William Lyon Homes (WLH) 10-Q 2010 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

OR

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

Commission file number 001-31625

WILLIAM LYON HOMES

(Exact name of registrant as specified in its charter)

Delaware	33-0864902
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
4490 Von Karman Avenue
Newport Beach, California	92660
(Address of principal executive offices)	(Zip Code)

(949) 833-3600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

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

Class of Common Stock	Outstanding at May 4, 2010
Common stock, par value $.01	1,000

WILLIAM LYON HOMES

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets — March 31, 2010 (unaudited) and December 31, 2009	4
	Consolidated Statements of Operations — Three Months Ended March 31, 2010  and 2009 (unaudited)	5
	Consolidated Statement of Equity — Three Months Ended March 31, 2010 (unaudited)	6
	Consolidated Statements of Cash Flows — Three Months Ended March  31, 2010 and 2009 (unaudited)	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53
Item 4T.	Not Applicable	53
PART II. OTHER INFORMATION		54
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	55
Item 2.	Not Applicable	55
Item 3.	Not Applicable	55
Item 4.	Not Applicable	55
Item 5.	Not Applicable	55
Item 6.	Exhibits	55
SIGNATURES		56
EXHIBIT INDEX		57

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The principal factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, worsening in general economic conditions either nationally or in regions in which the Company operates, worsening in the markets for residential housing, further decline in real estate values resulting in further impairment of the Company’s real estate assets, volatility in the banking industry and credit markets, terrorism or other hostilities involving the United States, whether an ownership change occurred which could, under certain circumstances, have resulted in the limitation of the Company’s ability to offset prior years’ taxable income with net operating losses, expiration of income tax incentives for homebuyers, changes in home mortgage interest rates, changes in generally accepted accounting principles or interpretations of those principles, changes in prices of homebuilding materials, labor shortages, adverse weather conditions, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements, changes in governmental laws and regulations, whether the Company is able to refinance the outstanding balances of its debt obligations at their maturity, the timing of receipt of regulatory approvals and the opening of projects and the availability and cost of land for future growth. These and other risks and uncertainties are more fully described in Item 1A. “Risk Factors” as contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. 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.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

WILLIAM LYON HOMES

CONSOLIDATED BALANCE SHEETS

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

		March 31, 2010		December 31, 2009
		(unaudited)
ASSETS
Cash and cash equivalents — Note 6		$	151,000	$	117,587
Restricted cash			4,356		4,352
Receivables			16,516		16,294
Income tax refunds receivable — Note 8			—		106,989
Real estate inventories — Notes 2 and 4
Owned			604,693		523,336
Not owned			55,270		55,270
Investments in joint ventures			1,763		1,703
Property & equipment, less accumulated depreciation of $7,345 and $8,195 at March 31, 2010 and December 31, 2009, respectively			1,449		1,673
Deferred loan costs			15,398		14,859
Other assets			8,967		18,036
		$	859,412	$	860,099
LIABILITIES AND EQUITY
Accounts payable		$	9,352	$	11,046
Accrued expenses			49,778		45,294
Liabilities from inventories not owned — Note 2			55,270		55,270
Notes payable — Note 5			68,392		64,227
Senior Secured Term Loan due October 20, 2014 — Note 5			206,000		206,000
7 5/8% Senior Notes due December 15, 2012 — Note 5			67,204		67,204
10 3/4% Senior Notes due April 1, 2013 — Note 5			168,233		168,158
7 1/2% Senior Notes due February 15, 2014 — Note 5			84,701		84,701
			708,930		701,900
Commitments and contingencies — Note 9
Equity:	��
Stockholders’ equity
Common stock, par value $.01 per share; 3,000 shares authorized; 1,000 shares outstanding at March 31,2010 and December 31, 2009, respectively			—		—
Additional paid-in capital			48,867		48,867
Retained earnings			93,249		101,733
			142,116		150,600
Noncontrolling interest — Note 2			8,366		7,599
			150,482		158,199
		$	859,412	$	860,099

See accompanying notes.

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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2010			2009
Operating revenue
Home sales	$	37,862		$	56,548
Lots, land and other sales		—			6,532
Construction services — Note 1		5,301			6,259
		43,163			69,339
Operating costs
Cost of sales — homes		(31,362	)		(50,862	)
Cost of sales — lots, land and other — Note 4		—			(44,262	)
Impairment loss on real estate assets — Note 4		—			(24,171	)
Construction services — Note 1		(3,247	)		(5,769	)
Sales and marketing		(3,587	)		(4,126	)
General and administrative		(6,002	)		(6,030	)
Other		(894	)		(1,860	)
		(45,092	)		(137,080	)
Equity in income (loss) of unconsolidated joint ventures		412			(1,723	)
Operating loss		(1,517	)		(69,464	)
Interest expense, net of amounts capitalized		(7,094	)		(8,712	)
Gain on retirement of debt		—			8,930
Other income, net		92			53
Loss before benefit from income taxes		(8,519	)		(69,193	)
Benefit from income taxes — Note 8		65			22
Consolidated net loss		(8,454	)		(69,171	)
Less: Net (income) loss — noncontrolling interest		(30	)		170
Net loss attributable to William Lyon Homes	$	(8,484	)	$	(69,001	)

See accompanying notes.

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WILLIAM LYON HOMES

CONSOLIDATED STATEMENT OF EQUITY

Three Months Ended March 31, 2010

(in thousands)

(unaudited)

	Common Stock			Additional Paid-In Capital		Retained Earnings			Non- Controlling Interest		Total
	Shares	Amount
Balance — December 31, 2009	1	$	—	$	48,867	$	101,733		$	7,599	$	158,199
Net (loss) income	—		—		—		(8,484	)		30		(8,454	)
Cash contributions from members of consolidated entities, net	—		—		—		—			737		737
Balance — March 31, 2010	1	$	—	$	48,867	$	93,249		$	8,366	$	150,482

See accompanying notes.

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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2010			2009
Operating activities
Consolidated net loss	$	(8,454	)	$	(69,171	)
Adjustments to reconcile consolidated net loss to net cash provided by operating activities:
Depreciation and amortization		135			514
Impairment loss on real estate assets		—			24,171
Equity in (income) loss of unconsolidated joint ventures		(412	)		1,723
Loss on disposition of fixed asset		110			—
Gain on retirement of debt		—			(8,930	)
Benefit from income taxes		(65	)		(22	)
Net changes in operating assets and liabilities:
Restricted cash		(4	)		(25	)
Receivables		(222	)		18,779
Income tax refunds receivable		107,054			41,614
Real estate inventories — owned		(70,630	)		58,595
Deferred loan costs		833			508
Other assets		9,069			(1,739	)
Accounts payable		(1,694	)		(6,263	)
Accrued expenses		4,484			2,336
Net cash provided by operating activities		40,204			62,090
Investing activities
Investments in and advances to unconsolidated joint ventures		(40	)		(194	)
Distributions of income from unconsolidated joint ventures		392			—
Purchases of property and equipment, net		(21	)		—
Net cash provided by (used in) investing activities		331			(194	)
Financing activities
Proceeds from borrowing on notes payable, net		4,590			29,602
Principal payments on notes payable		(12,449	)		(66,070	)
Net cash paid for repurchase of Senior Notes		—			(2,187	)
Noncontrolling interest contributions (distributions), net		737			(3,766	)
Net cash used in financing activities		(7,122	)		(42,421	)
Net increase in cash and cash equivalents		33,413			19,475
Cash and cash equivalents — beginning of period		117,587			67,017
Cash and cash equivalents — end of period		151,000		$	86,492
Supplemental disclosures of non-cash items:
Decrease to net real estate inventories not owned and liabilities from inventories not owned	$	—		$	9,309
Decrease to net real estate inventories not owned and noncontrolling interests	$	—		$	27,684
Increase in real estate inventories owned and seller notes payable	$	10,652		$	—

See accompanying notes

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 — Basis of Presentation and Significant Accounting Policies

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

The unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The interim consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a presentation in accordance with U.S. generally accepted accounting principles have been included. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of March 31, 2010 and December 31, 2009 and revenues and expenses for the periods presented. Accordingly, actual results could differ from those estimates. The significant accounting policies using estimates include real estate inventories and cost of sales, impairment of real estate inventories, warranty reserves, loss contingencies, sales and profit recognition, and accounting for variable interest entities. The current economic environment increases the uncertainty inherent in these estimates and assumptions.

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

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

The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets. The Company conducts its homebuilding operations through four reportable operating segments: Southern California, Northern California, Arizona and Nevada. See Note 3 for further discussion of the Company’s homebuilding segments.

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The Company accounts for construction management agreements using thePercentage of Completion Method in accordance with FASB ASC Topic 605 Revenue Recognition (“ASC 605”). Under ASC 605, the Company records revenues and expenses as work on a contract progresses, and based on the percentage of costs incurred to date compared to the total estimated costs of the contract. Based on the provisions of ASC 605, the Company has recorded construction services revenues and expenses of $5.3 million and $3.2 million, respectively, for the three months ended March 31, 2010 and $6.3 million and $5.8 million, respectively for the three months ended March 31, 2009, in the accompanying consolidated statement of operations.

The Company entered into construction management agreements to build, sell and market homes in 3 separate communities. For such services, the Company will receive fees (generally 5 percent of the sales price, as defined) and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved. In addition, in October 2008, the Company entered into a contract to build apartment units for a related party at a contract price of $13.5 million, which includes the Company’s contractor fee of $0.5 million. During the period ended March 31, 2009, the Company recorded construction services revenue of $4.4 million and expenses of $4.2 million for this project. This project was completed in 2009, therefore there is no comparable amount in 2010. For more information on this agreement see Note 7.

The Company evaluates performance and allocates resources primarily based on the operating loss of individual homebuilding projects. Operating loss is defined by the Company as operating revenue less operating costs plus equity in income (loss) of unconsolidated joint ventures. Accordingly, operating loss excludes certain expenses included in the determination of net loss.

Restricted cash consists of $4.4 million in deposits made by the Company to a bank account held with the lenders of two of the Company’s revolving credit facilities as collateral for the use of letters of credit provided by such lenders. Under the terms of the senior secured term loan disclosed in Note 5, all of the Company’s standby letters of credit are secured by cash.

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

	March 31,
	2010			2009
Warranty liability, beginning of period	$	21,365		$	26,394
Warranty provision during period		356			552
Warranty payments during period		(1,582	)		(1,405	)
Warranty charges related to pre-existing warranties during period		580			112
Warranty liability, end of period	$	20,719		$	25,653

The Company follows the guidance in ASC Topic 855Subsequent Events (“ASC 855”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance sheet date during which management of a reporting entity evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 became effective for interim periods ending after June 15, 2009.

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06,Fair Value Measurements and Disclosures (Topic 820),which requires additional disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in ASC 820-10. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption in January 2010 of the additional disclosure portion of this guidance did not have a material effect on the Company’s consolidated financial statements, but resulted in additional disclosures. The Company does not expect the adoption of the later portion of this guidance to have a material effect on its consolidated financial statements.

In June 2009 and February 2010, the FASB updated certain provisions of ASC 810. These provisions amend the consolidation guidance applicable to variable interest entities and the definition of a variable interest entity, and require enhanced disclosures to provide more information about an enterprise’s involvement in a variable interest entity. ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. These provisions under ASC 810 were effective for the Company on January 1, 2010. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements, but resulted in additional disclosures, which are reflected in Note 2 below.

Note 2 — Variable Interest Entities and Noncontrolling Interests

The FASB issued guidance now codified as ASC 810,Consolidation, which addresses the consolidation of variable interest entities (“VIEs”). Under this guidance, 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. The primary beneficiary is an enterprise that has the power to direct the activities of the VIE that most significantly impacts its economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE.

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.

Based on the provisions of this guidance, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements or (iii) enters into arrangements with a financial partner for the formation of joint ventures which engage in homebuilding and land development activities, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. The Company may be deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected losses if they occur. For each VIE created, in order to determine if the Company is the primary beneficiary, the Company considers various factors including, but not limited to, voting rights, risks, involvement in the operations of the VIE, ability to make major decisions, contractual obligations including distributions of income and loss, and computations of expected losses and residual returns based on the probability of future cash flow. If the Company has been 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.

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Joint Ventures

Certain joint ventures have been determined to be VIEs under ASC 810 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these VIEs have been consolidated with the Company’s financial statements. The Company did not recognize any gain or loss on initial consolidation of the VIE since the joint ventures were previously accounted for on an unconsolidated basis using the equity method of accounting.

The joint ventures which have been determined to be VIEs are each engaged in homebuilding and land development activities. Certain of these joint ventures have not obtained construction financing from outside lenders, but are financing their activities through equity contributions from each of the joint venture partners. Creditors of these VIEs have no recourse against the general credit of the Company. The liabilities of each VIE are restricted to VIE assets. Additionally, the creditors of the Company have no access to the assets of the VIEs. Income allocations and cash distributions to the Company are based on predetermined formulas between the Company and their 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.

As of March 31, 2010, the assets and liabilities of the consolidated VIEs totaled $14.2 million and $2.0 million, respectively. In addition, the Company’s interest in the consolidated VIEs is $3.8 million and the member’s interest in the consolidated VIEs is $8.4 million, which is reported as noncontrolling interest on the accompanying consolidated balance sheet.

As of December 31, 2009, the assets and liabilities of the consolidated VIEs totaled $13.5 million and $2.1 million, respectively. In addition, the Company’s interest in the consolidated VIEs was $3.7 million and the member’s interest in the consolidated VIEs was $7.6 million, which is reported as noncontrolling interest on the accompanying consolidated balance sheet.

