WILLIAM LYON HOMES - 10-K Annual Report

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, 2003


¨		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 0-18001

WILLIAM LYON HOMES

(Exact name of registrant as specified in its charter)


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


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

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

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

Title of Each Class

Name of Each Exchange

on Which Registered

Common Stock, par value $.01 per share

New York Stock Exchange

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

None

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES x NO ¨.

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2003 was $140,886,110. (This calculation assumes that all officers and directors of the Company are affiliates.)

The number of shares of Common Stock outstanding as of February 24, 2004 was 9,787,440.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant’s Proxy Statement for the Annual Meeting of Holders of Common Stock to be held on May 10, 2004 are incorporated herein by reference into Part III.

WILLIAM LYON HOMES

INDEX


		Page No.
PART I

Item 1.	Business	1

Item 2.	Properties	13

Item 3.	Legal Proceedings	13

Item 4.	Submission of Matters to a Vote of Security Holders	13

PART II

Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters	14

Item 6.	Selected Financial Data	15

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 8.	Financial Statements and Supplementary Data	38

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	38

Item 9A.	Controls and Procedures	39

PART III

Item 10.	Directors and Executive Officers of Registrant	40

Item 11.	Executive Compensation	40

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	40

Item 13.	Certain Relationships and Related Transactions	40

Item 14.	Principal Accountant Fees and Services	40

PART IV

Item 15.	Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K	41

	Index to Financial Statements	47

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 59,000 homes. The Company conducts its homebuilding operations through five geographic divisions (Southern California, San Diego, Northern California, Arizona and Nevada) including both consolidated projects and projects being developed in unconsolidated joint ventures. For 2003, approximately 69% of the home closings of the Company and its joint ventures were derived from its California operations. In 2003, the Company and its joint ventures had combined revenues of $1.2 billion and delivered 2,804 homes.

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, 2003, the Company marketed its homes through 42 sales locations in both its consolidated projects and projects being developed in unconsolidated joint ventures. In 2003, the average sales price for combined homes delivered was $422,200. Base sales prices for actively selling projects in 2003 ranged from $119,000 to $1,825,000.

As of December 31, 2003, the Company and its joint ventures owned approximately 6,174 lots (including 1,142 in unconsolidated joint ventures) and had options to purchase an additional 11,998 lots, substantially all of which are entitled. As used in this Annual Report on Form 10-K, “entitled” land has a development agreement and/or vesting tentative map, or a final recorded plat or map from the appropriate county or city government. Development agreements and vesting tentative maps generally provide for the right to develop the land in accordance with the provisions of the development agreement or vesting tentative map unless an issue arises concerning health, safety or general welfare. The Company’s sources of developed lots for its homebuilding operations are (1) development of master-planned communities, primarily through 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 land is adequate to supply its homebuilding operations at current operating levels for approximately 6 years.

As of December 31, 2003, the Company and certain of its subsidiaries were general partners or members in a number of joint ventures involved in the development and sale of residential projects. As described more fully in Note 2 of “Notes to Consolidated Financial Statements”, in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”), six joint ventures created after January 31, 2003 have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these six joint ventures have been consolidated with the Company’s financial statements as of December 31, 2003 and for the period then ended.

of “Notes to Consolidated Financial Statements” for condensed combined financial information for the six joint ventures whose financial statements have been consolidated with the Company’s financial statements. See Note 5 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.

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

The Company had total consolidated revenues from operations of $897.8 million, $613.3 million and $468.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. Homes closed by the Company, including its joint ventures, were 2,804, 2,522 and 2,566 for the years ended December 31, 2003, 2002 and 2001, respectively. Including its joint ventures, the Company’s dollar amount of backlog of homes sold but not closed as of December 31, 2003, was $595.2 million, a 130% increase over the $259.1 million as of December 31, 2002. The cancellation rate of buyers who contracted to buy a home but did not close escrow was approximately 18% during 2003 and 19% during 2002.

The Company’s operations are dependent to a significant extent on debt financing and on joint venture financing. The Company’s principal credit sources are its 10³/4% Senior Notes, 7¹/2% Senior Notes, secured revolving credit facilities, seller-provided financing, and land banking transactions. At December 31, 2003, the outstanding principal amount of the 10³/4% Senior Notes was $246.4 million. The secured revolving credit facilities are revolving lines of credit with a maximum commitment of $325.0 million at December 31, 2003. However, the credit facilities have limitations on the amounts that can be borrowed at any time based on assets which are included in the credit facilities and the specified borrowings permitted under borrowing base calculations. The secured revolving credit facilities are secured by substantially all of the Company’s assets. At December 31, 2003, the outstanding principal amount under the secured revolving credit facilities was $49.2 million. The Company’s mortgage subsidiary has a $20.0 million revolving credit facility and a $10.0 million revolving credit facility to fund its mortgage operations, of which an aggregate $9.6 million was outstanding at December 31, 2003. On February 6, 2004, the Company completed an offering of 7¹/2% Senior Notes due 2014 in the outstanding principal amount of $150.0 million. 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.”

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

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

The Company’s Markets

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

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


	Year Ended December 31,
	2003				2002				2001
	Dollar Amount		% of Total		Dollar Amount		% of Total		Dollar Amount		% of Total

	(Dollars in Thousands)
Consolidated
Southern California(1)	$	304,190	25	%	$	232,868	24	%	$	118,611	15	%
San Diego(2)		170,264	14	%		115,843	12	%		117,652	15	%
Northern California(3)		181,062	15	%		84,679	9	%		75,108	10	%
Arizona(4)		67,402	5	%		65,571	7	%		46,262	6	%
Nevada(5)		165,395	14	%		103,449	11	%		101,423	13	%

		888,313	73	%		602,410	63	%		459,056	59	%

Unconsolidated joint ventures
Southern California(1)		103,020	9	%		167,518	16	%		156,336	20	%
San Diego(2)		118,753	10	%		90,843	9	%		49,748	6	%
Northern California(3)		103,776	8	%		121,415	12	%		115,385	15	%

		325,549	27	%		379,776	37	%		321,469	41	%

Combined
Southern California(1)		407,210	34	%		400,386	40	%		274,947	35	%
San Diego(2)		289,017	24	%		206,686	21	%		167,400	21	%
Northern California(3)		284,838	23	%		206,094	21	%		190,493	25	%
Arizona(4)		67,402	5	%		65,571	7	%		46,262	6	%
Nevada(5)		165,395	14	%		103,449	11	%		101,423	13	%

	$	1,213,862	100	%	$	982,186	100	%	$	780,525	100	%

(1)

The Southern California Division consists of operations in the counties of Los Angeles, Orange and Ventura and a portion of Riverside County.

(2)

The San Diego Division consists of operations in San Diego County and a portion of Riverside County.

(3)

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

(4)

The Arizona Division consists of operations in the Phoenix area.

(5)

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

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

LAND ACQUISITION AND DEVELOPMENT

As of December 31, 2003, the Company and its joint ventures controlled 18,172 lots. Of these lots, 6,174 were owned and entitled.

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

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

•

Completing due diligence prior to committing to acquire land;

•

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

•

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

•

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

•

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

•

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

•

Employing centralized control of approval over all land transactions;

•

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

•

Diversifying with respect to geography, markets and product types.

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

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

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, 2003, the Company and its joint ventures had 42 sales locations.

Because the decision as to which product to develop is based on the Company’s assessment of market conditions and the restrictions imposed by government regulations, homestyles and sizes vary from project to project. The Company’s attached housing ranges in size from 1,207 to 2,666 square feet, and the detached housing ranges from 1,309 to 5,770 square feet.

Due to the Company’s product and geographic diversification strategy, the prices of the Company’s homes also vary substantially. Base sales prices for the Company’s attached housing range from approximately $297,000 to $437,000 and base sales prices for detached housing range from approximately $119,000 to $1,825,000. On a combined basis with the Company’s joint ventures, the average sales price of homes closed for the year ended December 31, 2003 was $422,200.

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

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

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

Description of Projects and Communities Under Development

The Company’s homebuilding projects usually take two to five years to develop. The following table presents project information relating to each of the Company’s homebuilding divisions as of December 31, 2003 and only includes projects with lots owned as of December 31, 2003 or homes closed for the year ended December 31, 2003.


Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of December 31, 2003	Backlog at December 31, 2003(2)(3)	Lots Owned as of December 31, 2003(4)	Homes Closed for the Year Ended December 31, 2003	Sales Price Range(5)

SOUTHERN CALIFORNIA
Consolidated:
Orange County
Terraza at Vista del Verde, Yorba Linda	2001	106	106	0	0	6	$565,000 — 615,000
Monticello, Irvine	2002	112	112	0	0	14	$330,000 — 390,000
Montellano at Talega, San Clemente	2002	61	61	0	0	33	$890,000 — 960,000
Mirador at Talega, San Clemente	2004	76	0	0	76	0	$1,025,000 — 1,125,000
Sterling Glen, Ladera Ranch	2002	102	102	0	0	11	$502,000 — 535,000
Davenport, Ladera Ranch	2003	163	112	30	51	112	$380,000 — 437,000
Walden Park, Ladera Ranch	2004	109	0	22	109	0	$560,000 — 590,000
Weatherhaven, Ladera Ranch	2002	71	71	0	0	68	$485,000 — 565,000
Laurel at Quail Hill, Irvine	2003	83	77	5	6	77	$560,000 — 610,000
Linden at Quail Hill, Irvine	2003	100	94	6	6	94	$580,000 — 675,000
Ambridge at Quail Hill, Irvine	2004	128	0	0	56	0	$460,000 — 520,000
Altamura @ Nellie Gail Ranch, Laguna Hills	2003	52	10	17	25	10	$1,650,000 — 1,825,000
Seacove at the Waterfront, Huntington Beach	2004	29	0	0	29	0	$675,000 — 810,000
Covenant Hills P-30A, Ladera Ranch	2005	53	0	0	53	0	$880,000 — 985,000
Covenant Hills P-30B, Ladera Ranch	2005	52	0	0	52	0	$1,010,000 — 1,059,000
Honeyman I, San Juan Capistrano	2005	80	0	0	80	0	$1,020,000 — 1,190,000
Honeyman II, San Juan Capistrano	2005	40	0	0	40	0	$1,260,000 — 1,350,000
Riverside County
Providence Ranch, Corona	2002	97	97	0	0	5	$290,000 — 340,000
Providence Ranch North, Corona	2002	83	83	0	0	2	$246,000 — 300,000
Providence Ranch III, Corona	2003	67	67	0	0	67	$290,000 — 365,000
San Bernardino County Echo Glen – Chino	2003	89	21	40	68	21	$480,000 — 540,000
Ventura County
Cantada, Oxnard	2002	113	113	0	0	1	$343,000 — 363,000

Total consolidated		1,866	1,126	120	651	521

Unconsolidated joint ventures:
Orange County
Beachside, Huntington Beach	2001	86	86	0	0	5	$620,000 — 640,000
Seacove at the Waterfront, Huntington Beach	2004	77	0	0	77	0	$675,000 — 810,000
Riverside County
Discovery, North Corona	2004	172	0	12	172	0	$360,000 — 395,000
Bounty, North Corona	2003	167	25	34	142	25	$405,000 — 435,000


Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of December 31, 2003	Backlog at December 31, 2003(2)(3)	Lots Owned as of December 31, 2003(4)	Homes Closed for the Year Ended December 31, 2003	Sales Price Range(5)
Ventura County
Quintana, Thousand Oaks	2001	90	90	0	0	33	$555,000 — 650,000
Coronado, Oxnard	2002	110	110	0	0	36	$435,000 — 460,000
Cantabria, Oxnard	2002	87	87	0	0	13	$350,000 — 370,000
Los Angeles County
Toscana, Moorpark	2002	70	70	0	0	44	$518,000 — 553,000
Oakmont @ Westridge, Valencia	2003	87	16	31	71	16	$915,000 — 1,025,000
Creekside, Valencia	2004	141	0	0	141	0	$320,000 — 370,000

Total unconsolidated joint ventures.		1,087	484	77	603	172

SOUTHERN CALIFORNIA REGION TOTAL		2,953	1,610	197	1,254	693


NORTHERN CALIFORNIA
Consolidated:
San Joaquin County
Ironwood II, Lathrop	2003	88	64	21	24	64	$276,000 — 317,000
Lyon Estates at Stonebridge, Lathrop	2001	145	145	0	0	63	$284,000 — 324,000
Lyon Estates at Stonebridge, (Unit 9), Lathrop	2004	72	0	46	72	0	$332,000 — 372,000
Contra Costa County
The Bluffs, Hercules	2003	80	43	33	37	43	$622,000 — 674,000
The Shores, Hercules	2003	110	55	36	55	55	$575,000 — 633,000
Sacramento County
Lyon Palazzo, Natomas	2001	100	100	0	0	9	$273,000 — 322,000
Santa Clara County
The Ranch at Silver Creek, San Jose:
Provance	2003	95	15	23	80	15	$1,075,000 — 1,260,000
Portofino	2003	42	8	26	34	8	$1,245,000 — 1,395,000
Mariposa	2003	78	18	14	60	18	$620,000 — 720,000
Siena	2003	61	17	20	44	17	$725,000 — 840,000
Casa Bella	2003	56	3	17	53	3	$560,000 — 665,000
Esperanza	2004	74	0	0	74	0	$710,000 — 845,000
Montesa	2004	54	0	0	54	0	$775,000 — 900,000
Hacienda	2004	34	0	0	34	0	$1,250,000 — 1,339,000
Tesoro	2004	44	0	0	44	0	$657,000 — 699,000

		538	61	100	477	61

Stanislaus County
Lyon Seasons, Modesto	2002	71	71	0	0	26	$296,000 — 339,000
Sonterra at Walker Ranch, Patterson	2003	119	18	7	101	18	$305,000 — 385,000

Total consolidated		1,323	557	243	766	339

Unconsolidated joint ventures:
Contra Costa County
Lyon Dorado, San Ramon	2001	54	54	0	0	1	$788,000 — 1,003,000
Olde Ivy, Brentwood	2003	77	20	20	57	20	$323,000 — 358,000
Heartland, Brentwood	2003	76	20	19	56	20	$329,000 — 356,000
Gables, Brentwood	2003	99	20	20	79	20	$335,000 — 394,000
Overlook, Hercules	2003	133	26	34	107	26	$545,000 — 587,000


Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of December 31, 2003	Backlog at December 31, 2003(2)(3)	Lots Owned as of December 31, 2003(4)	Homes Closed for the Year Ended December 31, 2003	Sales Price Range(5)
Solano County
Cascade/Paradise Valley, Fairfield	2003	9	9	0	0	9	$586,000 — 626,000
Brook, Fairfield	2001	121	121	0	0	7	$312,000 — 359,000
El Dorado County
Lyon Casina, El Dorado Hills	2001	123	100	20	23	60	$365,000 — 405,000
Lyon Prima, El Dorado Hills	2001	137	86	22	51	47	$405,000 — 481,000
Placer County
Pinehurst at Morgan Creek	2003	117	12	13	105	12	$491,000 — 583,000
Cypress at Morgan Creek	2003	73	12	12	61	12	$456,000 — 516,000

Total unconsolidated joint ventures		1,019	480	160	539	234

NORTHERN CALIFORNIA REGION TOTAL		2,342	1,037	403	1,305	573


SAN DIEGO
Consolidated:
Riverside County
Horsethief Canyon Ranch Series “400”, Corona	1995	554	554	0	0	1	$280,000 — 307,000
Sycamore Ranch, Fallbrook	1997	195	195	0	0	37	$509,000 — 690,000
Bridle Creek,, Corona	2003	274	18	23	172	18	$508,000 — 570,000
Willow Glen, Temecula	2003	74	59	13	15	59	$342,000 — 383,000
Tessera, Beaumont	2003	168	66	34	72	66	$223,000 — 262,000
Sedona, Murietta	2003	138	42	28	65	42	$385,000 — 478,000
Cabrillo at Montecito Ranch, Corona	2004	83	0	37	83	0	$483,000 — 515,000
San Diego County
The Groves, Escondido	2001	92	92	0	0	25	$367,000 — 382,000
The Orchards, Escondido	2002	79	79	0	0	57	$413,000 — 432,000
Vineyards, Escondido	2002	73	27	30	46	27	$529,000 — 546,000
Meadows, Escondido	2004	44	0	21	44	0	$477,000 — 536,000
Sonora Ridge, Chula Vista	2003	168	79	40	49	79	$386,000 — 422,000
Boardwalk, San Diego	2004	90	0	0	90	0	$447,000 — 500,000
San Miguel Village, Chula Vista	2005	195	0	0	195	0	$298,000 — 326,000

Total consolidated		2,227	1,211	226	831	411

Unconsolidated joint ventures:
San Diego County
Providence, San Diego	2001	123	123	0	0	49	$587,000 — 627,000
Tanglewood, San Diego	2002	161	161	0	0	132	$413,000 — 474,000
Summerwood, San Diego	2002	95	95	0	0	68	$430,000 — 473,000

Total unconsolidated joint ventures		379	379	0	0	249

SAN DIEGO REGION TOTAL		2,606	1,590	226	831	660


ARIZONA
Consolidated:
Maricopa County
Sage Creek — Arcadia, Avondale	2000	167	167	0	0	1	$137,000 — 160,000
Mesquite Grove — Parada, Chandler	2001	112	104	6	8	66	$189,000 — 233,000


Project (County) Product	Year of First Delivery	Estimated Number of Homes at Completion(1)	Units Closed as of December 31, 2003	Backlog at December 31, 2003(2)(3)	Lots Owned as of December 31, 2003(4)	Homes Closed for the Year Ended December 31, 2003	Sales Price Range(5)
Mesquite Grove — Estates, Chandler	2001	93	64	24	29	32	$294,000 — 330,000
Dove Wing at Power Ranch, Gilbert	2001	103	100	3	3	49	$177,000 — 235,000
Aubergine at Tramonto, Phoenix	2001	76	76	0	0	44	$191,000 — 254,000
Morgan Creek at Country Place, Tolleson	2001	115	112	3	3	83	$119,000 — 141,000
Oakcrest at Gateway Crossing, Gilbert	2003	236	42	68	114	42	$132,000 — 171,000
Woodridge at Gateway Crossing, Gilbert	2003	165	2	28	66	2	$148,000 — 188,000
Sonoran Foothills, Phoenix Desert Crown	2004	124	0	0	13	0	$259,000 — 340,000
Desert Sierra	2004	212	0	0	20	0	$160,000 — 191,000
Cooley Station, Gilbert	2004	548	0	0	548	0
Copper Canyon Ranch, Surprise Rancho Vistas	2004	212	0	75	212	0	$278,000 — 362,000
Sunset Point	2004	282	0	0	282	0	$131,000 — 195,000
El Sendero Hills	2004	188	0	0	188	0	$186,000 — 238,000

ARIZONA REGION TOTAL		2,633	667	207	1,486	319


NEVADA
Consolidated:
Clark County
Topaz Ridge at Summerlin, Las Vegas	2002	89	80	9	9	41	$577,000 — 630,000
Annendale, North Las Vegas	2001	194	193	1	1	107	$181,000 — 204,000
Santalina at Summerlin, Las Vegas	2002	74	74	0	0	73	$265,000 — 291,000
Encanto at Summerlin, Las Vegas	2003	79	79	0	0	79	$363,000 — 386,000
Calimesa, North Las Vegas	2003	90	90	0	0	90	$165,000 — 181,000
Iron Mountain, Las Vegas	2003	70	44	26	26	44	$363,000 — 416,000
Vista Verde at Summerlin, Las Vegas	2003	122	15	37	107	15	$298,000 — 340,000
Miraleste at Summerlin, Las Vegas	2003	122	7	44	115	7	$401,000 — 444,000
The Classics, North Las Vegas	2003	227	52	29	175	52	$190,000 — 214,000
The Springs, North Las Vegas	2003	209	27	29	182	27	$170,000 — 203,000
The Estates, North Las Vegas	2003	176	24	33	152	24	$204,000 — 228,000
The Cottages, North Las Vegas	2004	360	0	25	360	0	$150,000 — 167,000
Granada at Summerlin, Las Vegas	2004	144	0	0	144	0	$350,000 — 395,000
Palomar at Summerlin, Las Vegas	2005	27	0	0	27	0	$399,000 — 432,000

NEVADA REGION TOTAL		1,983	685	233	1,298	559

GRAND TOTALS:
Consolidated		10,032	4,246	1,029	5,032	2,149
Unconsolidated joint ventures		2,485	1,343	237	1,142	655

		12,517	5,589	1,266	6,174	2,804

(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, 2003, 1,127 represent homes completed or under construction and 139 represent homes not yet under construction.

