William Lyon Homes (WLH) 10-Q 2011 Q2 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 June 30, 2011

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	92660
Newport Beach, California	(Zip Code)
(Address of principal executive offices)

(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  x    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 August 12, 2011
Common stock, par value $.01	1,000

WILLIAM LYON HOMES

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets — June 30, 2011 (unaudited) and December 31, 2010		4
	Consolidated Statements of Operations — Three and Six Months Ended June 30, 2011 and 2010 (unaudited)		5
	Consolidated Statement of Equity — Six Months Ended June 30, 2011 (unaudited)		6
	Consolidated Statements of Cash Flows — Six Months Ended June 30, 2011 and 2010 (unaudited)		7
	Notes to Consolidated Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		54
Item 4.	Controls and Procedures		54
Item 4T.	Not Applicable		54
PART II. OTHER INFORMATION			55
Item 1.	Legal Proceedings		55
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, 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, inability to comply with financial and other covenants under the Company’s debt instruments, 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, 2010. 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)

	June 30, 2011			December 31, 2010
	(unaudited)
ASSETS
Cash and cash equivalents — Notes 1 and 6	$	34,590		$	71,286
Restricted cash — Note 1		502			641
Receivables		17,821			18,499
Real estate inventories — Notes 2 and 4
Owned		493,537			488,906
Not owned		47,408			55,270
Property & equipment, less accumulated depreciation of $4,586 and $4,816 at June 30, 2011 and December 31, 2010, respectively		1,089			1,230
Deferred loan costs		10,619			12,404
Other assets		5,586			768
	$	611,152		$	649,004
LIABILITIES AND EQUITY
Accounts payable	$	11,944		$	6,904
Accrued expenses		36,232			41,722
Liabilities from inventories not owned — Note 9		47,408			55,270
Notes payable — Note 5		25,341			30,541
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		66,704			66,704
10  3/4% Senior Notes due April 1, 2013 — Note 5		138,760			138,619
7  1/2% Senior Notes due February 15, 2014 — Note 5		77,867			77,867
		610,256			623,627
Commitments and contingencies — Note 9
Equity:
Stockholders’ equity (deficit)
Common stock, par value $.01 per share; 3,000 shares authorized; 1,000 shares outstanding at June 30, 2011 and December 31, 2010, respectively		—			—
Additional paid-in capital		48,867			48,867
Accumulated deficit		(57,449	)		(35,053	)
		(8,582	)		13,814
Noncontrolling interest — Note 2		9,478			11,563
		896			25,377
	$	611,152		$	649,004

See accompanying notes.

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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Operating revenue
Home sales	$	57,795		$	68,737		$	94,369		$	106,599
Lots, land and other sales		—			17,204			—			17,204
Construction services — Note 1		5,326			751			7,552			6,052
		63,121			86,692			101,921			129,855
Operating costs
Cost of sales — homes		(51,121	)		(56,795	)		(83,006	)		(88,157	)
Cost of sales — lots, land and other — Note 4		—			(15,573	)		—			(15,573	)
Impairment loss on real estate assets — Notes 4 and 6		—			(291	)		—			(291	)
Construction services — Note 1		(4,990	)		(674	)		(6,827	)		(3,921	)
Sales and marketing		(5,007	)		(5,815	)		(9,096	)		(9,402	)
General and administrative		(5,645	)		(5,584	)		(11,922	)		(11,586	)
Other		(5,792	)		(1,004	)		(7,277	)		(1,898	)
		(72,555	)		(85,736	)		(118,128	)		(130,828	)
Equity in income of unconsolidated joint ventures		3,469			761			3,676			1,173
Operating (loss) income		(5,965	)		1,717			(12,531	)		200
Interest expense, net of amounts capitalized		(5,197	)		(6,213	)		(9,975	)		(13,307	)
Other income (expense), net		77			(163	)		244			(71	)
Loss before (provision) benefit for income taxes		(11,085	)		(4,659	)		(22,262	)		(13,178	)
(Provision) benefit for income taxes — Note 8		(10	)		—			(10	)		65
Consolidated net loss		(11,095	)		(4,659	)		(22,272	)		(13,113	)
Less: Net (income) loss — noncontrolling interest		(76	)		121			(124	)		91
Net loss attributable to William Lyon Homes	$	(11,171	)	$	(4,538	)	$	(22,396	)	$	(13,022	)

See accompanying notes.