Option Deposits

During the three months ended March 31, 2009, the Company abandoned its option deposit in three of its consolidated land banking arrangements in which land purchase commitments were required. Management of the Company determined that the remaining purchase price of the lots in the arrangements were priced above market values at that time. In two of these arrangements, the Company reduced real estate inventories-not owned and the related noncontrolling interest $27.7 million for the remaining purchase price of the lots. In the other arrangement, the Company reduced real estate inventories-not owned and liabilities from inventories-not owned $9.3 million for the remaining purchase price of 51 lots. However, during the three month period ended December 31, 2009 the Company re-evaluated the purchase price of the 51 lots under option, and after the write-off of the $9.3 million deposit, the residual value became economically viable and the Company purchased the lots.

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 3 — Segment Information

The Company operates one principal homebuilding business. In accordance with FASB ASC Topic 280,Segment Reporting(“ASC 280”), the Company has determined that each of its operating divisions is an operating segment. Corporate is a non-operating segment.

The Company’s homebuilding operations design, construct and sell a wide range of homes designed to meet the specific needs of each of it markets. In accordance with the aggregation criteria defined by ASC 280, the Company’s homebuilding operating segments have been grouped into four reportable segments: Southern California, consisting of an operating division with operations in Orange, Los Angeles, Riverside, San Bernardino and San Diego counties; Northern California, consisting of an operating division with operations in Contra Costa, Sacramento, San Joaquin, Santa Clara, Solano and Placer counties; Arizona, consisting of operations in the Phoenix, Arizona metropolitan area; and Nevada, consisting of operations in the Las Vegas, Nevada metropolitan area.

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

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

	Three Months Ended March 31,
	2010			2009
	(in thousands)
Homebuilding revenues:
Southern California	$	21,381		$	28,383
Northern California		7,947			11,858
Arizona		4,099			7,230
Nevada		4,435			9,077
Total homebuilding revenues	$	37,862		$	56,548
	Three Months Ended March 31,
	2010			2009
	(in thousands)
(Loss) income before benefit from income taxes:
Southern California	$	(4,664	)	$	(17,232	)
Northern California		711			(36,907	)
Arizona		(1,023	)		(1,440	)
Nevada		(1,010	)		(20,296	)
Corporate		(2,533	)		6,682
Total homebuilding (loss) before benefit from income taxes	$	(8,519	)	$	(69,193	)

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

	Three Months Ended March 31,
	2010		2009
	(in thousands)
Inventory impairments
Southern California	$	—	$	450
Northern California		—		6,144
Nevada		—		17,577
Total homebuilding	$	—	$	24,171

Homebuilding pretax income (loss) includes the following pretax income (loss) on sales of lots, land and other recorded in the following segments (in thousands) for the three months ended March 31, 2009. The Company did not record a sale of lots or land during the three months ended March 31, 2010:

	Three Months Ended March 31, 2009
	Southern California			Northern California			Arizona			Nevada		Total
(Loss) Gain on sales of lots, land and other
Operating revenue	$	—		$	—		$	6,532		$	—	$	6,532
Operating costs		(9,316	)		(28,568	)		(6,378	)		—		(44,262	)
(Loss) Gain on sales of lots, land and other	$	(9,316	)	$	(28,568	)	$	154		$	—	$	(37,730	)

	March 31, 2010		December 31, 2009
	(in thousands)
Homebuilding assets:
Southern California	$	358,539	$	324,728
Northern California		68,009		38,383
Arizona		181,563		172,518
Nevada		64,666		60,764
Corporate (1)		186,635		263,706
Total homebuilding assets	$	859,412	$	860,099

(1) Comprised primarily of cash, receivables and other assets.

- 13 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 4 — Real Estate Inventories

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

	March 31, 2010		December  31, 2009
Inventories owned: (1)
Deposits	$	35,217	$	33,582
Land and land under development		348,748		334,877
Homes completed and under construction		163,259		100,795
Model homes		57,469		54,082
Total	$	604,693	$	523,336
Inventories not owned: (2)
Other land options contracts - land banking arrangement	$	55,270	$	55,270

(1) The Company temporarily suspended development, sales and marketing activities at certain of its projects from 2006 to 2008 which were in various stages of development. Management of the Company determined that this strategy was necessary under the market conditions at that time and would allow the Company to market the properties at some future time when market conditions may have improved. As market conditions continue to improve into 2010, management of the Company has released for sale or restarted development certain of these held projects. At March 31, 2010, the Company has incurred costs related to the remaining suspended projects of $111.3 million, of which $46.0 million is included in Land and land under development, $41.2 million is included in Homes completed and under construction and $24.0 million is included in Model homes. At December 31, 2009, the Company has incurred costs related to these certain projects of $261.9 million, of which $165.3 million is included in Land and land under development, $61.3 million is included in Homes completed and under construction and $35.3 million is included in model homes.

(2) Includes the consolidation of a land banking arrangement recorded as a product financing arrangement (See Note 9). Amounts are net of deposits.

The Company accounts for its real estate inventories (including land, construction in progress, completed inventory, including models, and inventories not owned) under FASB ASC 360Property, Plant, & Equipment(“ASC 360”).

ASC 360 requires impairment losses to be recorded on real estate inventories when indicators of impairment are present and the undiscounted cash flows estimated to be generated by real estate inventories are less than the carrying amount of such assets. Indicators of impairment include a decrease in demand for housing due to softening market conditions, competitive pricing pressures which reduce the average sales prices of homes including an increase in sales incentives offered to buyers, slowing sales absorption rates, decreases in home values in the markets in which the Company operates, significant decreases in gross margins and a decrease in project cash flows for a particular project.

For land, construction in progress, completed inventory, including model homes, and inventories not owned, the Company estimates expected cash flows at the project level by maintaining current budgets using recent historical information and current market assumptions. The Company updates project budgets and cash flows of each real estate project on a quarterly basis to determine whether the estimated remaining undiscounted future cash flows of the project are more or less than the carrying amount (net book value) of the asset. If the undiscounted cash flows are more than the net book value of the project, then there is no impairment. If the undiscounted cash flows are less than the net book value of the asset, then the asset is deemed to be impaired and is written-down to its fair value.

-14-

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties (i.e., other than a forced liquidation sale). Management determines the estimated fair value of each project by determining the present value of estimated future cash flows at discount rates that are commensurate with the risk of each project. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain because it requires estimates of future revenues and costs, as well as future events and conditions. Estimates of revenues and costs are supported by the Company’s budgeting process, and are based on recent sales in backlog, pricing required to get the desired pace of sales, pricing of competitive projects, incentives offered by competitors and current estimates of costs of development and construction.

Under the provisions of ASC 360, the Company is required to make certain assumptions to estimate undiscounted future cash flows of a project, which include: (i) estimated sales prices, including sales incentives, (ii) anticipated sales absorption rates and sales volume, (iii) project costs incurred to date and the estimated future costs of the project based on the project budget, (iv) the carrying costs related to the time a project is actively selling until it closes the final unit in the project, and (v) alternative strategies including selling the land to a third party or temporarily suspending development of the project. Each project has different assumptions and is based on management’s assessment of the current market conditions that exist in each project location. The Company’s assumptions include moderate absorption increases in certain projects beginning in 2010. In addition, the Company has assumed some moderate reduction in sales incentives in certain projects in certain markets.

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

Management assesses land deposits for impairment when estimated land values are deemed to be less than the agreed upon contract price. The Company considers changes in market conditions, the timing of land purchases, the ability to renegotiate with land sellers the terms of the land option contracts in question, the availability and best use of capital, and other factors. The Company records abandoned land deposits and related pre-acquisition costs in cost of sales-lots, land and other in the consolidated statements of operations in the period that it is abandoned. During the three months ended March 31, 2009, the Company recorded $37.9 million related to abandoned land deposits and related pre-acquisition costs.

The following table summarizes inventory impairments recorded during the three months ended March 31, 2010 and 2009:

	Three Months Ended March 31,
	2010		2009
	(Dollars in thousands)
Inventory impairments related to:
Land under development and homes completed and under construction	$	—	$	10,818
Land held for sale or sold		—		13,353
Total inventory impairments	$	—	$	24,171
Number of projects impaired during the period		—		11
Number of projects assessed for impairment during the period		64		69

These charges were included in impairment loss on real estate assets in the accompanying consolidated statements of operations (See Note 3 for a detail of impairment by segment). The impairment charges recorded during the period noted above stemmed from lower home prices which were driven by increased incentives and discounts resulting from weakened demand experienced from 2006 through 2009. The Company may incur impairment on real estate inventories in the future, if the homebuilding industry experiences deteriorating market condition described above.

- 15 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 5 — Senior Notes and Secured Indebtedness

As of March 31, 2010, the Company had the following outstanding Senior Secured Term Loan due 2014, 7 ⁵/8% Senior Notes due 2012, 10 ³/4% Senior Notes due 2013 and 7 ¹/2% Senior Notes due 2014 (in thousands):

Senior Secured Term Loan due October 20, 2014	$	206,000
7 5/8% Senior Notes due December 15, 2012		67,204
10 3/4% Senior Notes due April 1, 2013		168,233
7 1/2% Senior Notes due February 15, 2014		84,701
	$	526,138

Senior Secured Term Loan

William Lyon Homes, Inc., a California corporation and wholly-owned subsidiary of William Lyon Homes (“California Lyon”) is a party to a Senior Secured Term Loan Agreement (the “Term Loan Agreement”), dated October 20, 2009, with COLFIN WLH Funding, LLC, as Administrative Agent (“Admin Agent”), COLFIN WLH Funding, LLC, as Initial Lender and Lead Arranger (“COLFIN”) and the other Lenders who may become assignees of COLFIN (collectively, with COLFIN, the “Lenders”).

The Term Loan Agreement provides for a first lien secured loan of up to $206.0 million (the “Term Loan”), secured by substantially all of the assets of California Lyon, the Company, as defined in the agreement, (excluding stock in California Lyon) and certain wholly-owned subsidiaries. The Term Loan is guaranteed by the Company.

California Lyon received the first installment of $131.0 million, which funded in October 2009, and its second installment of $75.0 million, which funded in December 2009. Under the Term Loan Agreement, California Lyon will be restricted from future borrowings, and, if necessary, will be required to repay existing borrowings, in order to maintain required loan to value ratios such that: (i) the aggregate amount of outstanding loans under the Term Loan Agreement may not exceed 60% of the aggregate value of the properties securing the facility, with valuation based on the lower of appraised value (if any) and discounted net present value of the cash flows, and (ii) the aggregate amount of secured debt may not exceed 60% of the aggregate value of the properties owned by California Lyon and its subsidiaries, with valuation based on the lower of appraised value (if any) and discounted net present value of the cash flows and the second installment. California Lyon is currently in compliance with the above requirements following each drawdown. The net proceeds to the Company from the first installment of the term loan, after giving effect to attorney fees, loan fees and other miscellaneous costs associated with the loan transaction, and repayment of the revolving credit facilities and purchase of the senior notes was $34.6 million. A portion of the $75.0 million proceeds from the second installment were used to fund the Company’s opportunistic land acquisitions in 2010.

The Term Loan bears interest at a rate of 14.0%. However, California Lyon has also agreed that, upon any repayment of any portion of the principal amount under the Term Loan (whether or not at maturity), California Lyon will also pay an exit fee equal to the difference (if positive) between (x) the interest that would have been accrued and been then payable on the repaid portion if the interest rate under the Loan Agreement were 15.625% and (y) the internal rate of return realized by the Lenders on such repaid portion, taking into account all cash amounts actually received by the Lenders with respect thereto other than any make whole payments described below.

Based on the current outstanding balance of the Term Loan, interest payments are $28.8 million annually.

On any voluntary prepayment of any portion of the Term Loan, California Lyon will be required to make a “make whole payment” equal to an amount, if positive, of the present value of all future payments of interest which would become due with respect to such prepaid amount from the date of prepayment thereof through and including the maturity date, discounted at a rate of 14%.

The Term Loan will mature on October 20, 2014; however, in the event that any portion of the outstanding principal amounts (the “Repaid Senior Note Principal”) of the Senior Notes is repaid (whether or not at maturity), the Lenders may elect to require California Lyon to repay that portion of the outstanding Loan as bears the same ratio to the entire Loan outstanding as the Repaid Senior Note Principal bears to the entire amounts then outstanding under all of the indentures. All or a portion of the Term Loan may also be accelerated upon certain other events described in the Loan Agreement. The lenders waived the requirement for such repayment in connection with the Senior Note repurchases described above.

- 16 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The Term Loan Agreement requires the Company to maintain a Minimum Tangible Net Worth (as defined therein) of at least $75.0 million. The Term Loan Agreement also contains covenants that limit the ability of California Lyon and the Company to, among other things: (i) incur liens; (ii) incur additional indebtedness; (iii) transfer or dispose of assets; (iv) merge, consolidate or alter their line of business; (v) guarantee obligations; (vi) engage in affiliated party transactions; (vii) declare or pay dividends or make other distributions or repurchase stock; (viii) make advances, loans or investments; (ix) repurchase debt (including under the Senior Note indentures) and (x) engage in change of control transactions.

The Term loan Agreement contains customary events of default, including, without limitation, failure to pay when due amounts in respect of the loan or otherwise under the Term Loan Agreement; failure to comply with certain agreements or covenants contained in the Term Loan Agreement for a period of 10 days (or, in some cases, 30 days) after the administrative agent’s notice of such non-compliance; acceleration of more than $10.0 million of certain other indebtedness; and certain insolvency and bankruptcy events.