(4)

Lots owned as of December 31, 2003 include lots in backlog at December 31, 2003.

(5)

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

Sales and Marketing

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

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

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

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

The Company’s homes are typically sold before or during construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain contingencies such as the buyer’s ability to qualify for financing. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company and its joint ventures’ projects was approximately 18% during 2003. Cancellation rates are subject to a variety of factors beyond the Company’s control such as adverse economic conditions and increases in mortgage interest rates. The Company and its joint ventures’ inventory of completed and unsold homes was 6 homes as of December 31, 2003.

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 a three-year insurance policy in November 2001. The Company has been informed by the insurance carrier that this insurance policy will respond to construction defect claims on homes that close during each 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, such as landslides or earthquakes, or circumstances 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 — Duxford Financial, Inc.

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.

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

Information Systems and Controls

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

Regulation

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

Duxford Financial, Inc. 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

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

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

As of December 31, 2003, the Company employed 660 full-time and 27 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, sales and marketing activities.

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

Available Information

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

Item 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 Duxford Financial, Inc., 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

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

No matters were submitted to the Company’s stockholders during the fourth quarter of the Company’s fiscal year ended December 31, 2003.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

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


	High		Low
2002
First Quarter	$	23.7500	$	14.3300
Second Quarter		29.8700		18.3000
Third Quarter		25.9500		18.6200
Fourth Quarter		27.0500		20.8500

2003
First Quarter		25.7000		21.2000
Second Quarter		34.5000		25.1700
Third Quarter		50.5900		31.1600
Fourth Quarter		68.4500		50.0500

As of February 24, 2004, the closing price for the Company’s Common Stock as reported on the NYSE was $77.50.

As of February 24, 2004, there were approximately 1,157 beneficial owners of the Company’s Common Stock.

The Company’s Board of Directors has authorized a program to repurchase up to 20% of the Company’s outstanding shares as announced on September 20, 2001. No shares were repurchased under this program during the period ended December 31, 2001. For the year ended December 31, 2002, the Company repurchased 1,018,400 shares of its outstanding common shares for $19,570,000 and for the year ended December 31, 2003, the Company repurchased 200,000 shares of its outstanding common shares for $7,180,000.

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. In addition, the effect of the Company’s principal financing agreements currently prohibits the payment of dividends by the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity” and Note 7 of “Notes to Consolidated Financial Statements.”

The following table sets forth information as of December 31, 2003 with respect to compensation plans under which the Company’s Common Stock is authorized for issuance.


Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	189,627	$	8.8482	396,666
Equity compensation plans not approved by security holders	N/A		N/A	N/A

Total	189,627	$	8.8482	396,666

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

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, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 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, 2001, 2000 and 1999 and for the years ended December 31, 2000 and 1999 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,
	2003			2002			2001			2000			1999(1)
	(dollars in thousands, except per share amounts)
Statement of Income Data:
Operating revenue
Home sales	$	866,657		$	593,762		$	452,002		$	403,850		$	426,839
Lots, land and other sales		21,656			8,648			7,054			3,016			13,142
Management fees		9,490			10,892			9,127			10,456			4,825

		897,803			613,302			468,183			417,322			444,806

Operating costs
Cost of sales—homes		(714,385	)		(504,330	)		(382,608	)		(335,891	)		(357,153	)
Cost of sales—lots, land and other		(13,269	)		(9,404	)		(5,158	)		(3,378	)		(13,223	)
Sales and marketing		(31,252	)		(22,862	)		(18,149	)		(16,515	)		(19,387	)
General and administrative		(50,315	)		(39,366	)		(37,171	)		(35,348	)		(24,193	)
Amortization of goodwill(2)		—			—			(1,242	)		(1,244	)		(307	)

		(809,221	)		(575,962	)		(444,328	)		(392,376	)		(414,263	)

Equity in income of unconsolidated joint ventures		31,236			27,748			22,384			24,416			17,859

Operating income		119,818			65,088			46,239			49,362			48,402
Interest expense, net of amounts capitalized		—			—			(227	)		(5,557	)		(6,153	)
Financial advisory expenses		—			—			—			—			(2,197	)
Other income, net(3)		4,563			2,693			7,513			7,940			7,666
Minority equity in income of consolidated entities		(429	)		—			—			—			—

Income before provision for income taxes		123,952			67,781			53,525			51,745			47,718
Provision for income taxes		(51,815	)		(18,270	)		(5,847	)		(12,477	)		(241	)

Net income	$	72,137		$	49,511		$	47,678		$	39,268		$	47,477

Earnings per common share
Basic	$	7.37		$	4.85		$	4.50		$	3.74		$	4.55

Diluted	$	7.27		$	4.73		$	4.44		$	3.74		$	4.55

Balance Sheet Data:
Cash and cash equivalents	$	24,137		$	16,694		$	19,751		$	14,711		$	2,154
Real estate inventories		698,047			491,952			307,335			233,700			199,430
Investments in and advances to unconsolidated joint ventures		45,613			65,404			66,753			49,966			50,282
Total assets		839,715			617,581			433,709			330,280			278,483
Total debt		326,737			266,065			221,470			166,910			176,630
Minority interest		142,496			80,647			784			—			—
Stockholders’ equity		252,040			181,676			150,617			102,512			53,301

Operating Data (including unconsolidated joint ventures) (unaudited):
Number of net new home orders		3,443			2,607			2,541			2,603			2,303
Number of homes closed		2,804			2,522			2,566			2,666			2,618
Average sales price of homes closed	$	422		$	379		$	299		$	289		$	241
Backlog at end of period, number of homes(4)		1,266			627			542			567			630
Backlog at end of period, aggregate sales value(4)	$	595,180		$	259,123		$	176,531		$	171,650		$	185,800

(1)

On November 5, 1999, the Company acquired substantially all of the assets and assumed substantially all of the related liabilities of a homebuilding company owned by General William Lyon, Chairman of the Board, and a trust for the benefit of his son, William H. Lyon, a director. The total purchase price consisted of approximately $42.6 million in cash and the assumption of approximately $101.1 million of liabilities. The acquisition has been accounted for as a purchase and, accordingly, the purchase price has been allocated based on the fair value of the assets acquired and liabilities assumed.

(2)

The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill and, until January 1, 2002, was being amortized on a straight-line basis over seven years. Accumulated amortization was $2,793,000 as of December 31, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), effective for fiscal years beginning after December 15, 2001. Under the new rule, goodwill is no longer amortized but is subject to impairment tests in accordance with Statement No. 142. The Company performed its required annual impairment test of goodwill as of December 31, 2003 and determined that there have been no indicators of impairment. If Statement No. 142 had been adopted effective January 1, 1999, the pro forma impact of the non-amortization of goodwill on the results for the subsequent periods would have been as follows (in thousands except per share data):


	Year Ended December 31,
	2003		2002		2001		2000		1999
	(dollars in thousands)
Net income, as reported	$	72,137	$	49,511	$	47,678	$	39,268	$	47,477
Amortization of goodwill, net of tax		—		—		1,106		943		305

Net income, as adjusted	$	72,137	$	49,511	$	48,784	$	40,211	$	47,782

Earnings per common share, as adjusted:
Basic	$	7.37	$	4.85	$	4.61	$	3.83	$	4.58

Diluted	$	7.27	$	4.73	$	4.54	$	3.83	$	4.58

(3)

In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Recission of SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (“Statement No. 145”). Statement No. 145 prevents gains or losses on extinguishment of debt not meeting the criteria of APB 30 to be treated as extraordinary. Statement No. 145 is effective for fiscal years beginning after March 15, 2002. Upon adoption of Statement No. 145, the Company’s previously reported extraordinary items related to gain from retirement of debt were reclassified to other income and not reported as extraordinary items.

(4)

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, 2003, 1,127 represent homes under construction and 139 represent homes not yet under construction. Backlog as of all dates is unaudited.

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 consolidated projects and unconsolidated joint ventures.

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 59,000 homes. The Company conducts its homebuilding operations through five geographic divisions: Southern California, San Diego, Northern California, Arizona and Nevada. The Company believes that it is well positioned for future growth in all of its markets. For the year ended December 31, 2003, on a combined basis, the Company had revenues from home sales of $1.2 billion and delivered 2,804 homes.

The financial statements of joint ventures in which the Company has a 50% or less voting or economic interest (and thus are not controlled by the Company) and which were created prior to February 1, 2003, and the financial statements of joint ventures which have not been determined to be variable interest entities in which the Company is considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method. Income allocations and cash distributions to the Company from joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners’ priority returns and returns of partners’ capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the six joint ventures whose financial statements have been consolidated with the Company’s financial statements. See Note 5 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.

Results of Operations

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


	As of and for the year ended December 31, 2003
	Consolidated			Unconsolidated Joint Ventures			Combined Total
Selected Financial Information (dollars in thousands)
Homes closed		2,149			655			2,804

Home sales revenue	$	866,657		$	317,109		$	1,183,766
Cost of sales		(714,385	)		(248,252	)		(962,637	)

Gross margin	$	152,272		$	68,857		$	221,129

Gross margin percentage		17.6	%		21.7	%		18.7	%

Number of homes closed
California		1,271			655			1,926
Arizona		319			—			319
Nevada		559			—			559

Total		2,149			655			2,804

Average sales price
California	$	498,700		$	484,100		$	493,800
Arizona		211,300			—			211,300
Nevada		295,900			—			295,900

Total	$	403,300		$	484,100		$	422,200

Number of net new home orders
California		1,660			697			2,357
Arizona		389			—			389
Nevada		697			—			697

Total		2,746			697			3,443

Average number of sales locations during period
California		19			9			28
Arizona		6			—			6
Nevada		6			—			6

Total		31			9			40


	As of and for the year ended December 31, 2003
	Consolidated		Unconsolidated Joint Ventures		Combined Total
Backlog of homes sold but not closed at end of period
California		589		237		826
Arizona		207		—		207
Nevada		233		—		233

Total		1,029		237		1,266

Dollar amount of backlog of homes sold but not closed at end of period (dollars in thousands)
California	$	355,128	$	119,509	$	474,637
Arizona		47,228		—		47,228
Nevada		73,315		—		73,315

Total	$	475,671	$	119,509	$	595,180

Lots controlled at end of year
Owned lots
California		2,248		1,142		3,390
Arizona		1,486		—		1,486
Nevada		1,298		—		1,298

Total		5,032		1,142		6,174

Optioned lots(1)
California						4,835
Arizona						4,253
Nevada						2,910

Total						11,998

Total lots controlled
California						8,225
Arizona						5,739
Nevada						4,208

Total						18,172


	As of and for the year ended December 31, 2002
	Consolidated			Unconsolidated Joint Ventures			Combined Total
Selected Financial Information (dollars in thousands)
Homes closed		1,740			782			2,522

Home sales revenue	$	593,762		$	362,697		$	956,459
Cost of sales		(504,330	)		(298,838	)		(803,168	)

Gross margin	$	89,432		$	63,859		$	153,291

Gross margin percentage		15.1	%		17.6	%		16.0	%

Number of homes closed
California		1,116			782			1,898
Arizona		270			—			270
Nevada		354			—			354

Total		1,740			782			2,522

Average sales price
California	$	387,900		$	463,800		$	419,200
Arizona		212,800			—			212,800
Nevada		292,200			—			292,200

Total	$	341,200		$	463,800		$	379,200

Number of net new home orders
California		1,117			880			1,997
Arizona		289			—			289
Nevada		321			—			321

Total		1,727			880			2,607

Average number of sales locations during period
California		15			10			25
Arizona		6			—			6
Nevada		4			—			4

Total		25			10			35


	As of and for the year ended December 31, 2002
	Consolidated		Unconsolidated Joint Ventures		Combined Total
Backlog of homes sold but not closed at end of period
California		200		195		395
Arizona		137		—		137
Nevada		95		—		95

Total		432		195		627

Dollar amount of backlog of homes sold but not closed at end of period (dollars in thousands)
California	$	99,078	$	96,160	$	195,238
Arizona		30,206		—		30,206
Nevada		33,679		—		33,679

Total	$	162,963	$	96,160	$	259,123

Lots controlled at end of year
Owned lots
California		2,174		1,439		3,613
Arizona		963		—		963
Nevada		1,534		—		1,534

Total		4,671		1,439		6,110

Optioned lots(1)
California						2,953
Arizona						4,462
Nevada						198

Total						7,613

Total lots controlled
California						6,566
Arizona						5,425
Nevada						1,732

Total						13,723


	As of and for the year ended December 31, 2001
	Consolidated			Unconsolidated Joint Ventures			Combined Total
Selected Financial Information (dollars in thousands)
Homes closed		1,861			705			2,566

Home sales revenue	$	452,002		$	316,098		$	768,100
Cost of sales		(382,608	)		(258,997	)		(641,605	)

Gross margin	$	69,394		$	57,101		$	126,495

Gross margin percentage		15.4	%		18.1	%		16.5	%

Number of homes closed
California		1,087			705			1,792
Arizona		298			—			298
Nevada		476			—			476

Total		1,861			705			2,566

Average sales price
California	$	281,300		$	448,400		$	347,100
Arizona		150,200			—			150,200
Nevada		213,100			—			213,100

Total	$	242,900		$	448,400		$	299,300

Number of net new home orders
California		1,080			618			1,698
Arizona		336			—			336
Nevada		507			—			507

Total		1,923			618			2,541

Average number of sales locations during period
California		15			13			28
Arizona		6			—			6
Nevada		6			—			6

Total		27			13			40


	As of and for the year ended December 31, 2001
	Consolidated		Unconsolidated Joint Ventures		Combined Total
Backlog of homes sold but not closed at end of period
California		199		97		296
Arizona		118		—		118
Nevada		128		—		128

Total		445		97		542

Dollar amount of backlog of homes sold but not closed at end of period (dollars in thousands)
California	$	68,013	$	50,115	$	118,128
Arizona		24,523		—		24,523
Nevada		33,880		—		33,880

Total	$	126,416	$	50,115	$	176,531

Lots controlled at end of year
Owned lots
California		1,578		2,027		3,605
Arizona		923		—		923
Nevada		378		—		378

Total		2,879		2,027		4,906

Optioned lots(1)
California						1,156
Arizona						1,859
Nevada						446

Total						3,461

Total lots controlled
California						4,761
Arizona						2,782
Nevada						824

Total						8,367

(1)

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

On a combined basis, the number of net new home orders for the year ended December 31, 2003 increased 32.1% to 3,443 homes from 2,607 homes for the year ended December 31, 2002. The number of homes closed for the year ended December 31, 2003 increased 11.2% to 2,804 homes from 2,522 homes for the year ended December 31, 2002. The backlog of homes sold but not closed as of December 31, 2003 was 1,266 homes, up 102.0% from 627 homes as of December 31, 2002.

The number of net new home orders for the year ended December 31, 2002 on a combined basis increased 2.6% to 2,607 homes from 2,541 homes for the year ended December 31, 2001. The number of homes closed for the year ended December 31, 2002 decreased 1.7% to 2,522 homes from 2,566 homes for the year ended December 31, 2001. The backlog of homes sold but not closed as of December 31, 2002 was 627 homes, up 15.7% from 542 homes as of December 31, 2001.

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, 2003 was $595.2 million, up 130% from $259.1 million as of December 31, 2002. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 18% during 2003 and 19% during 2002. The inventory of completed and unsold homes was 6 homes as of December 31, 2003.

The Company believes that the increase in the number of net new home orders and homes closed during 2003, as described above, are indications of an improving economy in 2003. In addition, in most of the markets

in which the Company operates, the demand for housing exceeds the current supply of housing. The increase in the number of net new home orders and the decrease in cancellation rate during 2003 and 2002 (as compared to 2001), were indications of an improving economy in 2003 and 2002, subsequent to the weakened economic conditions following the unprecedented and tragic events of September 11, 2001.

Comparisons of Years Ended December 31, 2003 and 2002. Operating revenue for the year ended December 31, 2003 was $897.8 million, an increase of $284.5 million (46.4%), from operating revenue of $613.3 million for the year ended December 31, 2002. Revenue from sales of homes increased $272.9 million (46.0%) to $866.7 million in 2003 from $593.8 million in 2002. This increase was due primarily to an increase in the average sales prices of consolidated homes to $403,300 in 2003 from $341,200 in 2002 and an increase in the number of consolidated homes closed to 2,149 in 2003 from 1,740 in 2002. Revenues from sales of lots, land and other increased to $21.7 million in 2003 from $8.6 million in 2002, due to the bulk sale of land in one of the Company’s developments. Management fee income decreased by $1.4 million to $9.5 million in 2003 from $10.9 million in 2002 as a result of a decrease in the number of homes closed in unconsolidated joint ventures to 655 in 2003 from 782 in 2002. Equity in income of unconsolidated joint ventures amounting to $31.2 million was recognized in 2003, compared to $27.7 million in 2002 as a result of the increase in gross margin percentage of the unconsolidated joint ventures to 21.7% in 2003 from 17.6% in 2002.

Total operating income increased to $119.8 million in 2003 from $65.1 million in 2002. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $62.9 million to $152.3 million in 2003 from $89.4 million in 2002. This increase was primarily due to an increase in the average sales prices to $403,300 in 2003 from $341,200 in 2002 (18.2%) and an increase in the number of consolidated homes closed to 2,149 in 2003 from 1,740 in 2002 (23.5%). Gross margin percentages increased by 2.5% to 17.6% in 2003 from 15.1% in 2002. Sales and marketing expenses increased by $8.4 million (36.7%) to $31.3 million in 2003 from $22.9 million in 2002 primarily due to increased sales locations, increased marketing fees paid to developers of master-planned communities and sales commissions as a result of increased revenue from sales of homes. General and administrative expenses increased by $10.9 million to $50.3 million in 2003 from $39.4 million in 2002, primarily as a result of increased salaries and related benefits due to an increase in the number of employees and additional employee bonuses based on improved operating results of the Company.

Total interest incurred during 2003 increased $20.4 million to $47.2 million from $26.8 million in 2002 as a result of an increase in the average amount of outstanding debt including the issuance of the 10³/4% Senior Notes, offset by decreases in interest rates. There was no net interest expense recognized in 2003 or 2002 as a result of the increasing amount of real estate inventories available for capitalization of interest.

Other income (expense), net increased to $4.6 million in 2003 from $2.7 million in 2002 primarily as a result of increases in mortgage company operations and other miscellaneous income.

Minority interest in income of subsidiaries of $0.4 million during the year ended December 31, 2003 is related to the consolidation of the outside partners’ equity in income of an entity consolidated as defined in Financial Accounting Standards Board Interpretation No. 46 “Consolidation of Variable Interest Entities.” See Note 2 of “Notes to Consolidated Financial Statements”.

The estimated overall effective rate for the year ending December 31, 2003 is 41.8%. During the year ended December 31, 2003, income tax benefits of $3.1 million related to stock option exercises were excluded from the results of operations and credited to additional paid-in capital. The elimination during 2002 of the remaining valuation allowances for deferred tax assets reduced the Company’s estimated overall effective tax rate for the year ended December 31, 2002 from 39.3% to 27.0%. At December 31, 2003, the Company has net operating loss carryforwards for Federal tax purposes of approximately $2.0 million, which expire in 2009. In addition, unused recognized built-in losses in the amount of $23.9 million are available to offset future income and expire between 2009 and 2011. The utilization of these losses is limited to offset $3.2 million of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2011.

