Chief Operating Officer	March 27, 2009
/S/    DOUGLAS K. AMMERMAN       Douglas K. Ammerman	Director	March 25, 2009
/S/    HAROLD H. GREENE       Harold H. Greene	Director	March 25, 2009
/S/    GARY H. HUNT       Gary H. Hunt	Director	March 25, 2009
/S/    ALEX MERUELO       Alex Meruelo	Director	March 25, 2009
/S/    MICHAEL D. GRUBBS       Michael D. Grubbs	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)	March 27, 2009
/S/    W. DOUGLASS HARRIS       W. Douglass Harris	Senior Vice President, Corporate Controller and Corporate Secretary (Principal Accounting Officer)	March 27, 2009

85

INDEX TO FINANCIAL STATEMENTS

	Page
William Lyon Homes
Report of Independent Registered Public Accounting Firm	87
Consolidated Balance Sheets	88
Consolidated Statements of Operations	89
Consolidated Statements of Stockholders’ Equity	90
Consolidated Statements of Cash Flows	91
Notes to Consolidated Financial Statements	93

REQUIRED SCHEDULES

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

86

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

William Lyon Homes

We have audited the accompanying consolidated balance sheets of William Lyon Homes as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of William Lyon Homes at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

/S/    ERNST & YOUNG LLP

Irvine, California

March 25, 2009

87

WILLIAM LYON HOMES

CONSOLIDATED BALANCE SHEETS

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

	December 31,
	2008		2007
ASSETS
Cash and cash equivalents — Note 1	$	67,017	$	73,197
Restricted cash — Note 1		5,079		—
Receivables — Note 4		29,985		39,613
Income tax refunds receivable — Note 11		46,696		5,654
Real estate inventories — Notes 2 and 5
Owned		754,489		1,061,660
Not owned		107,763		144,265
Investments in and advances to unconsolidated joint ventures — Note 6		2,769		4,671
Property and equipment, less accumulated depreciation of $14,124 and $12,093 at December 31, 2008 and 2007, respectively		14,403		16,092
Deferred loan costs		6,264		9,645
Goodwill — Note 1		—		5,896
Other assets		10,378		14,635
	$	1,044,843	$	1,375,328
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	16,331	$	40,890
Accrued expenses		62,987		67,786
Liabilities from inventories not owned		80,079		113,395
Notes payable — Note 7		194,629		266,932
7 5/8% Senior Notes due December 15, 2012 — Note 7		133,800		150,000
10 3/4% Senior Notes due April 1, 2013 — Note 7		218,176		247,553
7 1/2% Senior Notes due February 15, 2014 — Note 7		124,300		150,000
		830,302		1,036,556
Minority interest in consolidated entities — Note 2		43,416		56,009
Commitments and contingencies — Note 13
Stockholders’ equity — Note 9
Common stock, par value $.01 per share; 3,000 shares authorized; 1,000 shares outstanding at December 31, 2008 and 2007		—		—
Additional paid-in capital		48,867		48,867
Retained earnings		122,258		233,896
		171,125		282,763
	$	1,044,843	$	1,375,328

See accompanying notes.

88

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

	Year Ended December 31,
	2008			2007			2006
Operating revenue
Home sales	$	468,452		$	1,002,549		$	1,478,694
Lots, land and other sales		39,512			102,808			13,527
Construction services — Note 1		18,114			—			—
		526,078			1,105,357			1,492,221
Operating costs
Cost of sales — homes		(439,276	)		(873,228	)		(1,160,614	)
Cost of sales — lots, land and other		(47,599	)		(205,603	)		(16,524	)
Impairment loss on real estate assets — Note 5		(135,311	)		(231,120	)		(39,895	)
Impairment loss on goodwill — Note 1		(5,896	)		—			—
Construction services — Note 1		(15,431	)		—			—
Sales and marketing		(40,441	)		(66,703	)		(72,349	)
General and administrative		(27,645	)		(37,472	)		(61,390	)
Other		(4,461	)		(903	)		(6,502	)
		(716,060	)		(1,415,029	)		(1,357,274	)
Equity in (loss) income of unconsolidated joint ventures — Note 6		(3,877	)		304			3,242
Minority equity in loss (income) of consolidated entities — Note 2		10,446			(11,126	)		(16,914	)
Operating (loss) income		(183,413	)		(320,494	)		121,275
Gain on retirement on debt — Note 7		54,044			—			—
Interest expense, net of amounts capitalized — Note 7		(24,440	)		—			—
Financial advisory expenses — Note 9		—			—			(3,165	)
Other income, net		579			3,744			5,599
(Loss) income before provision for income taxes		(153,230	)		(316,750	)		123,709
Benefit (provision) for income taxes — Note 11		41,592			(32,658	)		(48,931	)
Net (loss) income	$	(111,638	)	$	(349,408	)	$	74,778

See accompanying notes.

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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock					Additional Paid-In Capital		Retained Earnings
	Shares		Amount								Total
Balance — December 31, 2005	8,652		$	86		$	35,404	$	507,404		$	542,894
Income tax benefit from unused recognized built-in losses — Note 11	—			—			4,229		—			4,229
Issuance of common stock upon exercise of stock options and related income tax benefit	50			1			3,493		—			3,494
Elimination of common stock upon merger of WLH Acquisition Corp with and into Company — Note 9	(8,702	)		(87	)		87		—			—
Surviving common stock upon merger of WLH Acquisition Corp with and into the Company — Note 9	1			—			—		—			—
Net income	—			—			—		74,778			74,778
Balance — December 31, 2006	1			—			43,213		582,182			625,395
Income tax benefit and related interest recognized as the result of the adoption of FIN 48 — Note 11	—			—			5,654		1,122			6,776
Net loss	—			—			—		(349,408	)		(349,408	)
Balance — December 31, 2007	1			—			48,867		233,896			282,763
Net loss	—			—			—		(111,638	)		(111,638	)
Balance — December 31, 2008	1		$	—		$	48,867	$	122,258		$	171,125

See accompanying notes.

90

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2008			2007			2006
Operating activities
Net (loss) income	$	(111,638	)	$	(349,408	)	$	74,778
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,218			2,460			2,529
Impairment loss on real estate assets		135,311			231,120			39,895
Impairment loss on goodwill		5,896			—			—
Equity in loss (income) of unconsolidated joint ventures		3,877			(304	)		(3,242	)
Distributions of income from unconsolidated joint ventures		816			—			2,599
Minority equity in (loss) income of consolidated entities		(10,446	)		11,126			16,914
Gain on retirement of debt		(54,044	)		—			—
State income tax refund credited to additional paid-in capital		—			—			10
Federal income tax refund credited to additional paid-in capital		—			—			1,820
(Benefit) provision for income taxes		(41,592	)		32,658			48,931
Net changes in operating assets and liabilities:
Restricted cash		(5,079	)		—			—
Receivables		9,628			81,365			23,990
Income tax refunds receivable		550			—			—
Real estate inventories — owned		167,516			174,318			(147,790	)
Deferred loan costs		2,501			1,613			1,065
Other assets		4,257			3,113			(20,079	)
Accounts payable		(24,559	)		(9,469	)		(18,734	)
Accrued expenses		(4,799	)		(44,079	)		(112,669	)
Net cash provided by (used in) operating activities		80,413			134,513			(89,983	)
Investing activities
Investment in and advances to unconsolidated joint ventures		(3,003	)		(7,106	)		(1,976	)
Net cash paid for purchase of partner’s interest in unconsolidated joint venture		—			(1,484	)		—
Distributions of capital from unconsolidated joint ventures		212			1,095			—
Purchases of property and equipment		(529	)		(766	)		(804	)
Net cash used in investing activities		(3,320	)		(8,261	)		(2,780	)
Financing activities
Proceeds from borrowings on notes payable		591,427			1,699,700			2,139,789
Principal payments on notes payable		(659,021	)		(1,765,368	)		(1,981,937	)
Net cash paid for repurchase of Senior Notes		(16,718	)		—			—
Minority interest contributions (distributions), net		1,039			(26,119	)		(79,160	)
Common stock issued for exercised options		—			—			434
Net cash (used in) provided by financing activities		(83,273	)		(91,787	)		79,126
Net (decrease) increase in cash and cash equivalents		(6,180	)		34,465			(13,637	)
Cash and cash equivalents — beginning of year		73,197			38,732			52,369
Cash and cash equivalents — end of year	$	67,017		$	73,197		$	38,732

See accompanying notes.

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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

	Year Ended December 31,
	2008		2007		2006
Supplemental disclosures of non-cash activities:
Issuance of notes payable for land acquisitions	$	—	$	—	$	20,625
Reduction of notes payable to secure land option agreement	$	4,709	$	—	$	—
Consolidation of other assets and minority interest from variable interest entities	$	—	$	—	$	(8,404	)
Net increase in real estate inventories —  not owned and liabilities from inventories not owned	$	33,316	$	18,169	$	131,564
Net increase in real estate inventories — not owned and minority interest	$	3,186	$	38,233	$	55,073
Decrease in principal amount of senior notes due to repurchase	$	55,182	$	—	$	—
Income tax benefit credited to additional paid-in capital in connection with stock option exercises and other	$	—	$	—	$	5,459
Net change in assets from previously consolidated joint venture	$	—	$	2,196	$	—
Net change in liabilities from previously consolidated joint venture	$	—	$	626	$	—
Reduction of notes payable and real estate inventories-owned from reconveyance of land to land seller	$	—	$	10,021	$	—
Income tax benefit credited to additional paid-in capital and retained earnings	$	—	$	6,776	$	—
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.

92

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

Operations

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

Basis of Presentation

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

Financial Condition and Liquidity

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

Real Estate Inventories and Related Indebtedness

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

93

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 years ended December 31 are as follows (in thousands):

	December 31,
	2008			2007			2006
Warranty liability, beginning of year	$	30,048		$	23,364		$	20,219
Warranty provision during year		5,040			10,182			14,679
Warranty payments during year		(8,853	)		(12,030	)		(17,582	)
Warranty charges related to pre-existing warranties during year		159			8,532			6,048
Warranty liability, end of year	$	26,394		$	30,048		$	23,364

Interest incurred under the Revolving Credit Facilities, the 7 ⁵/8% Senior Notes, the 10 ³/4% Senior Notes, the 7 ¹/2% Senior Notes and other notes payable, as more fully discussed in Note 7, is capitalized to qualifying real estate projects under development. Any additional interest charges related to real estate projects not under development are expensed in the period incurred. During the year ended December 31, 2008, the Company incurred $24,440,000 of interest expense, due to a decrease in real estate assets which qualify for interest capitalization.

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives ranging from three to fifteen years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the shorter of either their estimated useful lives or term of the lease. As more fully discussed in Note 12, the Company owns an aircraft which is being depreciated using the straight-line method over an estimated useful life of fifteen years.