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

• A tangible net worth, as defined, of $75.0 million;

• A minimum borrowing base such that the indebtedness under the Term Loan does not exceed 60% of the Borrowing Base, with the “Borrowing Base” being calculated as (1) the discounted cash flows of each project securing the loan (collateral value), plus (2) restricted cash and (3) escrow proceeds receivable, as defined;

• Total secured indebtedness (including the indebtedness under the Term Loan and under all other Construction Notes payable) less than or equal to the Maximum Permitted Secured Indebtedness under the Term Loan Agreement (which is generally 60% of the total secured debt collateral value as calculated under the Term Loan Agreement, which value generally does not include cash assets); and

• Excluded Assets of no more than $20.0 million, with “Excluded Assets” being defined generally as the sum total of certain deposit accounts, payroll accounts, unrestricted cash accounts, and the Company’s total investment in joint ventures.

The Company’s covenant compliance for the Term Loan at March 31, 2010 is detailed in the table set forth below:

Covenant and Other Requirements	Actual at March 31, 2010			Covenant Requirements  at March 31, 2010
Tangible Net Worth (1)	$	135.1		³$75.0
Borrowing Base		37.9	%	£60%
Maximum Permitted Secured Indebtedness		59.2	%	£60%
Excluded Assets	$	13.4		£$20.0

(1) Tangible Net Worth was calculated based on the stated amount of equity less intangible assets of $15.4 million as of March 31, 2010.

As of and for the period ending March 31, 2010, the Company is in compliance with the covenants under this loan.

- 17 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

7  ⁵/8% Senior Notes

On November 22, 2004, California Lyon issued $150.0 million principal amount of 7 ⁵/8% Senior Notes due 2012 (the “7 ⁵/8% Senior Notes”), resulting in net proceeds to the Company of approximately $148.5 million. Of the initial $150.0 million, $67.2 million in aggregate principal amount remained as of December 31, 2009 and the date hereof.

Interest on the 7 ⁵/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount of the 7 ⁵/8% Senior Notes, the Company’s semi-annual interest payments are $2.6 million.

The 7 ⁵/8% Senior Notes are redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

10  ³/4% Senior Notes

On March 17, 2003 California Lyon issued $250.0 million of 10 ³/4% Senior Notes due 2013 (the “10 ³/4% Senior Notes”) 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. Of the initial $250.0 million, $168.2 million aggregate principal amount remained outstanding as of December 31, 2009 and the date hereof.

Interest on the 10 ³/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding principal amount of the 10 ³/4% Senior Notes, the Company’s semi-annual interest payments $9.0 million.

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

7  ¹/2% Senior Notes

On February 6, 2004, California Lyon issued $150.0 million principal amount of 7 ¹/2% Senior Notes due 2014 (the “7 ¹/2% Senior Notes”), resulting in net proceeds to the Company of approximately $147.6 million. Of the initial $150.0 million, $84.7 million aggregate principal amount remained outstanding as of December 31, 2009 and the date hereof.

Interest on the 7 ¹/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal amount of 7 ¹/2% Senior Notes the Company’s semi-annual interest payments are $3.2 million.

The 7 ¹/2% Senior Notes are redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

- 18 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

General Terms of the Senior Notes

The 7 ⁵/8% Senior Notes, the 10 ³/4% Senior Notes and the 7 ¹/2% Senior Notes (collectively, the “Senior Notes”) are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (“Delaware Lyon”), which is the parent company of California Lyon, and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The Senior Notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the Senior Notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness.

Upon a change of control as described in the respective Indentures governing the Senior Notes (the “Senior Notes Indentures”), California Lyon will be required to offer to purchase the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.

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

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

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

As of and for the period ending March 31, 2010, the Company was in compliance with these covenants.

The foregoing summary is not a complete description of the Senior Notes and is qualified in its entirety by reference to the Senior Notes Indentures.

Supplemental consolidating financial information of the Company, specifically including information for California Lyon, the issuer of the Senior Notes, and Delaware Lyon and the guarantor subsidiaries is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of California Lyon and the guarantor subsidiaries are not provided, as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of assets held and the operations of the combined groups.

Construction Notes Payable

At March 31, 2010, the Company had construction notes payable amounting to $57.7 million. The construction notes have various maturity dates through 2017 and bear interest at rates based on either LIBOR or prime plus 1.0% at March 31, 2010. Interest is calculated on the average daily balance and is paid following the end of each month. As discussed further in Note 10, in May 2010, the Company repaid $28.1 million of outstanding principal on one of its construction notes payable, after which the total remaining outstanding amount is $29.6 million.

- 19 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Seller Financing

At March 31, 2010, the Company had $10.7 million of notes payable outstanding related to land acquisitions for which seller financing was provided, which is included in notes payable in the accompanying consolidated balance sheet. The seller financing notes are due at various dates through 2012 and bear interest at 7.0%. Interest is calculated on the principal balance outstanding and is accrued and paid to the seller at the time each residential unit is closed. In addition, the Company makes an annual interest payment on the outstanding principal balance related to any remaining residential units.

- 20 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING BALANCE SHEET

March 31, 2010

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	148,796		$	128		$	2,076	$	—		$	151,000
Restricted cash		—		4,356			—			—		—			4,356
Receivables		—		12,743			319			3,454		—			16,516
Income tax refund receivable		—		—			—			—		—			—
Real estate inventories
Owned		—		596,068			—			8,625		—			604,693
Not owned		—		55,270			—			—		—			55,270
Investments in and advances to unconsolidated joint ventures		—		1,763			—			—		—			1,763
Property and equipment, net		—		1,423			26			—		—			1,449
Deferred loan costs		—		15,398			—			—		—			15,398
Other assets		—		8,345			211			411		—			8,967
Investments in subsidiaries		142,116		3,993			—			—		(146,109	)		—
Intercompany receivables		—		—			204,597			10		(204,607	)		—
	$	142,116	$	848,155		$	205,281		$	14,576	$	(350,716	)	$	859,412
LIABILITIES AND EQUITY
Accounts payable	$	—	$	7,366		$	(32	)	$	2,018	$	—		$	9,352
Accrued expenses		—		49,411			284			83		—			49,778
Liabilities from inventories not owned		—		55,270			—			—		—			55,270
Notes payable		—		68,392			—			—		—			68,392
Senior Secured Term Loan		—		206,000			—			—		—			206,000
7 5/8% Senior Notes		—		67,204			—			—		—			67,204
10 3/4% Senior Notes		—		168,233			—			—		—			168,233
7 1/2% Senior Notes		—		84,701			—			—		—			84,701
Intercompany payables		—		204,490			—			117		(204,607	)		—
Total liabilities		—		911,067			252			2,218		(204,607	)		708,930
Equity
Noncontrolling interest		—		—			—			—		8,366			8,366
Stockholders’ equity (deficit)		142,116		(62,912	)		205,029			12,358		(154,475	)		142,116
	$	142,116	$	848,155		$	205,281		$	14,576	$	(350,716	)	$	859,412

- 21 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING BALANCE SHEET

December 31, 2009

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	115,247		$	111	$	2,229	$	—		$	117,587
Restricted cash		—		4,352			—		—		—			4,352
Receivables		—		12,599			320		3,375		—			16,294
Income tax refunds receivable		—		106,989			—		—		—			106,989
Real estate inventories
Owned		—		515,102			—		8,234		—			523,336
Not owned		—		55,270			—		—		—			55,270
Investments in and advances to unconsolidated joint ventures		—		1,703			—		—		—			1,703
Property and equipment, net		—		1,624			49		—		—			1,673
Deferred loan costs		—		14,859			—		—		—			14,859
Other assets		—		17,819			217		—		—			18,036
Investments in subsidiaries		150,600		3,978			—		—		(154,578	)		—
Intercompany receivables		—		—			204,917		—		(204,917	)		—
	$	150,600	$	849,542		$	205,614	$	13,838	$	(359,495	)	$	860,099
LIABILITIES AND EQUITY
Accounts payable	$	—	$	8,914		$	42	$	2,090	$	—		$	11,046
Accrued expenses		—		44,814			397		83		—			45,294
Liabilities from inventories not owned		—		55,270			—		—		—			55,270
Notes payable		—		64,227			—		—		—			64,227
Senior Secured Term Loan		—		206,000			—		—		—			206,000
7 5/8% Senior Notes		—		67,204			—		—		—			67,204
10 3/4% Senior Notes		—		168,158			—		—		—			168,158
7 1/2% Senior Notes		—		84,701			—		—		—			84,701
Intercompany payables		—		204,829			—		88		(204,917	)		—
Total liabilities		—		904,117			439		2,261		(204,917	)		701,900
Equity
Noncontrolling interest		—		—			—		—		7,599			7,599
Stockholders’ equity (deficit)		150,600		(54,575	)		205,175		11,577		(162,177	)		150,600
	$	150,600	$	849,542		$	205,614	$	13,838	$	(359,495	)	$	860,099

- 22 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2010

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	33,763		$	4,099		$	—		$	—		$	37,862
Construction services		—			5,301			—			—			—			5,301
		—			39,064			4,099			—			—			43,163
Operating costs
Cost of sales		—			(27,510	)		(3,880	)		28			—			(31,362	)
Construction services		—			(3,247	)		—			—			—			(3,247	)
Sales and marketing		—			(3,336	)		(229	)		(22	)		—			(3,587	)
General and administrative		—			(5,919	)		(74	)		(9	)		—			(6,002	)
Other		—			(894	)		—			—			—			(894	)
		—			(40,906	)		(4,183	)		(3	)		—			(45,092	)
Equity in income of unconsolidated joint ventures		—			412			—			—			—			412
Loss from subsidiaries		(8,484	)		(62	)		(2	)		—			8,548			—
Operating loss		(8,484	)		(1,492	)		(86	)		(3	)		8,548			(1,517	)
Interest expense, net of amounts capitalized		—			(7,094	)		—			—			—			(7,094	)
Other income (loss), net		—			99			(60	)		53			—			92
(Loss) income before benefit from income taxes		(8,484	)		(8,487	)		(146	)		50			8,548			(8,519	)
Benefit from income taxes		—			65			—			—			—			65
Consolidated net (loss) income		(8,484	)		(8,422	)		(146	)		50			8,548			(8,454	)
Less: Net income—noncontrolling interest		—			—			—			—			(30	)		(30	)
Net (loss) income attributable to William Lyon Homes	$	(8,484	)	$	(8,422	)	$	(146	)	$	50		$	8,518		$	(8,484	)

- 23 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2009

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	53,990		$	7,230		$	1,860		$	—		$	63,080
Construction services		—			6,259			—			—			—			6,259
Management fees		—			90			—			—			(90	)		—
		—			60,339			7,230			1,860			(90	)		69,339
Operating costs
Cost of sales		—			(86,943	)		(6,818	)		(1,453	)		90			(95,124	)
Loss on impairment of real estate assets		—			(24,171	)		—			—			—			(24,171	)
Construction services		—			(5,769	)		—			—			—			(5,769	)
Sales and marketing		—			(3,429	)		(492	)		(205	)		—			(4,126	)
General and administrative		—			(5,912	)		(96	)		(22	)		—			(6,030	)
Other		—			(1,860	)		—			—			—			(1,860	)
		—			(128,084	)		(7,406	)		(1,680	)		90			(137,080	)
Equity in loss of unconsolidated joint ventures		—			(1,723	)		—			—			—			(1,723	)
(Loss) income from subsidiaries		(69,001	)		(324	)		—			—			69,325			—
Operating (loss) income		(69,001	)		(69,792	)		(176	)		180			69,325			(69,464	)
Interest expense, net of amounts capitalized		—			(8,712	)		—			—			—			(8,712	)
Gain on retirement of debt					8,930			—			—			—			8,930
Other income (loss), net		—			423			(252	)		(118	)		—			53
Loss before benefit for income taxes		(69,001	)		(69,151	)		(428	)		62			69,325			(69,193	)
Benefit from income taxes		—			22			—			—			—			22
Consolidated net (loss) income		(69,001	)		(69,129	)		(428	)		62			69,325			(69,171	)
Less: Net loss – noncontrolling interest		—			—			—			—			170			170
Net (loss) income attributable to William Lyon Homes	$	(69,001	)	$	(69,129	)	$	(428	)	$	62		$	69,495		$	(69,001	)

- 24 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2010

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities
Net (loss) income	$	(8,484	)	$	(8,422	)	$	(146	)	$	50		$	8,548		$	(8,454	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			96			39			—			—			135
Equity in income of unconsolidated joint ventures		—			(412	)		—			—			—			(412	)
Loss on disposition of fixed asset		—			—			110			—			—			110
Equity in earnings of subsidiaries		8,484			62			2			—			(8,548	)		—
Benefit from income taxes		—			(65	)		—			—			—			(65	)
Net changes in operating assets and liabilities:
Restricted cash		—			(4	)		—			—			—			(4	)
Receivables		—			(144	)		1			(79	)		—			(222	)
Income tax refund receivable		—			107,054			—			—			—			107,054
Real estate inventories—owned		—			(70,239	)		—			(391	)		—			(70,630	)
Deferred loan costs		—			833			—			—			—			833
Other assets		—			9,474			6			(411	)		—			9,069
Accounts payable		—			(1,548	)		(74	)		(72	)		—			(1,694	)
Accrued expenses		—			4,597			(113	)		—			—			4,484
Net cash provided (used in) by operating activities		—			41,282			(175	)		(903	)		—			40,204
Investing activities
Net change in investment in and advances to unconsolidated joint ventures		—			352			—			—			—			352
Purchases of property and equipment		—			105			(126	)		—			—			(21	)
Investments in subsidiaries		—			(77	)		(2	)		—			79			—
Advances to affiliates		—			—			—			—			—			—
Net cash provided by (used in) investing activities		—			380			(128	)		—			79			331
Financing activities
Proceeds from borrowings on notes payable		—			4,590			—			—			—			4,590
Principal payments on notes payable		—			(12,449	)		—			—			—			(12,449	)
Noncontrolling interest contributions, net		—			—			—			—			326			326
Advances to affiliates		—			—			—			731			(731	)		—
Intercompany receivables/payables		—			(254	)		320			19			326			411
Net cash (used in) provided by financing activities		—			(8,113	)		320			750			(79	)		(7,122	)
Net increase (decrease) in cash and cash equivalents		—			33,549			17			(153	)		—			33,413
Cash and cash equivalents at beginning of period		—			115,247			111			2,229			—			117,587
Cash and cash equivalents at end of period	$	—		$	148,796		$	128		$	2,076		$	—		$	151,000