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WILLIAM LYON HOMES

CONSOLIDATED STATEMENT OF EQUITY

Six Months Ended June 30, 2011

(in thousands)

(unaudited)

	Common Stock				Additional Paid-In		Accumulated			Non- Controlling
	Shares		Amount		Capital		Deficit			Interest			Total
Balance — December 31, 2010		1	$	—	$	48,867	$	(35,053	)	$	11,563		$	25,377
Net (loss) income		—		—		—		(22,396	)		124			(22,272	)
Cash distributions to members of consolidated entities, net		—		—		—		—			(2,209	)		(2,209	)
Balance — June 30, 2011		1	$	—	$	48,867	$	(57,449	)	$	9,478		$	896

See accompanying notes.

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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2011			2010
Operating activities
Consolidated net loss	$	(22,272	)	$	(13,113	)
Adjustments to reconcile consolidated net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		144			229
Impairment loss on real estate assets		—			291
Equity in income of unconsolidated joint ventures		(3,676	)		(1,173	)
Loss on disposition of fixed asset		—			122
Provision (benefit) for income taxes		10			(65	)
Net changes in operating assets and liabilities:
Restricted cash		139			460
Receivables		678			1,161
Income tax refunds receivable		—			107,054
Real estate inventories — owned		(3,690	)		(81,688	)
Deferred loan costs		1,785			1,731
Other assets		(3,107	)		13,371
Accounts payable		5,040			3,359
Accrued expenses		(5,500	)		(438	)
Net cash (used in) provided by operating activities		(30,449	)		31,301
Investing activities
Investments in and advances to unconsolidated joint ventures		—			(194	)
Distributions from unconsolidated joint ventures		1,165			775
Purchases of property and equipment, net		(3	)		(40	)
Net cash provided by investing activities		1,162			541
Financing activities
Proceeds from borrowing on notes payable, net		—			6,679
Principal payments on notes payable		(5,200	)		(48,379	)
Noncontrolling interest (distributions) contributions, net		(2,209	)		2,790
Net cash used in financing activities		(7,409	)		(38,910	)
Net decrease in cash and cash equivalents		(36,696	)		(7,068	)
Cash and cash equivalents — beginning of period		71,286			117,587
Cash and cash equivalents — end of period	$	34,590		$	110,519
Supplemental disclosures of non-cash items:
Distributions of real estate from unconsolidated joint ventures	$	800		$	—
Net change in real estate inventories not owned and liabilities from inventories not owned	$	7,862		$	—
Increase in real estate inventories owned and seller note 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

Operations

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

Basis of Presentation

The 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, 2010.

The interim consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a presentation in accordance with U.S. generally accepted accounting principles have been included. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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.

Reclassifications

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

Financial Condition and Liquidity

For the six months ended June 30, 2011, the Company incurred net loss of $22.4 million. As discussed in Note 5 to “Notes to Consolidated Financial Statements”, the Company has certain financial covenants with its lenders, including a tangible net worth covenant of $75.0 million, relating to the Senior Secured Term Loan due 2014 (the “Term Loan”) and the Senior Notes. As of June 30, 2011, the tangible net worth of the Company was $(9.7) million.

Related to the Company’s Term Loan and as reported on the Company’s current report on Form 8-K dated March 18, 2011, the Company reached an agreement with the lenders under the Senior Secured Term Loan Agreement (the “Term Loan Agreement”) that amended the Term Loan to permit the Company’s tangible net worth to fall below $75.0 million for two consecutive quarters. As reported on the Company’s current report on Form 8-K dated April 21, 2011, the Company reached a subsequent agreement with the lenders under the Term Loan to waive any non-compliance with the tangible net worth covenant through July 19, 2011, subject to certain terms and conditions. In addition, as reported on the Company’s current report on Form 8-K dated July 18, 2011, the Company reached a subsequent agreement with the lenders under the Term Loan to waive any non-compliance with the tangible net worth covenant and with certain other technical requirements through September 16, 2011, subject to certain terms and conditions. Management of the Company believes that it is in the best interests of the lenders of the Term Loan to extend the waiver and work with the Company on a solution, if the Company’s tangible net worth remains below $75.0 million on September 16, 2011.