Deferred Loan Costs

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

Goodwill

The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill, which is subject to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”). The Company reviews goodwill for impairment on an annual basis or when indicators of impairment exist. Evaluating goodwill for impairment involves the determination of the fair value of the Company’s reporting units in which the Company has recorded goodwill. A reporting unit is a component of an operating segment for which discrete financial information is available and reviewed by the Company’s management on a regular basis. Inherent in the determination of fair value are judgments and assumptions, including the interpretation of current economic conditions and market valuations.

Due to continued deterioration in market conditions, the Company recorded an impairment charge on goodwill of $5,896,000 during the year ended December 31, 2008. The Company did not incur impairment charges during the years ended December 31, 2007 and 2006.

94

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Sales and Profit Recognition

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

Construction Services

The Company accounts for 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 $18,114,000 and $15,431,000, respectively, for the year ended December 31, 2008, in the accompanying consolidated statement of operations.

The Company entered into construction management agreements to build and market homes 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. In addition, in October 2008, the Company entered into a contract to build apartment units for a related party at a contract price of $13,481,000, which includes the Company’s contractor fee of $529,000. For more information on this agreement, see Note 12.

Financial Instruments

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash investments, receivables, and deposits. The Company typically places its cash investments in investment grade short-term instruments. Deposits, included in other assets, are due from municipalities or utility companies and are generally collected from such entities through fees assessed to other developers.

The Company is an issuer of, or subject to, financial instruments with off-balance sheet risk in the normal course of business which exposes it to credit risks. These financial instruments include letters of credit and obligations in connection with assessment district bonds. These off-balance sheet financial instruments are described in more detail in Note 13.

Cash and Cash Equivalents

Short-term investments with a maturity of three months or less when purchased are considered cash equivalents. The Company’s cash and cash equivalents balance exceeds federally insurable limits as of December 31, 2008. The Company monitors the cash balances in its operating accounts and adjusts the cash balances as appropriate; however, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.

95

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restricted Cash

Restricted cash consists of a 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.

Earnings Per Common Share

On July 25, 2006, WLH Acquisition Corp., a corporation owned by General William Lyon, Chairman of the Board and Chief Executive Officer of the Company, The William Harwell Lyon 1987 Trust and The William Harwell Lyon Separate Property Trust, was merged with and into the Company, with the Company continuing as the surviving corporation of the merger. Prior to the completion of the merger, General Lyon and the two trusts contributed all the shares of the Company owned by them, which constituted more than 90% of the outstanding shares, to WLH Acquisition Corp. WLH Acquisition Corp. was then merged with and into the Company pursuant to the short-form merger provisions of Delaware law. After the merger, the Company’s capital structure consisted of common stock, par value $.01 per share, 3,000 shares authorized, and 1,000 shares outstanding. The Company will continue as a privately held company, wholly-owned by General Lyon and the two trusts. Because the Company is now a privately held company, no earnings per share information is presented. See Note 9 – Tender Offer and Merger for additional information.

Use of Estimates

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 December 31, 2008 and 2007 and revenues and expenses for each of the three years in the period ended December 31, 2008. Accordingly, actual results could differ from those estimates.

Impact of New Accounting Pronouncements

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 for financial assets and liabilities. The Company does not anticipate the adoption of the remaining provisions of FAS 157 will have a material impact on the Company’s consolidated financial position or results of operations. See Note 8 for further discussion.

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 141R on January 1, 2009 will require the company to expense all transaction costs for business combinations. We do not expect the adoption of FAS 141R to have a significant impact on the Company’s 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

96

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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 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.

In December 2008, the FASB issued FASB Staff Position (“FSP”) FAS 140-4 and FIN 46(R)-8, Disclosure by Public Entities (Enterprises) About Transfers of Financial Assets and Interests in Variable Interest Entities. The purpose of the FSP is to promptly improve disclosures by public companies until the pending amendments to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, (“SFAS 140”), and FIN 46R are finalized and approved by the FASB. The FSP amends SFAS 140 to

97

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

require public companies to provide additional disclosures about transferor’s continuing involvement with transferred financial assets. It also amends FIN 46R by requiring public companies to provide additional disclosures regarding their involvement with variable interest entities. This FSP is effective for the Company’s fiscal year beginning after December 1, 2008. The FSP will not have a material effect on the Company’s consolidated financial statements.

Reclassifications

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

Note 2 — Consolidation of Variable Interest Entities

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

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

Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements (see Note 13) 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 is determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE are consolidated with the Company’s financial statements.

At December 31, 2008, 2007 and 2006, certain joint ventures, lot option agreements and land banking arrangements have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures, lot option agreements and land banking arrangements have been consolidated with the Company’s financial statements as of December 31, 2008 and 2007, and for the three years in the period ended December 31, 2008. 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 (see Note 13) of $47,033,000 and $57,321,000 at December 31, 2008 and 2007, respectively. As of December 31, 2008, the Company’s remaining total contractual obligations for land purchases and option commitments was approximately $205,386,000.

98

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

99

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)

	December 31, 2008
	Wholly- Owned		Variable Interest Entities Under Interpretation No. 46		Eliminating Entries			Consolidated Total
ASSETS
Cash and cash equivalents	$	62,770	$	4,247	$	—		$	67,017
Restricted cash		5,079		—		—			5,079
Receivables		20,696		9,289		—			29,985
Income tax refunds receivable		46,696		—		—			46,696
Real estate inventories
Owned		681,609		72,880		—			754,489
Not owned		80,079		27,684		—			107,763
Investments in and advances to unconsolidated joint ventures		2,769		—		—			2,769
Investments in consolidated entities		7,200		—		(7,200	)		—
Other assets		31,045		—		—			31,045
Intercompany receivables		382		375		(757	)		—
	$	938,325	$	114,475	$	(7,957	)	$	1,044,843
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	72,367	$	6,951	$	—		$	79,318
Liabilities from inventories not owned		80,079		—		—			80,079
Notes payable		138,478		56,151		—			194,629
7 5/8% Senior Notes due December 15, 2012		133,800		—		—			133,800
10 3/4% Senior Notes due April 1, 2013		218,176		—		—			218,176
7 1/2% Senior Notes due February 15, 2014		124,300		—		—			124,300
Intercompany payables		—		757		(757	)		—
Total liabilities		767,200		63,859		(757	)		830,302
Minority interest in consolidated entities		—		—		43,416			43,416
Owners’ capital
William Lyon Homes		—		7,200		(7,200	)		—
Others		—		43,416		(43,416	)		—
Stockholders’ equity		171,125		—		—			171,125
	$	938,325	$	114,475	$	(7,957	)	$	1,044,843

100

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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		39,608		5		—			39,613
Income tax refunds receivable		5,654		—		—			5,654
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

101

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Year Ended December 31, 2008
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	485,627		$	22,337		$	—		$	507,694
Construction services		18,114			—			—			18,114
Management fees		825			—			(825	)		—
		504,566			22,337			(825	)		526,078
Operating costs
Cost of sales		(465,851	)		(21,849	)		825			(486,875	)
Impairment loss on real estate assets		(111,737	)		(23,574	)		—			(135,311	)
Impairment loss on goodwill		(5,896	)		—			—			(5,896	)
Construction services		(15,431	)		—			—			(15,431	)
Sales and marketing		(38,048	)		(2,393	)		—			(40,441	)
General and administrative		(27,598	)		(47	)		—			(27,645	)
Other		(4,461	)		—			—			(4,461	)
		(669,022	)		(47,863	)		825			(716,060	)
Equity in loss of unconsolidated joint ventures		(3,877	)		—			—			(3,877	)
Equity in loss of consolidated entities		(14,967	)		—			14,967			—
Minority equity in loss of consolidated entities		—			—			10,446			10,466
Operating loss		(183,300	)		(25,526	)		25,413			(183,413	)
Gain on retirement on debt		54,044			—			—			54,044
Interest expense, net of amounts capitalized		(24,440	)		—			—			(24,440	)
Other income, net		466			113			—			579
Loss before benefit for income taxes		(152,230	)		(25,413	)		25,413			(153,230	)
Benefit for income taxes		41,592			—			—			41,592
Net loss	$	(111,638	)	$	(25,413	)	$	25,413		$	(111,638	)

102

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Year Ended December 31, 2007
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	1,010,732		$	111,967		$	(17,342	)	$	1,105,357
Management fees		3,123			—			(3,123	)		—
		1,013,855			111,967			(20,465	)		1,105,357
Operating costs
Cost of sales		(1,010,146	)		(89,150	)		20,465			(1,078,831	)
Impairment loss on real estate assets		(231,120	)		—			—			(231,120	)
Sales and marketing		(60,965	)		(5,738	)		—			(66,703	)
General and administrative		(37,460	)		(12	)		—			(37,472	)
Other		(903	)		—			—			(903	)
		(1,340,594	)		(94,900	)		20,465			(1,415,029	)
Equity in income of unconsolidated joint ventures		304			—			—			304
Equity in income of consolidated entities		6,298			—			(6,298	)		—
Minority equity in income of consolidated entities		—			—			(11,126	)		(11,126	)
Operating (loss) income		(320,137	)		17,067			(17,424	)		(320,494	)
Other income, net		3,387			357			—			3,744
(Loss) income before provision for income taxes		(316,750	)		17,424			(17,424	)		(316,750	)
Provision for income taxes		(32,658	)		—			—			(32,658	)
Net (loss) income	$	(349,408	)	$	17,424		$	(17,424	)	$	(349,408	)

103

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Year Ended December 31, 2006
	Wholly-Owned			Variable Interest Entities Under Interpretation No. 46			Eliminating Entries			Consolidated Total
Operating revenue
Sales	$	1,289,338		$	202,883		$	—		$	1,492,221
Management fees		5,011			—			(5,011	)		—
		1,294,349			202,883			(5,011	)		1,492,221
Operating costs
Cost of sales		(1,022,443	)		(159,706	)		5,011			(1,177,138	)
Impairment loss on real estate assets		(39,895	)		—			—			(39,895	)
Sales and marketing		(64,073	)		(8,276	)		—			(72,349	)
General and administrative		(61,367	)		(23	)		—			(61,390	)
Other		(6,502	)		—			—			(6,502	)
		(1,194,280	)		(168,005	)		5,011			(1,357,274	)
Equity in income of unconsolidated joint ventures		3,242			—			—			3,242
Equity in income of consolidated entities		18,491			—			(18,491	)		—
Minority equity in income of consolidated entities		—			—			(16,914	)		(16,914	)
Operating income		121,802			34,878			(35,405	)		121,275
Financial advisory expenses		(3,165	)		—			—			(3,165	)
Other income, net		5,072			527			—			5,599
Income before provision for income taxes		123,709			35,405			(35,405	)		123,709
Provision for income taxes		(48,931	)		—			—			(48,931	)
Net income	$	74,778		$	35,405		$	(35,405	)	$	74,778

104

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 — Segment Information

The Company operates two principal businesses: Homebuilding and financial services (consisting of mortgage origination and escrow services operations). In accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), the Company has determined that each of its operating divisions and its financial services operations are its operating segments. Corporate is a non-operating segment.