- 25 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2009

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities
Net loss	$	(69,001	)	$	(69,129	)	$	(428	)	$	62		$	69,325		$	(69,171	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			169			345			—			—			514
Impairment loss on real estate assets		—			24,171			—			—			—			24,171
Equity in loss of unconsolidated joint ventures		—			1,723			—			—			—			1,723
Gain on retirement of debt		—			(8,930	)		—			—			—			(8,930	)
Equity in earnings (loss) of subsidiaries		69,001			324			—			—			(69,325	)		—
Benefit from income taxes		—			(22	)		—			—			—			(22	)
Net changes in operating assets and liabilities:
Restricted cash		—			(25	)		—			—			—			(25	)
Receivables		—			5,832			6,673			6,274			—			18,779
Income tax refund receivable		—			41,614			—			—			—			41,614
Real estate inventories—owned		—			57,012			—			1,583			—			58,595
Deferred loan costs		—			508			—			—			—			508
Other assets		—			(1,773	)		34			—			—			(1,739	)
Accounts payable		—			(2,345	)		82			(4,000	)		—			(6,263	)
Accrued expenses		—			2,751			(415	)		—			—			2,336
Net cash provided by (used in) operating activities		—			51,880			6,291			3,919			—			62,090
Investing activities
Net change in investment in and advances to unconsolidated joint ventures		—			(194	)		—			—			—			(194	)
Purchases of property and equipment		—			21			(21	)		—			—			—
Investments in subsidiaries		—			1,482			—			—			(1,482	)		—
Advances to affiliates		—			(26,616	)		—			—			26,616			—
Net cash provided by (used in) investing activities		—			(25,307	)		(21	)		—			25,134			(194	)
Financing activities
Proceeds from borrowings on notes payable		—			18,250			11,352			—			—			29,602
Principal payments on notes payable		—			(48,449	)		(17,621	)		—			—			(66,070	)
Net cash paid for retirement of senior notes		—			(2,187	)		—			—			—			(2,187	)
Noncontrolling interest contributions, net		—			—			—			—			(3,766	)		(3,766	)
Advances to affiliates		—			30,020			(1,968	)		(368	)		(27,684	)		—
Intercompany receivables/payables		—			—			(512	)		(5,804	)		6,316			—
Net cash (used in) provided by financing activities		—			(2,366	)		(8,749	)		(6,172	)		(25,134	)		(42,421	)
Net increase (decrease) in cash and cash equivalents		—			24,207			(2,479	)		(2,253	)		—			19,475
Cash and cash equivalents at beginning of period		—			59,285			2,898			4,834			—			67,017
Cash and cash equivalents at end of period	$	—		$	83,492		$	419		$	2,581		$	—		$	86,492

- 26 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 6 — Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820,Fair Value Measurements and Disclosures (“ASC 820”), the Company is required to disclose the estimated fair value of financial instruments. As of March 31, 2010, the Company used the following assumptions to estimate the fair value of each type of financial instrument for which it is practicable to estimate:

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

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

• Seller Financing — The carrying amount is a reasonable estimate of fair value. The notes originated during the three months ended March 31, 2010.

• Senior Secured Term Loan — The carrying amount is a reasonable estimate of fair value. The loan originated in October 2009 and due to the short time frame since the loan was funded, management of the Company believes a new loan of this type would have similar pricing, using level 3 inputs.

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

The estimated fair values of financial instruments are as follows (in thousands):

	March 31, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	151,000	$	151,000	$	117,587	$	117,587
Financial liabilities:
Construction notes payable	$	57,740	$	52,855	$	64,227	$	42,149
Seller financing	$	10,652	$	10,652	$	—	$	—
Senior Secured Term Loan due 2014	$	206,000	$	206,000	$	206,000	$	206,000
7 5/8% Senior Notes due 2012	$	67,204	$	55,500	$	67,204	$	42,943
10 3/4% Senior Notes due 2013	$	168,233	$	156,751	$	168,158	$	120,233
7 1/2% Senior Notes due 2014	$	84,701	$	61,408	$	84,701	$	59,291

Effective January 1, 2008, the Company implemented the requirements of ASC 820 for the Company’s financial assets and liabilities. ASC 820 establishes a framework for measuring fair value, expands disclosures regarding fair value measurements, and defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires the Company to maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. The three levels of the hierarchy are as follows:

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

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

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

- 27 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Non-financial Instruments

The Company adopted ASC 820 in 2008, however, disclosure of certain non-financial portions of the statement were deferred until the 2009 reporting period. These non-financial homebuilding assets are those assets for which the Company recorded valuation adjustments during the first quarter of 2009 on a nonrecurring basis. See Note 4, “Real Estate Inventories” for further discussion of the valuation of real estate inventories and within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following table summarizes the fair-value measurements of its non-financial assets for the three months ended March 31, 2009:

	Fair Value Hierarchy	Fair  Value at Measurement Date(1)		Impairment Charges for the  Three Months Ended March 31, 2009(1)
	(in thousands)
Land under development and homes completed and under construction(2)	Level 3	$	12,241	$	10,818
Inventory held-for-sale(3)	Level 3		7,822		13,353

(1) Amounts represent the aggregate fair values for communities where the Company recognized noncash inventory impairment charges during the period, as of March 31, 2009, the date that the fair value measurements were made. The carrying value for these communities may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.

(2) In accordance with ASC 360, inventory under this caption with a carrying value of $23.1 million was written down to its fair value of $12.3 million at March 31, 2009, resulting in total impairments of $10.8 million for the period. There were no impairments for the three months ended March 31, 2010.

(3) In accordance with ASC 360, inventory under this caption with a carrying value of $21.2 million was written down to its fair value of $7.8 million at March 31, 2009, resulting in total impairments of $13.4 million. There were no impairments for the three months ended March 31, 2010.

Fair values determined to be level 3 include the use of internal assumptions, estimates and financial forecasts. Valuations of these items are therefore sensitive to the assumptions used. Fair values represent the Company’s best estimates as of the measurement date, based on conditions existing and information available at the date of issuance of the March 31, 2009 consolidated financial statements. Subsequent changes in conditions or information available may change assumptions and estimates, as outlined in more detail within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Fair values determined using Level 3 inputs, were primarily based on the estimated future cash flows discounted for inherent risk associated with each asset. These discounted cash flows are impacted by: the risk-free rate of return; expected risk premium based on estimated land development; construction and delivery timelines; market risk from potential future price erosion; cost uncertainty due to development or construction cost increases; and other risks specific to the asset or conditions in the market in which the asset is located at the time the assessment is made. These factors are specific to each community and may vary among communities.

Note 7 — Related Party Transactions

On December 27, 2007, the Company sold certain land in San Diego County, California for $12.0 million in cash to a limited liability company owned indirectly by Frank T. Suryan, Jr. as Trustee for the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly-owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and a trust whose sole beneficiary is William H. Lyon, President and Chief Operating Officer of the Company. The Company received a report from a third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all independent members of the Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Company’s financial statements) was approximately $18.7 million resulting in a loss on the transaction of $6.7 million. In October 2008, in a separately negotiated transaction from the sale of the land to the Company owned indirectly by the Suryan Family Trust (the “Owner”), the Company was contracted by and for the Owner to build apartment units for a contract price of $13.5 million, which includes the Company’s contractor fee of $0.5 million. As described in Note 1, the Company accounts for this transaction based on the percentage of completion method, and recorded construction services revenue of $4.4 million and construction services costs of $4.2 million during the three months ended March 31, 2009, respectively. This project was completed during 2009 and therefore there are no comparable amounts during the three months ended March 31, 2010.

- 28 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

For the three months ended March 31, 2010 and 2009, the Company incurred reimbursable on-site labor costs of $62,000 and $69,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon of which $52,000 and $58,000, respectively, was due to the Company at March 31, 2010 and December 31, 2009, respectively, for reimbursable on-site labor costs.

The Company earned fees of $155,000 during the period ended March 31, 2010 with no comparable amount in 2009, related to a Human Resources and Payroll Services contract between the Company and an entity controlled by General William Lyon and William H. Lyon of which $256,000 was due to the Company at March 31, 2010.

For each of the three month periods ended March 31, 2010 and 2009, the Company incurred charges of $197,000 related to rent on the Company’s corporate office, from a trust of which William H. Lyon is the sole beneficiary.

On September 3, 2009, Presley CMR, Inc., a California corporation (“Presley CMR”) and wholly owned subsidiary of California Lyon, entered into an Aircraft Purchase and Sale Agreement (“PSA”) with an affiliate of General William Lyon to sell the aircraft described above. The PSA provides for an aggregate purchase price for the Aircraft of $8.3 million, (which value was the appraised fair market value of the Aircraft), which consists of: (i) cash in the amount of $2.1 million to be paid at closing and (ii) a promissory note from the affiliate in the amount of $6.2 million, which is included in receivables in the accompanying consolidated balance sheet at March 31, 2010 and December 31, 2009. The closing of this sale occurred on September 9, 2009. The Company recorded a loss on the sale of the Aircraft totaling $3.0 million in 2009.

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

- 29 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Affiliate on the aircraft are charged to the Company at the Affiliate’s published rates for maintenance, inspections and repairs in effect at the time such work is completed. The total compensation paid to the Affiliate under the agreement amounted to $230,000, for the three months ended March 31, 2009.

Effective July 1, 2006, General William Lyon entered into a time sharing agreement (“the Agreement”) with the Company pertaining to his personal use of the aircraft. The agreement calls for General Lyon to reimburse the company for all costs incurred by the Company during his personal flights plus a surcharge on fuel consumption of two times the cost. Pursuant to the agreement, the Company had earned revenue of $14,000 for charter services provided to William Lyon personally, during the three months ended March 31, 2009.

Note 8 — Income Taxes

Effective January 1, 2008, the Company and its shareholders made a revocation of the “S” corporation election. As a result of this revocation, the Company was taxed as a “C” corporation. The shareholders will not be able to elect “S” corporation status until 2013. The revocation of the “S” corporation election allowed taxable losses generated in 2008 to be carried back to the 2006 “C” corporation year. As a result of the change in tax status, the Company recorded a deferred tax asset and related income tax benefit of $41.6 million as of January 1, 2008. In January 2009, the Company received the tax refund for the amount of the deferred tax asset.

On November 6, 2009, an expanded carry back election was signed into law as part of the Worker, Homeownership, and Business Assistance Act of 2009. As a result of this legislation, the Company elected to carry back for five years the taxable losses generated in 2009. As of December 31, 2009, the Company recorded an income tax refund receivable and the related income tax benefit of $101.8 million. As of March 31, 2010, the Company received the tax refund.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) which is now codified as FASB ASC Topic 740,Income Taxes (“ASC 740”). ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be considered “more-likely-than-not” to be sustained upon examination by taxing authorities. The Company has taken positions in certain taxing jurisdictions for which it is more likely than not that previously unrecognized tax benefits will be recognized. In addition, the Company has elected to recognize interest and penalties related to uncertain tax positions in the income tax provision. In accordance with the provisions of ASC 740, effective January 1, 2007, the Company recorded an income tax refund receivable of $5.7 million and recognized the associated tax benefit as an increase in additional paid-in capital. In connection therewith, the Company recorded interest receivable of $1.1 million and recognized the associated tax benefit as an increase in retained earnings. Since recording the income tax refund, the Company has received refunds and accrued additional interest, leaving approximately $5.2 million of income tax refunds and interest receivable on the consolidated balance sheet at December 31, 2009. As of March 31, 2010, the Company received the balance of the refunds and interest, totaling $5.2 million. At December 31, 2009 and March 31, 2010, the Company has no unrecognized tax benefits.

In compliance with the Company’s election to recognize interest income (expense) and penalties related to uncertain tax positions in the income tax provision, $75,000 of interest income related to the income tax refund received, recorded under the provisions of ASC 740, is included in the benefit from income taxes of $65,000 for the three months ended March 31, 2010.

As of January 1, 2010, the Company has gross federal and state net operating loss carry forwards totaling approximately $39.2 million and $329.8 million respectively. Federal net operating loss carry forwards will expire after 2028; state net operating loss carry forwards begin to expire after 2013.

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

- 30 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The Company has federal alternative minimum tax credit carry forward of $2.7 million which do not expire.

In addition, as of January 1, 2010, the Company has unused built-in losses of $19.4 million which are available to offset future income and expire between 2010 and 2011. The utilization of these losses is limited to $3.9 million of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2010 and 2011. The maximum cumulative unused built-in loss that may be carried forward through 2010 and 2011 is $11.5 million and $7.9 million, respectively. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited under certain circumstances.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal income tax examination for calendar tax years ending 2006 through 2009. The Company is subject to various state income tax examinations for calendar tax years ending 2005 through 2009.