The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under certain circumstances.

As a result of the foregoing factors, net income increased to $72.1 million in the 2003 period from $49.5 million in the 2002 period.

Comparison of Years Ended December 31, 2002 and 2001. Operating revenue for the year ended December 31, 2002 was $613.3 million, an increase of $145.1 million (31.0%), from operating revenue of $468.2 million for the year ended December 31, 2001. Revenue from sales of homes increased $141.8 million (31.4%) to $593.8 million in 2002 from $452.0 million in 2001. This increase was due primarily to an increase in the average sales prices of consolidated homes to $341,200 in 2002 from $242,900 in 2001, offset by a decrease in the number of consolidated homes closed to 1,740 in 2002 from 1,861 in 2001. Management fee income increased by $1.8 million to $10.9 million in 2002 from $9.1 million in 2001 as a result of an increase in the number of homes closed in unconsolidated joint ventures to 782 in 2002 from 705 in 2001. Equity in income of unconsolidated joint ventures amounting to $27.7 million was recognized in 2002, compared to $22.4 million in 2001 as a result of the increase in net income of the unconsolidated joint ventures to $56.7 million in 2002 from $47.9 million in 2001. This increase in net income was due to a related increase in the number of homes closed in unconsolidated joint ventures to 782 in 2002 from 705 in 2001 and an increase in the average sales price of homes sold by unconsolidated joint ventures to $463,800 in 2002 from $448,400 in 2001.

Total operating income increased to $65.1 million in 2002 from $46.2 million in 2001. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $20.0 million to $89.4 million in 2002 from $69.4 million in 2001. This increase was primarily due to an increase in the average sales prices to $341,200 in 2002 from $242,900 in 2001 (a 40.5% increase), offset by a decrease in the number of consolidated homes closed to 1,740 in 2002 from 1,861 in 2001 (a 6.5% decrease). Gross margin percentages decreased by 0.3% to 15.1% in 2002 from 15.4% in 2001. Sales and marketing expenses increased by $4.8 million (26.5%) to $22.9 million in 2002 from $18.1 million in 2001 primarily due to increased marketing fees paid to developers of master-planned communities and sales commissions as a result of increased revenue from sales of homes. General and administrative expenses increased by $2.2 million to $39.4 million in 2002 from $37.2 million in 2001, primarily as a result of increased salaries and related benefits and additional employee bonuses based on improved operating results of the Company.

Total interest incurred during 2002 increased $4.9 million to $26.8 million from $21.9 million in 2001 as a result of an increase in the average amount of outstanding debt, offset by decreases in interest rates. There was no net interest expense recognized in 2002 compared to $0.2 million recognized in 2001 as a result of an increase in the amount of real estate inventories available for capitalization of interest in 2002.

Other income (expense), net decreased to $2.7 million in 2002 from $7.5 million in 2001 primarily as a result of initial start-up losses realized by a golf course operation at one of the Company’s projects and decreases in other miscellaneous income, offset by increases in mortgage company operations.

As of December 31, 2000, the Company had substantial net operating loss carryforwards for Federal tax purposes which were utilized to reduce taxable income during the year ended December 31, 2001. As a result of the reduction in the valuation allowance associated with such utilized net operating loss carryforwards, the Company’s overall effective tax rate for the year ended December 31, 2001 was approximately 10.9%. The elimination during 2002 of the remaining valuation allowances for deferred tax assets reduced the Company’s estimated overall effective tax rate for the year ended December 31, 2002 from 39.3% to 27.0%. At December 31, 2002, the Company had net operating loss carryforwards for Federal tax purposes of approximately $5.2 million, which expire in 2009. In addition, unused recognized built-in losses in the amount of $23.9 million are available to offset future income and expire between 2009 and 2011. The utilization of these losses is limited to offset $3.2 million of taxable income per year; however, any unused losses in any year may be

carried forward for utilization in future years through 2011. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under certain circumstances.

Although the Company’s certificate of incorporation included transfer restrictions intended to help reduce the risk of an ownership change, transactions could have occurred that would severely limit the Company’s ability to have used the tax benefits associated with the net operating loss carryforwards. The Company learned that one stockholder unknowingly violated the transfer restrictions. The stockholder divested itself of the requisite number of shares in February and March, 2002 so that it was no longer out of compliance with the Company’s certificate of incorporation. Pursuant to the certificate of incorporation, the transfer restrictions terminated on November 11, 2002.

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

As a result of the foregoing factors, net income increased to $49.5 million in the 2002 period from $47.7 million in the 2001 period.

Financial Condition and Liquidity

The Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate, outside borrowings and by forming new joint ventures with venture partners that provide a substantial portion of the capital required for certain projects. The Company currently has outstanding 10³/4% Senior Notes and 7¹/2% Senior Notes (issued on February 6, 2004 as discussed below) 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. In March 2003, the Company repaid its 12¹/2% Senior Notes due 2003 with the proceeds of the 10³/4% Senior Notes.

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.

10³/4% Senior Notes

The Company’s wholly-owned subsidiary, William Lyon Homes, Inc., a California corporation, (“California Lyon”) filed a Registration Statement on Form S-3 with the Securities and Exchange Commission for the sale of $250.0 million of 10³/4% 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.

The 10³/4% Senior Notes due April 1, 2013 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (“Delaware Lyon”) and the parent company of California Lyon, and all of Delaware Lyon’s existing and certain

of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness. At December 31, 2003, the Company had approximately $80.3 million of secured indebtedness and approximately $205.5 million of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas. Interest on the 10³/4% Senior Notes is payable on April 1 and October 1 of each year.

Except as set forth in the Indenture governing the 10³/4% Senior Notes (“10³/4% Senior Notes Indenture”), the 10³/4% Senior Notes are not redeemable prior to April 1, 2008. Thereafter, the 10³/4% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before April 1, 2006, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 110.75% of the principal amount, plus accrued and unpaid interest, if any.

Upon a change of control as described in the 10³/4% Senior Notes Indenture, California Lyon may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.

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

The 10³/4% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of Delaware Lyon’s restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (ix) consolidate, merge or sell all or substantially all of Delaware Lyon’s and California Lyon’s assets. These covenants are subject to a number of important exceptions and qualifications as described in the 10³/4% Senior Notes Indenture.

The foregoing summary is not a complete description of the terms of the 10³/4% Senior Notes and is qualified in its entirety by reference to the 10³/4% Senior Notes Indenture.

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


Repayment of revolving credit facilities	$	104,354
Repayment of 12¹/2% Senior Notes		70,279
Repayment of construction notes payable		28,000
Repayment of purchase money notes payable—land acquisitions		26,000
Repayment of unsecured line of credit		9,500
Underwriting discount		6,875
Offering costs		1,225

	$	246,233

As of December 31, 2003, the outstanding 10³/4% Senior Notes with a face value of $246.4 million had a fair value of approximately $284.0 million, based on quotes from industry sources.

12¹/2% Senior Notes

As of December 31, 2002, $70.3 million aggregate principal amount of the Company’s 12¹/2% Senior Notes was outstanding. On May 1, 2001, the Company completed a consent solicitation with respect to the 12¹/2%

Senior Notes and received consents from holders of $39.3 million of the then outstanding notes to extend the maturity date from July 1, 2001 to July 1, 2003 and to make certain amendments to the note covenants. Although the Company initially intended to accept consents from no more than 50% of holders, the Company elected to accept additional consents, as contemplated by the consent solicitation documents. The consenting holders received a consent fee of 4% of the principal balance. Subsequently, during May and June 2001, the Company also repurchased $31.4 million of the 12¹/2% Senior Notes from non-consenting holders.

In June 2001, General William Lyon, Chairman and Chief Executive Officer of the Company, and a trust for which his son William H. Lyon is a beneficiary, purchased from the Company at par $30.0 million of the 12¹/2% Senior Notes. William H. Lyon is also an employee and a Director of the Company. Effective in July 2001, William H. McFarland, another member of the Company’s Board of Directors, purchased from the Company at par $1.0 million of the 12¹/2% Senior Notes. In parity with holders consenting during the consent solicitation, these Directors received a consent fee of 4% of the principal balance and consented to the amendments effected by the Company’s consent solicitation statement dated February 28, 2001.

In July 2001, the Company repaid all of the 12¹/2% Senior Notes which matured on July 1, 2001 amounting to $5.9 million.

The remaining 12¹/2% Senior Notes were repaid on March 17, 2003 from the proceeds of the 10³/4% Senior Notes.

As of December 31, 2002, the outstanding 12¹/2% Senior Notes with a face value of $70.3 million were valued at approximately the face value, in the opinion of the Company’s management.

7¹/2% Senior Notes

On February 6, 2004, California Lyon closed its offering of $150.0 million principal amount of 7¹/2% Senior Notes due 2014. The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. The notes have not and will not be registered under the Securities Act of 1933 and, unless so registered, may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. The notes were issued at par, resulting in net proceeds to the Company of approximately $147.6 million. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes (“Exchange Notes”) having substantially identical terms. If California Lyon does not comply with its agreement regarding the registration and exchange of the notes with the Exchange Notes, additional interest on the notes will be payable on the interest payment dates.

The 7¹/2% Senior Notes due February 15, 2014 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by Delaware Lyon and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness. Interest on the 7¹/2% Senior Notes is payable on February 15 and August 15 of each year.

Except as set forth in the Indenture governing the 7¹/2% Senior Notes (“7¹/2% Senior Notes Indenture”), the 7¹/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 7¹/2% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before February 15, 2007, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.50% of the principal amount, plus accrued and unpaid interest, if any.

Upon a change of control as described in the 7¹/2% Senior Notes Indenture, California Lyon may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.

The 7¹/2% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of Delaware Lyon’s restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (ix) consolidate, merge or sell all or substantially all of Delaware Lyon’s and California Lyon’s assets. These covenants are subject to a number of important exceptions and qualifications as described in the 7¹/2% Senior Notes Indenture.

The foregoing summary is not a complete description of the terms of the 7¹/2% Senior Notes and is qualified in its entirety by reference to the 7¹/2% Senior Notes Indenture.

The net proceeds of the offering were used to repay $70.0 million of the outstanding balance on the revolving credit facilities and $21.5 million of a construction note payable described below, together with $0.3 million of accrued interest. The remaining proceeds will be used for fees and commissions related to the offering and other general corporate purposes.

Revolving Credit Facilities

As of December 31, 2003, the Company has three revolving credit facilities which have an aggregate maximum loan commitment of $325.0 million and mature at various dates through 2006. A $125.0 million revolving line of credit “expires” in November 2004. After that date the Company may borrow amounts, subject to applicable borrowing base and concentration limitations, under this facility solely to complete the construction of residences begun prior to such date in approved projects funded by disbursements under this facility. The final maturity date is the earlier of the date upon which the last residence, the construction of which was financed with proceeds of this loan, is sold or the date upon which such last residence is excluded from the borrowing base by the passage of time under this facility. Of the $125.0 million maximum commitment amount, $25.0 million is not available for disbursement and the loan amount is limited to $100.0 million until the lender consents, which consent may be withheld in its sole discretion, to make such funds available. A $150.0 million revolving line of credit finally matures in September 2006, although after September 2004, advances under this facility may only be made to complete projects approved on or before such date. A $50.0 million revolving line of credit initially “matures” in September 2004, after which the amounts available for borrowing begin to reduce with a final maturity date of September 2006. Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration limitations further restrict availability under the credit facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Company’s investment in a project, with higher percentages of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real property and improvements thereon owned by the Company in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes financial covenants, which may limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2003, $49.2 million was outstanding under these credit facilities, with a weighted-average interest rate of 4.375%, and the undrawn availability was $205.5 million as limited by the borrowing base formulas. Delaware Lyon has guaranteed on an unsecured basis California Lyon’s obligations

under certain of the revolving credit facilities and has provided an unsecured environmental indemnity in favor of the lender under the $125.0 million bank line of credit. The Company is required to comply with a number of covenants under these revolving credit facilities. See Note 6 of “Notes to Consolidated Financial Statements” for additional information relating to these covenants.

Construction Notes Payable

At December 31, 2003, the Company had a construction note payable amounting to $21.5 million related to a real estate project. The construction note was due on or before April 2, 2004 with interest at a rate of prime plus 0.5% at December 31, 2003. See Note 6 of “Notes to Consolidated Financial Statements.” A portion of the net proceeds of the offering of 7¹/2% Senior Notes (see above) was used to repay this note in full.

Revolving Mortgage Warehouse Credit Facilities

The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has entered into two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in May 2004, provides for revolving loans of up to $20.0 million outstanding, $10.0 million of which is committed (lender obligated to lend if stated conditions are satisfied) and $10.0 million is not committed (lender advances are optional even if stated conditions are otherwise satisfied). On August 29, 2003, the Company’s mortgage subsidiary and one of its unconsolidated joint ventures entered into an additional $10.0 million credit facility which matures in August 2004. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. The facilities are secured by substantially all of the assets of each of the borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with respect to contractual obligations of third party investors to purchase such mortgage loans, and all proceeds of sale of such mortgage loans. The facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the borrowers to maintain minimum tangible net worth, leverage, profitability and liquidity. These facilities are non-recourse and are not guaranteed by the Company. At December 31, 2003 the outstanding balance under these facilities was $9.6 million.

Land Banking Arrangements

The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers the Company’s right in such purchase agreements to entities owned by third parties (“land banking arrangements”). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit equal to 20% or less of the total purchase price. Additionally, the Company may be subject to other penalties if lots are not acquired. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. As described in Note 2 of “Notes to Consolidated Financial Statements,” a recently adopted accounting interpretation required the consolidation of the assets, liabilities and operations of one of the Company’s land banking arrangements created after January 31, 2003. As of March 31, 2004, the interpretation will likely require the consolidation of the assets, liabilities and operations on a prospective basis of the six remaining land banking arrangements created prior to February 1, 2003 (see Notes 2 and 5 of “Notes to Consolidated Financial Statements”). The deposits and penalties related to the six land banking projects have been recorded in the accompanying consolidated balance sheet. The financial statements of these six entities are not consolidated with the Company’s consolidated financial statements. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent

on, among other things, the availability of capital to the option provider, general housing market conditions and geographic preferences. Summary information with respect to the Company’s unconsolidated land banking arrangements is as follows as of December 31, 2003 (dollars in thousands):


Total number of unconsolidated land banking projects		6

Total number of lots		1,149

Total purchase price	$	108,958

Balance of lots still under option and not purchased:
Number of lots		588

Purchase price	$	41,997

Forfeited deposits and penalties if lots are not purchased	$	18,107

Joint Venture Financing

As of December 31, 2003, the Company and certain of its subsidiaries were general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in “Recently Issued Accounting Standards”, in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”) six joint ventures created after January 31, 2003 have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these six joint ventures have been consolidated with the Company’s financial statements as of December 31, 2003 and for the period then ended. The Company has not yet determined the anticipated impact of adopting Interpretation No. 46 for arrangements existing as of January 31, 2003. However, such adoption will likely require the consolidation in the Company’s financial statements as of March 31, 2004 of the assets, liabilities and operations of certain existing joint ventures, option agreements or land banking arrangements. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 will not affect the Company’s consolidated net income.

The financial statements of joint ventures in which the Company has a 50% or less voting or economic interest (and thus are not controlled by the Company) and which were created prior to February 1, 2003, and the financial statements of joint ventures which have not been determined to be variable interest entities in which the Company is considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method. Income allocations and cash distributions to the Company from the joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners’ priority returns and returns of partners’ capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the six joint ventures whose financial statements have been consolidated with the Company’s financial statements. See Note 5 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.

The six joint ventures created after January 31, 2003 which have been determined to be variable interest entities are each engaged in homebuilding and land development activities which will result in an estimated total of 562 homes at completion. The homes are expected to be constructed and sold in phases over a two-to-three

year period with approximate base sales prices ranging from $298,000 to $1,059,000. As of December 31, 2003, 98 homes have been sold and 21 homes have closed. 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 variable interest entities have no recourse against the general credit of the Company.

As of December 31, 2003, the Company’s investment in and advances to the unconsolidated joint ventures was $45.6 million and the venture partners’ investment in such joint ventures was $51.1 million. Certain of these joint ventures are in the form of limited partnerships of which the Company or one of its subsidiaries is general partner. As of December 31, 2003, these joint ventures had obtained financing from construction lenders which amounted to $90.3 million of outstanding indebtedness. While historically all liabilities of these partnerships have been satisfied out of the assets of such partnerships and while the Company believes that this will continue in the future, the Company or one of its subsidiaries, as general partner, is potentially responsible for all liabilities and indebtedness of these partnerships. In addition, Delaware Lyon has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. Delaware Lyon has also provided completion guarantees for some of the limited partnerships under their credit facilities.

During the year ended December 31, 2002, one of the Company’s joint ventures (“Existing Venture”) was restructured such that the Company was required to purchase the 538 lots owned by the Existing Venture on a specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the outside partner of the Existing Venture. During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64.5 million, which includes a $12.5 million preferred return to the outside partner of the Existing Venture. The 242 lots were purchased by a newly formed joint venture (“New Venture”) between the Company and an outside partner. The Company is required to purchase the 242 lots owned by the New Venture on a specified takedown basis through May 15, 2004 at a purchase price equal to $74.2 million plus a 13¹/2% preferred return on invested capital to the outside partner of the New Venture. Because the Company is required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company now controls both ventures, the financial statements of both ventures have been consolidated with the Company’s financial statements as of December 31, 2003, including real estate inventories of $28.1 million and minority interest in consolidated joint ventures of $22.6 million. During the year ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for $19.8 million, which included a $4.0 million preferred return to the outside partner of the Existing Venture, respectively. The 44 lots were purchased through a land banking arrangement. During the year ended December 31, 2003, an additional 219 lots were purchased from the Existing Venture for $74.9 million, which included a $21.7 million preferred return to the outside partner of the Existing Venture. These purchases included (i) 172 lots which were purchased from the Existing Venture under a land banking arrangement for $56.6 million, which included a $16.4 million preferred return to the outside partner of the Existing Venture and (2) 47 lots which were purchased by the New Venture from the Existing Venture for $18.3 million, which included a $5.3 million preferred return to the outside partner of the Existing Venture. During the year ended December 31, 2003, the Company purchased 175 lots from the New Venture for $54.5 million, all of which was paid to the outside partner as a return of capital. The intercompany sales and related profits have been eliminated in consolidation.