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Under the indentures governing the Company’s Senior Notes (the “Senior Notes Indentures”), 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. The tangible net worth for any fiscal quarter may not be counted more than once in determining whether California Lyon must make such an offer to purchase. Any such offer to purchase must be made within 65 days after the second quarter ended for which the Company’s tangible net worth is less than $75.0 million. However, California Lyon may reduce the principal amount of the notes to be purchased by the aggregate principal amount of all notes previously redeemed.

The Company’s consolidated tangible net worth was less than $75.0 million for the quarters ended December 31, 2010, March 31, 2011 and June 30, 2011.

The Company previously determined and calculated that California Lyon’s redemptions of Senior Notes during the period from 2008 to 2010 reduced California Lyon’s repurchase obligations resulting from the Company’s consolidated tangible net worth being less than $75.0 million as of December 31, 2010 and March 31, 2011 as follows: California Lyon would not be obligated to repurchase any of its 7 ⁵/8% Senior Notes due 2012 (the “7 ⁵/8% Senior Notes”), as a result of California Lyon’s previous redemption of $83.3 million in aggregate principal amount of the 7 ⁵/8% Senior Notes; California Lyon would not be obligated to repurchase any of the 10 ³/4% Senior Notes due 2013 (the “10 ³/4% Senior Notes”), as a result of California Lyon’s previous redemption of $110.7 million in aggregate principal amount of its 10 ³/4% Senior Notes; and California Lyon would not be obligated to repurchase any of its 7 ¹/2% Senior Notes due 2014 (the “7 ¹/2% Senior Notes”) as a result of California Lyon’s previous redemption of $72.1 million in aggregate principal amount of the 7 ¹/2% Senior Notes.

Since the Company’s consolidated tangible net worth as of March 31, 2011 cannot be counted more than once in determining whether California Lyon must make an offer to repurchase any of the Senior Notes, two applicable fiscal quarters had not passed, and accordingly the requirement to make such an offer was not triggered, as of June 30, 2011, notwithstanding the fact that the Company’s consolidated tangible net worth was less than $75.0 million as of that date.

The ability of the Company to meet its obligations on its indebtedness will depend to a large degree on its future performance. 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. In addition, the Company cannot be certain that it will be able to comply with the financial covenants under its debt obligations. If the Company is not able to meet any of the foregoing 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 Term Loan, Senior Note obligations and other indebtedness may restrict the Company from pursuing any of these alternatives.

The management of the Company, with the approval of the board of directors, has retained the services of an outside consulting firm to institute and implement all required programs to accomplish management’s objectives and to work with management in the analysis and process of renegotiating, refinancing, repaying or restructuring debt maturities and loan terms, including covenants. The Company has requested proposals for a debt financing to use in some combination of debt refinance or capital restructuring of the Term Loan and the Senior Notes.

Management of the Company continues to analyze its liquidity based on its current capital structure and existing cash forecast as well as factoring in the potential of acceleration of the Term Loan. Assuming that the Company is successful in obtaining continued waivers of the consolidated tangible net worth covenant in the Term Loan, management believes the Company has adequate sources of liquidity to fund its operations and meet its obligations for at least the next year, from the date of this filing. Also, the Company is evaluating sales of certain real estate inventories to generate the cash necessary to repay the Term Loan, should an extension not be reached. The Company’s balance of real estate inventories owned at June 30, 2011 was $493.5 million.