The Company’s homebuilding operations design, construct and sell a wide range of homes designed to meet the specific needs of each of it markets. In accordance with the aggregation criteria defined in SFAS 131, the Company’s homebuilding operating segments have been grouped into four reportable segments: Southern California, consisting of an operating division with operations in Orange, Los Angeles, Riverside, San Bernardino and San Diego counties; Northern California, consisting of an operating division with operations in Contra Costa, Sacramento, Placer, Monterey and Stanislaus counties; Arizona, consisting of an operating division in the Phoenix, Arizona metropolitan area: and Nevada, consisting of an operating division in the Las Vegas, Nevada metropolitan area.

The Company’s mortgage origination operations provide mortgage financing to the Company’s homebuyers in substantially all of the markets in which the Company operates. The Company’s escrow services operations provide escrow processing services to the Company’s homebuyers in substantially all of the markets in which the Company operates. The Company’s financial services segment did not meet the materiality thresholds which would require disclosure for the years ended December 31, 2008, 2007 and 2006, and accordingly, is not separately reported. In addition, the Company’s mortgage origination operations will be discontinued effective March 1, 2009.

Corporate is a non-operating segment that develops and implements strategic initiatives and supports the Company’s operating divisions by centralizing key administrative functions such as finance and treasury, information technology, risk management and litigation, and human resources.

Segment financial information relating to the Company’s homebuilding operations was as follows:

	Year Ended December 31,
	2008			2007			2006
	(in thousands)
Homebuilding revenues:
Southern California	$	323,446		$	780,213		$	852,528
Northern California		95,084			102,432			232,100
Arizona		49,187			134,153			208,084
Nevada		58,361			88,559			199,509
Total homebuilding	$	526,078		$	1,105,357		$	1,492,221
	Year Ended December 31,
	2008			2007			2006
	(in thousands)
Homebuilding pretax (loss) income:
Southern California	$	(79,966	)	$	(222,849	)	$	73,309
Northern California		(59,518	)		(55,243	)		14,040
Arizona		(17,746	)		19,639			50,994
Nevada		(37,225	)		(46,340	)		14,137
Corporate		41,225			(11,957	)		(28,771	)
Total homebuilding	$	(153,230	)	$	(316,750	)	$	123,709

105

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Homebuilding pretax (loss) income includes the following pretax inventory and goodwill impairment charges recorded in the following segments:

	Year Ended December 31, 2008
	Southern California		Northern California		Arizona		Nevada		Total
	(in thousands)
Inventory impairments	$	39,925	$	51,457	$	14,256	$	29,673	$	135,311
Goodwill impairments		4,831		1,065		—		—		5,896
Total impairments	$	44,756	$	52,522	$	14,256	$	29,673	$	141,207

	Year Ended December 31, 2007
	Southern California		Northern California		Arizona		Nevada		Total
	(in thousands)
Inventory impairments	$	146,625	$	40,909	$	—	$	43,586	$	231,120
Goodwill impairments		—		—		—		—		—
Total impairments	$	146,625	$	40,909	$	—	$	43,586	$	231,120

	Year Ended December 31, 2006
	Southern California		Northern California		Arizona		Nevada		Total
	(in thousands)
Inventory impairments	$	12,261	$	17,535	$	—	$	10,099	$	39,895
Goodwill impairments		—		—		—		—		—
Total impairments	$	12,261	$	17,535	$	—	$	10,099	$	39,895

Homebuilding pretax (loss) income includes the following pretax loss on sales of lots, land and other recorded in the following segments:

	Year Ended December 31, 2008
	Southern California			Northern California			Arizona			Nevada			Total
	(in thousands)
Loss on sales of lots, land and other
Operating revenue	$	24,721		$	14,791		$	—		$	—		$	39,512
Operating costs		(30,780	)		(16,036	)		(783	)		—			(47,599	)
Loss on sales of lots, land and other	$	(6,059	)	$	(1,245	)	$	(783	)	$	—		$	(8,087	)
	Year Ended December 31, 2007
	Southern California			Northern California			Arizona			Nevada			Total
	(in thousands)
Gain (loss) on sales of lots, land and other
Operating revenue	$	83,559		$	—		$	19,249		$	—		$	102,808
Operating costs		(184,607	)		(5,649	)		(15,004	)		(343	)		(205,603	)
Gain (loss) on sales of lots, land and other	$	(101,048	)	$	(5,649	)	$	4,245		$	(343	)	$	(102,795	)

106

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Year Ended December 31, 2006
	Southern California			Northern California			Arizona			Nevada			Total
	(in thousands)
Gain (loss) on sales of lots, land and other
Operating revenue	$	570		$	6,970		$	2,423		$	3,564		$	13,527
Operating costs		(8,912	)		(3,659	)		(1,705	)		(2,248	)		(16,524	)
Gain (loss) on sales of lots, land and other	$	(8,342	)	$	3,311		$	718		$	1,316		$	(2,997	)

	December 31,
	2008		2007
	(in thousands)
Homebuilding assets:
Southern California	$	393,754	$	606,581
Northern California		162,730		260,695
Arizona		193,796		202,483
Nevada		134,146		172,789
Corporate(1)		160,417		132,780
Total homebuilding assets	$	1,044,843	$	1,375,328

(1) Comprised primarily of cash and receivables.

Note 4 — Receivables

Receivables consist of the following (in thousands):

	December 31,
	2008		2007
First trust deed mortgage notes receivable, pledged as collateral for revolving mortgage warehouse credit facility	$	7,030	$	11,971
Escrow proceeds receivable		8,619		19,214
Other receivables		14,336		8,428
	$	29,985	$	39,613

107

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5 — Real Estate Inventories and Impairment Loss on Real Estate Assets

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

	December 31,
	2008		2007
Inventories owned: (1)
Land deposits	$	47,033	$	57,321
Land and land under development		477,249		609,023
Homes completed and under construction		146,838		258,161
Model homes		83,369		137,155
Total	$	754,489	$	1,061,660
Inventories not owned: (2)
Variable interest entities — land banking arrangement	$	27,684	$	30,870
Other land options contracts		80,079		113,395
Total inventories not owned	$	107,763	$	144,265

(1) In 2008, the Company has temporarily suspended all development, sales and marketing activities at thirteen of its projects which are in various 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 $229,858,000 as of December 31, 2008, of which $128,988,000 is included in Land and land under development, $62,223,000 is included in Homes completed and under construction and $38,647,000 is included in Model homes.

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

The Company accounts for its real estate inventories (including land, construction in progress, completed inventory, including models, and inventories not owned) 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. Indicators of impairment include a decrease in demand for housing due to softening market conditions, competitive pricing pressures which reduce the average sales prices of homes including an increase in sales incentives offered to buyers, slowing sales absorption rates, decreases in home values in the markets in which the Company operates, significant decreases in gross margins and a decrease in project cash flows for a particular project.

For land, construction in progress, completed inventory, including model homes, and inventories not owned, the Company estimates expected cash flows at the project level by maintaining current budgets using recent historical information and current market assumptions. The Company updates project budgets and cash flows of each real estate project on a quarterly basis to determine whether the estimated remaining undiscounted future cash flows of the project are more or less than the carrying amount (net book value) of the asset. If the

108

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

undiscounted cash flows are more than the net book value of the project, then there is no impairment. If the undiscounted cash flows are less than the net book value of the asset, then the asset is deemed to be impaired and is written-down to its fair value.

Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties (i.e., other than a forced or liquidation sale). Management determines the estimated fair value of each project by determining the present value of estimated future cash flows at discount rates that are commensurate with the risk of each project. 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 future revenues and costs, as well as future events and conditions. As described more fully above in the section entitled “Real Estate Inventories and Cost of Sales”, estimates of revenues and costs are supported by the Company’s budgeting process, and are based on recent sales in backlog, pricing required to get the desired pace of sales, pricing of competitive projects, incentives offered by competitors and current estimates of costs of development and construction.

Under the provisions of Statement No. 144, the Company is required to make certain assumptions to estimate undiscounted future cash flows of a project, which include: (i) estimated sales prices, including sales incentives, (ii) anticipated sales absorption rates and sales volume, (iii) project costs incurred to date and the estimated future costs of the project based on the project budget, (iv) the carrying costs related to the time a project is actively selling until it closes the final unit in the project, and (v) alternative strategies including selling the land to a third party or temporarily suspending development at the project. Each project has different assumptions and is based on management’s assessment of the current market conditions that exist in each project location. The Company’s assumptions include moderate absorption increases in certain projects beginning in 2009. In addition, the Company has assumed some moderate reduction in sales incentives in certain projects in certain markets beginning in 2009.

The assumptions and judgments used by the Company in the estimation process to determine the future undiscounted cash flows of a project and its fair value are inherently uncertain and require a substantial degree of judgment. The realization of the Company’s real estate inventories is dependent upon future uncertain events and market conditions. Due to the subjective nature of the estimates and assumptions used in determining the future cash flows of a project, the continued decline in the current housing market, the uncertainty in the banking and credit markets, actual results could differ materially from current estimates.

Management assesses land deposits for impairment when estimated land values are deemed to be less than the agreed upon contract price. The Company considers changes in market conditions, the timing of land purchases, the ability to renegotiate with land sellers the terms of the land option contracts in question, the availability and best use of capital, and other factors. The Company records abandoned land deposits and related preacquisition costs in cost of sales-land in the consolidated statement of operations in the period that it is abandoned.

109

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes inventory impairments recorded during the years ended December 31, 2008, 2007 and 2006:

	Year Ended December 31,
	2008		2007		2006
	(Dollars in thousands)
Inventory impairments related to:
Land under development and homes completed and under construction	$	83,174	$	184,719	$	39,895
Land held for sale or sold		52,137		46,401		—
Total inventory impairments	$	135,311	$	231,120	$	39,895
Number of projects impaired during the year		41		42		13
Number of projects assessed for impairment during the year		84		84		68

These charges were included in impairment loss on real estate assets in the accompanying consolidated statements of operations (See Note 3 - Notes to Consolidated Financial Statement for a detail of impairment by segment). The impairment charges recorded during the periods noted above stemmed from lower home prices which were driven by increased incentives and discounts resulting from weakened demand experienced during 2006 through 2008. The Company may incur impairment on real estate inventories in the future, if the homebuilding industry continues to experience the deteriorating market conditions identified above.