During the year ended December 31, 2003, California Lyon and two unaffiliated parties formed a series of limited liability companies (“Development LLCs”) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. The development process is anticipated to be completed by mid 2004 at which time California Lyon will be required under certain specific conditions to purchase approximately one half in value of the lots. California Lyon has a 12¹/2% indirect, minority interest in the Development LLCs, which are the borrowers under two secured lines of credit. Advances under the lines of credit are to be used to pay acquisition and development costs and expenses. The lines of credit are secured by deeds of trust on the real property and improvements thereon owned by the applicable Development LLC, as well as pledges of all net

sale proceeds, related contracts and other ancillary property. The maximum commitment amounts under the lines of credit are limited by specified agreed loan-to-value ratios. The maximum commitment amount under the line of credit that closed in January 2003 (“First Line of Credit”) is $35.0 million. Subject to specified terms and conditions, California Lyon and the other direct and indirect members of the Development LLC that is the borrower under the First Line of Credit, including certain affiliates of such other members, each (i) have guaranteed to the bank the repayment of the Development LLC’s indebtedness under the First Line of Credit, completion of certain infrastructure improvements to the land, payment of necessary loan remargining obligations, and the Development LLC’s performance under its environmental indemnity and covenants, and (ii) have agreed to take all actions and pay all amounts to assure that the Development LLC is in compliance with financial covenants. The First Line of Credit matures in January 2005, but may be extended to July 2005, subject to specified terms and conditions. The maximum commitment amount under the line of credit that closed in March 2003 (“Second Line of Credit”) is $105.0 million. The Second Line of Credit matures in September 2004, but may be extended to September 2005, subject to specified terms and conditions. Although the guarantee obligations of the other direct and indirect members of the Development LLC that is the borrower under the Second Line of Credit, and certain of their affiliates, are similar in nature to those under the First Line of Credit, California Lyon does not have any such guarantee obligations to the banks under the Second Line of Credit. However, California Lyon has posted letters of credit equal to approximately $24.6 million to secure its obligations as well as the Development LLCs’ obligations to the bank under both lines of credit. Further, California Lyon and the other direct and indirect members of the Development LLCs, including certain affiliates of such other members, have entered into reimbursement and indemnity agreements to allocate any liability arising from each line of credit, including the related guarantees and letters of credit. Delaware Lyon has entered into joinder agreements to be jointly and severally liable for California Lyon’s obligations under the reimbursement and indemnity agreements. While the reimbursement and indemnity agreements provide that liability is generally allocated in accordance with the members’ percentage interests in the Development LLCs’ distributions, Delaware Lyon and California Lyon may be liable for the full amount of the obligations guaranteed to the banks under either or both of the lines of credit in certain specified circumstances, such as those involving the default, willful misconduct or gross negligence of California Lyon. As of December 31, 2003, the outstanding indebtedness under the First Line of Credit was $33.6 million and the outstanding indebtedness under the Second Line of Credit was $100.6 million.

Assessment District Bonds

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

Cash Flows — Comparison of Years Ended December 31, 2003 and 2002

Net cash (used in) provided by operating activities changed from a source of $16.2 million in 2002 to a use of $158.6 million in 2003. The change was primarily a result of increased expenditures in real estate inventories in 2003, offset by an increase in operating income as a result of increased operating revenues.

Net cash provided by (used in) investing activities changed from a source of $11.1 million in 2002 to a source of $49.0 million in 2003 primarily as a result of an increase in net distributions from unconsolidated joint ventures in 2003.

Net cash provided by (used in) financing activities changed from a use of $30.3 million in 2002 to a source of $117.0 million in 2003 primarily as a result of the issuance of the 10³/4% Senior Notes in 2003, offset by the repayment of the 12¹/2% Senior Notes.

Cash Flows — Comparison of Years Ended December 31, 2002 and 2001

Net cash provided by (used in) operating activities changed from a use of $2.3 million in 2001 to a source of $16.2 million in 2002. The change was primarily a result of an increase in operating income as a result of increased operating revenues in 2002.

Net cash provided by (used in) investing activities changed from a use of $4.1 million in 2001 to a source of $11.1 million in 2002 primarily as a result of an increase in net distributions from unconsolidated joint ventures in 2002.

Net cash (used in) provided by financing activities changed from a source of $11.4 million in 2001 to a use of $30.3 million in 2002 primarily as a result of purchases of common stock in 2002.

Off-Balance Sheet Arrangements

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

Contractual Obligations

The Company’s contractual obligations consisted of the following at December 31, 2003 (in thousands):


			Payments due by period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
10³/4% Senior Notes	$	498,594	$	26,875	$	53,750	$	53,750	$	364,219
Revolving credit facilities		59,781		59,781		—		—		—
Construction notes payable		21,783		21,783		—		—		—
Operating leases		8,890		2,290		4,900		1,700		—
Purchase obligations:
Land purchases and option commitments		568,346		388,743		163,550		8,067		7,986
Project commitments		163,818		139,879		17,954		5,985		—

Total	$	1,321,212	$	639,351	$	240,154	$	69,502	$	372,205

Inflation

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

Critical Accounting Policies

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

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

Real Estate Inventories and Cost of Sales

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

Impairment of Real Estate Inventories

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”). This pronouncement superseded Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (“Statement No. 121”) and was required to be adopted on January 1, 2002. Statement No. 144 retained the fundamental provisions of Statement No. 121 as it relates to assets to be held and used and assets to be sold. Statement No. 144 requires impairment losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. The estimation process used in determining the undiscounted cash flows of the assets is inherently uncertain because it involves estimates of future revenues and costs. As described more fully above in the section entitled “Real Estate Inventories and Cost of Sales”, estimates of revenues and costs are supported by the Company’s budgeting process. When an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value.

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

Sales and Profit Recognition

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

Variable Interest Entities

Certain land purchase contracts and lot option contracts are accounted for in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”). In addition, all joint ventures are reviewed and analyzed under Interpretation No. 46 to determine whether or not these arrangements are accounted for under the principles of Interpretation No. 46 or other accounting rules. Under Interpretation No. 46, a variable interest entity (“VIE”) is created when (i) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) the entity’s equity holders as a group either (a) lack direct or indirect ability to make decisions about the entity through voting or similar rights, (b) are not obligated to absorb expected losses of the entity if they occur or (c) do not have the right to receive expected residual returns of the entity if they occur. If a 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.”

Related Party Transactions

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

Impact of New Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Recission of SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (“Statement No. 145”). Statement No. 145 prevents gains or losses on extinguishment of debt not meeting the criteria of APB 30 to be treated as extraordinary. Statement No. 145 is effective for fiscal years beginning after March 15, 2002. Upon adoption of Statement No. 145, the Company’s previously reported extraordinary items related to gain from retirement of debt were reclassified to other income and not reported as extraordinary items.

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“Interpretation No. 45”). The disclosure requirements of Interpretation No. 45 are effective as of December 31, 2002. The initial recognition and measurement requirements of Interpretation No. 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002. However, in the case of a guarantee issued as part of a transaction with multiple elements with an unrelated party, Interpretation No. 45 generally requires the recording at inception of the guarantee of a liability equal to the guarantee’s estimated fair value. In the absence of observable transactions for identical or similar guarantees, estimated fair value will likely be based on the expected present value which is the sum of the estimated probability-weighted range of contingent payments under the guarantee arrangement. The recording of a liability could have a corresponding effect on various of the Company’s financial ratios and other financial and operational indicators. The application of Interpretation No. 45 beginning on January 1, 2003 did not have a material impact on the Company’s financial statements with respect to any guarantees issued or modified by the Company after December 31, 2002. See Notes 5, 6 and 10 of “Notes to Consolidated Financial Statements” for additional information related to the Company’s guarantees.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”), which applies to arrangements created after January 31, 2003. Interpretation No. 46 applies to arrangements created before February 1, 2003 beginning on March 31, 2004. As of December 31, 2003, the Company is considered to be the primary beneficiary in six joint ventures created after January 31, 2003, which have been determined to be variable interest entities. Accordingly, the assets, liabilities and operations of these six joint ventures have been consolidated with the Company’s financial statements as of December 31, 2003 and for the period then ended. The Company has not yet determined the anticipated impact of adopting Interpretation No. 46 for arrangements existing as of January 31, 2003. However, such adoption will likely require the consolidation of certain of the Company’s joint ventures, option agreements and land banking arrangements in the Company’s financial statements as of March 31, 2004. The consolidation of the assets, liabilities and operations of any joint venture, option agreements or land banking arrangements would have a corresponding effect on various of the Company’s financial ratios and other financial and operational indicators. See Note 2 of “Notes to Consolidated Financial Statements” for additional information regarding variable interest entities. See Notes 5 and 10 of “Notes to Consolidated Financial Statements” for additional information regarding joint venture and land banking arrangements.

Forward Looking Statements

Investors are cautioned that certain statements contained in this Annual Report on Form 10-K, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects”,

“anticipates”, “intends”, “plans”, “believes”, “estimates”, “hopes”, and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements as defined in the Act. Forward-looking statements are based upon expectations and projections about future events and are subject to assumptions, risks and uncertainties about, among other things, the Company, economic and market factors and the homebuilding industry.

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk for changes in interest rates relates to the Company’s floating rate debt with a total outstanding balance at December 31, 2003 of $80.3 million where the interest rate is variable based upon certain bank reference or prime rates. If interest rates were to increase by 10%, the estimated impact on the Company’s consolidated financial statements would be no reduction to income before provision for taxes based on amounts outstanding and rates in effect at December 31, 2003, but would increase capitalized interest by approximately $0.8 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 financial statements of the Significant Subsidiaries of William Lyon Homes, together with the reports of the independent auditors, listed under Item 15, are submitted as a separate section of this report beginning on page 45 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

An evaluation was performed under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this 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.

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

PART III

Item 10. Directors and Executive Officers of Registrant

The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Holders of Common Stock to be held on May 10, 2004.

Item 11. Executive Compensation

The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Holders of Common Stock to be held on May 10, 2004.

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

The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Holders of Common Stock to be held on May 10, 2004.

Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Holders of Common Stock to be held on May 10, 2004.

Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Holders of Common Stock to be held on May 10, 2004.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(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 Auditors		48
Consolidated Balance Sheets		49
Consolidated Statements of Income		50
Consolidated Statements of Stockholders’ Equity		51
Consolidated Statements of Cash Flows		52
Notes to Consolidated Financial Statements		53

Significant Subsidiaries of William Lyon Homes
Report of Independent Auditors		90
Combined Balance Sheet		91
Combined Statement of Income		92
Combined Statement of Members’ Capital		93
Combined Statement of Cash Flows		94
Notes to Combined Financial Statements		95

(2) Financial Statement Schedules:

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

(3) Listing of Exhibits:


Exhibit Number		Description
2.1(1)		Certificate of Ownership and Merger.

3.1(2)		Certificate of Incorporation of the Company.

3.3(2)		Bylaws of the Company.

4.1(2)		Specimen certificate of Common Stock.

4.2(3)		Indenture dated as of March 17, 2003 governing the 10³/4% Senior Notes due 2013 among William Lyon Homes, Inc. as Issuer, William Lyon Homes, California Equity Funding, Inc., Carmel Mountain Ranch, Duxford Financial, Inc., HSP Inc., Mountain Gate Ventures, Inc., OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH Ventures—San Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc. and William Lyon Southwest, Inc. as Guarantors and U.S. Bank National Association, as Trustee.

4.3(3)		Form of 10³/4% Senior Notes (included in Exhibit 4.2).

4.4(3)		Form of Notation of Guarantee (included in Exhibit 4.2).

4.5		Indenture dated as of February 6, 2004 governing the 7¹/2% Senior Notes due 2014 among William Lyon Homes, Inc. as Issuer, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc., Lyon Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH Ventures—San Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc. as Guarantors and U.S. Bank National Association, as Trustee.

4.6		Form of 7¹/2% Senior Note (included in Exhibit 4.5).

4.7		Form of Notation of Guarantee (included in Exhibit 4.5).


Exhibit Number		Description

10.1(4)		Form of Indemnity Agreement, between the Company and the Directors and Officers of the Company.

10.2(2)		Purchase Agreement and Escrow Instructions dated October 7, 1999 among The Presley Companies, Presley Homes, William Lyon Homes, Inc., William Lyon and William H. Lyon.

10.3(4)		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.

10.4(4)		Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5, 1999.

10.5(5)		Loan Agreement dated as of September 25, 2000 between William Lyon Homes, Inc., a California corporation, the “Borrower,” and Residential Funding Corporation, a Delaware corporation, “Lender.”

10.6(6)		First Amendment to Loan Agreement, dated as of July 13, 2001, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.

10.7(6)		Second Amendment to Loan Agreement and to Other Loan Documents, dated as of March 28, 2002, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.

10.8(6)		Third Amendment to Loan Agreement and to Other Loan Documents, dated as of January 10, 2003, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.

10.9(6)		Fourth Amendment to Loan Agreement, dated as of January 23, 2003, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.

10.10(5)		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”).

10.11(7)		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.

10.12(6)		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.

10.13(6)		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.

10.14(6)		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.
10.15(8)		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.


Exhibit Number		Description

10.16		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.

10.17(5)		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.

10.18(9)		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.

10.19(6)		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.

10.20		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.

10.21(5)		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.

10.22(10)		William Lyon Homes 2000 Stock Incentive Plan.

10.23(11)		Form of Stock Option Agreements.

10.24(11)		William Lyon Homes, Inc. 2000 Cash Bonus Plan.

10.25(11)		Standard Industrial/Commercial Single-Tenant Lease — Net Between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.

10.26(12)		William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.

10.27(13)		William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.

10.28(6)		The Presley Companies Non-Qualified Retirement Plan for Outside Directors.

10.29		Underwriting Agreement dated as of March 12, 2003 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Carmel Mountain Ranch, Duxford Financial, Inc., HSP Inc., Mountain Gate Ventures, Inc., OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH Ventures—San Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc. and William Lyon Southwest, Inc. as Guarantors and UBS Warburg, LLC and Salomon Smith Barney Inc. as Underwriters.

10.30(8)		Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and first Tennessee Bank as Lender.

10.31(14)		Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.

10.32		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.
10.33		Purchase Agreement dated as of January 28, 2004 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc., Lyon Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH Ventures—San Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc. as Guarantors and UBS Securities LLC, as Initial Purchaser.


Exhibit Number		Description

10.34		Registration Rights Agreement dated as of February 6, 2004 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc., Lyon Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH Ventures—San Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc. as Guarantors and UBS Securities, LLC, as Initial Purchaser.

12.1		Statement of Ratio of Earnings to Fixed Charges.

21.1		List of Subsidiaries of the Company.

23.1		Consent of Independent Auditors.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed January 5, 2000 and incorporated herein by this reference.

(2)

Previously filed in connection with the Company’s Registration Statement on Form S-4, and amendments thereto, (S.E.C. Registration No. 333-88569) and incorporated herein by this reference.

(3)

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

(4)

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.

(5)

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.

(6)

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.

(7)

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.

(8)

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.

(9)

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.

(10)

Previously filed as an exhibit to the Company’s Registration Statement on Form S-8 (SEC Registration No. 333-50232) filed on November 17, 2000 and incorporated herein by this reference.

(11)

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.

(12)

Previously filed as an exhibit to the Company’s Registration Statement on Form S-8 (SEC Registration No. 333-82448) filed on February 8, 2002 and incorporated herein by this reference.

(13)

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

(14)

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.

(b) Reports on Form 8-K

October 8, 2003. A Current Report on Form 8-K was furnished by the Company in reference to a press release announcing the Company’s preliminary net new home orders and backlog for the fiscal quarter ended September 30, 2003.

November 20, 2003. A Current Report on Form 8-K was furnished by the Company in reference to a press release announcing the Company’s financial results for the fiscal quarter ended September 30, 2003.

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 3, 2004	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.


Signature	Title	Date

/s/ WILLIAM LYON William Lyon	Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)	March 3, 2004

/s/ WADE H. CABLE Wade H. Cable	Director, President and Chief Operating Officer	March 3, 2004

/s/ JAMES E. DALTON James E. Dalton	Director	March 8, 2004

/s/ RICHARD E. FRANKEL Richard E. Frankel	Director	March 8, 2004

/s/ WILLIAM H. LYON William H. Lyon	Director	March 3, 2004

/s/ WILLIAM H. MCFARLAND William H. McFarland	Director	March 8, 2004

/s/ MICHAEL L. MEYER Michael L. Meyer	Director	March 8, 2004

/s/ RAY A. WATT Ray A. Watt	Director	March 8, 2004

/s/ RANDOLPH W. WESTERFIELD Randolph W. Westerfield	Director	March 8, 2004

/s/ MICHAEL D. GRUBBS Michael D. Grubbs	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)	March 3, 2004

/s/ W. DOUGLASS HARRIS W. Douglass Harris	Vice President and Corporate Controller (Principal Accounting Officer)	March 3, 2004

INDEX TO FINANCIAL STATEMENTS


		Page

William Lyon Homes

Report of Independent Auditors		48
Consolidated Balance Sheets		49
Consolidated Statements of Income		50
Consolidated Statements of Stockholders’ Equity		51
Consolidated Statements of Cash Flows		52
Notes to Consolidated Financial Statements		53

Significant Subsidiaries of William Lyon Homes
Report of Independent Auditors		90
Combined Balance Sheet		91
Combined Statement of Income		92
Combined Statement of Members’ Capital		93
Combined Statement of Cash Flows		94
Notes to Combined Financial Statements		95

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.

REPORT OF INDEPENDENT AUDITORS

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, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of William Lyon Homes at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

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

/S/ ERNST & YOUNG LLP

Irvine, California

February 13, 2004

WILLIAM LYON HOMES

CONSOLIDATED BALANCE SHEETS

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


	December 31,
	2003		2002
ASSETS
Cash and cash equivalents	$	24,137	$	16,694
Receivables — Note 3		46,211		28,734
Real estate inventories — Notes 2 and 4		698,047		491,952
Investments in and advances to unconsolidated joint ventures — Note 5		45,613		65,404
Property and equipment, less accumulated depreciation of $6,517 and $5,435 at December 31, 2003 and 2002, respectively		1,625		2,131
Deferred loan costs		9,041		1,341
Goodwill — Note 1		5,896		5,896
Other assets		9,145		5,429

	$	839,715	$	617,581


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	35,697	$	34,881
Accrued expenses		82,745		54,312
Notes payable — Note 6		80,331		195,786
10³/4% Senior Notes due April 1, 2013 — Note 6		246,406		—
12¹/2% Senior Notes due July 1, 2003 — Note 6		—		70,279

		445,179		355,258

Minority interest in consolidated entities — Note 2		142,496		80,647

Commitments and contingencies — Note 10

Stockholders’ equity — Note 7
Common stock, par value $.01 per share; 30,000,000 shares authorized; 9,787,440 and 9,728,747 shares issued and outstanding at December 31, 2003 and 2002, respectively		98		97
Additional paid-in capital		106,818		108,592
Retained earnings		145,124		72,987

		252,040		181,676

	$	839,715	$	617,581

See accompanying notes.

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands except per common share amounts)


	Year Ended December 31,
	2003			2002			2001
Operating revenue
Home sales	$	866,657		$	593,762		$	452,002
Lots, land and other sales		21,656			8,648			7,054
Management fees — Note 1		9,490			10,892			9,127

		897,803			613,302			468,183

Operating costs
Cost of sales — homes		(714,385	)		(504,330	)		(382,608	)
Cost of sales — lots, land and other		(13,269	)		(9,404	)		(5,158	)
Sales and marketing		(31,252	)		(22,862	)		(18,149	)
General and administrative		(50,315	)		(39,366	)		(37,171	)
Amortization of goodwill — Note 1		—			—			(1,242	)

		(809,221	)		(575,962	)		(444,328	)

Equity in income of unconsolidated joint ventures — Note 5		31,236			27,748			22,384

Operating income		119,818			65,088			46,239
Interest expense, net of amounts capitalized — Note 6		—			—			(227	)
Other income, net		4,563			2,693			7,513
Minority equity in income of consolidated entities — Note 2		(429	)		—			—

Income before provision for income taxes		123,952			67,781			53,525
Provision for income taxes — Note 8		(51,815	)		(18,270	)		(5,847	)

Net income	$	72,137		$	49,511		$	47,678

Earnings per common share — Note 1
Basic	$	7.37		$	4.85		$	4.50

Diluted	$	7.27		$	4.73		$	4.44

See accompanying notes.

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)


	Common Stock					Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)
	Shares		Amount			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Total

Balance—December 31, 2000	10,570		$	106		$	126,608		$	(24,202	)	$	102,512
Issuance of common stock upon exercise of stock options—Note 7	49			—			427			—			427
Net income for the year	—			—			—			47,678			47,678


Balance—December 31, 2001	10,619			106			127,035			23,476			150,617
Issuance of common stock upon exercise of stock options—Note 7	128			1			1,117			—			1,118
Purchase and retirement of common stock—Note 7	(1,018	)		(10	)		(19,560	)		—			(19,570	)
Net income for the year	—			—			—			49,511			49,511


Balance—December 31, 2002	9,729			97			108,592			72,987			181,676
Issuance of common stock upon exercise of stock options and related income tax benefit—Notes 7 and 8	258			3			5,404			—			5,407
Purchase and retirement of common stock—Note 7	(200	)		(2	)		(7,178	)		—			(7,180	)
Net income for the year	—			—			—			72,137			72,137


Balance—December 31, 2003	9,787		$	98		$	106,818		$	145,124		$	252,040

See accompanying notes.