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Real Estate Inventories and Related Indebtedness

Real estate inventories are carried at cost net of impairment losses, if any. Real estate inventories consist primarily of land deposits, raw land, lots under development, finished lots, homes under construction, completed homes and model homes of real estate projects. All direct and indirect land costs, offsite and onsite improvements and applicable interest and other carrying charges are capitalized to real estate projects during periods when the project is under development. Land, offsite costs and all other common costs are allocated to land parcels benefited based upon relative fair values before construction. Onsite construction costs and related carrying charges (principally interest and property taxes) are allocated to the individual homes within a phase based upon the relative sales value of the homes. The Company relieves its accumulated real estate inventories through cost of sales for the estimated cost of homes sold. Selling expenses and other marketing costs are expensed in the period incurred. A provision for warranty costs relating to the Company’s limited warranty plans is included in cost of sales and accrued expenses at the time the sale of a home is recorded. The Company generally reserves a percentage 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 June 30 are as follows (in thousands):

	June 30
	2011			2010
Warranty liability, beginning of period	$	16,341		$	21,365
Warranty provision during period		1,112			1,004
Warranty payments during period		(2,721	)		(5,581	)
Warranty charges related to pre-existing warranties during period		535			832
Warranty liability, end of period	$	15,267		$	17,620

Interest incurred under the Term Loan, the 7 ⁵/8% Senior Notes, 10  ⁵/8% Senior Notes, 7  ¹/2% Senior Notes and other notes payable, as more fully discussed in Note 5 of “Notes to Consolidated Financial Statements”, is capitalized to qualifying real estate projects under development. Any additional interest charges related to real estate projects not under development are expensed in the period incurred. During the three and six months ended June 30, 2011, the Company recorded $5.2 million and $10.0 million, respectively, of interest expense. During the three and six months ended June 30, 2010, the Company recorded $6.2 million and $13.3 million, respectively, of interest expense.

Construction Services

The Company accounts for construction management agreements using thePercentage of Completion Method in accordance with FASB ASC Topic 605Revenue Recognition (“ASC 605”). Under ASC 605, the Company records revenues and expenses as work on a contracted project 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 $5.0 million respectively for the three months ended June 30, 2011 and $0.8 million and $0.7 million respectively, for the three months ended June 30, 2010, in the accompanying consolidated statement of operations. In addition, the Company has recorded construction services revenues and expenses of $7.6 million and $6.8 million respectively for the six months ended June 30, 2011 and $6.1 million and $3.9 million respectively, for the six months ended June 30, 2010, in the accompanying consolidated statement of operations.

The Company entered into construction management agreements to build, sell and market homes in certain communities. For such services, the Company will receive fees (generally 3 to 5 percent of the sales price, as defined) and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved.

Cash and Cash Equivalents

Short-term investments with a maturity of three months or less when purchased are considered cash equivalents. The Company’s cash and cash equivalents balance exceeds federally insurable limits as of June 30, 2011. The Company monitors the cash balances in its operating accounts and adjusts the cash balances as appropriate; however, these cash balances could be negatively impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Restricted Cash

Restricted cash consists of deposits made by the Company to a bank account as collateral for the use of letters of credit to guarantee the Company’s financial obligations under certain other contractual arrangements in the normal course of business. Under the terms of the Term Loan disclosed in Note 5, all of the Company’s standby letters of credit are secured by cash.

Use of Estimates

The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of June 30, 2011 and December 31, 2010 and revenues and expenses for the three and six months ended June 30, 2011 and 2010. 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.

Subsequent Events

The Company follows the guidance in ASC Topic 855.Subsequent 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 that an entity should make about events or transactions that occurred after the balance sheet date. Pursuant to ASC 855 the Company’s management has evaluated subsequent events through the date that the consolidated financial statements were issued for the period ended June 30, 2011.

Impact of New Accounting Pronouncements

In 2011, the FASB issued ASU 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement and results in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” ASU 2011-04 is effective during interim and annual periods beginning after December 15, 2011. The effect of adoption of these provisions on the Company’s future consolidated financial statements has not yet been analyzed.

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 impact 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,

- 11 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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.

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 the assets of each VIE. 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 June 30, 2011, the assets and liabilities of the consolidated VIEs totaled $13.5 million and $1.0 million, respectively. In addition, the Company’s interest in the consolidated VIEs is $3.1 million and the members’ interest in the consolidated VIEs is $9.5 million, which is reported as noncontrolling interest on the accompanying consolidated balance sheet.

As of December 31, 2010, the assets and liabilities of the consolidated VIEs totaled $15.4 million and $0.8 million, respectively. In addition, the Company’s interest in the consolidated VIEs was $3.1 million and the members’ interest in the consolidated VIEs was $11.6 million, which is reported as noncontrolling interest on the accompanying consolidated balance sheet.