Note 9 — Commitments and Contingencies

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

Litigation Arising from General Lyon’s Tender Offer

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

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

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

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

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

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

On April 23, 2006, the Delaware Chancery Court conditionally certified a class in the Consolidated Delaware Action. The parties to the Consolidated Delaware Action agreed to a Stipulation of Settlement, and on August 9, 2006, the Delaware Chancery Court certified a class in the Consolidated Delaware Action, approved the settlement, and dismissed the Consolidated Delaware Action with prejudice as to all defendants and the class. On February 16, 2007, plaintiff in the California Action appealed the fee award in the Consolidated Delaware Action to the Supreme Court of the State of Delaware. Thereafter, the Delaware Supreme Court remanded the matter to the Chancery Court for further proceedings and, on April 2, 2009, the Chancery Court issued its decision on remand denying the fee award sought by the California plaintiff. On April 30, 2009, the California plaintiff again appealed the fee award to the Delaware Supreme Court. On January 14, 2010, the Delaware Supreme court affirmed the order of the Chancery Court.

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.

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, now codified as FASB ASC Topic 970-470,Real Estate – Debt, and recorded as liabilities in the Company’s consolidated balance sheet, if the amounts are fixed and determinable.

As of March 31, 2010, the Company had$4.4 million of outstanding irrevocable standby letters of credit to guarantee the Company’s financial obligations under certain land banking arrangements and other contractual arrangements in the normal course of business. The standby letters of credit were secured by cash as reflected by restricted cash on the accompanying consolidated 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 generally have a stated term of 12 months and have varying maturities throughout 2010, at which time the Company may be required to renew to coincide with the term of the respective arrangement.

The Company also had outstanding performance and surety bonds of $102.4 million at March 31, 2010 related principally to its obligations for site improvements at various projects. The Company does not believe that draws upon these bonds, if any, will have a material effect on the Company’s financial position, results of operations or cash flows.

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

See Note 5 for additional information relating to the Company’s guarantee arrangements.

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Land Banking Agreements

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 corporate financing sources and limiting the Company’s risk, the Company transfers its right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. ASC 810 requires the consolidation of the assets, liabilities and operations of the Company’s land banking arrangements that are VIEs, of which none existed at March 31, 2010 and December 31, 2009.

The Company participates in one land banking arrangement, which is not a VIE in accordance with ASC 810, but is consolidated in accordance with FASB ASC Topic 470,Debt(“ASC 470”). Under the provisions of ASC 470, the Company has determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangement, and therefore, must record the remaining purchase price of the land which is included in real estate inventories not owned and liabilities from inventories not owned in the accompanying balance sheet.

Consolidated real estate inventories-owned include land deposits under option agreements or land banking arrangements of $55.3 million at March 31, 2010 and December 31, 2009, respectively.

Summary information with respect to the Company’s consolidated land banking arrangements is as follows as of March 31, 2010 (dollars in thousands):

Total number of land banking projects		1
Total number of lots		625
Total purchase price	$	161,465
Balance of lots still under option and not purchased:
Number of lots		236
Purchase price	$	55,270
Forfeited deposits if lots are not purchased	$	25,234

Note 10 — Subsequent Events

In May 2010, the Company repaid $28.1 million of principal outstanding on a construction loan with an outstanding balance of $38.1 million, which was due to mature in July 2010. In conjunction with the repayment, the Company and the lending institution entered into a new loan agreement for the remaining outstanding principal of $10.0 million. The new loan pays interest monthly at a fixed rate of 12.5%, with quarterly principal payments of $0.5 million beginning in October 2010. The interest rate decreases to 10.0% when the principal balance is reduced to $7.5 million.

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

WILLIAM LYON HOMES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion of results of operations and financial condition should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1, as well as the information presented in the Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

Beginning in 2006 and continuing into the beginning of 2009, the homebuilding industry experienced decreased demand for housing and declining sales prices. These conditions were the result of an erosion of homebuyer confidence which was driven by increases in unemployment, limited availability of mortgage financing due to stress in the mortgage and credit markets, price instability, increasing foreclosures and increased levels of housing inventory in the market. In the latter part of 2009 and into 2010, in certain of the Company’s markets, the Company has experienced steadying sales absorption rates, a decrease in sales incentives and an increase in base pricing, while homebuilding costs continue to decrease. In Southern California, net new home orders per average sales location increased to 14.4 during the period ended March 31, 2010 from 7.7 for the same period in 2009. In addition, the Company’s cancellation rate decreased to 19% in the 2010 period compared to 27% in the 2009 period, particularly impacted by Southern California of 17% in the 2010 period compared to 23% in the 2009 period and Northern California of 11% in the 2010 period compared to 31% in the 2009 period. In addition, the Company is experiencing increased homebuilding gross margin percentages of 17.2% in the 2010 period compared to 10.1% in the 2009 period particularly impacted by Southern California gross margins of 16.4% in the 2010 period compared to 11.6% in the 2009 period, Northern California gross margins of 26.5% in the 2010 period compared to 8.3% in the 2009 period and Nevada of 14.5% in the 2010 period compared to 8.4% in the 2009 period.

Comparisons of Three Months Ended March 31, 2010 to March 31, 2009

On a consolidated basis, the number of net new home orders for the three months ended March 31, 2010 decreased slightly to 181 homes from 182 homes for the three months ended March 31, 2009. The number of homes closed on a consolidated basis for the three months ended March 31, 2010, decreased 30% to 132 homes from 188 homes for the three months ended March 31, 2009. On a consolidated basis, the backlog of homes sold but not closed as of March 31, 2010 was 243, up 4% from 234 homes a year earlier.

Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed on a consolidated basis as of March 31, 2010 was $79.7 million, up 8% from $74.1 million as of March 31, 2009. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 19% during the three months ended March 31, 2010 compared to 27% during the three months ended March 31, 2009. The inventory of completed and unsold homes was 50 homes as of March 31, 2010, down from 69 homes at March 31, 2009.

The average number of sales locations during the quarter ended March 31, 2010 was 19, down 34% from 29 in the comparable period a year ago.

The Company’s number of new home orders per average sales location overall increased 52% to 9.5 for the three months ended March 31, 2010 as compared to 6.3 for the three months ended March 31, 2009. This was attributable to Southern California new home orders per average sales location which increased from 7.7 per location at March 31, 2009 to 14.4 per location at March 31, 2010, and Northern California, which increased from 6.6 per location at March 31, 2009 to 8.3 per location at March 31, 2010. These are partially offset by Arizona for which the number of new home orders per average sales location decreased slightly from 7.5 per location at March 31, 2009 to 7.3 per location at March 31, 2010 and by Nevada which held constant at 3.8 new home orders per average sales location.

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	Three Months Ended March 31,				Increase (Decrease)
	2010		2009		Amount		%
Number of Net New Home Orders
Southern California	115		85		30		35	%
Northern California	25		33		(8	)	(24	)%
Arizona	22		30		(8	)	(27	)%
Nevada	19		34		(15	)	(44	)%
Total	181		182		(1	)	(1	)%
Cancellation Rate	19	%	27	%	(8	)%

Net new home orders in the Northern California, Arizona and Nevada segments decreased period over period, offset by a 35% increase in the Southern California segment. Many of the Company’s Southern California markets have seen a reduction in sales incentives, an increase in base pricing and an increase in weekly absorption.

Cancellation rates decreased to 19% at March 31, 2010 from 27% at March 31, 2009. The change includes a decrease in the cancellation rate in Southern California to 17% in the 2010 period from 23% in the 2009 period, a decrease in Northern California to 11% in the 2010 period from 31% in the 2009 period, an increase in Arizona to 31% in the 2010 period from 21% in the 2009 period and a decrease in Nevada to 21% in the 2010 period from 36% in the 2009 period.

	Three Months Ended March 31,		Increase (Decrease)
	2010	2009	Amount		%
Average Number of Sales Locations
Southern California	8	11	(3	)	(27	)%
Northern California	3	5	(2	)	(40	)%
Arizona	3	4	(1	)	(25	)%
Nevada	5	9	(4	)	(44	)%
Total	19	29	(10	)	(34	)%

The average number of sales locations decreased in each homebuilding segment during the 2010 period primarily due to (i) final deliveries in a project, (ii) temporarily suspending the development of certain projects throughout the Company and (iii) management’s efforts to manage cash outflows by limiting the purchase of new lots in 2008 and 2009. However, in the last half of 2009 and into 2010, the Company has purchased additional lots for new projects.

	March 31,		Increase (Decrease)
	2010	2009	Amount		%
Backlog(units)
Southern California	203	143	60		42	%
Northern California	12	44	(32	)	(73	)%
Arizona	18	27	(9	)	(33	)%
Nevada	10	20	(10	)	(50	)%
Total	243	234	9		4	%

The Company’s backlog at March 31, 2010 increased 4% from levels at March 31, 2009, primarily resulting from an increase in demand for new homes in Southern California. The increase in backlog during this period reflects a decrease in total net new order activity of 1% to 181 homes in the 2010 period from 182 homes in the 2009 period which includes the increase in net new order activity of 35% related to Southern California. The increase in backlog also reflects the decrease in the number of homes closed by 30% to 132 in the 2010 period from 188 in the 2009 period.

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	March 31,				Increase (Decrease)
	2010		2009		Amount			%
	(dollars in thousands)
Backlog(dollars)
Southern California	$	70,955	$	52,495	$	18,460		35	%
Northern California		3,892		12,364		(8,472	)	(69	)%
Arizona		2,677		4,669		(1,992	)	(43	)%
Nevada		2,193		4,594		(2,401	)	(52	)%
Total	$	79,717	$	74,122	$	5,595		8	%

The dollar amount of backlog of homes sold but not closed as of March 31, 2010 was $79.7 million, up 8% from $74.1 million as of March 31, 2009. The increase in backlog during this period reflects a decrease in net new order activity of 1% to 181 homes in the 2010 period compared to 182 homes in the 2009 period which includes the increase in net new order activity of 35% related to Southern California. In addition, the dollar amount of backlog is affected by recent average sales prices for new home orders. The Company experienced an increase of 4% in the average sales price of homes in backlog to $328,100 as of March 31, 2010 compared to $316,800 as of March 31, 2009. The increase in the dollar amount of backlog of homes sold but not closed as described above generally results in an increase in operating revenues in the subsequent period as compared to the previous period.

In Southern California, the dollar amount of backlog increased 35% to $71.0 million as of March 31, 2010 from $52.5 million as of March 31, 2009, which is attributable to an increase of 35% in net new home orders in Southern California to 115 homes in the 2010 period compared to 85 homes in the 2009 period, and a decrease of 5% in the average sales price of homes in backlog to $349,500 as of March 31, 2010 compared to $367,100 as of March 31, 2009. In Southern California, the cancellation rate decreased to 17% for the period ended March 31, 2010 from 23% for the period ended March 31, 2009.

In Northern California, the dollar amount of backlog decreased 69% to $3.9 million as of March 31, 2010 from $12.4 million as of March 31, 2009, which is attributable to a decrease of 24% in net new home orders in Northern California to 25 homes in the 2010 period compared to 33 homes in the 2009 period. This was partially offset by an increase of 15% in the average sales price of homes in backlog to $324,300 as of March 31, 2010 compared to $281,000 as of March 31, 2009. In Northern California the cancellation rate decreased to 11% for 2010 period from 31% for the 2009 period.

In Arizona, the dollar amount of backlog decreased 43% to $2.7 million as of March 31, 2010 from $4.7 million as of March 31, 2009, which is attributable to a decrease of 27% in net new home orders in Arizona to 22 homes in the 2010 period compared to 30 homes in the 2009 period, and a decrease of 14% in the average sales price of homes in backlog to $148,700 as of March 31, 2010 compared to $172,900 as of March 31, 2009. In Arizona, the cancellation rate increased to 31% for the 2010 period from 21% for the 2009 period.

In Nevada, the dollar amount of backlog decreased 52% to $2.2 million as of March 31, 2010 from $4.6 million as of March 31, 2009, which is attributable to a decrease of 44% in net new home orders in Nevada to 19 homes in the 2010 period compared to 34 homes in the 2009 period, and a decrease of 5% in the average sales price of homes in backlog to $219,300 as of March 31, 2010 compared to $229,700 as of March 31, 2009. In Nevada, the cancellation rate decreased to 21% for the period from 36% for the 2009 period.

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	Three Months Ended March 31,		Increase (Decrease)
	2010	2009	Amount		%
Number of Homes Closed
Southern California	70	76	(6	)	(8	)%
Northern California	19	37	(18	)	(49	)%
Arizona	21	37	(16	)	(43	)%
Nevada	22	38	(16	)	(42	)%
Total	132	188	(56	)	(30	)%

During the three months ended March 31, 2010, the number of homes closed decreased 30%. The number of homes closed during the period was impacted by the uncertain economic conditions and continued down-turn in the homebuilding industry.

	Three Months Ended March 31,				Increase (Decrease)
	2010		2009		Amount			%
	(dollars in thousands)
Home Sales Revenue
Southern California	$	21,381	$	28,383	$	(7,002	)	(25	)%
Northern California		7,947		11,858		(3,911	)	(33	)%
Arizona		4,099		7,230		(3,131	)	(43	)%
Nevada		4,435		9,077		(4,642	)	(51	)%
Total	$	37,862	$	56,548	$	(18,686	)	(33	)%

The decrease in homebuilding revenue of 33% to $37.9 million during the first quarter 2010 from $56.5 million during the first quarter 2009 is primarily attributable to (i) a decrease in the number of homes closed to 132 during the 2010 period from 188 in the 2009 period, (ii) the decrease in the average sales price of homes closed to $286,800 during the 2010 period from $300,800 during the 2009 period, and (iii) the decrease in the number of homes closed with a sale price in excess of $500,000 from 19 in the 2009 period to zero in the 2010 period.