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Year Ended December 31,
	2003			2002			2001
Operating activities
Net income	$	72,137		$	49,511		$	47,678
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		1,082			1,355			2,519
Equity in income of unconsolidated joint ventures		(31,236	)		(27,748	)		(22,384	)
Minority equity in income of consolidated entities		429			—			—
Provision for income taxes		51,815			18,270			5,847
Net changes in operating assets and liabilities:
Receivables		(16,026	)		(3,767	)		2,480
Real estate inventories		(205,922	)		(23,126	)		(31,185	)
Deferred loan costs		(7,700	)		1,490			(2,077	)
Other assets		(3,716	)		(2,681	)		(93	)
Accounts payable		816			8,467			(6,416	)
Accrued expenses		(20,269	)		(5,580	)		1,333

Net cash (used in) provided by operating activities		(158,590	)		16,191			(2,298	)

Investing activities
Investment in and advances to unconsolidated joint ventures		(8,493	)		(26,475	)		(30,547	)
Distributions of income from unconsolidated joint ventures		37,501			24,621			18,404
Distributions of capital from unconsolidated joint ventures		22,019			18,453			14,543
Mortgage notes receivable originations/issuances		(380,543	)		(333,029	)		(220,505	)
Mortgage notes receivable sales/repayments		379,092			328,821			214,636
Purchases of property and equipment		(576	)		(1,315	)		(630	)

Net cash provided by (used in) investing activities		49,000			11,076			(4,099	)

Financing activities
Proceeds from borrowings on notes payable		1,105,464			913,599			687,641
Principal payments on notes payable		(1,220,919	)		(920,029	)		(669,709	)
Repurchase of 12¹/2% Senior Notes		—			—			(51,637	)
Reissuance of 12¹/2% Senior Notes		—			—			44,715
Repayment of 12¹/2% Senior Notes		(70,279	)		—			—
Issuance of 10³/4% Senior Notes		246,233			—			—
Minority interest contributions (distributions), net		61,420			(5,442	)		—
Common stock issued for exercised options		2,294			1,118			427
Common stock purchased		(7,180	)		(19,570	)		—

Net cash provided by (used in) financing activities		117,033			(30,324	)		11,437

Net increase (decrease) in cash and cash equivalents		7,443			(3,057	)		5,040
Cash and cash equivalents—beginning of year		16,694			19,751			14,711

Cash and cash equivalents—end of year	$	24,137		$	16,694		$	19,751

Supplemental disclosures of cash flow and non-cash activities
Cash paid for interest, net of amounts capitalized	$	—		$	—		$	—

Issuance of notes payable for land acquisitions	$	21,534		$	51,025		$	43,550

Investment in joint venture in connection with contribution of land to joint venture	$	—		$	2,000		$	1,100

Income tax benefit credited to additional paid-in capital in connection with stock option exercises	$	3,113		$	—		$	—

See accompanying notes.

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

Segment Information

The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets. For internal reporting purposes, the Company is organized into five geographic home building regions and its mortgage origination operation. Because each of the Company’s geographic home building regions has similar economic characteristics, housing products and class of prospective buyers, the geographic home building regions have been aggregated into a single home building segment. The Company’s mortgage origination operations did not meet the materiality thresholds which would require disclosure for the years ended December 31, 2003, 2002 and 2001, and accordingly, are not separately reported.

The Company evaluates performance and allocates resources primarily based on the operating income of individual home building projects. Operating income is defined by the Company as operating revenue less operating costs plus equity in income of unconsolidated joint ventures. Accordingly, operating income excludes certain expenses included in the determination of net income. Operating income from home building operations totaled $119.8 million, $65.1 million and $46.2 million for the years ended December 31, 2003, 2002 and 2001, respectively.

All revenues are from external customers. There were no customers that contributed 10% or more of the Company’s total revenues during the years ended December 31, 2003, 2002 or 2001.

Real Estate Inventories and Related Indebtedness

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	December 31,
	2003			2002			2001

Warranty liability, beginning of year	$	4,287		$	2,598		$	2,885
Warranty provision during year		9,279			5,167			4,156
Warranty settlements during year		(6,299	)		(3,478	)		(4,443	)

Warranty liability, end of year	$	7,267		$	4,287		$	2,598

Interest incurred under the Revolving Credit Facilities, the 12¹/2% Senior Notes, the 10³/4% Senior Notes and other notes payable, as more fully discussed in Note 6, is capitalized to qualifying real estate projects under development. Any additional interest charges related to real estate projects not under development are expensed in the period incurred.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”). This pronouncement superseded Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (“Statement No. 121”) and was required to be adopted on January 1, 2002. Statement No. 144 retained the fundamental provisions of Statement No. 121 as it relates to assets to be held and used and assets to be sold. Statement No. 144 requires impairment losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. When an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value.

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

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 seven 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.

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Loan Costs

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

Goodwill

The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill and, until January 1, 2002 was being amortized on a straight-line basis over seven years. Accumulated amortization was $2,793,000 as of December 31, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), effective for fiscal years beginning after December 15, 2001. Under this rule, goodwill is no longer amortized but is subject to impairment tests in accordance with Statement No. 142. The Company performed its first required annual impairment test of goodwill as of January 1, 2002 and determined that goodwill was not impaired. As of December 31, 2003, there have been no indicators of impairment related to the Company’s goodwill. If Statement No. 142 had been adopted effective January 1, 2001, the pro forma impact of the nonamortization of goodwill on the results for the subsequent period would have been as follows (in thousands except per common share data):


		Year Ended December 31, 2001
Net income, as reported		$47,678
Amortization of goodwill, net of tax		1,106

Net income, as adjusted		$48,784

Earnings per common share, as adjusted:
Basic		$4.61

Diluted		$4.54

Sales and Profit Recognition

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

During the year ended December 31, 2001, the Company completed the sale and related leaseback of 56 model homes for a sales price of $16,216,000, of which $13,938,000 was paid in cash and $2,278,000 of which was paid in the form of a partial recourse note receivable. The sale was accounted for on the cost recovery method in accordance with Statement No. 66 and Statement No. 98, and as such deferred profits of $2,385,000 were recorded resulting in gross profits from the sale of $531,000. As of December 31, 2003 and 2002, the partial recourse note receivable of $460,000 and $1,379,000 and related deferred profits of $460,000 and $1,486,000 are reflected in receivables and accrued expenses, respectively. The Company pays rent on the related lease and earns income on the partial recourse note receivable at LIBOR plus 4.75% (5.90% at December 31, 2003).

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 paid-in capital.

Financial Instruments

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

For those instruments, as defined under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, for which it is practical to estimate fair value, management has determined that the carrying amounts of the Company’s financial instruments approximate their fair value at December 31, 2003, except for the 10³/4% Senior Notes as described in Note 6.

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

Cash and Cash Equivalents

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

Management Fees

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

Basic and Diluted Earnings Per Common Share

Earnings per share amounts for all periods presented conform to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic and diluted earnings per common share for the year ended December 31, 2003 are based on 9,782,928 and 9,928,733 shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the year ended December 31, 2002 are based on 10,203,497 and 10,474,868 shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the year ended December 31, 2001 are based on 10,583,564 and 10,739,540 shares of common stock outstanding, respectively.

Stock-Based Compensation

At December 31, 2003, the Company had stock plans, which are described more fully in Note 7. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25,

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	Year Ended December 31
	2003			2002			2001
Net income, as reported	$	72,137		$	49,511		$	47,678
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(380	)		(937	)		(916	)

Net income, as adjusted	$	71,757		$	48,574		$	46,762

Earnings per common share:
Basic—as reported		$7.37			$4.85			$4.50

Basic—as adjusted		$7.33			$4.76			$4.42

Diluted—as reported		$7.27			$4.73			$4.44

Diluted—as adjusted		$7.23			$4.64			$4.35

Use of Estimates

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 2003 and 2002 and revenues and expenses for each of the three years in the period ended December 31, 2003. Accordingly, actual results could differ from those estimates in the near-term.

Impact of New Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Recission of SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (“Statement No. 145”). Statement No. 145 prevents gains or losses on extinguishment of debt not meeting the criteria of APB 30 to be treated as extraordinary. Statement No. 145 is effective for fiscal years beginning after March 15, 2002. Upon adoption of Statement No. 145, the Company’s previously reported extraordinary items related to gain from retirement of debt were reclassified to other income and not reported as extraordinary items.

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

expected present value which is the sum of the estimated probability-weighted range of contingent payments under the guarantee arrangement. The recording of a liability could have a corresponding effect on various of the Company’s financial ratios and other financial and operational indicators. The application of Interpretation No. 45 beginning on January 1, 2003 did not have a material impact on the Company’s financial statements with respect to any guarantees issued or modified by the Company after December 31, 2002. See Notes 5, 6 and 10 of “Notes to Consolidated Financial Statements” for additional information related to the Company’s guarantees.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”), which applies to arrangements created after January 31, 2003. Interpretation No. 46 applies to arrangements created before February 1, 2003 beginning on March 31, 2004. As of December 31, 2003, the Company is considered to be the primary beneficiary in six joint ventures and one land banking arrangement created after January 31, 2003, which have been determined to be variable interest entities. Accordingly, the assets, liabilities and operations of these six joint ventures and one land banking arrangement have been consolidated with the Company’s financial statements as of December 31, 2003 and for the period then ended. The Company has not yet determined the anticipated impact of adopting Interpretation No. 46 for arrangements existing as of January 31, 2003. However such adoption will likely require the consolidation of certain of the Company’s joint ventures, option agreements and land banking arrangements in the Company’s financial statements as of March 31, 2004. The consolidation of the assets, liabilities and operations of any joint venture, option agreements or land banking arrangements would have a corresponding effect on various of the Company’s financial ratios and other financial and operational indicators. See Note 2 for information regarding variable interest entities. See Notes 5 and 10 for additional information regarding joint venture and land banking arrangements.

Reclassifications

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

Note 2 — Consolidation of Variable Interest Entities

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

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

Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements (see Note 10) or (iii) enters into

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Based on the Company’s analysis of arrangements created after January 31, 2003, no VIEs have been created for the period from February 1, 2003 through December 31, 2003 with respect to option agreements as identified under clause (i) of the previous paragraph. At December 31, 2003, six joint ventures and one land banking arrangement created after January 31, 2003 have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these six joint ventures and one land banking arrangement have been consolidated with the Company’s financial statements as of December 31, 2003 and for the period then ended. Supplemental consolidating financial information of the Company, specifically including information for the six joint ventures and one land banking arrangement consolidated under Interpretation No. 46 and for two joint ventures which were previously consolidated (see Note 5), is presented below to allow investors to determine the nature of assets held and the operations of the consolidated entities. Investments in consolidated joint ventures are presented using the equity method of accounting. Consolidated real estate inventories include land deposits under option agreements or land banking arrangements (excluding the consolidated land banking arrangement as previously described in this paragraph) (see Note 10) of $37,293,000 and $37,443,000 at December 31, 2003 and 2002, respectively. As of December 31, 2003, the Company’s remaining total contractual obligations for land purchases and option commitments was approximately $568,300,000.

The six joint ventures created after January 31, 2003 which have been determined to be VIEs are each engaged in homebuilding and land development activities which will result in an estimated total of 562 homes at completion. The homes are expected to be constructed and sold in phases over a two-to-three year period with approximate base sales prices ranging from $298,000 to $1,059,000. As of December 31, 2003, 98 homes have been sold and 21 homes have closed. 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.

The land banking arrangement which has been determined to be a VIE was entered into effective on September 29, 2003. Under this arrangement, the Company transferred to an entity owned by a third party the Company’s right to purchase certain real estate assets (lots) from a joint venture whose financial statements have previously been consolidated with the Company’s financial statements (see Note 5). Concurrently, the Company entered into an option agreement with the entity owned by a third party whereby the Company agreed to acquire lots in staged takedowns through August 15, 2005. The Company made a non-refundable deposit of $14,418,000 and the entity owned by a third party made an equity contribution of $42,214,000 to purchase the lots from the joint venture for a total price of $56,632,000 (which included a $16,441,000 preferred return to the outside partner of the joint venture). The Company is under no obligation to purchase the lots, but would forfeit remaining deposits if the lots were not purchased. The Company does not have legal title to the entity owned by a third party and has not guaranteed its liabilities. The total purchase price under the option agreement is $60,848,550 plus a 10¹/4% preferred return on invested capital to the outside third party. The property consists of 128 single-family lots and 22 high-density lots on which the Company expects to construct 128 single-family

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

homes on the single-family lots and 44 duplex condominium units on the high-density lots. The homes are expected to be constructed and sold in phases over a two-to-three year period with approximate base sales prices ranging from $680,000 to $930,000. As of December 31, 2003, 11 lots have been taken down for a purchase price of $3,744,975 and no homes have closed. The intercompany sales and related profits have been eliminated in consolidation.

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)


	December 31, 2003
			Consolidated Entities
	Wholly- Owned		Variable Interest Entities Under Interpretation No. 46		Joint Ventures Previously Consolidated		Elimination Entries			Consolidated Total

ASSETS

Cash and cash equivalents	$	18,893	$	4,775	$	469	$	—		$	24,137
Receivables		43,719		2,492		—		—			46,211
Real estate inventories		515,984		153,968		28,095		—			698,047
Investments in and advances to unconsolidated joint ventures		45,613		—		—		—			45,613
Investments in consolidated entities		40,694		—		—		(40,694	)		—
Other assets		25,707		—		—		—			25,707
Intercompany receivables		3,420		—		—		(3,420	)		—

	$	694,030	$	161,235	$	28,564	$	(44,114	)	$	839,715


LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable and accrued expenses	$	115,253	$	3,010	$	179	$	—		$	118,442
Notes payable		80,331		—		—		—			80,331
10³/4% Senior Notes due April 1, 2013		246,406		—		—		—			246,406
Intercompany payables		—		2,894		526		(3,420	)		—

Total liabilities		441,990		5,904		705		(3,420	)		445,179
Minority interest in consolidated entities		—		—		—		142,496			142,496
Owners’ capital
William Lyon Homes		—		35,467		5,227		(40,694	)		—
Others		—		119,864		22,632		(142,496	)		—
Stockholders’ equity		252,040		—		—		—			252,040

	$	694,030	$	161,235	$	28,564	$	(44,114	)	$	839,715

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)


	December 31, 2002
			Consolidated Entities
	Wholly- Owned		Variable Interest Entities Under Interpretation No. 46		Joint Ventures Previously Consolidated		Elimination Entries			Consolidated Total

ASSETS

Cash and cash equivalents	$	14,404	$	—	$	2,290	$	—		$	16,694
Receivables		28,734		—		—		—			28,734
Real estate inventories		390,103		—		101,849		—			491,952
Investments in and advances to unconsolidated joint ventures		65,404		—		—		—			65,404
Investments in consolidated entities		19,937		—		—		(19,937	)		—
Other assets		14,797		—		—		—			14,797
Intercompany receivables		—		—		951		(951	)		—

	$	533,379	$	—	$	105,090	$	(20,888	)	$	617,581


LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable and accrued expenses	$	84,687	$	—	$	4,506	$	—		$	89,193
Notes payable		195,786		—		—		—			195,786
12¹/2% Senior Notes due July 1, 2003		70,279		—		—		—			70,279
Intercompany payables		951		—		—		(951	)		—

Total liabilities		351,703		—		4,506		(951	)		355,258

Minority interest in consolidated entities		—		—		—		80,647			80,647
Owners’ capital
William Lyon Homes		—		—		19,937		(19,937	)		—
Others		—		—		80,647		(80,647	)		—
Stockholders’ equity		181,676		—		—		—			181,676

	$	533,379	$	—	$	105,090	$	(20,888	)	$	617,581

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)


	Year Ended December 31, 2003
				Consolidated Entities
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Joint Ventures Previously Consolidated			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	879,114		$	9,199		$	129,439		($	129,439	)	$	888,313
Management fees		9,490			—			—			—			9,490

		888,604			9,199			129,439			(129,439	)		897,803

Operating costs
Cost of sales		(719,750	)		(7,904	)		(107,696	)		107,696			(727,654	)
Sales and marketing		(29,910	)		(979	)		(363	)		—			(31,252	)
General and administrative		(50,315	)		—			—			—			(50,315	)

		(799,975	)		(8,883	)		(108,059	)		107,696			(809,221	)

Equity in income of unconsolidated joint ventures		31,236			—			—			—			31,236

Equity in loss of consolidated entities		(449	)		—			—			449			—

Operating income		119,416			316			21,380			(21,294	)		119,818
Other income, net		4,536			6			21			—			4,563
Minority equity in income of consolidated entities		—			(429	)		(21,743	)		21,743			(429	)

Income (loss) before provision for income taxes		123,952			(107	)		(342	)		449			123,952
Provision for income taxes		(51,815	)		—			—			—			(51,815	)

Net income (loss)	$	72,137		$	(107	)	$	(342	)	$	449		$	72,137

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)

The Company has not yet determined the anticipated impact of adopting Interpretation No. 46 for arrangements existing as of January 31, 2003. However, such adoption will likely require the consolidation in the Company’s financial statements as of March 31, 2004 of the assets, liabilities and operations on a prospective basis of certain existing joint ventures, option agreements or land banking arrangements. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 will not affect the Company’s consolidated net income.

Note 3 — Receivables

Receivables consist of the following (in thousands):


	December 31,
	2003		2002
Notes receivable:
First trust deed mortgage notes receivable, pledged as collateral for revolving mortgage warehouse credit facility	$	20,498	$	18,139
Notes receivable from sale and related leaseback of 56 model homes which is accounted for on the cost recovery method (Note 1)		471		1,379

		20,969		19,518
Receivables from affiliates for management fees, cost reimbursements and other		115		3,226
Other receivables—primarily escrow proceeds		25,127		5,990

	$	46,211	$	28,734

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4 — Real Estate Inventories

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


	December 31, 2003
Division	Deposits, Land and Construction in Progress		Completed Inventory, Including Models and Completed Lots Held for Sale		Total
Southern California	$	187,083	$	5,230	$	192,313
San Diego		134,141		7,718		141,859
Northern California		215,216		16,824		232,040
Arizona		59,614		1,894		61,508
Nevada		70,157		170		70,327

	$	666,211	$	31,836	$	698,047


	December 31, 2002
Division	Deposits, Land and Construction In Progress		Completed Inventory, Including Models and Completed Lots Held for Sale		Total
Southern California	$	108,176	$	8,999	$	117,175
San Diego		83,699		2,847		86,546
Northern California		172,780		9,801		182,581
Arizona		39,664		2,001		41,665
Nevada		62,636		1,249		63,885
Other		100		—		100

	$	467,055	$	24,897	$	491,952

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5 — Investments in and Advances to Unconsolidated Joint Ventures

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

CONDENSED COMBINED BALANCE SHEETS

(In thousands)


	December 31,
	2003		2002
ASSETS
Cash and cash equivalents	$	4,973	$	18,023
Receivables		2,339		13,017
Real estate inventories		187,048		234,896
Investment in unconsolidated joint venture		22,804		—

	$	217,164	$	265,936

LIABILITIES AND OWNERS’ CAPITAL
Accounts payable	$	6,408	$	14,640
Accrued expenses		2,645		1,309
Amounts payable to William Lyon Homes		115		3,226
Notes payable		111,273		90,086
Advances from William Lyon Homes		2,668		7,498

		123,109		116,759

Owners’ Capital
William Lyon Homes		42,945		57,906
Others		51,110		91,271

		94,055		149,177

	$	217,164	$	265,936

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED COMBINED STATEMENTS OF INCOME

(In thousands)


	Year Ended December 31,
	2003			2002			2001
Operating revenue
Home sales	$	317,109		$	362,697		$	316,098
Land sale		8,440			17,079			5,371

		325,549			379,776			321,469
Operating costs
Cost of sales — homes		(248,252	)		(298,838	)		(258,997	)
Cost of sales — land		(8,132	)		(13,542	)		(4,214	)
Sales and marketing		(9,431	)		(10,814	)		(10,609	)

Operating income		59,734			56,582			47,649
Other income (loss), net		(1,327	)		83			295

Net income	$	58,407		$	56,665		$	47,944

Allocation to owners
William Lyon Homes	$	31,236		$	27,748		$	22,384
Others		27,171			28,917			25,560

	$	58,407		$	56,665		$	47,944

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

Certain joint ventures have obtained financing from construction lenders which amounted to $111,273,000 at December 31, 2003. As common practice required by commercial lenders, all of the joint ventures that have obtained financing are obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at the time. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance. Certain of the joint ventures that have obtained such financing are in the form of limited partnerships of which the Company is the general partner. While historically all liabilities of these partnerships have been satisfied out of the assets of such partnerships and while the Company believes that this will continue in the future, the Company, as general partner, is potentially responsible for all liabilities and indebtedness of these partnerships. In addition, the Company has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. The Company has also provided completion guarantees for some of the limited partnerships under their credit facilities.