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.

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s chief executive officer and chief operating officer have been identified as the chief operating decision makers. The Company’s chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

The Company’s homebuilding operations design, construct and sell a wide range of homes designed to meet the specific needs in 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, 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:

- 12 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(in thousands)
Homebuilding revenues:
Southern California	$	30,145		$	53,640		$	50,286		$	75,021
Northern California		15,501			3,319			24,903			11,266
Arizona		4,382			6,025			7,835			10,124
Nevada		7,767			5,753			11,345			10,188
Total homebuilding revenues	$	57,795		$	68,737		$	94,369		$	106,599
	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(in thousands)
Homebuilding (loss) income before (provision) benefit for income taxes:
Southern California	$	404		$	(1,212	)	$	(2,128	)	$	(5,876	)
Northern California		(598	)		1,912			(1,822	)		2,623
Arizona		(282	)		(1,439	)		(1,059	)		(2,461	)
Nevada		(2,494	)		(921	)		(4,888	)		(1,931	)
Corporate		(8,115	)		(2,999	)		(12,365	)		(5,533	)
Total homebuilding loss before (provision) benefit for income taxes	$	(11,085	)	$	(4,659	)	$	(22,262	)	$	(13,178	)

	June 30, 2011		December 31, 2010
	(in thousands)
Homebuilding assets:
Southern California	$	228,037	$	239,510
Northern California		53,129		60,542
Arizona		210,131		194,635
Nevada		63,583		58,827
Corporate (1)		56,272		95,490
Total homebuilding assets	$	611,152	$	649,004

(1) Comprised primarily of cash, receivables, deferred loan costs 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):

	June 30, 2011		December 31, 2010
Inventories owned: (1)
Deposits	$	27,939	$	27,939
Land and land under development		315,012		298,677
Homes completed and under construction		107,714		114,592
Model homes		42,872		47,698
Total	$	493,537	$	488,906
Inventories not owned: (2)
Other land options contracts — land banking arrangement	$	47,408	$	55,270

(1) Beginning in 2008, the Company temporarily suspended all development, sales and marketing activities at certain projects which were in various stages of development. Management of the Company concluded that this strategy was necessary under the prevailing market conditions and would allow the Company to market the properties at some future time when market conditions may have improved. Certain of these projects were restarted beginning in 2010; and, as markets continue to improve, management continues to evaluate and analyze the marketplace to potentially activate temporarily suspended projects in 2011 and beyond. The Company has incurred costs related to these certain projects of $15.1 million as of June 30, 2011, of which $9.4 million is included in Land and land under development and $5.7 million is included in Model homes. The Company may bring more of these projects to market in 2011.

(2) Represents the consolidation of a land banking arrangement which does not obligate the Company to purchase the lots, however, based on certain factors, the Company has determined it is economically compelled to purchase the lots in the land banking arrangement and has been consolidated. 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.

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

- 14 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

project budget and pace of construction of the homes, (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 2013. In addition, the Company has assumed some moderate reduction in sales incentives in certain projects.

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 and the pace of the national economic recovery, 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 and six months ended June 30, 2011, the Company did not record any impairments related to abandoned land deposits (not under land banking arrangements) and related pre-acquisition costs. During the three and six months ended June 30, 2010, the Company recorded $1.2 million related to abandoned land deposits and related pre-acquisition costs.

Note 5 — Senior Notes and Secured Indebtedness

As of June 30, 2011, the Company had the following outstanding Term Loan, 7 ⁵/8% Senior Notes, 10 ³/4% Senior Notes and 7  ¹/2% Senior Notes (in thousands):

Senior Secured Term Loan due October 20, 2014	$	206,000
7  5/8% Senior Notes due December 15, 2012		66,704
10 3/4% Senior Notes due April 1, 2013		138,760
7  1/2% Senior Notes due February 15, 2014		77,867
	$	489,331

Term Loan

William Lyon Homes, Inc., a California corporation and wholly-owned subsidiary of the Company (“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 $206.0 million, secured by substantially all of the assets of California Lyon, the Company (excluding stock in California Lyon and other specified excluded assets) and certain wholly-owned subsidiaries. The Term Loan is guaranteed by the Company.