	Three Months Ended March 31,				Increase (Decrease)
	2010		2009		Amount			%
Average Sales Price of Homes Closed
Southern California	$	305,400	$	373,500	$	(68,100	)	(18	)%
Northern California		418,300		320,500		97,800		31	%
Arizona		195,200		195,400		(200	)	0	%
Nevada		201,600		238,900		(37,300	)	(16	)%
Total	$	286,800	$	300,800	$	(14,000	)	(5	)%

The average sales price of homes closed during the 2010 period decreased in 3 segments due primarily to a change in product mix. The number of homes closed with a sale price in excess of $500,000 was 19 in the 2009 period with no comparable amount in the 2010 period.

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	Three Months Ended March 31,				Increase (Decrease)
	2010		2009
Homebuilding Gross Margin Percentage
Southern California	16.4	%	11.6	%	41	%
Northern California	26.5	%	8.3	%	218	%
Arizona	5.8	%	8.7	%	(33	)%
Nevada	14.5	%	8.4	%	72	%
Total	17.2	%	10.1	%	71	%

Homebuilding gross margin percentage during the 2010 period increased to 17.2% from 10.1% during the 2009 period which is primarily attributable to a 12% decrease in the average cost per home closed of $237,600 in the 2010 period from $270,500 in the 2009 period which is partially offset by a decrease in the average sales price of homes closed of 5% from $300,800 in the 2009 period to $286,800 in the 2010 period. This is due to declining material prices as well as the effect of previous impairments.

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

Lots, Land and Other

Land sales revenue was $6.5 million during the 2009 period with no comparable amount during the 2010 period, related to an opportunistic land sale in Arizona. During the three months ended March 31, 2009 the Company recorded gross loss related to land sales of $(37.7) million. Included in this amount are the write-off of land deposits and pre-acquisition costs of $37.9 million related to future projects which the Company has concluded are not currently economically viable. The write-off of land deposits and pre-acquisition costs of $37.9 million recorded during the three months ended March 31, 2009 are attributable to projects held in three of its land banking arrangements. Management of the Company determined that the remaining purchase prices of the lots in the arrangements were priced above current market values.

Construction Services Revenue

Construction services revenue, which is all recorded in Southern California, was $5.3 million in the 2010 period compared with $6.3 million in the 2009 period. See Note 1 to “Notes to Consolidated Financial Statements” for further discussion.

	Three Months Ended March 31,
	2010		2009
Impairment Loss on Real Estate Assets
Land under development and homes completed and under construction
Southern California	$	—	$	450
Northern California		—		6,144
Nevada		—		4,224
Total		—	$	10,818
Land Held-for-Sale or Sold
Nevada	$	—	$	13,353
Total		—		13,353
Total Impairment Loss on Real Estate Assets	$	—	$	24,171

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The Company evaluates homebuilding assets for impairment when indicators of impairments are present. Given the current market conditions in the homebuilding industry since 2008, the Company evaluates all homebuilding assets for impairments on a quarterly basis. Indicators of potential impairment include, but are not limited to, a decrease in housing market values and sales absorption rates.

The impairment loss related to land under development and homes completed and under construction incurred during the three months ended March 31, 2009, primarily resulted from decreases in home sales prices, due to increased sales incentives, and the continued deterioration in the homebuilding industry. During the 2009 period, the Company used discount rates in the estimated discounted cash flow assessments of a range of 17% to 23%. These rates were due to risks and uncertainties in the homebuilding industry due to the on-going deterioration in the market value of land and homes as well as homebuyer confidence in the economy.

The impairment loss related to land held-for-sale or sold in the 2009 periods primarily resulted from significant decreases in the fair market values of new homes being sold, as this has caused corresponding declines in the fair market values of land held by the Company. Also contributing to these impairments was the decision that the best economic value to the Company of these lots was to sell them in their current condition as opposed to holding the lots and eventually building and selling homes. The Company continues to evaluate land values to determine whether to hold for development or to sell at current prices, which may lead to additional impairment on real estate assets.

	Three Months Ended March 31,				Increase (Decrease)
	2010		2009		Amount			%
Sales and Marketing Expenses
Homebuilding
Southern California	$	2,331	$	1,838	$	493		27	%
Northern California		595		1,037		(442	)	(43	)%
Arizona		228		505		(277	)	(55	)%
Nevada		433		746		(313	)	(42	)%
Total	$	3,587	$	4,126	$	(539	)	(13	)%

Sales and marketing expense decreased $0.5 million to $3.6 million in the 2010 period from $4.1 million in the 2009 period, primarily attributable to a decrease in direct selling expense of $1.2 million from $2.5 million in the 2009 period to $1.3 million in the 2010 period, which includes (i) a decrease in sales commissions of $0.7 million due to the reduction in units closed and the reduction in revenue from home sales due to decreased average selling price and (ii) commissions paid to outside brokers which decreased $0.5 million in 2010 as compared to 2009. In addition, advertising expenses increased $0.7 million in 2010 compared to 2009 due to opening of new model complexes and the re-introduction of projects where development was temporarily suspended.

	Three Months Ended March 31,				Increase (Decrease)
	2010		2009		Amount			%
General and Administrative Expenses
Homebuilding
Southern California	$	1,289	$	1,569	$	(280	)	(18	)%
Northern California		536		704		(168	)	(24	)%
Arizona		588		641		(53	)	(8	)%
Nevada		475		677		(202	)	(30	)%
Corporate		3,114		2,439		675		28	%
Total	$	6,002	$	6,030	$	(28	)	0	%

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General and administrative expenses remained constant at $6.0 million in the 2010 and 2009 period

Other Items

Other operating costs decreased to $0.9 million in the 2010 period compared to $1.9 million in the 2009 period. The decrease is due to two projects which were previously suspended being brought back to market in the first quarter of 2010 and therefore more property taxes were capitalized in 2010.

Equity in income (loss) of unconsolidated joint ventures increased to income of $0.4 million in the 2010 period from a loss of ($1.7) million in the 2009 period, primarily due to income in the William Lyon Mortgage joint venture.

During the period ending March 31, 2009, the Company purchased, in privately negotiated transactions, $11.3 million principal amount of its outstanding Senior Notes at a cost of $2.2 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $8.9 million.

During the period ending, March 31, 2010, the Company incurred interest related to its outstanding debt of $15.8 million and capitalized $8.7 million, resulting in net interest expense of $7.1 million. During the period ending March 31, 2009, the Company incurred interest related to its outstanding debt of $12.6 million and capitalized $3.9 million, resulting in net interest expense of $8.7 million.

The noncontrolling interest of consolidated entities increased to non-controlling interest in income of $0.03 million in the 2010 period compared to noncontrolling interest in loss of $0.2 million in the 2009 period,

	Three Months Ended March 31,						Increase (Decrease)
	2010			2009			Amount			%
(Loss) Income Before Benefit from Income Taxes
Homebuilding
Southern California	$	(4,664	)	$	(17,232	)	$	12,568		73	%
Northern California		711			(36,907	)		37,618		102	%
Arizona		(1,023	)		(1,440	)		417		29	%
Nevada		(1,010	)		(20,296	)		19,286		95	%
Corporate		(2,533	)		6,682			(9,215	)	(138	)%
Total	$	(8,519	)	$	(69,193	)	$	60,674		88	%

In Southern California, loss before benefit from income taxes decreased 73% to $(4.7) million in the 2010 period from $(17.2) million in the 2009 period. The decrease in loss is primarily attributable to (i) an increase in homebuilding gross margins to 16.4% in the 2010 period from 11.6% in the 2009 period, (ii) a decrease in impairment loss on real estate assets from $0.5 million in the 2009 period to zero in the 2010 period, (iii) loss on sales of lots, land and other of $9.3 million in the 2009 period with no comparable amount in the 2010 period. This loss includes the write-off of land deposits and pre-acquisition costs for one of the Company’s land banking arrangements as discussed in Note 2 of the “Notes to Consolidated Financial Statements.”

In Northern California, loss before benefit from income taxes improved to income of $0.7 million in the 2010 period from a loss of $(36.9) million in the 2009 period. The change is primarily attributable to (i) a decrease in impairment loss on real estate assets from $6.1 million in the 2009 period to zero in the 2010 period, (ii) an increase in homebuilding gross margins to 26.5% in the 2010 period from 8.3% in the 2009 period and, (iii) loss on sales of lots, land and other of $28.6 million in the 2009 period with no comparable amount in the 2010 period. This loss includes the write-off of land deposits and pre-acquisition costs for one of the Company’s land banking arrangements as discussed in Note 2 of the “Notes to Consolidated Financial Statements.”

In Arizona, loss before benefit from income taxes decreased slightly to a loss of $(1.0) million in the 2010 period from a loss of $(1.4) million in the 2009 period.

In Nevada, loss before benefit from income taxes decreased 95% to $(1.0) million in the 2010 period from $(20.3) million in the 2009 period. The decrease in loss is primarily attributable to (i) a decrease in impairment loss on real estate assets from $17.6

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million in the 2009 period to zero in the 2010 period and (ii) an increase in homebuilding gross margins to 14.5% in the 2010 period from 8.4% in the 2009 period.

The Corporate segment is a non-homebuilding segment where the Company develops and implements strategic initiatives and supports the Company’s operating divisions by centralizing key administrative functions such as finance and treasury, information technology, tax planning, internal audit, risk management and litigation and human resources. The Company records the gain from retirement of senior notes and income tax provisions and benefits at the corporate segment. The change in (loss) income before benefit from income taxes to a loss of $2.5 million in the 2010 period from income of $6.7 million in the 2009 period is attributable to the Company recording a gain on retirement of debt of $8.9 million in the 2009 period with no comparable amount in the 2010 period.

Income Taxes

Effective January 1, 2008, the Company’s stockholders made a revocation of the “S” corporation election. As a result of this revocation, the Company was taxed as a “C” corporation. The shareholders will not be able to elect “S” corporation status until 2013. The revocation of the “S” corporation election allowed taxable losses generated in 2008 to be carried back to the 2006 “C” corporation year. As a result of the change in tax status, the Company recorded a deferred tax asset and related income tax benefit of $41.6 million as of January 1, 2008. In January 2009, the Company received the tax refund for the amount of the deferred tax asset.

On November 6, 2009, an expanded carry back election was signed into law as part of the Worker, Homeownership, and Business Assistance Act of 2009. As a result of this legislation, the Company elected to carry back for five years the taxable losses generated in 2009. As of December 31, 2009, the Company recorded an income tax refund receivable and the related income tax benefit of $101.8 million. As of March 31, 2010, the Company received the tax refund.

Consolidated Net Loss

As a result of the foregoing factors, consolidated net loss for the three months ended March 31, 2010 was $8.5 million compared to consolidated net loss for the three months ended March 31, 2009 of $69.2 million.

Lots Owned and Controlled

The table below summarizes the Company’s lots owned and controlled as of the periods presented:

	March 31,		Increase (Decrease)
	2010	2009	Amount		%
Lots Owned
Southern California	1,224	1,490	(266	)	(18	)%
Northern California	762	899	(137	)	(15	)%
Arizona	4,964	5,564	(600	)	(11	)%
Nevada	2,590	2,801	(211	)	(8	)%
Total	9,540	10,754	(1,214	)	(11	)%
Lots Controlled(1)
Southern California	533	406	127		31	%
Arizona	767	713	54		8	%
Total	1,300	1,119	181		16	%
Total Lots Owned and Controlled	10,840	11,873	(1,033	)	(9	)%

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

Financial Condition and Liquidity

The Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate, outside borrowings and by forming new joint ventures with venture partners that provide a substantial portion of the capital required for certain projects. The Company currently has outstanding a Senior Secured Term Loan due 2014, 7⁵/₈% Senior Notes due 2012, 10³/₄% Senior Notes due 2013 and 7¹/₂% Senior Notes due 2014. The Company has financed, and may in the future finance again, certain projects and land acquisitions with construction loans secured by real estate inventories, seller provided financing and land banking transactions. The Company believes that its cash on hand, which includes the income tax refunds received in March 2010, and anticipated net cash flows from operations are and will be sufficient to meet its current and reasonably anticipated liquidity needs on both a near-term and long-term basis (and in any event for the next twelve months) for funds to build homes and run its day-to-day operations.

Beginning in 2006 and continuing into the beginning of 2009, the homebuilding industry had experienced continued decreased demand for housing and declining sales prices. These conditions were the result of a continued erosion of homebuyer confidence which was driven by increases in unemployment, limited availability of mortgage financing due to stress in the mortgage and credit markets, price instability, increasing foreclosures and increased levels of housing inventory in the market. In certain of the Company’s markets, however, the Company has experienced steadying absorption rates, a

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decrease in sales incentives and an increase in base pricing, while homebuilding costs continue to decrease. In Southern California, net new home orders per average sales location increased to 14.4 during the period ended March 31, 2010 from 7.7 during the same period in 2009. In addition, the Company’s cancellation rate decreased to 19% in the 2010 period compared to 27% in the 2009 period, particularly impacted by Northern California’s cancellation rate of 11% in the 2010 period compared to 31% in the 2009 period and Southern California’s cancellation rate of 17% in the 2010 period compared to 23% in the 2009 period. Further, the Company is experiencing increased homebuilding gross margin percentages of 17.2% in the 2010 period compared to 10.1% in the 2009 period particularly impacted by Northern California of 26.5% in the 2010 period compared to 8.3% in the 2009 period, Southern California of 16.4% in the 2010 period compared to 11.6% in the 2009 period, and Nevada of 14.5% in the 2010 period compared to 8.4% in the 2009 period.