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 $90,650,000 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 $65,929,000 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 $210,739,000, resulting in a total loss on the sales transactions of $120,089,000. The loss of $40,282,000 related to the portion of the land sales which closed in January 2008 has been reflected in the Consolidated Statement of Operations as Impairment Losses on Real Estate Assets for the year ended December 31, 2007.

On December 27, 2007, the Company sold certain land in San Diego County, California for $12,000,000 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 two trusts 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 $18,737,000 resulting in a loss on the transaction of $6,737,000.

110

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6 — Investments in and Advances to Unconsolidated Joint Ventures

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

CONDENSED COMBINED BALANCE SHEETS

(In thousands)

	December 31,
	2008		2007
ASSETS
Cash and cash equivalents	$	737	$	1,912
Real estate inventories		7,676		9,910
Investment in unconsolidated joint venture		—		3,899
	$	8,413	$	15,721
LIABILITIES AND OWNERS’ CAPITAL
Accounts payable	$	250	$	294
Accrued expenses		754		—
Notes payable		—		4,991
		1,004		5,285
Owners’ Capital
William Lyon Homes		2,769		4,671
Others		4,640		5,765
		7,409		10,436
	$	8,413	$	15,721

111

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED COMBINED STATEMENTS OF INCOME

(In thousands)

	Year Ended December 31,
	2008			2007			2006
Operating revenue
Land sales	$	—		$	—		$	17,046
		—			—			17,046
Operating costs
Cost of sales — land		—			—			(13,315	)
Impairment loss on real estate assets		(4,500	)		—			—
General and administrative		(843	)		(467	)		—
Other		—			(743	)		(1,579	)
		(5,343	)		(1,210	)		(14,894	)
Equity in (loss) income of unconsolidated joint ventures		(2,410	)		1,710			5,037
Operating (loss) income		(7,753	)		500			7,189
Other income, net		—			108			384
Net (loss) income	$	(7,753	)	$	608		$	7,573
Allocation to owners
William Lyon Homes	$	(3,877	)	$	304		$	3,786
Others		(3,876	)		304			3,787
	$	(7,753	)	$	608		$	7,573

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

As common practice required by commercial lenders, all of the joint ventures that have obtained financing are obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at the time. Under the provisions of the loan described above, the joint venture is permitted to borrow an amount equal to the lesser of (1) 75% of the net book value of the property or (2) 75% of the aggregate retail value as determined by lender and subject to an appraisal. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance. If the joint venture were required by the lender to repay loan amounts in order to return the loan balance to the required ratios, the Company is obligated to pay 50% of that amount in accordance with the joint venture operating agreements, which could negatively impact the Company’s liquidity and available capital resources, depending on the severity of the decrease in value or increase in cost. A joint venture had obtained financing from construction lenders which amounted to $4,991,000 at December 31, 2007. In December 2008, the joint venture repaid the loan balance outstanding.

A certain joint venture recorded an impairment loss on real estate assets of $4,500,000 during the year ended December 31, 2008. The Company was allocated its share of the loss of $2,250,000, which is included in the loss on unconsolidated joint ventures in the accompanying consolidated statement of operations.

112

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The joint venture accounts for the impairment of its real estate inventories under Statement No. 144, which 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. See Note 5 – “Real Estate Inventories” for further discussion.

Note 7 — Notes Payable and Senior Notes

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

	December 31,
	2008		2007
Notes payable:
Revolving credit facilities	$	72,044	$	139,642
Construction notes payable		116,316		115,836
Collateralized mortgage obligations under revolving mortgage warehouse credit facilities, secured by first trust deed mortgage notes receivable		6,269		11,454
		194,629		266,932
Senior Notes:
7 5/8% Senior Notes due December 15, 2012		133,800		150,000
10 3/4% Senior Notes due April 1, 2013		218,176		247,553
7 1/2% Senior Notes due February 15, 2014		124,300		150,000
		476,276		547,553
	$	670,905	$	814,485

During the year ended December 31, 2008, the Company incurred interest related to the above debt of $66,749,000 and capitalized $42,309,000, resulting in net interest expense of $24,440,000 on the accompanying consolidated statement of operations. During 2008, the real estate assets that qualify for interest capitalization decreased compared to 2007 levels. During the years ended December 31, 2007 and 2006, the Company incurred and capitalized interest relating to the above debt of $76,497,000 and $80,173,000, respectively.

Maturities of the notes payable and Senior Notes are as follows as of December 31, 2008:

Year Ended December 31,	(in thousands)
2009	$	100,287
2010		36,498
2011		56,150
2012		218,176
2013		124,300
Thereafter		135,494
	$	670,905

113

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7 ⁵/8% Senior Notes

On November 22, 2004, the Company’s 100% owned subsidiary, William Lyon Homes, Inc., a California corporation, (“California Lyon”) closed its offering of $150,000,000 principal amount of 7 ⁵/8% Senior Notes due 2012 (the “7 ⁵/8% Senior Notes”). The notes were issued at par, resulting in net proceeds to the Company of approximately $148,500,000. 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. Interest on the 7 ⁵/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount of the 7 ⁵/8% Senior Notes, the Company’s semi-annual interest payments are $5,101,000.

The 7 ⁵/8% 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.

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. 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. Interest on the 10 ³/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding principal amount of the 10 ³/4% Senior Notes, the Company’s semi-annual interest payments are $11,825,000.

The 10 ³/4% Senior Notes are redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

7 ¹/2% Senior Notes

On February 6, 2004, California Lyon closed its offering of $150,000,000 principal amount of 7 ¹/2% Senior Notes due 2014 (the “7 ¹/2% Senior Notes”). The notes were issued at par, resulting in net proceeds to the Company of approximately $147,600,000. 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. Interest on the 7 ¹/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal amount of 7 ¹/2% Senior Notes the Company’s semi-annual interest payments are $4,661,000.

114

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Generally, the 7 ¹/2% Senior Notes were not redeemable prior to February 15, 2009. Thereafter, the 7 ¹/2% 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.

* * * * *

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 $75,000,000 million for any two consecutive fiscal quarters, California Lyon will be required to make an offer to purchase up to 10% of each class of Senior Notes originally issued at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.

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

The Senior Notes Indentures contain covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions; (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.

Supplemental consolidating financial information of the Company, specifically including information for California Lyon, the issuer of the 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.

115

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	59,285		$	2,898	$	4,834	$	—		$	67,017
Restricted cash		—		5,079			—		—		—			5,079
Receivables		—		13,081			7,615		9,289		—			29,985
Income tax refunds receivable		—		46,696			—		—		—			46,696
Real estate inventories
Owned		—		681,609			—		72,880		—			754,489
Not owned		—		107,763			—		—		—			107,763
Investments in and advances to unconsolidated joint ventures		—		2,769			—		—		—			2,769
Property and equipment, net		—		2,264			12,139		—		—			14,403
Deferred loan costs		—		6,264			—		—		—			6,264
Other assets		—		9,139			1,239		—		—			10,378
Investments in subsidiaries		171,125		7,677			—		—		(178,802	)		—
Intercompany receivables		—		—			195,801		375		(196,176	)		—
	$	171,125	$	941,626		$	219,692	$	87,378	$	(374,978	)	$	1,044,843
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	9,078		$	294	$	6,959	$	—		$	16,331
Accrued expenses		—		61,625			1,260		102		—			62,987
Liabilities from inventories not owned		—		80,079			—		—		—			80,079
Notes payable		—		132,209			6,269		56,151		—			194,629
7 5/8% Senior Notes		—		133,800			—		—		—			133,800
10 3/4% Senior Notes		—		218,176			—		—		—			218,176
7 1/2% Senior Notes		—		124,300			—		—		—			124,300
Intercompany payables		—		195,419			—		757		(196,176	)		—
Total liabilities		—		954,686			7,823		63,969		(196,176	)		830,302
Minority interest in consolidated entities		—		—			—		—		43,416			43,416
Stockholders’ equity (deficit)		171,125		(13,060	)		211,869		23,409		(222,218	)		171,125
	$	171,125	$	941,626		$	219,692	$	87,378	$	(374,978	)	$	1,044,843

116

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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		—		26,691		12,901		21		—			39,613
Income tax refunds receivable		—		5,654		—		—		—			5,654
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

117

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	437,038		$	48,589		$	22,337		$	—		$	507,964
Management fees		—			18,114			—			—			—			18,114
Construction services		—			825			—			—			(825	)		—
		—			455,977			48,589			22,337			(825	)		526,078
Operating costs
Cost of sales		—			(421,620	)		(44,231	)		(21,849	)		825			(486,875	)
Impairment loss on real estate assets		—			(111,737	)		—			(23,574	)		—			(135,311	)
Impairment loss on goodwill		—			(5,896	)		—			—			—			(5,896	)
Construction services		—			(15,431	)		—			—			—			(15,431	)
Sales and marketing		—			(34,815	)		(3,233	)		(2,393	)		—			(40,441	)
General and administrative		—			(27,176	)		(422	)		(47	)		—			(27,645	)
Other		—			(4,404	)		(57	)		—			—			(4,461	)
		—			(621,079	)		(47,943	)		(47,863	)		825			(716,060	)
Equity in loss of unconsolidated joint ventures		—			(3,877	)		—			—			—			(3,877	)
Loss from subsidiaries		(111,638	)		(7,552	)		(8,693	)		—			127,883			—
Minority equity in loss of consolidated entities		—			—			—			—			10,446			10,446
Operating loss		(111,638	)		(176,531	)		(8,047	)		(25,526	)		138,329			(183,413	)
Gain on retirement of debt		—			54,044			—			—			—			54,044
Interest expense, net of amounts capitalized		—			(24,440	)		—			—			—			(24,440	)
Other income (expense), net		—			2,050			(1,593	)		122			—			579
Loss before benefit for income taxes		(111,638	)		(144,877	)		(9,640	)		(25,404	)		138,329			(153,230	)
Benefit from income taxes		—			41,592			—			—			—			41,592
Net loss	$	(111,638	)	$	(103,285	)	$	(9,640	)	$	(25,404	)	$	138,329		$	(111,638	)

118

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2007

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	885,284		$	115,714		$	121,701		$	(17,342	)	$	1,105,357
Management fees		—			3,123			—			—			(3,123	)		—
		—			888,407			115,714			121,701			(20,465	)		1,105,357
Operating costs
Cost of sales		—			(908,201	)		(92,518	)		(98,577	)		20,465			(1,078,831	)
Impairment loss on real estate assets		—			(231,120	)		—			—			—			(231,120	)
Sales and marketing		—			(53,192	)		(6,481	)		(7,030	)		—			(66,703	)
General and administrative		—			(37,083	)		(375	)		(14	)		—			(37,472	)
Other		—			(795	)		(108	)		—			—			(903	)
		—			(1,230,391	)		(99,482	)		(105,621	)		20,465			(1,415,029	)
Equity in income (loss) of unconsolidated joint ventures		—			676			(372	)		—			—			304
(Loss) income from subsidiaries		(349,408	)		20,034			191			—			329,183			—
Minority equity in income of consolidated entities		—			—			—			—			(11,126	)		(11,126	)
Operating (loss) income		(349,408	)		(321,274	)		16,051			16,080			318,057			(320,494	)
Other income (expense), net		—			(247	)		3,551			440			—			3,744
(Loss) income before provision for income taxes		(349,408	)		(321,521	)		19,602			16,520			318,057			(316,750	)
Provision for income taxes		—			(32,645	)		—			(13	)		—			(32,658	)
Net (loss) income	$	(349,408	)	$	(354,166	)	$	19,602		$	16,507		$	318,057		$	(349,408	)