During the year ended December 31, 2003, one of the joint ventures in which the Company is a general partner completed a land sale to the Company for $8,440,000 resulting in no gain or loss to the joint venture. During the year ended December 31, 2002, one of the joint ventures in which the Company is a general partner completed a land sale to the Company for $17,079,000 resulting in a profit of approximately $3,537,000, all of which was allocated to the Company’s outside partner as preferred return in accordance with the joint venture agreement.

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During the year ended December 31, 2002, one of the Company’s joint ventures (“Existing Venture”) was restructured such that the Company was required to purchase the 538 lots owned by the Existing Venture on a specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the outside partner of the Existing Venture. During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64,468,000, which includes a $12,493,000 preferred return to the outside partner of the Existing Venture. The 242 lots were purchased by a newly formed joint venture (“New Venture”) between the Company and an outside partner. The Company is required to purchase the 242 lots owned by the New Venture on a specified takedown basis through May 15, 2004 at a purchase price equal to $74,210,000 plus a 13¹/2% preferred return on invested capital to the outside partner of the New Venture. Because the Company is required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company now controls both ventures, the financial statements of both ventures have been consolidated with the Company’s financial statements as of December 31, 2003, including real estate inventories of $28,095,000 and minority interest in consolidated joint ventures of $22,632,000. During the year ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for $19,765,000, which included a $3,953,000 preferred return to the outside partner of the Existing Venture. The 44 lots were purchased through a land banking arrangement (see Note 10 for additional information regarding the Company’s land banking arrangements). During the year ended December 31, 2003, an additional 219 lots were purchased from the Existing Venture for $74,896,000, which included a $21,743,000 preferred return to the outside partner of the Existing Venture. These purchases included (1) 172 lots which were purchased from the Existing Venture under a land banking arrangement (see Note 2) for $56,632,000, which included a $16,441,000 preferred return to the outside partner of the Existing Venture and (2) 47 lots which were purchased by the New Venture from the Existing Venture for $18,264,000, which included a $5,302,000 preferred return to the outside partner of the Existing Venture. During the year ended December 31, 2003 the Company purchased 175 lots from the New Venture for $54,543,000, all of which was paid to the outside partner as a return of capital. The intercompany sales and related profits have been eliminated in consolidation.

During the year ended December 31, 2003, the Company’s wholly-owned subsidiary William Lyon Homes Inc., a California corporation, (“California Lyon”), and two unaffiliated parties formed a series of limited liability companies (“Development LLCs”) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. The development process is anticipated to be completed by mid 2004 at which time California Lyon will be required under certain specific conditions to purchase approximately one half in value of the lots. California Lyon has a 12¹/2% indirect, minority interest in the Development LLCs, which are the borrowers under two secured lines of credit. Advances under the lines of credit are to be used to pay acquisition and development costs and expenses. The lines of credit are secured by deeds of trust on the real property and improvements thereon owned by the applicable Development LLC, as well as pledges of all net sale proceeds, related contracts and other ancillary property. The maximum commitment amounts under the lines of credit are limited by specified agreed loan-to-value ratios. The maximum commitment amount under the line of credit that closed in January 2003 (“First Line of Credit”) is $35,000,000. Subject to specified terms and conditions, California Lyon and the other direct and indirect members of the Development LLC that is the borrower under the First Line of Credit, including certain affiliates of such other members, each (i) have guaranteed to the bank the repayment of the Development LLC’s indebtedness under the First Line of Credit, completion of certain infrastructure improvements to the land, payment of necessary loan remargining obligations, and the Development LLC’s performance under its environmental indemnity and covenants, and (ii) have agreed to take all actions and pay all amounts to assure that the Development LLC is in compliance with financial covenants. The First Line of Credit matures in January 2005, but may be extended to July 2005, subject to specified terms and conditions. The maximum commitment amount under the line of credit that closed in March 2003 (“Second Line of Credit”) is $105,000,000. The Second Line of Credit matures in September 2004, but may be extended to September 2005, subject to specified terms and conditions. Although the guarantee obligations of the other direct

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and indirect members of the Development LLC that is the borrower under the Second Line of Credit, and certain of their affiliates, are similar in nature to those under the First Line of Credit, California Lyon does not have any such guarantee obligations to the banks under the Second Line of Credit. However, California Lyon has posted letters of credit equal to approximately $24,600,000 to secure its obligations as well as the Development LLCs’ obligations to the banks under both lines of credit. Further, California Lyon and the other direct and indirect members of the Development LLCs, including certain affiliates of such other members, have entered into reimbursement and indemnity agreements to allocate any liability arising from each line of credit, including the related guarantees and letters of credit. California Lyon’s parent company, William Lyon Homes, a Delaware corporation (“Delaware Lyon”) has entered into joinder agreements to be jointly and severally liable for California Lyon’s obligations under the reimbursement and indemnity agreements. While the reimbursement and indemnity agreements provide that liability is generally allocated in accordance with the members’ percentage interests in the Development LLCs’ distributions, Delaware Lyon and California Lyon may be liable for the full amount of the obligations guaranteed to the banks under either or both of the lines of credit in certain specified circumstances, such as those involving the default, willful misconduct or gross negligence of California Lyon. As of December 31, 2003, the outstanding indebtedness under the First Line of Credit was $33,600,000 and the outstanding indebtedness under the Second Line of Credit was $100,600,000.

Note 6 — Notes Payable and Senior Notes

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


	December 31,
	2003		2002
Notes payable:
Revolving credit facilities	$	49,175	$	118,068
Construction notes payable		21,534		25,218
Purchase money notes payable—land acquisitions		—		28,861
Collateralized mortgage obligations under revolving mortgage warehouse credit facilities, secured by first trust deed mortgage notes receivable		9,622		18,139
Unsecured line of credit		—		5,500

		80,331		195,786
10³/4% Senior Notes due April 1, 2013		246,406		—
12¹/2% Senior Notes due July 1, 2003		—		70,279

	$	326,737	$	266,065

Interest relating to the above debt consists of the following (in thousands):


	Year Ended December 31,
	2003			2002			2001
Interest incurred	$	47,188		$	26,783		$	21,908
Interest capitalized		(47,188	)		(26,783	)		(21,681	)

Interest expense	$	—		$	—		$	227

10³/4% Senior Notes

The Company’s wholly-owned subsidiary, William Lyon Homes, Inc., a California corporation (“California Lyon”), filed a Registration Statement on Form S-3 with the Securities and Exchange Commission for the sale of $250,000,000 of Senior Notes which became effective on March 12, 2003. The offering closed on March 17, 2003 and was fully subscribed and issued. The notes were issued at a price of 98.493% to the public, resulting in

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

net proceeds to the Company of approximately $246,233,000. The purchase price reflected a discount to yield 11% under the effective interest method and the notes have been reflected net of the unamortized discount in the accompanying consolidated balance sheet.

The 10³/4% Senior Notes due 2013 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (“Delaware Lyon”), which is the parent company of California Lyon, and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness. At December 31, 2003, the Company had approximately $80,331,000 of secured indebtedness and approximately $205,500,000 of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas. Interest on the 10³/4% Senior Notes is payable on April 1 and October 1 of each year, commencing October 1, 2003.

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

The 10³/4% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of Delaware Lyon’s restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (ix) consolidate, merge or sell all or substantially all of Delaware Lyon’s or California Lyon’s assets. These covenants are subject to a number of important exceptions and qualifications as described in the Indenture.

The foregoing summary is not a complete description of the terms of the 10³/4% Senior Notes and is qualified in its entirety by reference to the 10³/4% Senior Notes Indenture.

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


Repayment of revolving credit facilities	$	104,354
Repayment of 12¹/2% Senior Notes		70,279
Repayment of construction notes payable		28,000
Repayment of purchase money notes payable — land acquisitions		26,000
Repayment of unsecured line of credit		9,500
Underwriting discount		6,875
Offering costs		1,225

	$	246,233

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2003, the outstanding 10³/4% Senior Notes with a face value of $246,406,000 had a fair value of approximately $284,000,000, based on quotes from industry sources.

12¹/2% Senior Notes

As of December 31, 2002, the Company’s outstanding balance under its 12¹/2% Senior Notes was $70,279,000. On May 1, 2001, the Company completed a consent solicitation with respect to the 12¹/2% Senior Notes and received consents from holders of $39,279,000 of the then outstanding notes to extend the maturity date from July 1, 2001 to July 1, 2003 and to make certain amendments to the note covenants. Although the Company initially intended to accept consents from no more than 50% of holders, the Company elected to accept additional consents, as contemplated by the consent solicitation documents. The consenting holders received a fee of 4% of the principal balance. Subsequently, during May and June 2001, the Company had also repurchased $31,444,000 of the Senior Notes from non-consenting holders.

In June 2001, General William Lyon, Chairman and Chief Executive Officer of the Company, and a trust for which his son William Harwell Lyon is a beneficiary, purchased from the Company at par $30,000,000 of the 12¹/2% Senior Notes. William H. McFarland, another member of the Company’s Board of Directors, purchased from the Company at par $1.0 million of the 12¹/2% Senior Notes. In parity with holders consenting during the consent solicitation, these Directors received a consent fee of 4% of the principal balance and consented to the amendments effected by the Company’s consent solicitation statement dated February 28, 2001.

In July 2001, the Company repaid all of the remaining 12¹/2% Senior Notes which matured on July 1, 2001 amounting to $5,893,000.

A portion of the net proceeds of the Company’s offering of 10³/4% Senior Notes (see above) was used to repay all of the Company’s 12¹/2% Senior Notes, including $30,000,000 in principal amount held by General William Lyon, Chairman and Chief Executive Officer, and the trust of which his son, William H. Lyon, is the sole beneficiary, $2,323,000 held by Wade H. Cable, President and Chief Operating Officer, and $1,000,000 held by William H. McFarland, a director.

7¹/2% Senior Notes

On February 6, 2004, the Company’s wholly-owned subsidiary, William Lyon Homes, Inc., a California corporation, (“California Lyon”) closed its offering of $150,000,000 principal amount of 7¹/2% Senior Notes due 2014. The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. The notes have not and will not be registered under the Securities Act of 1933 and, unless so registered, may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. The notes were issued at par, resulting in net proceeds to the Company of approximately $147,600,000. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes (“Exchange Notes”) having substantially identical terms. If California Lyon does not comply with its agreement regarding the registration and exchange of the notes with the Exchange Notes, additional interest on the notes will be payable on the interest payment dates.

The 7¹/2% Senior Notes due February 15, 2004 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by Delaware Lyon and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but are effectively

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. Interest on the 7¹/2% Senior Notes is payable on February 15 and August 15 of each year.

The foregoing summary is not a complete description of the 7¹/2% Senior Notes and is qualified in its entirety by reference to the 7¹/2% Senior Notes Indenture.

The net proceeds of the offering were used to repay $70,000,000 of the outstanding balance on the revolving credit facilities and $21,500,000 of a construction note payable, together with $300,000 of accrued interest. The remaining proceeds will be used to pay fees and commissions related to the offering and for other general corporate purposes.

Supplemental consolidating financial information of the Company, specifically including information for California Lyon, the issuer of the 10³/4% Senior Notes and the 7¹/2% 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.

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2003

(in thousands)


	Unconsolidated
	Delaware Lyon		California Lyon		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company

ASSETS
Cash and cash equivalents	$	—	$	13,684	$	4,207	$	6,246	$	—		$	24,137
Receivables		—		22,215		21,213		2,783		—			46,211
Real estate inventories		—		538,910		1,094		158,043		—			698,047
Investments in and advances to unconsolidated joint ventures		—		45,613		—		—		—			45,613
Property and equipment, net		—		800		825		—		—			1,625
Deferred loan costs		—		9,041		—		—		—			9,041
Goodwill		—		5,896		—		—		—			5,896
Other assets		—		7,975		1,170		—		—			9,145
Investments in subsidiaries		252,040		105,495		—		—		(357,535	)		—
Intercompany receivables		—		1,190		69,830		—		(71,020	)		—

	$	252,040	$	750,819	$	98,339	$	167,072	$	(428,555	)	$	839,715


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	30,635	$	421	$	4,641	$	—		$	35,697
Accrued expenses		—		77,888		3,909		948		—			82,745
Notes payable		—		49,176		9,621		21,534		—			80,331
10³/4% Senior Notes		—		246,406		—		—		—			246,406
Intercompany payables		—		69,830		1,190		—		(71,020	)		—

Total liabilities		—		473,935		15,141		27,123		(71,020	)		445,179
Minority interest in consolidated joint ventures		—		41,101		—		101,395		—			142,496
Stockholders’ equity		252,040		235,783		83,198		38,554		(357,535	)		252,040

	$	252,040	$	750,819	$	98,339	$	167,072	$	(428,555	)	$	839,715

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2002

(in thousands)


	Unconsolidated
	Delaware Lyon		California Lyon		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company

ASSETS
Cash and cash equivalents	$	—	$	11,524	$	2,071	$	3,099	$	—		$	16,694
Receivables		—		8,657		19,941		136		—			28,734
Real estate inventories		—		389,010		1,094		101,848		—			491,952
Investments in and advances to unconsolidated joint ventures		—		64,540		864		—		—			65,404
Property and equipment, net		—		1,177		954		—		—			2,131
Deferred loan costs		586		755		—		—		—			1,341
Goodwill		—		5,896		—		—		—			5,896
Other assets		—		5,303		126		—		—			5,429
Investments in subsidiaries		180,033		83,834		—		—		(263,867	)		—
Intercompany receivables		79,308		9,149		77,287		—		(165,744	)		—

	$	259,927	$	579,845	$	102,337	$	105,083	$	(429,611	)	$	617,581


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	28,363	$	1,574	$	4,944	$	—		$	34,881
Accrued expenses		—		49,130		5,007		175		—			54,312
Notes payable		—		177,647		18,139		—		—			195,786
12¹/2% Senior Notes		70,279		—		—		—		—			70,279
Intercompany payables		7,972		156,596		1,176		—		(165,744	)		—

Total liabilities		78,251		411,736		25,896		5,119		(165,744	)		355,258
Minority interest in consolidated joint ventures		—		—		—		80,647		—			80,647
Stockholders’ equity		181,676		168,109		76,441		19,317		(263,867	)		181,676

	$	259,927	$	579,845	$	102,337	$	105,083	$	(429,611	)	$	617,581

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2003

(in thousands)


	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	811,342		$	67,772		$	138,638		$	(129,439	)	$	888,313
Management fees		—		9,490			—			—			—			9,490

		—		820,832			67,772			138,638			(129,439	)		897,803

Operating costs
Cost of sales		—		(659,473	)		(60,277	)		(115,600	)		107,696			(727,654	)
Sales and marketing		—		(26,856	)		(3,052	)		(1,344	)		—			(31,252	)
General and administrative		—		(50,105	)		(210	)		—			—			(50,315	)

		—		(736,434	)		(63,539	)		(116,944	)		107,696			(809,221	)

Equity in income of unconsolidated joint ventures		—		31,236			—			—			—			31,236

Income from subsidiaries		72,137		2,604			—			—			(74,741	)		—

Operating income		72,137		118,238			4,233			21,694			(96,484	)		119,818
Other income, net		—		1,041			2,524			998			—			4,563
Minority equity in income of consolidated joint ventures		—		(429	)		—			(22,172	)		22,172			(429	)

Income before provision for income taxes		72,137		118,850			6,757			520			(74,312	)		123,952
Provision for income taxes		—		(51,475	)		—			(340	)		—			(51,815	)

Net income	$	72,137	$	67,375		$	6,757		$	180		$	(74,312	)	$	72,137

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2002

(in thousands)


	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—	$	427,492		$	85,550		$	98,146		$	(8,778	)	$	602,410
Management fees		—		10,892			—			—			—			10,892

		—		438,384			85,550			98,146			(8,778	)		613,302

Operating costs
Cost of sales		—		(367,757	)		(73,057	)		(81,636	)		8,716			(513,734	)
Sales and marketing		—		(19,337	)		(3,395	)		(130	)		—			(22,862	)
General and administrative		—		(39,015	)		(319	)		(32	)		—			(39,366	)

		—		(426,109	)		(76,771	)		(81,798	)		8,716			(575,962	)

Equity in income of unconsolidated joint ventures		—		27,748			—			—			—			27,748

Income from subsidiaries		49,511		7,043			—			—			(56,554	)		—

Operating income		49,511		47,066			8,779			16,348			(56,616	)		65,088
Other income, net		—		(196	)		2,169			720			—			2,693
Minority equity in income of consolidated joint ventures		—		—			—			(16,447	)		16,447			—

Income before income taxes		49,511		46,870			10,948			621			(40,169	)		67,781
Provision for income taxes		—		(18,020	)		—			(250	)		—			(18,270	)

Net income	$	49,511	$	28,850		$	10,948		$	371		$	(40,169	)	$	49,511

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2001

(in thousands)


	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company

Operating revenue
Sales	$	—	$	404,000		$	55,056		$	—		$	—		$	459,056
Management fees		—		9,127			—			—			—			9,127

		—		413,127			55,056			—			—			468,183

Operating costs
Cost of sales		—		(339,970	)		(47,796	)		—			—			(387,766	)
Sales and marketing		—		(15,747	)		(2,398	)		(4	)		—			(18,149	)
General and administrative		—		(36,872	)		(297	)		(2	)		—			(37,171	)
Amortization of goodwill		—		(1,242	)		—			—			—			(1,242	)

		—		(393,831	)		(50,491	)		(6	)		—			(444,328	)

Equity in income of unconsolidated joint ventures		—		22,414			(30	)		—			—			22,384

Income from subsidiaries		47,678		4,614			—			—			(52,292	)		—

Operating income (loss)		47,678		46,324			4,535			(6	)		(52,292	)		46,239
Interest expense, net of amounts capitalized		—		(227	)		—			—			—			(227	)
Other income, net		—		4,264			2,752			497			—			7,513

Income (loss) before income taxes		47,678		50,361			7,287			491			(52,292	)		53,525
Provision for income taxes		—		(5,648	)		—			(199	)		—			(5,847	)

Net income	$	47,678	$	44,713		$	7,287		$	292		$	(52,292	)	$	47,678

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2003

(in thousands)


	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company

Operating activities:
Net income	$	72,137		$	67,375		$	6,757		$	180		$	(74,312	)	$	72,137
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			668			414			—			—			1,082
Equity in income of unconsolidated joint ventures		—			(31,236	)		—			—			—			(31,236	)
Equity in earnings of subsidiaries		(72,137	)		(2,604	)		—			—			74,741			—
Minority equity in income of consolidated joint ventures		—			429			—			22,172			(22,172	)		429
Provision for income taxes		—			51,475			—			340			—			51,815
Net changes in operating assets and liabilities:
Receivables		—			(14,466	)		1,087			(2,647	)		—			(16,026	)
Intercompany receivables/payables		(586	)		586			7,457			—			(7,457	)		—
Real estate inventories		—			(171,261	)		—			(34,661	)		—			(205,922	)
Deferred loan costs		586			(8,286	)		—			—			—			(7,700	)
Other assets		—			(2,672	)		(1,044	)		—			—			(3,716	)
Accounts payable		—			2,272			(1,153	)		(303	)		—			816
Accrued expenses		—			(19,603	)		(1,098	)		432			—			(20,269	)