The management of the Company has shifted its strategy of generating positive cash flow, by re-starting temporarily suspended projects, reducing overall debt levels and improving liquidity. In addition, the management intends to focus on returning the Company to profitability. The cash balance at March 31, 2010 was $151.0 million which includes the tax refund described below. In addition, the Company generated $40.2 million of cash flows from operations during the period ended March 31, 2010.

Further, the Company received a federal income tax refund of approximately $41.6 million in January 2009 as a result of the carryback of estimated 2008 tax losses to 2006. Then on November 6, 2009, Congress enacted legislation that allowed net operating losses realized in either tax year 2008 or 2009 to be carried back up to five years. Based upon this new legislation, the Company has received, during the period ending March 31, 2010, a federal income tax refund of approximately $101.8 million.

As discussed more fully below, in October 2009, the Company entered into a Senior Secured Term Loan in the amount of $206.0 million. The Company used a portion of the net proceeds to fully repay the outstanding balances on its revolving credit facilities during the fourth quarter of 2009. As of December 31, 2009, the revolving credit facilities have been retired and there are no available borrowing.

There is no assurance, however, that future cash flows will be sufficient to meet the Company’s future capital needs. The amount and types of indebtedness that the Company may incur may be limited by the terms of the indentures and credit or other agreements governing the Company’s senior note obligations, senior secured term loan and other indebtedness.

In 2007 and 2008, the Company suspended development, sales and marketing activities at certain of its projects which were in the early stages of development. The Company has concluded that this strategy was necessary under the prevailing market conditions at that time and believes that it will allow the Company to market the properties at some future time when market conditions may have improved. As market conditions continue to improve, management of the Company has released for sale or re-started development certain of these held projects.

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

Senior Secured Term Loan

William Lyon Homes, Inc., a California corporation and wholly-owned subsidiary of William Lyon Homes (“California Lyon”) is a party to a Senior Secured Term Loan Agreement (the “Term Loan Agreement”), dated October 20, 2009, with COLFIN WLH Funding, LLC, as Administrative Agent (“Admin Agent”), COLFIN WLH Funding, LLC, as Initial Lender and Lead Arranger (“COLFIN”) and the other Lenders who may become assignees of COLFIN (collectively, with COLFIN, the “Lenders”).

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The Term Loan Agreement provides for a first lien secured loan of up to $206.0 million (the “Term Loan”), secured by substantially all of the assets of California Lyon, the Company, as defined in the agreement, (excluding stock in California Lyon) and certain wholly-owned subsidiaries. The Term Loan is guaranteed by the Company.

California Lyon received the first installment of $131.0 million, which funded in October 2009, and its second installment of $75.0 million, which funded in December 2009. Under the Term Loan Agreement, California Lyon will be restricted from future borrowings, and, if necessary, will be required to repay existing borrowings, in order to maintain required loan to value ratios such that: (i) the aggregate amount of outstanding loans under the Term Loan Agreement may not exceed 60% of the aggregate value of the properties securing the facility, with valuation based on the lower of appraised value (if any) and discounted net present value of the cash flows, and (ii) the aggregate amount of secured debt may not exceed 60% of the aggregate value of the properties owned by California Lyon and its subsidiaries, with valuation based on the lower of appraised value (if any) and discounted net present value of the cash flows and the second installment. California Lyon is currently in compliance with the above requirements following each drawdown. The net proceeds to the Company from the first installment of the term loan, after giving effect to attorney fees, loan fees and other miscellaneous costs associated with the loan transaction, and repayment of the revolving credit facilities and purchase of the senior notes was $34.6 million. A portion of the $75.0 million proceeds from the second installment was used to fund the Company’s opportunistic land acquisitions in the three months ended March 31, 2010.

The Term Loan bears interest at a rate of 14.0%. However, California Lyon has also agreed that, upon any repayment of any portion of the principal amount under the Term Loan (whether or not at maturity), California Lyon will also pay an exit fee equal to the difference (if positive) between (x) the interest that would have been accrued and been then payable on the repaid portion if the interest rate under the Loan Agreement were 15.625% and (y) the internal rate of return realized by the Lenders on such repaid portion, taking into account all cash amounts actually received by the Lenders with respect thereto other than any make whole payments described below.

Based on the current outstanding balance of the Term Loan, interest payments are $28.8 million annually.

On any voluntary prepayment of any portion of the Term Loan, California Lyon will be required to make a “make whole payment” equal to an amount, if positive, of the present value of all future payments of interest which would become due with respect to such prepaid amount from the date of prepayment thereof through and including the maturity date, discounted at a rate of 14%.

The Term Loan will mature on October 20, 2014; however, in the event that any portion of the outstanding principal amounts (the “Repaid Senior Note Principal”) of the Senior Notes is repaid (whether or not at maturity), the Lenders may elect to require California Lyon to repay that portion of the outstanding Loan as bears the same ratio to the entire Loan outstanding as the Repaid Senior Note Principal bears to the entire amounts then outstanding under all of the indentures. All or a portion of the Term Loan may also be accelerated upon certain other events described in the Loan Agreement. The lenders waived the requirement for such repayment in connection with the Senior Note repurchases described above.

The Term Loan Agreement requires the Company to maintain a Minimum Tangible Net Worth (as defined therein) of at least $75.0 million. The Term Loan Agreement also contains covenants that limit the ability of California Lyon and the Company to, among other things: (i) incur liens; (ii) incur additional indebtedness; (iii) transfer or dispose of assets; (iv) merge, consolidate or alter their line of business; (v) guarantee obligations; (vi) engage in affiliated party transactions; (vii) declare or pay dividends or make other distributions or repurchase stock; (viii) make advances, loans or investments; (ix) repurchase debt (including under the Senior Note indentures) and (x) engage in change of control transactions.

The Term Loan Agreement contains customary events of default, including, without limitation, failure to pay when due amounts in respect of the loan or otherwise under the Term Loan Agreement; failure to comply with certain agreements or covenants contained in the Term Loan Agreement for a period of 10 days (or, in some cases, 30 days) after the administrative agent’s notice of such non-compliance; acceleration of more than $10.0 million of certain other indebtedness; and certain insolvency and bankruptcy events.

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

• A tangible net worth, as defined, of $75.0 million;

• A minimum borrowing base such that the indebtedness under the Term Loan does not exceed 60% of the Borrowing Base, with the “Borrowing Base” being calculated as (1) the discounted cash flows of each project securing the loan (collateral value), plus (2) restricted cash and (3) escrow proceeds receivable, as defined;

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• Total secured indebtedness (including the indebtedness under the Term Loan and under all other Construction Notes payable) less than or equal to the Maximum Permitted Secured Indebtedness under the Term Loan Agreement (which is generally 60% of the total secured debt collateral value as calculated under the Term Loan Agreement, which value generally does not include cash assets); and

• Excluded Assets of no more than $20.0 million, with “Excluded Assets” being defined generally as the sum total of certain deposit accounts, payroll accounts, unrestricted cash accounts, and the Company’s total investment in joint ventures.

The Company’s covenant compliance for the Term Loan at March 31, 2010 is detailed in the table set forth below:

Covenant and Other Requirements	Actual at March 31, 2010			Covenant Requirements at March 31, 2010
Tangible Net Worth (1)	$	135.1		³$75.0
Borrowing Base		37.9	%	£60%
Maximum Permitted Secured Indebtedness		59.2	%	£60%
Excluded Assets	$	13.4		£$20.0

(1) Tangible Net Worth was calculated based on the stated amount of equity less intangible assets of $15.4 million as of March 31, 2010.

As of and for the period ending March 31, 2010, the Company is in compliance with the covenants under this loan.

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

7  ⁵/8% Senior Notes

On November 22, 2004, California Lyon issued $150.0 million principal amount of 7 ⁵/8% Senior Notes due 2012 (the “7 ⁵/8% Senior Notes”), resulting in net proceeds to the Company of approximately $148.5 million. Of the initial $150.0 million, $67.2 million in aggregate principal amount remained as of December 31, 2009 and the date hereof.

Interest on the 7 ⁵/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount of the 7 ⁵/8% Senior Notes, the Company’s semi-annual interest payments are $2.6 million.

The 7 ⁵/8% Senior Notes are redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

10  ³/4% Senior Notes

On March 17, 2003 California Lyon issued $250.0 million of 10 ³/4% Senior Notes due 2013 (the “10 ³/4% Senior Notes”) 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. Of the initial $250.0 million, $168.2 million aggregate principal amount remained outstanding as of December 31, 2009 and the date hereof.

Interest on the 10 ³/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding principal amount of the 10 ³/4% Senior Notes, the Company’s semi-annual interest payments $9.0 million.

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

7  ¹/2% Senior Notes

On February 6, 2004, California Lyon issued $150.0 million principal amount of 7 ¹/2% Senior Notes due 2014 (the “7 ¹/2% Senior Notes”), resulting in net proceeds to the Company of approximately $147.6 million. Of the initial $150.0 million, $84.7 million aggregate principal amount remained outstanding as of December 31, 2009 and the date hereof.

Interest on the 7 ¹/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal amount of 7 ¹/2% Senior Notes the Company’s semi-annual interest payments are $3.2 million.

The 7 ¹/2% Senior Notes are redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

General Terms of the Senior Notes

The 7 ⁵/8% Senior Notes, the 10 ³/4% Senior Notes and the 7 ¹/2% Senior Notes (collectively, the “Senior Notes”) are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (“Delaware Lyon”), which is the parent company of California Lyon, and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The Senior Notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the Senior Notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness.

Upon a change of control as described in the respective Indentures governing the Senior Notes (the “Senior Notes Indentures”), California Lyon will be required to offer to purchase the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.

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

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

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

As of and for the period ending March 31, 2010, the Company was in compliance with these covenants.

The foregoing summary is not a complete description of the Senior Notes and is qualified in its entirety by reference to the Senior Notes Indentures.

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Supplemental consolidating financial information of the Company, specifically including information for California Lyon, the issuer of the Senior Notes, and Delaware Lyon and the guarantor subsidiaries is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of California Lyon and the guarantor subsidiaries are not provided, as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of assets held and the operations of the combined groups.

Construction Notes Payable

At March 31, 2010, the Company had construction notes payable amounting to $57.7 million. The construction notes have various maturity dates through 2017 and bear interest at rates based on either LIBOR or prime plus 1.0% at March 31, 2010. Interest is calculated on the average daily balance and is paid following the end of each month. As discussed further in Note 10, in May 2010, the Company repaid $28.1 million of outstanding principal on one of its construction notes payable, after which the total remaining outstanding amount is $29.6 million.

Seller Financing

At March 31, 2010, the Company had $10.7 million of notes payable outstanding related to land acquisitions for which seller financing was provided, which is included in notes payable in the accompanying consolidated balance sheet. The seller financing notes are due at various dates through 2012 and bear interest at 7.0%. Interest is calculated on the principal balance outstanding and is accrued and paid to the Seller at the time each residential unit is closed. In addition, the Company makes an annual interest payment on the outstanding principal balance related to any remaining residential units.

Land Banking Arrangements

The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers its right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. ASC 810 requires the consolidation of the assets, liabilities and operations of the Company’s land banking arrangements that are VIEs, of which none existed at March 31, 2010.

The Company participates in one land banking arrangement, which is not a VIE in accordance with ASC 810, but is consolidated in accordance with FASB ASC Topic 470,Debt(“ASC 470”). Under the provisions of ASC 470, the Company has determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangement, and therefore, must record the remaining purchase price of the land which is included in real estate inventories not owned and liabilities from inventories not owned in the accompanying balance sheet.

Consolidated real estate inventories-owned include land deposits under option agreements or land banking arrangements of $55.3 million at March 31, 2010 and December 31, 2009, respectively.

Summary information with respect to the Company’s consolidated land banking arrangements is as follows as of March 31, 2010 (dollars in thousands):

Total number of land banking projects		1
Total number of lots		625
Total purchase price	$	161,465
Balance of lots still under option and not purchased:
Number of lots		236
Purchase price	$	55,270
Forfeited deposits if lots are not purchased	$	25,234

During the three months ended March 31, 2009, the Company abandoned its option deposit in three of its land banking arrangements in which land purchase commitments are required. Management of the Company determined that the remaining purchase prices of the lots in the arrangements were priced above current market values. In two of these arrangements, the

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Company reduced real estate inventories-not owned and the related noncontrolling interest by $27.7 million for the remaining investment in this project. In the other arrangement, the Company reduced real estate inventories-not owned and liabilities from inventories-not owned by $9.3 million for the remaining investment in this project. The impact of these transactions is reflected in the accompanying consolidated financial statements as of the period ending March 31, 2009.

See Notes 4 and 9 of “Notes to Consolidated Financial Statements” for further discussion of the Company’s land banking arrangements.

Joint Venture Financing

The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in Note 2 of “Notes to Consolidated Financial Statements”, in accordance with FASB ASC 810 certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Income allocations and cash distributions to the Company from the unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners’ priority returns and returns of partners’ capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the joint ventures whose financial statements have been consolidated with the Company’s financial statements. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures. As of March 31, 2010, the Company’s investment in and advances to unconsolidated joint ventures was $1.8 million and the venture partners’ investment in such joint ventures was $1.8 million.