119

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2006

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	1,127,624		$	206,230		$	202,883		$	(44,516	)	$	1,492,221
Management fees		—		5,011			—			—			(5,011	)		—
		—	$	1,132,635			206,230			202,883			(49,527	)		1,492,221
Operating costs
Cost of sales		—		(927,090	)		(139,869	)		(159,706	)		49,527			(1,177,138	)
Impairment loss on real estate assets		—		(39,895	)		—			—			—			(39,895	)
Sales and marketing		—		(54,732	)		(9,341	)		(8,276	)		—			(72,349	)
General and administrative		—		(61,252	)		(115	)		(23	)		—			(61,390	)
Other		—		—			(6,502	)		—			—			(6,502	)
		—		(1,082,969	)		(155,827	)		(168,005	)		49,527			(1,357,274	)
Equity in income (loss) of unconsolidated joint ventures		—		4,032			(790	)		—			—			3,242
Income (loss) from subsidiaries		74,778		66,411			(40	)		—			(141,149	)		—
Minority equity in income of consolidated entities		—		—			—			—			(16,914	)		(16,914	)
Operating income		74,778		120,109			49,573			34,878			(158,063	)		121,275
Financial advisory expenses		—		(3,165	)		—			—			—			(3,165	)
Other income, net		—		777			4,265			557			—			5,599
Income before provision for income taxes		74,778		117,721			53,838			35,435			(158,063	)		123,709
Provision for income taxes		—		(48,921	)		—			(10	)		—			(48,931	)
Net income	$	74,778	$	68,800		$	53,838		$	35,425		$	(158,063	)	$	74,778

120

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2008

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net loss	$	(111,638	)	$	(103,285	)	$	(9,640	)	$	(25,404	)	$	138,329		$	(111,638	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		—			745			1,473			—			—			2,218
Impairment loss on real estate assets		—			111,737			—			23,574			—			135,311
Impairment loss on goodwill		—			5,896			—			—			—			5,896
Equity in loss of unconsolidated joint ventures		—			3,877			—			—			—			3,877
Distributions of income from unconsolidated joint ventures		—			816			—			—			—			816
Equity in loss of subsidiaries		111,638			7,552			8,693			—			(127,883	)		—
Gain on retirement of debt		—			(54,044	)		—			—			—			(54,044	)
Minority equity in loss of consolidated entities		—			—			—			—			(10,446	)		(10,446	)
Benefit from income taxes		—			(41,592	)		—			—			—			(41,592	)
Net changes in operating assets and liabilities:
Restricted cash		—			(5,079	)		—			—			—			(5,079	)
Receivables		—			13,610			5,286			(9,268	)		—			9,628
Income tax refund receivable		—			550			—			—			—			550
Real estate inventories-owned		—			104,899			—			62,617			—			167,516
Deferred loan costs		—			2,501			—			—			—			2,501
Other assets		—			3,104			1,153			—			—			4,257
Accounts payable		—			(23,950	)		(97	)		(512	)		—			(24,559	)
Accrued expenses		—			(500	)		(2,233	)		(2,066	)		—			(4,799	)
Net cash provided by operating activities		—			26,837			4,635			48,941			—			80,413
Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			(3,003	)		—			—			—			(3,003	)
Distributions of capital from unconsolidated joint venture		—			212			—			—			—			212
Purchases of property and equipment		—			(417	)		(112	)		—			—			(529	)
Investment in subsidiaries		—			52,201			—			—			(52,201	)		—
Advances to affiliates		—			(10,308	)		—			—			10,308			—
Net cash provided by (used in) investing activities		—			38,685			(112	)		—			(41,893	)		(3,320	)
Financing activities:
Proceeds from borrowings on notes payable		—			312,094			279,333			—			—			591,427
Principal payments on notes payable		—			(358,952	)		(284,518	)		(15,551	)		—			(659,021	)
Net cash paid for repurchase of senior notes		—			(16,718	)		—			—			—			(16,718	)
Minority interest contributions, net		—			—			—			—			1,039			1,039
Intercompany receivables/payables		—			1,927			(3,087	)		4,346			(3,186	)		—
Advances to affiliates		—			—			(284	)		(43,756	)		44,040			—
Net cash used in financing activities		—			(61,649	)		(8,556	)		(54,961	)		41,893			(83,273	)
Net increase (decrease) in cash and cash equivalents		—			3,873			(4,033	)		(6,020	)		—			(6,180	)
Cash and cash equivalents at beginning of year		—			55,412			6,931			10,854			—			73,197
Cash and cash equivalents at end of year	$	—		$	59,285		$	2,898		$	4,834		$	—		$	67,017

121

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2007

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net (loss) income	$	(349,408	)	$	(354,166	)	$	19,602		$	16,507		$	318,057		$	(349,408	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		—			1,002			1,458			—			—			2,460
Impairment loss on real estate assets		—			231,120			—			—			—			231,120
Equity in (income) loss of unconsolidated joint ventures		—			(676	)		372			—			—			(304	)
Equity in earnings (loss) of subsidiaries		349,408			(20,034	)		(191	)		—			(329,183	)		—
Minority equity in income of consolidated entities		—			—			—			—			11,126			11,126
Provision for income taxes		—			32,645			—			13			—			32,658
Net changes in operating assets and liabilities:
Receivables		—			30,880			49,273			1,212			—			81,365
Real estate inventories-owned		—			153,234			1,846			19,238			—			174,318
Deferred loan costs		—			1,613			—			—			—			1,613
Other assets		—			2,819			294			—			—			3,113
Accounts payable		—			(2,040	)		(693	)		(6,736	)		—			(9,469	)
Accrued expenses		—			(42,357	)		(3,705	)		1,983			—			(44,079	)
Net cash provided by operating activities		—			34,040			68,256			32,217			—			134,513
Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			(5,639	)		(372	)		—			—			(6,011	)
Net cash paid for purchase of partner’s interest in unconsolidated joint venture		—			(1,484	)		—			—			—			(1,484	)
Purchases of property and equipment		—			(143	)		(623	)		—			—			(766	)
Investment in subsidiaries		—			29,885			—			—			(29,885	)		—
Advances (to) from affiliates		—			(27,967	)		—			—			27,967			—
Net cash used in investing activities		—			(5,348	)		(995	)		—			(1,918	)		(8,261	)
Financing activities:
Proceeds from borrowings on notes payable		—			894,199			799,498			6,003			—			1,699,700
Principal payments on notes payable		—			(917,965	)		(847,403	)		—			—			(1,765,368	)
Minority interest (distributions) contributions, net		—			—			—			—			(26,119	)		(26,119	)
Intercompany receivables/payables		—			38,233			(22,731	)		(648	)		(14,854	)		—
Advances (to) from affiliates		—			—			(916	)		(41,975	)		42,891			—
Net cash provided by (used in) financing activities		—			14,467			(71,552	)		(36,620	)		1,918			(91,787	)
Net increase (decrease) in cash and cash equivalents		—			43,159			(4,291	)		(4,403	)		—			34,465
Cash and cash equivalents at beginning of year		—			12,253			11,222			15,257			—			38,732
Cash and cash equivalents at end of year	$	—		$	55,412		$	6,931		$	10,854		$	—		$	73,197

122

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2006

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net income	$	74,778		$	68,800		$	53,838		$	35,425		$	(158,063	)	$	74,778
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			881			1,648			—			—			2,529
Equity in (income) loss of unconsolidated joint ventures		—			(4,032	)		790			—			—			(3,242	)
Distributions of income from unconsolidated joint ventures		—			841			1,758			—			—			2,599
Minority equity in income of consolidated entities		—			—			—			—			16,914			16,914
Equity in (earnings) loss of subsidiaries		(74,778	)		(66,411	)		40			—			141,149			—
Impairment loss on real estate asset		—			39,895			—			—			—			39,895
State income tax refund credited to additional paid in capital		—			10			—			—			—			10
Federal income tax refund credited to additional paid in capital		—			1,820			—			—			—			1,820
Provision for income taxes		—			48,921			—			10			—			48,931
Net changes in operating assets and liabilities:
Receivables		—			19,421			(9,607	)		14,176			—			23,990
Real estate inventories owned		—			(153,824	)		(1,190	)		7,224			—			(147,790	)
Real estate inventories not owned		—			67,793			—			—			—			67,793
Deferred loan costs		—			1,065			—			—			—			1,065
Other assets		—			(19,656	)		(423	)		—			—			(20,079	)
Accounts payable		—			(12,883	)		328			(6,179	)		—			(18,734	)
Accrued expenses		—			(108,845	)		948			(4,772	)		—			(112,669	)
Net cash (used in) provided by operating activities		—			(116,204	)		48,130			45,884			—			(22,190	)
Investing activities:
Net change in investment in unconsolidated joint ventures		—			(862	)		(1,114	)		—			—			(1,976	)
Purchases of property and equipment		—			(1,246	)		442			—			—			(804	)
Investments in subsidiaries		—			77,384			1,790			—			(79,174	)		—
Advances (to) from affiliates		(434	)		(45,084	)		—			—			45,518			—
Net cash (used in) provided by investing activities		(434	)		30,192			1,118			—			(33,656	)		(2,780	)
Financing activities:
Proceeds from borrowings on notes payable		—			1,262,858			822,673			54,258			—			2,139,789
Principal payments on notes payable		—			(1,170,807	)		(811,130	)		—			—			(1,981,937	)
Minority interest distributions, net		—			(12,720	)		—			(134,233	)		—			(146,953	)
Common stock issued for exercised stock options		434			—			—			—			—			434
Intercompany receivables/payables		—			—			(56,453	)		3,267			53,186			—
Advances (to) from affiliates		—			—			197			19,333			(19,530	)		—
Net cash provided by (used in) financing activities		434			79,331			(44,713	)		(57,375	)		(33,656	)		11,333
Net (decrease) increase in cash and cash equivalents		—			(6,681	)		4,535			(11,491	)		—			(13,637	)
Cash and cash equivalents at beginning of year		—			18,934			6,687			26,748			—			52,369
Cash and cash equivalents at end of year	$	—		$	12,253		$	11,222		$	15,257		$	—		$	38,732

123

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At December 31, 2008, the Company had approximately $119,589,000 of secured indebtedness, (excluding approximately $75,040,000 of secured indebtedness of consolidated entities) and approximately $37,806,000 of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas.