Net cash (used in) provided by operating activities		—			(127,323	)		12,420			(14,487	)		(29,200	)		(158,590	)

Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			50,163			864			—			—			51,027
Net change in mortgage notes receivable		—			908			(2,359	)		—			—			(1,451	)
Purchases of property and equipment		—			(291	)		(285	)		—			—			(576	)
Investment in subsidiaries		—			(19,058	)		—			—			19,058			—
Advances from (to) affiliates		75,165			(82,207	)		—			—			7,042			—

Net cash provided by (used in) investing activities		75,165			(50,485	)		(1,780	)		—			26,100			49,000

Financing activities:
Proceeds from borrowings on notes payable		—			726,146			379,318			—			—			1,105,464
Principal payments on notes payable		—			(833,083	)		(387,836	)		—			—			(1,220,919	)
Repayment of 12¹/2% Senior Notes		(70,279	)		—			—			—			—			(70,279	)
Issuance of 10³/4% Senior Notes		—			246,233			—			—			—			246,233
Common stock issued for exercised options		2,294			—			—			—			—			2,294
Common stock purchased		(7,180	)		—			—			—			—			(7,180	)
Minority interest distributions, net		—			40,672			—			(1,424	)		22,172			61,420
Advances from affiliates		—			—			14			19,058			(19,072	)		—

Net cash (used in) provided by financing activities		(75,165	)		179,968			(8,504	)		17,634			3,100			117,033

Net increase in cash and cash equivalents		—			2,160			2,136			3,147			—			7,443
Cash and cash equivalents at beginning of year		—			11,524			2,071			3,099			—			16,694

Cash and cash equivalents at end of year	$	—		$	13,684		$	4,207		$	6,246		$	—		$	24,137

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2002

(in thousands)


	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company

Operating activities:
Net income	$	49,511		$	28,850		$	10,948		$	371		$	(40,169	)	$	49,511
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			983			372			—			—			1,355
Equity in income of unconsolidated joint ventures		—			(27,748	)		—			—			—			(27,748	)
Equity in earnings of subsidiaries		(49,511	)		(7,043	)		—			—			56,554			—
Provision for income taxes		—			18,020			—			250			—			18,270
Net changes in operating assets and liabilities:
Receivables		—			(3,238	)		(576	)		47			—			(3,767	)
Intercompany receivables/payables		(1,407	)		1,407			(27,920	)		85,305			(57,385	)		—
Real estate inventories		—			63,826			7,553			(94,505	)		—			(23,126	)
Deferred loan costs		1,407			83			—			—			—			1,490
Other assets		—			(2,617	)		(64	)		—			—			(2,681	)
Accounts payable		—			3,037			494			4,936			—			8,467
Accrued expenses		—			(8,621	)		3,402			(361	)		—			(5,580	)

Net cash provided by (used in) operating activities		—			66,939			(5,791	)		(3,957	)		(41,000	)		16,191

Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			17,000			(401	)		—			—			16,599
Net change in mortgage notes receivable		—			2,945			(7,153	)		—			—			(4,208	)
Purchases of property and equipment		—			(248	)		(1,067	)		—			—			(1,315	)
Investment in subsidiaries		—			(26,442	)		—			—			26,442			—
Advances from (to) affiliates		18,452			(59,519	)		—			—			41,067			—

Net cash provided by (used in) investing activities		18,452			(66,264	)		(8,621	)		—			67,509			11,076

Financing activities:
Proceeds from borrowings on notes payable		—			580,585			333,014			—			—			913,599
Principal payments on notes payable		—			(585,268	)		(333,723	)		(1,038	)		—			(920,029	)
Common stock issued for exercised options		1,118			—			—			—			—			1,118
Common stock purchased		(19,570	)		—			—			—			—			(19,570	)
Minority interest distributions, net		—			—			—			(5,442	)		—			(5,442	)
Advances from affiliates		—			—			13,333			13,176			(26,509	)		—

Net cash (used in) provided by financing activities		(18,452	)		(4,683	)		12,624			6,696			(26,509	)		(30,324	)

Net (decrease) increase in cash and cash equivalents		—			(4,008	)		(1,788	)		2,739			—			(3,057	)
Cash and cash equivalents at beginning of year		—			15,532			3,859			360			—			19,751

Cash and cash equivalents at end of year	$	—		$	11,524		$	2,071		$	3,099		$	—		$	16,694

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2001

(in thousands)


	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company

Operating activities:
Net income	$	47,678		$	44,713		$	7,287		$	292		$	(52,292	)	$	47,678
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			2,397			122			—			—			2,519
Equity in income of unconsolidated joint ventures		—			(22,414	)		30			—			—			(22,384	)
Equity in earnings of subsidiaries		(47,678	)		(4,614	)		—			—			52,292			—
Provision for income taxes		—			5,648			—			199			—			5,847
Net changes in operating assets and liabilities:
Receivables		—			3,170			(507	)		(183	)		—			2,480
Intercompany receivables/payables		1,812			(1,812	)		(1,506	)		(8	)		1,514			—
Real estate inventories		—			(16,289	)		(7,553	)		(7,343	)		—			(31,185	)
Deferred loan costs		(1,812	)		(265	)		—			—			—			(2,077	)
Other assets		—			(118	)		25			—			—			(93	)
Accounts payable		—			(7,269	)		845			8			—			(6,416	)
Accrued expenses		—			977			(515	)		871			—			1,333

Net cash provided by (used in) operating activities		—			4,124			(1,772	)		(6,164	)		1,514			(2,298	)

Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			2,893			(493	)		—			—			2,400
Net change in mortgage notes receivable		—			(2,046	)		(3,823	)		—			—			(5,869	)
Purchases of property and equipment		—			(503	)		(127	)		—			—			(630	)
Investment in subsidiaries		—			(1,732	)		—			—			1,732			—
Advances from (to) affiliates		6,495			(4,959	)		—			—			(1,536	)		—

Net cash provided by (used in) investing activities		6,495			(6,347	)		(4,443	)		—			196			(4,099	)

Financing activities:
Proceeds from borrowings on notes payable		—			468,144			218,459			1,038			—			687,641
Principal payments on notes payable		—			(462,935	)		(206,774	)		—			—			(669,709	)
Repurchase of 12¹/2% Senior Notes		(51,637	)		—			—			—			—			(51,637	)
Reissuance of 12¹/2% Senior Notes		44,715			—			—			—			—			44,715
Common stock issued for exercised options		427			—			—			—			—			427
Advances (to) from affiliates		—			—			(3,454	)		5,164			(1,710	)		—

Net cash (used in) provided by financing activities		(6,495	)		5,209			8,231			6,202			(1,710	)		11,437

Net increase in cash and cash equivalents		—			2,986			2,016			38			—			5,040
Cash and cash equivalents at beginning of year		—			12,546			1,843			322			—			14,711

Cash and cash equivalents at end of year	$	—		$	15,532		$	3,859		$	360		$	—		$	19,751

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revolving Credit Facilities

As of December 31, 2003, the Company has three revolving credit facilities which have an aggregate maximum loan commitment of $325,000,000 and mature at various dates through 2006. A $125,000,000 revolving line of credit “expires” in November 2004. After that date the Company may borrow amounts, subject to applicable borrowing base and concentration limitations, under this facility solely to complete the construction of residences begun prior to such date in approved projects funded by disbursements under this facility. The final maturity date is the earlier of the date upon which the last residence, the construction of which was financed with proceeds of this loan, is sold or the date upon which such last residence is excluded from the borrowing base by the passage of time under this facility. Of the $125,000,000 maximum commitment amount, $25,000,000 is not available for disbursement and the loan amount is limited to $100,000,000 until the lender consents, which consent may be withheld in its sole discretion, to make such funds available. A $150,000,000 revolving line of credit finally matures in September 2006, although after September 2004, advances under this facility may only be made to complete projects approved on or before such date. A $50,000,000 bank revolving line of credit initially “matures” in September 2004, after which the amounts available for borrowing begin to reduce with a final maturity date of September 2006. Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration limitations further restrict availability under the credit facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Company’s investment in a project, with higher percentages of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real property and improvements thereon owned by the Company in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes financial covenants, which may limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2003, $49,175,000 was outstanding under these credit facilities, with a weighted-average interest rate of 4.375%, and the undrawn availability was $205,500,000 as limited by the Company’s borrowing base calculation. The Company has provided an unsecured environmental indemnity in favor of the lender under the $125,000,000 bank line of credit (see Note 10.).

Under the revolving credit facilities, the Company is required to comply with a number of covenants, the most restrictive of which require the Company to maintain: (i) a tangible net worth, as defined of $120,000,000 adjusted upwards quarterly by 50% of the Company’s net income after March 31, 2002; (ii) a ratio of total liabilities to tangible net worth, each as defined, of less than 3.25 to 1.0; and (iii) minimum liquidity, as defined of at least $10,000,000. These facilities include a number of other covenants with respect to such matters as the posting of cash or letters of credit in certain circumstances, the application or deposit of excess net sales proceeds, maintenance of specified ratios, limitations on investments in joint ventures, maintenance of fixed charge coverages, stock ownership changes, and lot ownership.

As a common practice required by commercial lenders, the Company is obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at any time. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance. The entire revolving credit facilities balance is subject to these obligations as of December 31, 2003.

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Construction Notes Payable

At December 31, 2003, the Company had a construction note payable amounting to $21,534,000 related to a real estate project. The note was due on or before April 2, 2004 with interest at a rate of prime plus 0.5% at December 31, 2003. A portion of the net proceeds of the offering of 7¹/2% Senior Notes (see above) was used to repay this note in full.

Revolving Mortgage Warehouse Credit Facilities

The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has entered into two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in May 2004, provides for revolving loans of up to $20,000,000 outstanding, $10,000,000 of which is committed (lender obligated to lend if stated conditions are satisfied) and $10,000,000 of which is not committed (lender advances are optional even if stated conditions are otherwise satisfied). On August 29, 2003, the Company’s mortgage subsidiary and one of its unconsolidated joint ventures entered into an additional $10,000,000 credit facility which matures in August 2004. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. The facilities are secured by substantially all of the assets of each of the borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with respect to contractual obligations of third party investors to purchase such mortgage loans, and all proceeds of sale of such mortgage loans. The facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the borrowers to maintain minimum tangible net worth, leverage, profitability and liquidity. These facilities are non-recourse and are not guaranteed by the Company. At December 31, 2003 the outstanding balance under these facilities was $9,622,000.

Prime Interest Rates

The prime interest rates at December 31, 2003, 2002 and 2001 were 4.00%, 4.25% and 4.75%, respectively. The weighted-average prime interest rates for each of the three years ended December 31, 2003, 2002 and 2001 were 4.12%, 4.67% and 6.91%, respectively.

Note 7 — Stockholders’ Equity

Stock Repurchase

On September 20, 2001, the Company announced that the Company’s Board of Directors had authorized a program to repurchase up to 20% of the Company’s outstanding common shares. Under the plan, the stock will be purchased in the open market or privately negotiated transactions from time to time in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. The timing and amounts of any purchases will be as determined by the Company’s management from time to time or may be suspended at any time or from time to time without prior notice, depending on market conditions and other factors they deem relevant. The repurchased shares may be held as treasury stock and used for general corporate purchases or cancelled. As of December 31, 2003, 1,218,400 shares had been purchased and retired under this program for an aggregate purchase price of $26,750,000.

Stock Option Plans

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

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

number of shares subject to each option and the exercise price thereof. The per share exercise price for options will not be less than 100% of the fair market value of a share of common stock on the date the option is granted. The options will be exercisable for a term determined by the Committee, not to exceed ten years from the date of grant, and vest as follows: one year from date of grant—33¹/3%; two years from date of grant—33¹/3%; and three years from date of grant—33¹/3%.

Effective on May 9, 2000, the Company issued options under the William Lyon Homes 2000 Stock Incentive Plan to purchase a total of 627,500 shares of common stock at $8.6875 per share. During the year ended December 31, 2001, the Company issued additional options under the William Lyon Homes 2000 Stock Incentive Plan to purchase 12,500 shares of common stock at $9.10 per share and 20,000 shares of common stock at a price of $13.00 per share. During the years ended December 31, 2003, 2002 and 2001, certain officers and directors exercised options to purchase 240,359, 102,504 and 49,176 shares, respectively, of the Company’s common stock at a price of $8.6875 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan. During the years ended December 31, 2003 and 2002, certain officers exercised options to purchase 10,000 and 3,334 shares, respectively, of the Company’s common stock at a price of $13.00 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan. During the year ended December 31, 2003 an officer exercised options to purchase 8,334 shares of the Company’s common stock at a price of $9.10. As of December 31, 2003, 56,666 options have been forfeited and 189,627 options remain unexercised. The unexercised options are as follows: 178,795 options priced at $8.6875, 4,166 options priced at $9.10, and 6,666 options priced at $13.00. All unexercised options expire on May 9, 2010.

During the year ended December 31, 2002, certain officers exercised options to purchase 13,912 shares of the Company’s common stock at a price of $5.00 per share in accordance with the Company’s 1991 Stock Option Plan, as amended. During the year ended December 31, 2002, certain officers exercised options to purchase 7,998 shares of the Company’s common stock at a price of $14.375 per share in accordance with the Company’s 1991 Stock Option Plan, as amended. As of December 31, 2002, there were no outstanding options to purchase common stock under the Company’s 1991 Stock Option Plan.

Pursuant to the provisions of Statement No. 123, issued in October 1995, the Company has elected to continue applying the methodology prescribed by APB No. 25 and related interpretations to account for outstanding stock options. Accordingly, no compensation cost has been recognized in the financial statements related to stock options awarded to officers, directors and employees under the Plan. As required by Statement No. 123, for disclosure purposes only, the Company has measured the amount of compensation cost which would have been recognized related to stock options had the fair value of the options at the date of grant been used for accounting purposes which is summarized in Note 1. The Company estimated the fair value of the stock options issued in 2000 at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 4.83%; a dividend yield of 0.00%; a volatility factor for the market price of the Company’s common stock of 0.645; and a weighted average expected life of seven years for the stock options. The Company estimated the fair value of the stock options issued in 2001 at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.00%; a dividend yield of 0.00%; a volatility factor for the market price of the Company’s common stock of 0.618; and a weighted average expected life of seven years for the stock options.

Incentive Compensation Plan

The Company’s Board of Directors has approved a Cash Bonus Plan for all of the Company’s full-time, salaried employees, including the Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”), Chief Financial Officer (“CFO”), Division Presidents, Executives, Managers, Field Construction Staff, and certain other employees. Under the terms of this plan, the CEO, the COO, and the CFO are eligible to receive bonuses

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

based upon specified percentages of the Company’s pre-tax, pre-bonus income. Division Presidents are eligible to receive bonuses based upon specified percentages of their respective division pre-tax, pre-bonus income. All other participants are eligible to receive bonuses based upon specified percentages of a bonus pool consisting of a specified percentage of pre-tax, pre-bonus income. Awards are recorded in the period earned, but are paid out over two years, with 75% paid out following the determination of bonus awards, and 25% paid out one year later. The deferred amount will be forfeited in the event of termination for any reason except retirement, death or disability.

Executive Deferred Compensation Plan

Effective on February 11, 2002, the Company implemented a deferred compensation plan which allows certain officers and employees to defer a portion of total income (base salary and bonuses). The deferral amount can be up to 20% of total income with a minimum of $10,000 annually. The Company must accrue the deferred compensation liability but cannot deduct such amounts for income tax purposes until actually paid to the employee.

Note 8 — Income Taxes

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


	Year Ended December 31,
	2003			2002			2001
Current
Federal	$	(45,123	)	$	(23,525	)	$	2,467
State		(10,286	)		(6,038	)		(3,318	)

		(55,409	)		(29,563	)		(851	)

Deferred
Federal		2,985			9,656			(3,989	)
State		609			1,637			(1,007	)

		3,594			11,293			(4,996	)

	$	(51,815	)	$	(18,270	)	$	(5,847	)

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


	Year Ended December 31,
	2003			2002			2001
Provision for Federal income taxes at the statutory rate	$	(43,420	)	$	(23,723	)	$	(18,734	)
Provision for state income taxes, net of Federal income tax benefits		(6,044	)		(2,860	)		(2,811	)
Valuation allowance for deferred tax asset		—			8,348			15,490
Other		(2,351	)		(35	)		208

	$	(51,815	)	$	(18,270	)	$	(5,847	)

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	December 31,
	2003			2002
Deferred tax assets
Reserves deducted for financial reporting purposes not allowable for tax purposes	$	4,754		$	3,880
Compensation deductible for tax purposes when paid		4,702			2,802
Interest expensed for financial reporting purposes and capped for tax purposes		14			104
Net operating loss and alternative minimum tax credit carryovers		698			1,830
State income tax provisions deductible when paid for Federal tax purposes		2,550			1,780
Effect of book/tax differences for joint ventures		394			410

		13,112			10,806
Deferred tax liabilities
Effect of book/tax differences for joint ventures		(3,221	)		(4,509	)

	$	9,891		$	6,297

During the year ended December 31, 2003, income tax benefits of $3,113,000 related to stock option exercises were excluded from the results of operations and credited to additional paid-in capital.

The elimination during 2002 of the remaining valuation allowances for deferred tax assets reduced the Company’s estimated overall effective tax rate for the year ended December 31, 2002 from 39.3% to 27.0%. The estimated overall effective tax rate for the year ending December 31, 2003 is 41.8%. At December 31, 2003 the Company has net operating loss carryforwards for Federal tax purposes of approximately $1,994,000 which expire in 2009. In addition, unused recognized built-in losses in the amount of $23,891,000 are available to offset future income and expire between 2009 and 2011. The utilization of these losses is limited to offset $3,235,000 of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2011. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under certain circumstances.

Note 9 — Related Party Transactions

A portion of the net proceeds of the Company’s offering of 10³/4% Senior Notes (see Note 6) was used to repay all of the Company’s 12¹/2% Senior Notes, including $30,000,000 in principal amount held by General William Lyon, Chairman and Chief Executive Officer, and the trust of which his son, William H. Lyon, is the sole beneficiary, $2,323,000 held by Wade H. Cable, President and Chief Operating Officer, and $1,000,000 held by William H. McFarland, a director. See Note 6 for description of the transactions between the Company and certain of the Company’s Board of Directors with respect to the 12¹/2% Senior Notes.

The Company purchased real estate projects for a total purchase price of $8,468,000 during the year ended December 31, 2000 from entities controlled by William Lyon and William H. Lyon. In addition, one-half of the net profits in excess of six to eight percent from the development are to be paid to the seller. During the year ended December 31, 2003 and 2002, $0 and $1,770,000, respectively was paid to the seller in accordance with the agreement.

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. The terms of the purchase agreement provide for an initial option payment of $1,000,000 and a rolling option takedown of the lots. Phase takedowns of approximately 20 lots each are anticipated to occur at two to three month intervals for each of several product types through September 2004. In addition, one-half of the net profits in excess of six percent from the development are to be paid to the seller. During the years ended December 31, 2003, 2002 and 2001, the Company purchased 72, 183 and 143 lots, respectively, under this agreement for a total purchase price of $2,507,000, $4,150,000 and $2,777,000, respectively. During the year ended December 31, 2003, there were no payments made for one-half of the net profits in excess of six percent from the development and during the year ended December 31, 2002, payments were made in the amount of $1,614,000. This land acquisition qualified as an affiliate transaction under the Company’s 12¹/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994, as amended (“Indenture”). Pursuant to the terms of the Indenture, the Company determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to the Trustee under the Indenture a resolution of the Board of Directors of the Company set forth in an Officers’ Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.