California Lyon received the first installment of $131.0 million in October 2009, and its second installment of $75.0 million in December 2009. Under the Term Loan Agreement, California Lyon is 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. California Lyon is currently in compliance with the above requirements. 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 redemption of the Senior Notes, were $34.6 million. A portion of the $75.0 million proceeds from the second installment was used to fund additional land acquisitions in 2009 and 2010.

- 15 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The Term Loan bears interest at a rate of 14.0%. However, the Term Loan Agreement also provides that, upon any repayment of any portion of the principal amount under the Term Loan (whether or not at maturity), California Lyon will 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 Term 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.

Upon any prepayment of any portion of the Term Loan prior to its scheduled maturity (other than any prepayment required in connection with a payment of all or any portion of the outstanding principal balance of any of the Senior Notes Indentures), the Term Loan Agreement provides that California Lyon 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 is scheduled to 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 Term Loan outstanding as the Repaid Senior Note Principal bears to the entire amounts then outstanding under all of the Senior Notes Indentures. All or a portion of the Term Loan may also be accelerated upon certain other events described in the Term Loan Agreement. The lenders waived the requirement for such repayment in connection with the Senior Note redemptions which occurred from 2008 to 2010 and which are described below.

The Term Loan Agreement requires that the Company’s Minimum Tangible Net Worth (as defined therein) not fall below $75.0 million at the end of any two consecutive fiscal quarters. However, as discussed below, the Company has obtained temporary relief with respect to this covenant. The Term Loan Agreement also contains covenants that limit the ability of California Lyon and the Company to, without prior approval from Lenders, 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 Notes 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 at least $75.0 million (this covenant was modified as described below);

• 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) unrestricted 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.

- 16 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The Company’s covenant compliance for the Term Loan at June 30, 2011 is detailed in the table set forth below (dollars in millions):

Covenant and Other Requirements	Actual at June 30, 2011			Covenant Requirements at June 30, 2011
Tangible Net Worth (1)	$	(9.7	)	³$75.0
Ratio of Term Loan to Borrowing Base		54.5	%	£60%
Secured Indebtedness (as a percentage of collateral value)		58.0	%	£60%
Excluded Assets	$	11.0		£$20.0

(1) Tangible Net Worth was calculated based on the stated amount of equity less intangible assets of $10.6 million as of June 30, 2011. This covenant has been amended as described below.

As reported on the Company’s current report on Form 8-K dated March 18, 2011, the Company reached an agreement with the Lenders under the Term Loan that amended the Term Loan to permit the Company’s tangible net worth to fall below $75.0 million for two consecutive quarters. As reported on the Company’s current report on Form 8-K, dated April 21, 2011, the Company reached a subsequent agreement with the Lenders under the Term Loan to waive any non-compliance with the tangible net worth covenant and with certain other technical requirements through July 19, 2011, subject to certain terms and conditions. In addition, as reported on the Company’s current report on Form 8-K, dated July 18, 2011, the Company reached a subsequent agreement with the Lenders under the Term Loan to waive any non-compliance with the tangible net worth covenant and with certain other technical requirements through September 16, 2011, subject to certain terms and conditions.

Except as noted above, as of and for the period ending June 30, 2011, the Company is in compliance with the covenants under the Term Loan.

If market conditions deteriorate, the Company believes that its ability to comply with financial covenants contained in the Company’s Term Loan will continue to be negatively impacted. Under these circumstances, the Company could be required to seek additional covenant relief to avoid future noncompliance with the financial covenants in the Term Loan Agreement. 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 then be required to repay.

7 ⁵/8% Senior Notes

On November 22, 2004, California Lyon issued $150.0 million principal amount of the 7 ⁵/8% Senior Notes, resulting in net proceeds to the Company of approximately $148.5 million. Of the initial $150.0 million, $66.7 million in aggregate principal amount remained outstanding as of June 30, 2011 and the date hereof. In August 2010, the Company redeemed, in a privately negotiated transaction, $0.5 million principal amount of its outstanding 7 ⁵/8% Senior Notes at a cost of $0.4 million plus accrued interest.