Revolving Credit Facilities

As of December 31, 2008, the Company has six revolving credit facilities which have an aggregate maximum loan commitment of $185,000,000, with maturities at various dates as follows:

Loan Commitment Amount (in thousands)	Balance Outstanding at December 31, 2008 (in thousands)		Undrawn Availability at December 31, 2008 (in thousands)		Initial Maturity Date(1)
$  30,000	$	8,000	$	6,400	April 2009
40,000		24,800		8,400	May 2009(2)
25,000		8,200		4,100	May 2009
30,000		15,700		6,100	June 2009
30,000		3,100		11,600	July 2009
30,000		12,200		1,200	September 2009(3)
$185,000		$72,000		$  37,800

(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) In March 2009, the commitment amount of this facility was reduced to $30,000,000 and the initial maturity date was extended to December 2009.

(3) In March 2009, the commitment amount of this facility was reduced to $20,000,000.

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 $90,000,000; and

• Minimum liquidity, as defined, of at least $30,000,000.

As of and for the year ending December 31, 2008, the Company is in compliance with the covenants under its revolving credit facilities. Effective January 1, 2010, the Company will be required to maintain a ratio of total liabilities to tangible net worth, as defined in each credit facility.

If market conditions continue to deteriorate, the financial covenants contained in the Company’s Revolving Credit Facilities will continue to be negatively impacted. Under these circumstances, the lenders under the Revolving Credit Facilities would need to provide the Company with additional covenant relief if the Company is to avoid future noncompliance with these financial covenants. If the Company is unable to obtain requested covenant relief or is unable to obtain a waiver for any covenant non-compliance, the Company could be prohibited from making further borrowings under the Revolving Credit Facilities and the Company’s obligation to repay indebtedness under the Revolving Credit Facilities and the Senior Notes could be accelerated. The Company can give no assurance that in such an event, the Company would have, or be able to obtain, sufficient funds to pay all debt that the Company would be required to repay.

124

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company’s covenant compliance for the Revolving Credit Facilities at December 31, 2008 is detailed in the table set forth below:

Covenant and Other Requirements	Actual at December 31, 2008		Covenant Requirements at December 31, 2008
	(Dollars in millions)
Tangible Net Worth (1)	$	164.9	³ $90.0
Minimum Liquidity	$	104.8	³ $30.0

(1) Tangible Net Worth was calculated based on the stated amount of stockholders’ equity less intangible assets of $6.3 million as of December 31, 2008.

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

Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases 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, determined by adding an interest rate spread to LIBOR or the prime rate, as defined. Certain facilities have an interest rate floor of 5.5%. As of December 31, 2008, $72,044,000 was outstanding under these credit facilities, with a weighted-average interest rate of 5.12%, and the undrawn availability was $37,806,000 as limited by the Company’s borrowing base formulas. Interest on the revolving credit facilities is calculated on the average, outstanding daily balance and is paid following the end of each month. During the year ended December 31, 2008, the Company borrowed $291,849,000 and repaid $359,446,000 under these facilities. The maximum amount outstanding was $170,583,000 and the weighted average borrowings were $123,641,000 during the year ended December 31, 2008. Interest incurred on the revolving credit facilities for the year ended December 31, 2008 was $6,728,000. The Company routinely borrows under its revolving credit facilities in the ordinary course of business within the maximum aggregate loan commitment amounts to fund its operations, including its land acquisition and home building activities, and repays such borrowings, as required by the credit facilities, with the net proceeds from sales of the real property, including homes, which secure the applicable credit facility.

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

125

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As a common practice required by commercial lenders, the Company is obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at any time. In accordance with the terms of the revolving credit facility loan agreements, the Company is permitted to borrow amounts ranging from 50% to 90% of the lesser of (1) the net book value or (2) the retail value as determined by an appraisal by the lender of the property secured by the facilities. The loan-to-appraised value or loan-to-carrying cost percentage is dependent upon the stage of construction of each lot, which changes during the entitlement and development process of the lot and the subsequent construction of the homebuilding unit, as defined in each agreement. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger the pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance. All revolving credit facility balances are subject to these obligations as of December 31, 2008. If property values declined and the ratios defined above required the Company to repay a portion of the amounts outstanding in order to return the loan balances to the required ratios as stated in each agreement, it could significantly reduce the Company’s liquidity and capital resources. The Company could be required to reduce availability on these loans, make payments on these loans from available cash on hand or be required to place additional assets in the borrowing base to secure additional borrowings, if such assets are available.

Construction Notes Payable

At December 31, 2008, the Company had construction notes payable amounting to $116,316,000, including $75,040,000 on certain consolidated entities. The construction notes have various maturity dates through 2017 and bear interest at rates ranging from prime plus 0.25% to prime plus 1.0% at December 31, 2008. Interest is calculated on the average daily balance and is paid following the end of each month.

The Company is the sole member of Lyon East Garrison Company I, LLC which is a member with Woodman Development Company, LLC (the “Members”) in East Garrison Partners I, LLC (the “LLC”). The LLC has a non-recourse construction note payable with an outstanding balance of $56,200,000 as of December 31, 2008 related to the acquisition and development of real estate in Monterey County, California. In addition to the non-recourse construction note payable, the Company and affiliates of the other Member entered into a completion guaranty. The construction note payable is secured by the underlying land parcel, which contains approximately 1,400 buildable lots, of which the Members had the right to purchase approximately 600 lots each and approximately 200 lots were to be sold to a third party.

Based on current market and general economic conditions, the Members of the LLC and the construction note lender determined to temporarily suspend further entitlement and development of the project, at which time it was agreed that certain site improvements would be completed in order to prepare and protect the site for a delay of approximately two years. The Company and affiliates of the other Member of the LLC believed that the completion of these site improvements satisfied the obligation under the completion guaranty. The lender agreed to fund the revised budgeted site improvements which the LLC had completed. However the lender stopped funding for the improvements, which left the LLC with unpaid invoices. During this same period, the LLC received several letters from the lender alleging default under the construction loan agreement which the Members contended were invalid based on previous discussions.

In addition, under the terms of the construction loan agreement, the LLC was required to reduce the loan commitment from $75,000,000 to $35,000,000 by January 31, 2009, which required a $21,200,000 pay down. The LLC did not make the required pay down on January 31, 2009 and is now in default under the construction loan agreement. The LLC assumes that the lender will continue to exercise its legal remedies. Due to the foregoing factors, the Company recorded an entry to reduce its interest in the LLC to zero.

126

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revolving Mortgage Warehouse Credit Facilities

The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matured in January 2009, provided for revolving loans of up to $22,500,000 outstanding, $15,000,000 of which is committed (lender obligated to lend if stated conditions are satisfied) and $7,500,000 of which is not committed (lender advances are optional even if stated conditions are otherwise satisfied). At December 31, 2008, the outstanding balance under this facility was $1,624,000. The mortgage subsidiary and one of its unconsolidated joint ventures had an additional $20,000,000 credit facility which matures in April 2009. At December 31, 2008, the outstanding balance under this facility was $4,645,000. In January 2009, the Company implemented a strategy to cease operations at its mortgage subsidiary, in which it will discontinue originating and funding homebuyer mortgage loans. Due to this strategy, the Company does not anticipate it will extend the revolving mortgage warehouse credit facilities beyond current maturity dates. 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. Effective March 13, 2009, the facilities have been paid down and the commitments reduced to zero.

Prime Interest Rates

The prime interest rates at December 31, 2008, 2007 and 2006 were 3.25%, 7.25% and 8.25%, respectively. The weighted-average prime interest rates for each of the three years ended December 31, 2008, 2007 and 2006 were 5.09%, 8.05% and 7.96%, respectively.

Note 8 — Fair Value of Financial Instruments

In accordance with Statement No. 157, the Company is required to disclose the estimated fair value of financial instruments. As of December 31, 2008, the Company used the following assumptions to estimate the fair value of each type of financial instrument for which it is practicable to estimate:

• Cash and Equivalents — The carrying amount is a reasonable estimate of fair value. The Company’s cash balances primarily consist of short-term liquid investments and demand deposits.

• First Trust Deed Mortgage Notes Receivable — The carrying amounts of these receivables approximate market value because of the frequency of repricing the mortgage to borrowers.

• Revolving Credit Facilities — The carrying amount is a reasonable estimate of fair value because the initial term-out provisions occur within one year.

• Construction Notes Payable — On certain notes, the carrying amount is a reasonable estimate of fair value because the maturities occur within one year. On certain other notes, the Company used Level 3 unobservable inputs, as defined below, to estimate fair value.

• Mortgage Credit Facilities — The carrying amounts of these credit obligations approximate market value because of the frequency of repricing the borrowings.

• Senior Notes Payable — The senior notes are publicly traded over the counter and their fair values were based on quotes from industry sources.

127

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The estimated fair values of financial instruments are as follows at December 31, 2008:

	Carrying Amount		Fair Value
Financial assets:
Cash and equivalents	$	67,017	$	67,017
First Trust Deed Mortgage Notes Receivable	$	7,030	$	7,030
Financial liabilities:
Revolving credit facilities	$	72,044	$	72,044
Construction Notes payable	$	116,316	$	97,672
Revolving Mortgage Warehouse Credit Facility	$	6,269	$	6,269
7 5/8% Senior Notes due 2012	$	133,800	$	28,100
10 3/4% Senior Notes due 2013	$	218,176	$	47,300
7 1/2% Senior Notes due 2014	$	124,300	$	24,900

Effective January 1, 2008, the Company implemented the requirements of Statement No. 157 for the Company’s financial assets and liabilities. Statement No. 157 establishes a framework for measuring fair value, expands disclosures regarding fair value measurements and defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Statement No. 157 requires the Company to maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements. Statement No. 157 specifies a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. The three levels of the hierarchy are as follows:

• Level 1 — quoted prices for identical assets or liabilities in active markets;

• Level 2 — quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

• Level 3 — valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

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 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

128

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 13 for information on certain lawsuits which have been filed relating to the tender offer.

