William Lyon Homes, 2000 ANNUAL REPORT

Senior Notes

In accordance with the bond indenture agreement governing the Company's Senior Notes which are due on July 1, 2001, if the Company's Consolidated Tangible Net Worth is less than $60,000,000 for two consecutive fiscal quarters, the Company is required to offer to purchase $20,000,000 in principal amount of the Senior Notes. Because the Company's Consolidated Tangible Net Worth had been less than $60,000,000 beginning with the quarter ended June 30, 1997 and continuing through the quarter ended March 31, 2000, the Company would, effective on December 4, 1997, June 4, 1998, December 4, 1998, June 4, 1999, December 4, 1999 and June 4, 2000 have been required to make offers to purchase $20,000,000 of the Senior Notes at par plus accrued interest, less the face amount of Senior Notes acquired by the Company after September 30, 1997, March 31, 1998, September 30, 1998, March 31, 1999, September 30, 1999 and March 31, 2000, respectively. The Company acquired Senior Notes with a face amount equal to or greater than $20,000,000 after September 30, 1997 and prior to December 4, 1997, again after March 31, 1998 and prior to June 4, 1998, again after September 30, 1998 and prior to December 4, 1998, again after March 31, 1999 and prior to June 4, 1999, again after September 30, 1999 and prior to December 4, 1999, and again after March 31, 2000 and prior to June 4, 2000, and therefore was not required to make offers to purchase Senior Notes. As a result of these transactions, the Company recognized as an extraordinary item net gains from retirement of debt totaling $496,000, $4,200,000 and $2,741,000 during the years ended December 31, 2000, 1999 and 1998, after giving effect to income taxes and amortization of related loan costs.

At December 31, 2000, the Company's Consolidated Tangible Net Worth was $94,620,000. As long as the Company's Consolidated Tangible Net Worth is not less than $60,000,000 on the last day of each of any two consecutive fiscal quarters, the Company will not be required to make similar offers to purchase $20,000,000 in principal amount of the Senior Notes.

Because of the Company's obligation to offer to purchase $20,000,000 in principal amount of the Senior Notes every six months so long as the Company's Consolidated Tangible Net Worth was less than $60,000,000, the Company has been restricted in its ability to acquire, hold and develop real estate projects. The Company changed its operating strategy during 1997 to finance certain projects by forming joint ventures with venture partners that would provide a substantial portion of the capital necessary to develop these projects.

The 12 1/2% Senior Notes due July 1, 2001 are obligations of William Lyon Homes (formerly The Presley Companies), a Delaware corporation ("Delaware Lyon"), and are unconditionally guaranteed on a senior basis by William Lyon Homes, Inc. (formerly Presley Homes), a California corporation and a wholly-owned subsidiary of Delaware Lyon. However, William Lyon Homes, Inc. has granted liens on substantially all of its assets as security for its obligations under the Revolving Credit Facilities and other loans. Because the William Lyon Homes, Inc. guarantee is not secured, holders of the Senior Notes are effectively junior to borrowings under the Revolving Credit Facilities with respect to such assets. Delaware Lyon and its consolidated subsidiaries are referred to collectively herein as the "Company." Interest on the Senior Notes is payable on January 1 and July 1 of each year.

Except as set forth in the Indenture Agreement (the "Indenture"), the Senior Notes are redeemable at the option of Delaware Lyon, in whole or in part, at the redemption prices set forth in the Indenture.

The Senior Notes are senior obligations of Delaware Lyon and rank pari passu in right of payment to all existing and future unsecured indebtedness of Delaware Lyon, and senior in right of payment to all future indebtedness of the Company which by its terms is subordinated to the Senior Notes.

Upon certain changes of control as described in the Indenture, Delaware Lyon must offer to repurchase Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase.

The Indenture governing the Senior Notes restricts Delaware Lyon and certain of its subsidiaries with respect to, among other things: (i) the payment of dividends on and redemptions of capital stock, (ii) the incurrence of indebtedness or the issuance of preferred stock, (iii) the creation of certain liens, (iv) consolidations or mergers with or transfer of all or substantially all of its assets and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions.

As of December 31, 2000, the outstanding 12 1/2% Senior Notes with a face value of $77,201,000 have a fair value of approximately $75,300,000 to $77,201,000, based on quotes from industry sources.

Supplemental consolidating financial information of the Company, specifically including information for William Lyon Homes, Inc., is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of William Lyon Homes, Inc. 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.

Revolving Credit Facilities

On September 27, 2000, the Company completed agreements with various lenders to provide financing to replace the Company's prior $100,000,000 Working Capital Facility which was scheduled to mature on May 20, 2001. Under these agreements, project level financing was obtained in facilities provided by these lenders which, collectively, provided for the repayment on September 27, 2000 of all amounts then outstanding under the Company's prior Working Capital Facility.

Three of the facilities described in the preceding paragraph are Revolving Credit Facilities with an aggregate maximum loan commitment of $170,000,000, with various maturities beginning in 2002 through September 2004. The collateral for the loans provided by the Revolving Credit Facilities includes substantially all real estate of the Company (excluding assets which are pledged as collateral for construction notes payable described below and excluding assets of partnerships and limited liability companies). Although the aggregate maximum loan commitment for these loans is $170,000,000, the credit facilities have limitations on the amounts which 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 undrawn availability at December 31, 2000 was $29,238,000 and the principal outstanding under the Revolving Credit Facilities at December 31, 2000 was $66,322,000.

Pursuant to the terms of the Revolving Credit Facilities, outstanding advances bear interest at various rates which approximate the prime rate.

The Revolving Credit Facilities include financial covenants which may limit the amount which may be borrowed thereunder.

Construction Notes Payable

At December 31, 2000, the Company had construction notes payable amounting to $9,592,000 related to various real estate projects. The notes are due as units close or at various dates on or before December 31, 2002 and bear interest at rates of prime plus 0.25% to prime plus 0.50%.

Seller Financing

Another source of financing available to the Company is seller-provided financing for land acquired by the Company. At December 31, 2000, the Company had various notes payable outstanding related to land acquisitions for which seller financing was provided in the amount of $6,632,000.

Revolving Mortgage Warehouse Credit Facility

The Company has a $ 15,000,000 revolving mortgage warehouse credit facility with a bank to fund its mortgage origination operations. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. Borrowings are secured by the related mortgage loans held for sale. At December 31, 2000 the outstanding balance was $7,163,000. The facility, which has a current maturity date of May 31, 2001, also contains a financial covenant requiring that the Company maintains cash and/or marketable securities on the books of account of its subsidiary, Duxford Financial, Inc., a California corporation ("Duxford") in an amount equal to no less than $1,000,000 and a financial covenant requiring the Company to maintain total assets net of total liabilities and net of amounts receivable from the Company and/or affiliates on the books of account of Duxford in an amount equal to no less than $1,000,000.