On July 9, 2002, the Company’s Board of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 144 lots, through a land banking arrangement, for a total purchase price of $16,660,000 from an entity that purchased the lots from William Lyon. The terms of the purchase agreement provide for an initial deposit of $3,300,000 (paid on July 23, 2002) and monthly option payments of 11.5% on the seller’s outstanding investment. Such option payments entitle the Company to phase takedowns of approximately 14 lots each, which are anticipated to occur at one to two month intervals through December 2003. As of December 31, 2003 and 2002, 85 and 16 lots have been purchased under this agreement for a purchase price of $9,834,000 and $1,851,000, respectively. Had the Company purchased the property directly, the acquisition would have qualified as an affiliate transaction under the Indenture. Even though the Company’s agreement is not with William Lyon, the Company chose to treat it as an affiliate transaction. Pursuant to the terms of the Indenture, the Company determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to the Trustee under the Indenture a resolution of the Board of Directors of the Company set forth in an Officers’ Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company has delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.

The Company purchased land for a total purchase price of $8,440,000, $17,079,000 and $5,371,000 during the years ended December 31, 2003, 2002 and 2001, respectively, from certain of its unconsolidated joint ventures.

For the years ended December 31, 2003, 2002 and 2001, the Company incurred reimbursable on-site labor costs of $277,000, $178,000 and $175,000, respectively, for providing customer service to real estate projects

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

developed by entities controlled by William Lyon and William H. Lyon, of which $25,000 and $72,000 was due to the Company at December 31, 2003 and 2002, respectively. In addition, the Company earned fees of $109,000, $99,000 and $108,000, respectively, for tax and accounting services performed for entities controlled by William Lyon and William H. Lyon during the years ended December 31, 2003, 2002 and 2001.

For the years ended December 31, 2003, 2002 and 2001, the Company incurred charges of $753,000, $729,000 and $729,000, respectively, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.

During the years ended December 31, 2003, 2002 and 2001, the Company incurred charges of $250,000, $177,000 and $201,000, respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon, of which $19,000 was due to the Company at December 31, 2003.

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

Note 10 — Commitments and Contingencies

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

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.

The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers its right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit equal to 20% or less of the total purchase price. Additionally, the Company may be subject to other penalties if lots are not acquired. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots are not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. As described in Note 2, a recently adopted accounting interpretation required the consolidation of the assets, liabilities and operations of one of the Company’s land banking arrangements created after January 31, 2003. As of March 31, 2004, the interpretation will likely require the consolidation of the assets, liabilities and operations on a prospective basis of the six remaining unconsolidated land banking arrangements created prior to February 1, 2003 (see Notes 2 and 3). The deposits and penalties related to the six land banking projects created prior to February 1, 2003 have been recorded in the accompanying consolidated balance sheet. The financial statements of these six entities are not consolidated with the Company’s consolidated financial statements. 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

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

capital to the option provider, general housing market conditions and geographic preferences. Summary information with respect to the Company’s unconsolidated land banking arrangements is as follows as of December 31, 2003 (dollars in thousands):


Total number of land banking projects		6

Total number of lots		1,149

Total purchase price	$	108,958

Balance of lots still under option and not purchased:
Number of lots		588

Purchase price	$	41,997

Forfeited deposits and penalties if lots are not purchased	$	18,107

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, 2003, the Company had $38,400,000 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. Letters of credit totaling $9,289,000 related to land banking arrangements are recorded on the accompanying balance sheet. The beneficiary may draw upon these letters of credit in the event of a contractual default by the Company relating to each respective obligation. These letters of credit have a stated term of 12 months and have varying maturities throughout 2004, at which time the Company may be required to renew to coincide with the term of the respective arrangement.

The Company also had outstanding performance and surety bonds related principally to its obligations for site improvements at various projects at December 31, 2003. The Company does not believe that draws upon these bonds, if any, will have a material effect on the Company’s financial position, results of operations or cash flows.

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

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

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11 — Unaudited Summarized Quarterly Financial Information

Summarized unaudited quarterly financial information for the years ended December 31, 2003, 2002 and 2001 is as follows (in thousands except per common share amounts):


	Three Months Ended
	March 31, 2003			June 30, 2003			September 30, 2003			December 31, 2003
Sales	$	70,423		$	156,681		$	212,598		$	448,611
Other income, costs and expenses, net		(62,162	)		(133,345	)		(188,197	)		(380,657	)

Income before provision for income taxes		8,261			23,336			24,401			67,954
Provision for income taxes		(3,379	)		(9,544	)		(9,534	)		(29,358	)

Net income	$	4,882		$	13,792		$	14,867		$	38,596

Basic earnings per common share	$	0.50		$	1.40		$	1.52		$	3.95

Diluted earnings per common share	$	0.49		$	1.38		$	1.49		$	3.89


	Three Months Ended
	March 31, 2002			June 30, 2002			September 30, 2002			December 31, 2002
Sales	$	90,149		$	127,417		$	182,998		$	201,846
Other income, costs and expenses, net		(86,359	)		(117,559	)		(164,036	)		(166,675	)

Income before provision for income taxes		3,790			9,858			18,962			35,171
Provision for income taxes		(677	)		(2,826	)		(5,212	)		(9,555	)

Net income	$	3,113		$	7,032		$	13,750		$	25,616

Basic earnings per common share	$	0.30		$	0.68		$	1.34		$	2.63

Diluted earnings per common share	$	0.29		$	0.66		$	1.30		$	2.56


	Three Months Ended
	March 31, 2001			June 30, 2001			September 30, 2001			December 31, 2001
Sales	$	72,455		$	105,222		$	107,629		$	173,750
Other income, costs and expenses, net		(65,662	)		(94,467	)		(94,483	)		(150,919	)

Income before provision for income taxes		6,793			10,755			13,146			22,831
Provision for income taxes		(712	)		(1,137	)		(1,468	)		(2,530	)

Net income	$	6,081		$	9,618		$	11,678		$	20,301

Basic earnings per common share	$	0.58		$	0.91		$	1.10		$	1.91

Diluted earnings per common share	$	0.57		$	0.90		$	1.08		$	1.89

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

William Lyon Homes

We have audited the accompanying combined balance sheet of the Significant Subsidiaries of William Lyon Homes, as defined in Note 1, as of December 31, 2001, and the related combined statements of income, members’ capital and cash flows for the year then ended. 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 audit.

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

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Significant Subsidiaries of William Lyon Homes at December 31, 2001, and the combined results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Irvine, California

February 15, 2002

SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

COMBINED BALANCE SHEET

(in thousands)


	December 31, 2001

ASSETS

Cash	$	3,797
Receivables		4,555
Real estate inventories — Note 2		153,182

	$	161,534


LIABILITIES AND MEMBERS’ CAPITAL

Accounts payable and accrued liabilities	$	12,150
Amount due to member — Note 3		2,407

		14,557
Commitments and contingencies — Note 4

Members’ capital		146,977

	$	161,534

See accompanying notes.

SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

COMBINED STATEMENT OF INCOME

(in thousands)


	Year Ended December 31, 2001

REVENUES
Sales of homes	$	189,349
Interest and other income		91

		189,440

COSTS AND EXPENSES
Cost of homes sold		(151,838	)
Sales, marketing and administrative expenses		(6,138	)

		(157,976	)

NET INCOME	$	31,464

See accompanying notes.

SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

COMBINED STATEMENT OF MEMBERS’ CAPITAL

For the Year Ended December 31, 2001

(in thousands)


	Lyon Members			Common Unaffiliated Members			Total Members’ Capital
BALANCE — December 31, 2000	$	31,767		$	91,240		$	123,007
Contributions		15,555			141,543			157,098
Distributions		(21,510	)		(143,082	)		(164,592	)
Net income		15,009			16,455			31,464

BALANCE — December 31, 2001	$	40,821		$	106,156		$	146,977

See accompanying notes.

SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

COMBINED STATEMENT OF CASH FLOWS

(in thousands)


	Year Ended December 31, 2001

Operating activities
Net income	$	31,464
Adjustments to reconcile net income to net cash provided by operating activities:
Net changes in operating assets and liabilities:
Receivables		(3,600	)
Real estate inventories		(10,993	)
Other assets		250
Accounts payable and accrued liabilities		(2,035	)
Amount due member		(32	)

Net cash provided by operating activities		15,054

Financing activities
Contributions from members		157,098
Distributions to members		(164,592	)
Proceeds from notes payable		2,401
Repayment of notes payable		(12,261	)

Net cash used in financing activities		(17,354	)

Net decrease in cash		(2,300	)
Cash — beginning of year		6,097

Cash — end of year	$	3,797


Supplemental disclosures of cash flow activities
Cash paid for interest	$	156

See accompanying notes.

SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

NOTES TO COMBINED FINANCIAL STATEMENTS

December 31, 2001

1. Organization and Summary of Significant Accounting Policies

Basis of Presentation

The combined financial statements are presented in accordance with Rule 3-09 of SEC Regulation S-X (“Rule 3-09”) and represent the combined financial position, results of operations and cash flows of the subsidiaries which are accounted for using the equity method by William Lyon Homes (“Lyon”) which have a common unaffiliated member with cross-collateralized and cross-defaulted membership interests and are deemed “significant” when aggregated for purposes of Rule 3-09 (collectively, the “Significant Subsidiaries of William Lyon Homes”) as of December 31, 2001 and for the year then ended. The membership interests were not cross-collateralized or cross-defaulted as of December 31, 2003 or 2002 and not aggregated for purposes of Rule 3-09. None of the subsidiaries was deemed “significant” individually and as such, information for such periods are not presented herein.

Organization

The Significant Subsidiaries of William Lyon Homes are all Delaware limited liability companies consisting of second-tier wholly-owned Lyon subsidiaries (the “Lyon Member”) as one member and an unaffiliated common member (the “Unaffiliated Member”) as the other member.

The Significant Subsidiaries of William Lyon Homes were formed for the purpose of acquiring, developing and selling single-family homes in the state of California.

Net income and losses are allocated to the members in accordance with the respective Limited Liability Operating Agreements (the “Agreements”).

The Agreements provide among other things that the Unaffiliated Member is entitled to receive a construction loan equivalent return consisting of a rate that ranges from prime (4.75% as of December 31, 2001) plus 1% to prime plus 4.75% on between 100% and 70% of the Unaffiliated Member’s unrecovered capital which is payable by the companies in all events in accordance with the Agreements. Additionally, the Unaffiliated Member is entitled to receive a preferred return consisting of a rate that ranges from prime plus 1% to prime plus 4.75% on between 0% and 30% of the Unaffiliated Member’s unrecovered capital. The Lyon Member is entitled to receive a preferred return consisting of a rate of interest that ranges from prime plus 1% to prime plus 4.75% on the Lyon Member’s unrecovered capital.

The following is a summary of the Unaffiliated Member’s construction loan equivalent returns and preferred returns and the Lyon Member’s preferred returns through December 31, 2001 (in thousands):


	Unaffiliated Member’s Construction Loan Equivalent Returns			Unaffiliated Member’s Preferred Returns			Lyon Member’s Preferred Returns
Cumulative returns on unrecovered capital	$	19,179		$	17,723		$	8,130
Cumulative return distributions		(9,418	)		(17,013	)		(3,484	)

Remaining undistributed returns as of December 31, 2001	$	9,761		$	710		$	4,646

Cash flow, as defined in the Agreements, is generally distributed first, to the Unaffiliated Member to the extent of its unpaid construction loan equivalent and preferred returns and to the extent required to reduce the

SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)

balance of the Unaffiliated Member’s unrecovered capital account to zero; second to Lyon Member to the extent of its unpaid preferred returns and to the extent required to reduce the balance of the Lyon Member’s unrecovered capital account to zero; thereafter, between 25% to 80% to the Lyon Member and between 20% to 75% to the Unaffiliated Member.

Use of Estimates

The preparation of the Significant Subsidiaries of William Lyon Homes’ combined financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of December 31, 2001 and the revenues and expenses for the year then ended. Actual results could materially differ from these estimates in the near-term.

Real Estate Inventories

Real estate inventories are carried at cost. Project costs include direct and indirect land costs, offsite costs and onsite improvement costs, as well as carrying charges which are capitalized to real estate inventories while under active development. Selling costs are expensed as incurred. 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 are allocated to individual homes within a phase based upon the relative sales value of the homes.

The Significant Subsidiaries of William Lyon Homes account for their real estate inventories in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (“Statement No. 121”). Statement No. 121 requires impairment losses to be recorded on assets to be held and used by the Significant Subsidiaries of William Lyon Homes when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. Under Statement No. 121, when an asset to be held and used by the Significant Subsidiaries of William Lyon Homes is determined to be impaired, the related carrying amount of the asset is adjusted to its estimated fair value.

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

Management has evaluated the projects and determined that no indicators of impairment are present as of December 31, 2001.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”), effective for fiscal years beginning after December 15, 2001. Statement No. 144 supersedes Statement No. 121. The Significant Subsidiaries of William Lyon Homes do not believe Statement 144 will have a significant impact on the earnings or financial position of the Significant Subsidiaries of William Lyon Homes upon adoption.

SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)

Revenue 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. As of December 31, 2001, there are no deferred profits.

Warranty Costs

The Significant Subsidiaries of William Lyon Homes account for warranty costs under the reserve method. As homes are sold, an estimate of warranty costs is charged to the cost of homes sold and an accrual for future warranty costs is established. As actual costs are incurred, the warranty reserve is reduced. If actual warranty costs of the Significant Subsidiaries of William Lyon Homes are in excess of amounts estimated in the Agreements (which generally range from 0.5% to 1.0% of the sales price of homes sold), the Lyon Member will be obligated to complete all warranty work without reimbursement from the Significant Subsidiaries of William Lyon Homes. If actual warranty costs of the Significant Subsidiaries of William Lyon Homes are less than the amounts estimated in the Agreements, the Lyon Member will be paid the difference.

Income Taxes

The Significant Subsidiaries of William Lyon Homes are not taxable entities and the results of operations are included in the tax returns of the members. Accordingly, no provision for income taxes is reflected in the combined financial statements.

2. Real Estate Inventories

Real estate inventories consist of the following as of December 31, 2001 (in thousands):



Land under development	$	122,796
Construction in process and completed homes		30,386

	$	153,182

3. Related Party Transactions

The Agreements provide for builder overhead fees to be paid to the Lyon Member as homes close and a project commitment fee to the Unaffiliated Member, one-third to one-half of which is paid upon the Unaffiliated Member’s initial capital funding with the remaining balance paid in equal monthly installments. Additionally, the Lyon member is reimbursed for costs related to certain construction, customer service and sales office activities.

The following amounts were incurred during the years ended December 31, 2001 (in thousands):



Lyon Member fees	$	5,432
Lyon Member cost reimbursements		4,071
Unaffiliated Member fees		1,745

	$	11,248

As of December 31, 2001, $2,407,000 is due Lyon Member for fees and cost reimbursements.

SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)

4. Commitments and Contingencies

The Significant Subsidiaries of William Lyon Homes’ commitments and contingencies 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 Significant Subsidiaries of William Lyon Homes’ financial position or results of operations.

EXHIBIT INDEX


Exhibit Number		Description
2.1(1)		Certificate of Ownership and Merger.

3.1(2)		Certificate of Incorporation of the Company.

3.3(2)		Bylaws of the Company.

4.1(2)		Specimen certificate of Common Stock.

4.2(3)		Indenture dated as of March 17, 2003 governing the 10³/4% Senior Notes due 2013 among William Lyon Homes, Inc. as Issuer, William Lyon Homes, California Equity Funding, Inc., Carmel Mountain Ranch, Duxford Financial, Inc., HSP Inc., Mountain Gate Ventures, Inc., OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH Ventures—San Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc. and William Lyon Southwest, Inc. as Guarantors and U.S. Bank National Association, as Trustee.

4.3(3)		Form of 10³/4% Senior Notes (included in Exhibit 4.2).

4.4(3)		Form of Notation of Guarantee (included in Exhibit 4.2).

4.5		Indenture dated as of February 6, 2004 governing the 7¹/2% Senior Notes due 2014 among William Lyon Homes, Inc. as Issuer, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc., Lyon Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH Ventures—San Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc. as Guarantors and U.S. Bank National Association, as Trustee.

4.6		Form of 7¹/2% Senior Note (included in Exhibit 4.5).

4.7		Form of Notation of Guarantee (included in Exhibit 4.5).

10.1(4)		Form of Indemnity Agreement, between the Company and the Directors and Officers of the Company.

10.2(2)		Purchase Agreement and Escrow Instructions dated October 7, 1999 among The Presley Companies, Presley Homes, William Lyon Homes, Inc., William Lyon and William H. Lyon.

10.3(4)		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.

10.4(4)		Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5, 1999.

10.5(5)		Loan Agreement dated as of September 25, 2000 between William Lyon Homes, Inc., a California corporation, the “Borrower,” and Residential Funding Corporation, a Delaware corporation, “Lender.”

10.6(6)		First Amendment to Loan Agreement, dated as of July 13, 2001, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.

10.7(6)		Second Amendment to Loan Agreement and to Other Loan Documents, dated as of March 28, 2002, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.
10.8(6)		Third Amendment to Loan Agreement and to Other Loan Documents, dated as of January 10, 2003, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.

10.9(6)		Fourth Amendment to Loan Agreement, dated as of January 23, 2003, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.


Exhibit Number		Description

10.10(5)		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”).

10.11(7)		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.

10.12(6)		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.

10.13(6)		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.

10.14(6)		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.

10.15(8)		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.

10.16		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.

10.17(5)		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.

10.18(9)		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.

10.19(6)		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.

10.20		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.

10.21(5)		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.

10.22(10)		William Lyon Homes 2000 Stock Incentive Plan.

10.23(11)		Form of Stock Option Agreements.
10.24(11)		William Lyon Homes, Inc. 2000 Cash Bonus Plan.

10.25(11)		Standard Industrial/Commercial Single-Tenant Lease — Net Between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.

10.26(12)		William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.

10.27(13)		William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.


Exhibit Number		Description

10.28(6)		The Presley Companies Non-Qualified Retirement Plan for Outside Directors.

10.29		Underwriting Agreement dated as of March 12, 2003 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Carmel Mountain Ranch, Duxford Financial, Inc., HSP Inc., Mountain Gate Ventures, Inc., OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH Ventures—San Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc. and William Lyon Southwest, Inc. as Guarantors and UBS Warburg, LLC and Salomon Smith Barney Inc. as Underwriters.

10.30(8)		Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and first Tennessee Bank as Lender.

10.31(14)		Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.

10.32		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.

10.33		Purchase Agreement dated as of January 28, 2004 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc., Lyon Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH Ventures—San Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc. as Guarantors and UBS Securities LLC, as Initial Purchaser.

10.34		Registration Rights Agreement dated as of February 6, 2004 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc., Lyon Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH Ventures—San Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc. as Guarantors and UBS Securities, LLC, as Initial Purchaser.

12.1		Statement of Ratio of Earnings to Fixed Charges.

21.1		List of Subsidiaries of the Company.

23.1		Consent of Independent Auditors.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed January 5, 2000 and incorporated herein by this reference.

(2)

Previously filed in connection with the Company’s Registration Statement on Form S-4, and amendments thereto, (S.E.C. Registration No. 333-88569) and incorporated herein by this reference.

(3)

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

(4)

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.

(5)

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.

(6)

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.

(7)

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.

(8)

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.

(9)

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.

(10)

Previously filed as an exhibit to the Company’s Registration Statement on Form S-8 (SEC Registration No. 333-50232) filed on November 17, 2000 and incorporated herein by this reference.

(11)

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.

(12)

Previously filed as an exhibit to the Company’s Registration Statement on Form S-8 (SEC Registration No. 333-82448) filed on February 8, 2002 and incorporated herein by this reference.

(13)

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

(14)

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.