Note 10 — Stockholders’ Equity

Incentive Compensation Plans

The Company’s 2008 Senior Executive Bonus Plan (the “Plan”) provides that (i) the Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO”) are each eligible to receive a bonus of 3% of the Company’s consolidated pre-tax, pre-bonus income; (ii) the Executive Vice President (“EVP”) is eligible to receive a bonus of ¾ of 1% of the Company’s consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (“CFO”) is eligible to receive a bonus of ½ of 1% of the Company’s consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Division President is eligible to receive a bonus of 3% of the division’s pre-tax, pre-bonus income, determined after allocation to the division of its allocable portion of corporate general and administrative expenses. All other participants under this cash bonus plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income. In addition, because the Company’s results of operations were expected to be in a loss position for the year ending December 31, 2008, and thus participants would receive no bonus income in 2008, the Plan provided for a 2008 Bonus Plan for all participants in various management bonus plans. Under this 2008 Bonus Plan, bonus ranges (defined as a percent of salary) are varied based on the level of position but range from a maximum of 25% to 100% of salary for managers. In addition, the Company’s board of directors has approved a cash bonus plan applicable in 2008 for all of its full-time, salaried employees who are not included in the Company’s 2008 Senior Executive Bonus Plan. All participants under this cash bonus plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.

For the CEO, COO, EVP CFO, division presidents, executives and managers, awards under bonus plans are generally paid over two years with 75% paid following the determination of bonus awards, and 25% paid one year later. The deferred amounts would be forfeited in the event of termination for any reason except retirement, death or disability. However, under the 2008 Bonus Plan, 100% of the bonuses awarded for 2008 were paid in January 2009.

Note 11 — Income Taxes

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

129

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

	Year Ended December 31,
	2008			2007			2006
Current
Federal	$	41,602		$	(234	)	$	(47,250	)
State		(10	)		240			(12,285	)
		41,592			6			(59,535	)
Deferred
Federal		—			(27,148	)		7,766
State		—			(5,516	)		2,838
		—			(32,664	)		10,604
	$	41,592		$	(32,658	)	$	(48,931	)

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

	Year Ended December 31,
	2008			2007			2006
Provision for Federal income taxes at the statutory rate	$	53,630		$	—		$	(43,298	)
Provision for state income taxes, net of Federal income tax benefits		(6	)		—			(6,111	)
Valuation allowance		(94,607	)		(771	)		—
Reduction of deferred tax assets as a result of election to be taxed as an “S” corporation		—			(31,887	)		—
Increase of deferred tax assets as a result of revocation of “S” corporation election		86,113			—			—
Goodwill impairment		(2,064	)		—			—
Other		(1,474	)		—			478
	$	41,592		$	(32,658	)	$	(48,931	)

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

	December 31,
	2008			2007
Deferred tax assets
Reserves deducted for financial reporting purposes not allowable for tax purposes	$	84,348		$	2,698
Compensation deductible for tax purposes when paid		481			21
State income tax provisions deductible when paid for Federal tax purposes		3			—
Effect of book/tax differences for joint ventures		7,403			36
Other		311			—
AMT credit carryover		2,698			—
Net operating loss		32,458			1,851
Valuation allowance		(123,321	)		(4,486	)
		4,381			120
Deferred tax liabilities
Effect of book/tax differences for joint ventures		(4,381	)		(120	)
	$	—		$	—

130

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 $41,602,000 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. In January 2009, the Company received a tax refund for the amount of the deferred tax asset and related tax benefit. As of and during the year ended December 31, 2008, the deferred tax asset was reclassified to income tax refunds receivable and the tax benefit was recorded as benefit from provision for income taxes in the accompanying consolidated balance sheet and statement of operations.

In assessing the realizability of deferred tax assets, management considers whether it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carry back years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. The revocation of the “S” corporation election allowed the recording of the deferred tax assets on the books; however, as of December 31, 2008, due to uncertainties surrounding the realization of the cumulative federal and state deferred tax assets, the Company has a full valuation allowance against the deferred tax assets. The valuation allowances for the years ending December 31, 2008 and 2007 are $123,321,000 and $4,486,000, respectively.

At December 31, 2008, the Company has gross federal and state net operating loss carry forwards totaling approximately $36,567,000 and $168,422,000, respectively. Federal net operating loss carry forwards will expire in 2028; state net operating loss carry forwards begin to expire in 2013.

Due to the “change of ownership” provision of the Tax Reform Act of 1986, utilization of the Company’s net operating loss carry forwards may be subject to an annual limitation against taxable income in future periods. As a result of the annual limitation, a portion of these carry forwards may expire before ultimately becoming available to reduce future income tax liabilities.

The Company has federal alternative minimum tax credit carry forwards of $2,698,000 which do not expire.

In addition, as of December 31, 2008, the Company has unused built-in losses of $19,414,000 which are available to offset future income and expire in 2010 and 2011. Pursuant to Internal Revenue Code Section 382, 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 made an election in accordance with federal and state regulations to be taxed as an “S” corporation rather than a “C” corporation. Under this election, the Company’s taxable income flows through to and is reported on the personal tax returns of its shareholders. The shareholders are responsible for paying the appropriate taxes based on this election. The Company does not pay any federal taxes under this election and is only required to pay certain state taxes based on a rate of approximately 1.5% of taxable income. As a result of this election, the Company’s provision for income taxes for the year ended December 31, 2007 includes 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, the provision reflects a valuation allowance of $771,000.

131

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 January 1, 2007, December 31, 2007 and December 31, 2008 the Company has no unrecognized tax benefits.

During the year ended December 31, 2006, income tax benefits of $3,059,000 related to stock option exercises were excluded from the results of operations and credited to additional paid-in capital. In addition, for the year ending December 31, 2006, utilization of built-in losses associated with transactions prior to the quasi-reorganization, including federal and state tax refunds received of $1,820,000 and $10,000, respectively, resulted in income tax benefits credited to additional paid-in capital of $4,229,000.

The estimated overall effective tax rate for the years ending December 31, 2008, 2007 and 2006 are 27.1%, (10.3%) and 39.5%.

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 2005 through 2008. The Company is subject to various state income tax examinations for calendar tax years ending 2004 through 2008.

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

Note 12 — Related Party Transactions

On December 27, 2007, the Company sold certain land in San Diego County, California for $12,000,000 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 two trusts whose sole beneficiary is William H. Lyon, President and Chief Operating Officer of the Company. The Company 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 $18,737,000 resulting in a loss on the transaction of $6,737,000. In October 2008, in a separately negotiated transaction from the sale of the land to the Suryan Family Trust (the “Owner”), the Company was contracted by and for the Owner to build apartment units for a contract price of $13,481,000, which includes the Company’s contractor fee of $529,000. As described in Note 1 – Construction Services, the company accounts for this transaction based on the percentage of completion method, and recorded construction services revenue of $209,000 and construction costs of $209,000 during the year ended December 31, 2008.

132

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. In addition to the purchase price, one-half of the net profits in excess of six percent from the development were to be paid to the seller. As of December 31, 2004, all lots were purchased under this agreement. During the year ended December 31, 2007, $8,305,000 was paid to the seller and a total amount of $14,015,000 has been paid to the seller as of December 31, 2008.

The Company purchased land for a total purchase price of $17,342,000 and $6,221,000 during the years ended December 31, 2007 and 2006, respectively, from certain of its joint ventures.

For the years ended December 31, 2008, 2007 and 2006, the Company incurred reimbursable on-site labor costs of $176,000, $224,000 and $133,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon, of which $18,000 and $89,000 was due to the Company at December 31, 2008 and 2007, respectively. In addition, the Company earned fees of $64,000, $90,000 and $98,000, respectively, for tax and accounting services performed for entities controlled by William Lyon and William H. Lyon during the years ended December 31, 2008, 2007 and 2006.

For the year ended December 31, 2008, the Company incurred charges of $778,000, and for each of the years ended December 31, 2007 and 2006, the Company incurred charges of $755,000, 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, inspection and repairs in effect at the time such work is completed. The total expenses incurred by the Company and paid to the Affiliate under the agreement amounted to $1,610,000, $1,423,000 and $1,488,000 during the years ended December 31, 2008, 2007 and 2006, respectively.

Effective July 1, 2006, 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 and the rates charged to General Lyon prior to the agreement in 2006, the Company had earned revenue of $368,000, $564,000 and $524,000 for charter services provided to William Lyon personally, during the years ended December 31, 2008, 2007 and 2006, respectively, of which $16,000 and $337,000 was due to the Company at December 31, 2008 and 2007.

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

133

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. As of December 31, 2008, no amounts had been paid to Mr. Meruelo under this agreement.

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

Note 13 — 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

As described above in Note 9—Tender Offer and Merger, 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 was $93 per share, but it has since been 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 name the Company and the then directors of the Company as defendants. These complaints allege, among other things, that the defendants have 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 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

134

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Consolidated Delaware Action have determined that the settlement is “fair, reasonable, adequate, and in the best interests of plaintiffs and the putative Class.” A Special Committee of the Company’s Board of Director’s 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. Thereafter, the Delaware Supreme Court remanded the matter to the Chancery Court for further proceedings and, on December 1, 2008, the Chancery Court heard oral argument and reserved decision regarding the fee award to Plaintiffs’ counsel, which is 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 then 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 pending final resolution of all matters in the Delaware 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.

Land Banking Arrangements

The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers the Company’s right in such purchase agreements to entities owned by third parties (“land banking arrangements”). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. As described in Note 2, above, Interpretation No. 46, requires the consolidation of the assets, liabilities and operations of two of the Company’s land banking arrangements including, as of December 31, 2008, real estate inventories of $27,684,000, which are included in real estate inventories not owned in the accompanying balance sheet.

135

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In addition, the Company participates in two land banking arrangements, which are not VIEs 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 $80,079,000, 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 land banking arrangements is as follows as of December 31, 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	$	107,763
Forfeited deposits (cash and letters of credit) if lots are not purchased	$	42,003

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

As of December 31, 2008, the Company had $12,855,000 of outstanding irrevocable standby letters of credit to guarantee the Company’s financial obligations under certain land banking arrangements and other contractual arrangements in the normal course of business. The beneficiary may draw upon these letters of credit in the event of a contractual default by the Company relating to each respective obligation. These letters of credit generally have a stated term of 12 months and have varying maturities throughout 2010, at which time the Company may be required to renew to coincide with the term of the respective arrangement.

The Company also had outstanding performance and surety bonds of $145,153,000 at December 31, 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 7 for additional information relating to the Company’s guarantee arrangements.