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 $2.5 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 accrued and unpaid interest, if any.

10 ³/4% Senior Notes

On March 17, 2003, California Lyon issued $250.0 million of 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 redemption 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, $138.8 million aggregate principal amount remained outstanding as of June 30, 2011 and the date hereof. In July 2010, the Company redeemed, in a privately negotiated transaction, $10.5

- 17 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

million principal amount of its outstanding 10 ³/4% Senior Notes at a cost of $9.0 million plus accrued interest. In August 2010, the Company redeemed, in privately negotiated transactions, $19.5 million principal amount of its outstanding 10 ³/4% Senior Notes at a cost of $16.9 million plus accrued interest.

Interest on the 10 ³/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding principal amount of the 10 ³/4% Senior Notes, the Company’s semi-annual interest payments are $7.4 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 accrued and unpaid interest, if any.

7  ¹/2% Senior Notes

On February 6, 2004, California Lyon issued $150.0 million principal amount of the 7 ¹/2% Senior Notes, resulting in net proceeds to the Company of approximately $147.6 million. Of the initial $150.0 million, $77.9 million aggregate principal amount remained outstanding as of June 30, 2011 and the date hereof. In August 2010, the Company redeemed, in a privately negotiated transaction, $6.8 million principal amount of its outstanding 7 ¹/2% Senior Notes at a cost of $5.1 million plus accrued interest.

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 $2.9 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 Senior Notes are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by the Company, and by all of the Company’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 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.

Under the Senior Notes Indentures, 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. The tangible net worth for any fiscal quarter may not be counted more than once in determining whether California Lyon must make such an offer to purchase. Any such offer to purchase must be made within 65 days after the second quarter ended for which the Company’s tangible net worth is less than $75.0 million. However, California Lyon may reduce the principal amount of the notes to be purchased by the aggregate principal amount of all notes previously redeemed.

The Company’s consolidated tangible net worth was less than $75.0 million as of December 31, 2010, March 31, 2011 and June 30, 2011.

The Company previously determined and calculated that California Lyon’s redemptions of Senior Notes during the period from 2008 to 2010 reduced California Lyon’s repurchase obligations resulting from the Company’s consolidated tangible net worth being less than $75.0 million as of December 31, 2010 and March 31, 2011 as follows: California Lyon would not be obligated to repurchase any of the 7 ⁵/8% Senior Notes, as a result of California Lyon’s previous redemption of $83.3 million in aggregate principal amount of the 7 ⁵/8% Senior Notes; California Lyon would not be obligated to repurchase any of the 10 ³/4% Senior Notes, as a result of California Lyon’s previous redemption of $110.7 million in aggregate principal amount of the 10 ³/4% Senior Notes; and California Lyon would not be obligated to repurchase any of the 7 ¹/2% Senior Notes, as a result of California Lyon’s previous redemption of $72.1 million in aggregate principal amount of the 7 ¹/2% Senior Notes.

Since the Company’s consolidated tangible net worth as of March, 31, 2011 cannot be counted more than once in determining whether California Lyon must make an offer to repurchase any of the Senior Notes, two applicable fiscal quarters had not passed, and accordingly the requirement to make such an offer was not triggered, as of June 30, 2011, notwithstanding the fact that the Company’s consolidated tangible net worth was less than $75.0 million as of that date.

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

The Senior Notes Indentures contain covenants that limit the ability of the Company and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of the Company’s restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and

- 18 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(viii) consolidate, merge or sell all or substantially all of the Company’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 June 30, 2011, the Company was in compliance with the Senior Notes 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.

Prior Redemptions of the Senior Notes

During the year ended December 31, 2010, California Lyon redeemed, in privately negotiated transactions, $37.3 million principal amount of its outstanding Senior Notes at a cost of $31.3 million, plus accrued interest. The net gain resulting from the redemptions, after giving effect to amortization of related deferred loan costs, was $5.6 million.