In conjunction with the Company’s strategy to cease operations at William Lyon Financial Services, in which it discontinued originating and funding homebuyer mortgage loans, in March 2009, the Company entered into a joint venture operating agreement with a lending institution. The Company receives 50% of the profits and cash flows from the venture. The joint venture was created to service the Company’s homebuyers by having access to a larger mortgage portfolio with the lending institution.

Assessment District Bonds

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

Cash Flows — Comparison of Three Months Ended March 31, 2010 to Three Months Ended March 31, 2009

Net cash provided by operating activities decreased to $40.2 million in the 2010 period from $62.1 million in the 2009 period. The change was primarily as a result of (i) an increase in real estate inventories-owned of $70.6 million in the 2010 period compared to an decrease of $58.6 million in the 2009 period, (ii) an increase in receivables of $0.2 million in the 2010 period compared to a decrease of $18.8 million in the 2009 period, (iii) a decrease in income tax refunds receivable of $107.0 million in the 2010 period compared with $41.6 million in the 2009 period, (iv) impairment loss on real estate assets $24.2 million in the 2009 period with no comparable amount in the 2010 period and (v) consolidated net loss of $8.5 million in the 2010 period compared to consolidated net loss of $69.2 million in the 2009 period. The increase in the income tax benefit was the result of the legislation enacted in November 2009 which allows net operating losses realized in either tax year 2008 or 2009 to be carried back up to five years. As a result of the new legislation the Company recorded a federal income tax benefit of $101.8 million for the year ended December 31, 2009, which the Company received in the first quarter of 2010.

The decrease in impairment loss on real estate assets is described in “Results of Operations” above. The gain on retirement of debt is attributable to the Senior Note repurchase transactions that occurred during 2009. The difference between the benefit from income taxes in the 2010 period and the benefit for income taxes in the 2009 period is described in detail in Note 8 to “Notes to Consolidated Financial Statements.”

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Net cash provided by (used in) investing activities increased to $0.3 million in the 2010 period from $(0.2) million in the 2009 period. The change was primarily as a result of a decrease in investments in and advances to unconsolidated joint ventures of $0.04 million in the 2010 period compared to $0.2 million in the 2009 period.

Net cash used in financing activities decreased to $7.1 million in the 2010 period from $42.4 million in the 2009 period, primarily as a result of the decrease in cash paid in principal payments on notes payable of $12.5 million in the 2010 period compared to $66.1 million in the 2009 period and the decrease in proceeds on borrowings to $4.6 million in the 2010 period compared to $29.6 million in the 2009 period.

Off-Balance Sheet Arrangements

The Company enters into certain off-balance sheet arrangements including joint venture financing, option arrangements, land banking arrangements and variable interests in consolidated and unconsolidated entities. These arrangements are more fully described above and in Notes 2 and 9 of “Notes to Consolidated Financial Statements”. In addition, the Company is party to certain contractual obligations, including land purchases and project commitments, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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Description of Projects

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

Project (County or City)	Year of First Delivery	Estimated Number of Homes at Completion (1)	Cumulative Units Closed as of March 31, 2010	Backlog at March 3, 2010 (2)(3)	Lots Owned as of March 31, 2010(4)	Homes Closed for the Three Months Ended March 31, 2010	Sales Price Range(5)
SOUTHERN CALIFORNIA
San Diego County:
Pasado Del Sur	2009	25	20	0	5	0	$	535,000 - 575,000
Pasado Del Sur II	2010	64	0	16	32	0	$	522,000 - 569,000
Carlsbad
Blossom Grove	2010	110	0	2	32	0	$	565,000 - 640,000
Mirasol at La Costa Greens	2010	71	0	0	71	0	$	636,000 - 771,000
San Bernardino County:
Fontana
Adelina	2008	109	60	45	49	1	$	208,000 - 241,000
Rosabella	2007	114	74	21	40	1	$	225,000 - 260,000
Rancho Cucamonga
Amador	2007	69	60	9	9	0	$	214,000 - 258,000
Amador (Lewis)	2010	30	18	12	12	18	$	214,000 - 256,000
Vintner’s Grove
Sollara SFD	2007	45	38	6	7	0	$	358,000 - 408,000
Canela Triplex	2007	63	57	6	6	3	$	220,000 - 260,000
Vintner’s Grove (Lewis)
Sollara SFD	2009	33	22	9	11	22	$	350,000 - 405,000
Canela Triplex	2010	15	15	0	0	15	$	217,000 - 256,000
Orange County:
Irvine
San Carlos II	2010	92	0	0	92	0	$	315,000 - 470,000
Ivy	2009	135	29	36	55	9	$	385,000 - 463,000
Los Angeles County:
Arboreta at Rainbird, Glendora
Vintage	2008	87	54	29	33	1	$	345,000 - 455,000
360 South Bay, Hawthorne (6):
The Flats	2010	188	0	7	188	0	$	375,000 - 540,000
The Lofts	2011	123	0	0	123	0	$	525,000 - 775,000
The Rows	2011	94	0	0	94	0	$	700,000 - 810,000
The Courts	2010	118	0	5	118	0	$	475,000 - 575,000
The Gardens	2012	102	0	0	102	0	$	755,000 - 980,000
Rosedale, Azusa (6):
Gardenia	2011	147	0	0	81	0	$	455,000 - 550,000
Sage Court	2011	176	0	0	64	0	$	420,000 - 515,000
SOUTHERN CALIFORNIA TOTAL		2,010	447	203	1,224	70

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Project (County or City)	Year of First Delivery	Estimated Number of Homes at Completion (1)	Cumulative Units Closed as  of March 31, 2010	Backlog at March 3, 2010 (2)(3)	Lots Owned as of March 31, 2010(4)	Homes Closed for the Three Months Ended March 31, 2010	Sales Price Range(5)
NORTHERN CALIFORNIA
Contra Costa County:
Vista Del Mar, Pittsburgh
Villages	2007	102	50	0	52	0	$	296,000 - 355,000
Venue	2007	132	48	0	84	0	$	363,000 - 410,000
Vineyard	2007	29	24	0	5	7	$	386,000 - 430,000
Victory	2008	25	14	0	11	0	$	680,000 - 745,000
Antioch (Arcadia), Antioch	2011	130	0	0	130	0	$	290,000 - 315,000
Placer County:
Whitney Ranch, Rocklin
Twin Oaks	2006	92	74	3	18	11	$	400,000 - 470,000
Sacramento County:
Big Horn, Elk Grove
Gallery Walk	2005	149	149	0	0	1	$	180,000 - 230,000
Magnolia Lane (Madeira), Elk Grove	2010	90	0	0	90	0	$	290,000 - 335,000
San Joaquin County:
The Ranch @ Mossdale Landing	2010	168	0	8	168	0	$	210,000 - 245,000
Santa Clara County:
The Gardens, San Jose	2010	40	0	1	40	0	$	660,000 - 660,000
Arcadia, Gilroy	2010	92	0	0	92	0
Solano County:
Fairfield (Arcadia), Fairfield	2010	72	0	0	72	0	$	367,000 - 439,000
NORTHERN CALIFORNIA TOTAL		1,121	359	12	762	19
ARIZONA
Maricopa County:
Arroyo @ Coldwater Ranch, Peoria	2009	20	9	2	11	1	$	132,000 - 168,000
Lehi Crossing, Mesa	2012	928	0	0	113	0	$	179,000 - 343,000
Rancho Mercado, Phoenix	2013	1,826	0	0	1,826	0	$	123,000 - 228,000
Hastings Property, Queen Creek	2011	631	0	0	631	0	$	114,000 - 382,000
Circle G at the Church Farm North	2013	1,745	0	0	1,745	0	$	111,000 - 400,000
Lyon’s Gate, Gilbert:
Pride	2006	650	443	10	207	9	$	134,000 - 162,000
Savanna	2006	174	174	0	0	2	$	172,000 - 215,000
Sahara	2006	169	169	0	0	3	$	196,000 - 259,000
Acacia	2007	365	147	6	218	6	$	160,000 - 216,000
Future Products	2011	213	0	0	213	0
ARIZONA TOTAL		6,721	942	18	4,964	21
NEVADA
Clark County:
North Las Vegas
The Cottages	2004	360	316	0	44	0	$	152,000 - 179,000
Serenity Brook II	2012	90	0	0	90	0	$	380,000 - 455,000
Las Vegas
Carson Ranch
West Series I	2005	74	67	0	7	0	$	395,000 - 430,000
West Series II	2005	56	53	0	3	0	$	406,000 - 503,000
East Series I	2006	116	107	2	9	5	$	219,000 - 254,000
East Series II	2007	45	39	3	6	2	$	246,000 - 305,000

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Project (County or City)	Year of First Delivery	Estimated Number of Homes at Completion (1)	Cumulative Units Closed as of March 31, 2010	Backlog at March 3, 2010 (2)(3)	Lots Owned as of March 31, 2010(4)	Homes Closed for the Three Months Ended March 31, 2010	Sales Price Range(5)
West Park
Villas	2006	95	95	0	0	4	$	183,000 - 225,000
Courtyards	2006	82	82	0	0	3	$	235,000 - 275,000
Flagstone
Crossings	2011	77	0	0	77	0	$	229,000 - 264,000
Commons	2011	37	0	0	37	0	$	229,000 - 259,000
Rhapsody	2011	63	0	0	63	0	$	179,000 - 209,000
The Fields at Aliente	2010	60	0	0	60	0	$	197,000 - 225,000
Nye County:
Mountain Falls, Pahrump:
Cascata	2005	147	137	0	10	0	$	216,000 - 238,000
Tramonto	2005	212	176	2	36	2	$	176,000 - 211,000
Move up Product	2011	91	0	0	91	0	$	194,000 - 229,000
Bella Sera	2005	129	111	1	18	1	$	217,000 - 257,000
Cascata Ancora	2007	118	77	2	41	5	$	99,000 - 148,000
Entrata	2007	99	26	0	73	0	$	142,000 - 164,000
Future Projects	2010	1,925	0	0	1,925	0
NEVADA TOTAL		3,876	1,286	10	2,590	22
GRAND TOTALS		13,728	3,034	243	9,540	132

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

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

(3) Of the total homes subject to pending sales contracts as of September 30, 2009, 237 represent homes completed or under construction and 6 represent homes not yet under construction.

(4) Lots owned as of March 31, 2010 include lots in backlog at March 31, 2010.

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

(6) All or a portion of the lots in this project are not owned as of March 31, 2010. The Company consolidated the purchase price of the lots in accordance with guidance now codified under ASC Topic 470, and considers the lots owned at March 31, 2010.

Income Taxes

See Note 8 of “Notes to Consolidated Financial Statements” for a description of the Company’s income taxes.

Related Party Transactions

See Note 7 of “Notes to Consolidated Financial Statements” for a description of the Company’s transactions with related parties.

Critical Accounting Polices

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and costs and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those which impact its most critical accounting policies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, the Company’s most critical accounting policies are real estate inventories and cost of sales; impairment of real estate inventories; sales and profit recognition; and variable interest entities. We believe that there have been no significant changes to our critical accounting policies during the three months ended March 31, 2010, as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2009, except for the following accounting policies that were updated as a result of the implementation of certain new provisions of ASC 810.

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Recently Issued Accounting Standards

See Note 1 of “Notes to Consolidated Financial Statements” for a description of the recently issued accounting standards.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s Annual Report on Form 10-K for the year ended December 31, 2009, includes detailed disclosure about quantitative and qualitative disclosures about market risk. Quantitative and qualitative disclosures about market risk have not materially changed since December 31, 2009.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report. Although the Company’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives, there can be no assurance that such disclosure controls and procedures will always achieve their stated goals under all circumstances.

Management’s Annual Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting and has designed internal controls and procedures to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment, our management concluded that, the Company maintained effective internal control over financial reporting as of December 31, 2009.

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

Item 4T.

Not Applicable

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WILLIAM LYON HOMES

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Litigation Arising from General Lyon’s Tender Offer

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

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

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

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

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

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

On April 23, 2006, the Delaware Chancery Court conditionally certified a class in the Consolidated Delaware Action. The parties to the Consolidated Delaware Action agreed to a Stipulation of Settlement, and on August 9, 2006, the Delaware Chancery Court certified a class in the Consolidated Delaware Action, approved the settlement, and dismissed the Consolidated Delaware Action with prejudice as to all defendants and the class. On February 16, 2007, plaintiff in the California Action appealed the fee award in the Consolidated Delaware Action to the Supreme Court of the State of Delaware. Thereafter, the Delaware Supreme Court remanded the matter to the Chancery Court for further proceedings and, on April 2, 2009, the Chancery Court issued its decision on remand denying the fee award sought by the California plaintiff. On April 30, 2009, the California plaintiff again appealed the fee award to the Delaware Supreme Court. On January 14, 2010, the Delaware Supreme court affirmed the order of the Chancery Court.

Other Legal Proceedings

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

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Item 1A. Risk Factors

The Company’s Annual Report on Form 10-K for the year ended December 31, 2009, includes detailed disclosure about risk factors which should be carefully considered when evaluating any investment in the Company. Risk factors have not materially changed since the filing of the Annual Report on Form 10-K for the year ended December 31, 2009.

Items 2, 3, 4 and 5.

Not applicable.

Item 6. Exhibits

Exhibit No.	Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

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WILLIAM LYON HOMES

SIGNATURES

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

	WILLIAM LYON HOMES                 Registrant
Date: May 7, 2010	By:	/S/    COLIN T. SEVERN
		Colin T. Severn
		Vice President, Chief Financial Officer, Corporate Secretary (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

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