136

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 14 — Unaudited Summarized Quarterly Financial Information

Summarized unaudited quarterly financial information for the years ended December 31, 2008, 2007 and 2006 is as follows (in thousands except per common share amounts):

	Three Months Ended
	March 31, 2008			June 30, 2008			September 30, 2008			December 31, 2008
Sales	$	137,437		$	140,089		$	102,168		$	146,384
Cost of sales		(132,669	)		(134,693	)		(88,812	)		(130,701	)
Gross profit		4,768			5,396			13,356			15,683
Other income, costs and expenses, net		(47,166	)		(44,326	)		(54,452	)		(46,489	)
Loss before benefit for income taxes		(42,398	)		(38,930	)		(41,096	)		(30,806	)
Benefit for income taxes		41,592			—			—			—
Net loss	$	(806	)	$	(38,930	)	$	(41,096	)	$	(30,806	)
	Three Months Ended
	March 31, 2007			June 30, 2007			September 30, 2007			December 31, 2007
Sales	$	206,041		$	271,088		$	182,244		$	445,984
Cost of sales		(169,801	)		(232,843	)		(160,621	)		(515,566	)
Gross profit (loss)		36,240			38,245			21,623			(69,582	)
Other income, costs and expenses, net		(30,436	)		(116,031	)		(82,935	)		(113,874	)
Income (loss) before provision for income taxes		5,804			(77,786	)		(61,312	)		(183,456	)
Benefit (provision) for income taxes		(32,388	)		914			1,300			(2,484	)
Net loss	$	(26,584	)	$	(76,872	)	$	(60,012	)	$	(185,940	)
	Three Months Ended
	March 31, 2006			June 30, 2006			September 30, 2006			December 31, 2006
Sales	$	307,381		$	408,254		$	311,248		$	465,338
Cost of sales		(229,873	)		(315,993	)		(247,099	)		(388,073	)
Gross profit		77,508			92,261			64,149			77,265
Other income, costs and expenses, net		(34,386	)		(42,283	)		(46,382	)		(64,423	)
Income before provision for income taxes		43,122			49,978			17,767			12,842
Provision for income taxes		(16,908	)		(19,597	)		(7,265	)		(5,161	)
Net income	$	26,214		$	30,381		$	10,502		$	7,681

137

EXHIBIT INDEX

Exhibit Number	Description
3.1(2)	Certificate of Incorporation of William Lyon Homes, a Delaware corporation.
3.2(1)	Certificate of Ownership and Merger.
3.3(30)	Certificate of Ownership and Merger.
3.4(30)	Certificate of Amendment of Certificate of Incorporation.
3.5(2)	Bylaws of William Lyon Homes, a Delaware corporation.
4.1(19)	Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.2(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.3(20)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.4(3)	Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.5(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.6(20)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.7(14)	Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.8(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.9(20)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
10.1(4)	Master Loan Agreement dated as of August 31, 2000 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Federal Bank, F.S.B., a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.2(34)	Amended and Restated Master Loan Agreement dated as of January 28, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (“Lender”).

Exhibit Number	Description
10.3(6)	Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.4(5)	Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.5(5)	Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.6(5)	Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.7(7)	Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.8(3)	Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.9(12)	Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.10(20)	Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated as of October 14, 2005 by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.11(29)	Agreement for Ninth Modification of Deeds of Trust and Other Loan Instruments dated as of October 31, 2006 by and between William Lyon Homes, Inc., a California corporation, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.12(37)	Amended and Restated Master Loan Agreement dated as of January 28, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.13(40)	First Modification of Amended and Restated Loan Agreement dated as of December 5, 2008, by and between William Lyon Homes, Inc., a California Corporation and Guaranty Bank, a federal savings bank.
10.14(4)	Revolving Line of Credit Loan Agreement (Borrowing Base Loan) by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation, dated as of September 21, 2000.
10.15(16)	Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.16(5)	Second Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of December 13, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.

Exhibit Number	Description
10.17(3)	Third Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of January 26, 2004, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.18(11)	Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.19(21)	First Amendment to Amended and Restated Revolving Line of Credit Loan Agreement, dated as of July 19, 2005, by and between William Lyon Homes, Inc. and California Bank & Trust.
10.20(26)	Second Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.21(34)	Third Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of December 28, 2007, by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California banking corporation.
10.22(34)	Fourth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of January 17, 2008 by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California banking corporation.
10.23(37)	Fifth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of May 20, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”), and California Bank & Trust, a California banking corporation (“Lender”).
10.24(38)	Sixth Amendment to Amended and Restated Revolving Line of Credit Loan 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.
10.25(40)	Side Letter Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of December 17, 2008, by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California Banking Corporation.
10.26(24)	Mortgage Warehouse Loan and Security Agreement dated June 29, 2006 by and between Duxford Financial, Inc. dba William Lyon Financial Services and/or Bayport Mortgage, L.P. and/or California Pacific Mortgage, L.P., as Borrower and First Tennessee Bank as Lender.
10.27(8)	Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.28(3)	Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.29(15)	First Amendment to Credit Agreement dated as of August 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.30(13)	Amendment No. 2 to Credit Agreement dated as of November 15, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.31(9)	Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as borrower, and California Bank & Trust, a California banking corporation, and the other financial institutions named therein, as lenders.
10.32(9)	Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware corporation.
10.33(10)	Borrowing Base Revolving Line of Credit Agreement, dated as of June 28, 2004, by and between William Lyon Homes, Inc., a California corporation, and Bank One, NA, a national banking association.
10.34(15)	Modification Agreement, dated as of December 7, 2004, by and between William Lyon Homes, Inc., a California corporation, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA, a national banking association).
10.35(21)	Second Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, between William Lyon Homes, Inc. and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA).

Exhibit Number	Description
10.36(28)	Third Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated October 23, 2006 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a National Banking Association.
10.37(31)	Fifth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated November 6, 2007 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a national banking association.
10.38(34)	Sixth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated February 20, 2008 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a national banking association.
10.39(37)	Seventh Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of March 12, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and JPMorgan Chase Bank, N.A., a national banking association (“Bank”).
10.40(37)	Eighth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of June 5, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and JPMorgan Chase Bank, N.A., a national banking association (“Bank”).
10.41(39)	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”).
10.42(40)	Tenth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated December 19, 2008, by and between JPMorgan Chase Bank, N.A., a national banking association, and William Lyon Homes, Inc., a California Corporation.
10.43(17)	Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.
10.44(17)	Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective November 5, 1999.
10.45(17)	Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5, 1999.
10.46(4)	Option Agreement and Escrow Instructions between William Lyon Homes, Inc., a California corporation and Lathrop Investment, L.P., a California limited partnership, dated as of October 24, 2000.
10.47(30)	Description of 2006 Cash Bonus Plan.
10.48(30)	2006 Senior Executive Bonus Plan.
10.49(30)	Description of 2007 Cash Bonus Plan.
10.50(30)	2007 Senior Executive Bonus Plan.
10.51(18)	Standard Industrial/Commercial Single-Tenant Lease – Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.
10.52(5)	The Presley Companies Non-Qualified Retirement Plan for Outside Directors.
10.53(22)	Borrowing Base Revolving Line of Credit Agreement, dated as of February 14, 2006, by and between William Lyon Homes, Inc., a California corporation, and Wachovia Financial Services, Inc, a North Carolina corporation, by and through its Agent, Wachovia Bank, National Association, a national banking association.
10.54(27)	First Amendment to Borrowing Base Revolving Line of Credit Agreement dated September 29, 2006 by and between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association, a national banking association.
10.55(34)	Third Amendment to Borrowing Base Revolving Line of Credit Agreement dated January 23, 2008 between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association, a national banking association, formerly referenced as Agent for Wachovia Financial Services, Inc., a North Carolina corporation.
10.56(36)	Fourth Amendment to Borrowing Base Revolving Line of Credit Agreement, dated as of May 14, 2008, by and between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association.

Exhibit Number	Description
10.57(40)	Fifth Amendment to Borrowing Base Revolving Line of Credit Agreement, dated as of December 15, 2008, between William Lyon Homes, Inc., a California Corporation, and Whitney Ranch Village 5, LLC, a Delaware limited liability company (individually and collectively as the context may require) and Wachovia Bank, National Association, a national banking association.
10.58(25)	Borrowing Base Revolving Line of Credit Agreement dated as of July 10, 2006 by and between William Lyon Homes, Inc., a California corporation, and California National Bank.
10.59(32)	Extension and Modification Agreement dated as of August 2, 2007 by and between William Lyon Homes, Inc., a California corporation, and California National Bank
10.60(35)	Second Extension and Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated May 21, 2008 by and between William Lyon Homes, Inc., a California corporation and California National Bank, a national banking association.
10.61(35)	Third Extension and Modification agreement dated May 19, 2008, by and between Circle G at the Church Farm North Joint Venture, LLC, an Arizona limited liability company, and California National Bank, a national banking association.
10.62(40)	Third Modification Agreement dated as of December 23, 2008, by and between William Lyon Homes, Inc., a California Corporation and California National Bank, a national banking association.
10.63(23)	Revolving Line of Credit Loan Agreement dated as of March 8, 2006 by and between William Lyon Homes, Inc., a California corporation, and Comerica Bank.
10.64(34)	Amendment Agreement entered into as of February 28, 2008, by and between William Lyon Homes, Inc., a California corporation and Comerica Bank
10.65(39)	Second Amendment Agreement dated as of September 2, 2008, by and between William Lyon Homes, Inc., a California Corporation (“Borrower”), and Comerica Bank (“Lender”).
10.66(40)	Third Amendment Agreement dated as of December 22, 2008, by and between William Lyon Homes, Inc., a California Corporation, and Comerica Bank.
10.67(33)	Loan Agreement dated as of January 30, 2007, by and between East Garrison Partners I, a California limited liability company, and Residential Funding Company, LLC, a Delaware limited liability company.
10.68(33)	Completion Guaranty dated as of January 30, 2007, by and between William Lyon Homes, Inc., a California corporation, and other guarantors in favor of Residential Funding Company, LLC.
10.69(34)	First Amendment to Loan Agreement dated as of February 25, 2008, but effective as of December 31, 2007, by and between East Garrison Partners I, LLC, a California limited liability company, and RFC Construction Funding, LLC, a Delaware limited liability company, as successor in interest to and assignee of Residential Funding Company, LLC., a Delaware limited liability company.
12.1(41)	Statement of computation of ratio of earnings to fixed charges.
21.1(41)	List of Subsidiaries of William Lyon Homes, a Delaware corporation.
31.1(41)	Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2(41)	Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1(41)	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(41)	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(22) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.

(23) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed April 3, 2006 and incorporated herein by reference.

(24) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed July 6, 2006 and incorporated herein by reference.

(25) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed August 1, 2006 and incorporated herein by reference.

(26) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed September 27, 2006 and incorporated herein by reference.

(27) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed October 17, 2006 and incorporated herein by reference.

(28) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed October 27, 2006 and incorporated herein by reference.

(29) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed December 11, 2006 and incorporated herein by reference.

(30) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

(31) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on November 15, 2007 and incorporated herein by reference.

(32) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on August 6, 2007 and incorporated herein by reference.

(33) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on February 2, 2007 and incorporated herein by reference.

(34) Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.

(35) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on May 28, 2008 and incorporated herein by reference.

(36) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on July 10, 2008 and incorporated herein by reference.

(37) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008 and incorporated herein by reference.

(38) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on September 24, 2008 and incorporated herein by reference.

(39) Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 and incorporated herein by reference.

(40) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on January 5, 2009 and incorporated herein by reference.

(41) Filed herewith.