On June 10, 2009, California Lyon consummated a cash tender offer (the “Tender Offer”) to redeem a portion of its outstanding Senior Notes. The principal amount of Senior Notes redeemed by California Lyon on settlement of the Tender Offer totaled $53.2 million, including $29.1 million of the 7 ⁵/8% Senior Notes, $2.4 million of the 10  ⁵/8% Senior Notes, and $21.7 million of the 7  ¹/2% Senior Notes. The aggregate Tender Offer consideration paid totaled $14.9 million, plus accrued interest. The net gain resulting from the Tender Offer, after closing costs, was $37.0 million.

Also, during 2009 the Company redeemed, in privately negotiated transactions, a total of $103.7 million principal amount of the outstanding Senior Notes at a cost of $62.1 million, plus accrued interest. The net gain resulting from the redemption, after giving effect to amortization of related deferred loan costs, was $41.1 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity” and Note 5 of “Notes to Consolidated Financial Statements” for more information relating to the Senior Notes of the Company.

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

Construction Notes Payable

As of June 30, 2011, the Company had two construction notes payable with outstanding principal totaling $19.9 million. One of the notes matured July 1, 2011 and bears interest at rates based on either LIBOR or prime with an interest rate floor of 6.5%. The outstanding principal balance of the note was $11.9 million as of June 30, 2011. Interest is calculated on the average daily balance and is paid following the end of each month. While the Company was previously required to maintain minimum tangible net worth of $90.0 million under this note, the Company and the lender have amended the note to eliminate the tangible net worth covenant in exchange for a principal payment of $2.0 million, which was made in April 2011. During the second quarter, the Company and the lender agreed to extend the maturity of the loan to January 2012 in exchange for a principal payment of $2.0 million, which was paid on July 1, 2011. The Company is required to make an additional principal payment of $0.9 Million in September 2011, and the interest rate floor will decrease to 6.0%.

The other construction note had a remaining balance at June 30, 2011 of $8.0 million, which will mature in May 2015. The loan bears interest payable monthly at a fixed rate of 12.5%, with quarterly principal payments of $500,000. The interest rate decreases to 10.0% when the principal balance is reduced to $7.5 million.

Seller Financing

At June 30, 2011, the Company had $5.4 million of notes payable outstanding related to a land acquisition for which seller financing was provided, which is included in notes payable in the accompanying consolidated balance sheet. The seller financing note is due at various dates through 2012 and bears 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.

- 19 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING BALANCE SHEET

June 30, 2011

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—		$	32,847		$	101	$	1,642	$	—		$	34,590
Restricted cash		—			502			—		—		—			502
Receivables		—			14,359			312		3,150		—			17,821
Real estate inventories
Owned		—			484,503			—		9,034		—			493,537
Not owned		—			47,408			—		—		—			47,408
Property and equipment, net		—			1,089			—		—		—			1,089
Deferred loan costs		—			10,619			—		—		—			10,619
Other assets		—			5,438			148		—		—			5,586
Investments in subsidiaries		(8,582	)		3,277			—		—		5,305			—
Intercompany receivables		—			—			203,300		12		(203,312	)		—
	$	(8,582	)	$	600,042		$	203,861	$	13,838	$	(198,007	)	$	611,152
LIABILITIES AND EQUITY
Accounts payable	$	—		$	11,311		$	74	$	559	$	—		$	11,944
Accrued expenses		—			35,939			222		71		—			36,232
Liabilities from inventories not owned		—			47,408			—		—		—			47,408
Notes payable		—			25,341			—		—		—			25,341
Senior Secured Term Loan		—			206,000			—		—		—			206,000
7  5/8% Senior Notes		—			66,704			—		—		—			66,704
10  3/4% Senior Notes		—			138,760			—		—		—			138,760
7  1/2% Senior Notes		—			77,867			—		—		—			77,867
Intercompany payables		—			202,859			—		453		(203,312	)		—
Total liabilities		—			812,189			296		1,083		(203,312	)		610,256
Equity
Stockholders’ equity (accumulated deficit)		(8,582	)		(212,147	)		203,565		12,755		(4,173	)		(8,582	)
Noncontrolling interest		—			—			—		—		9,478			9,478
	$	(8,582	)	$	600,042		$	203,861	$	13,838	$	(198,007	)	$	611,152

- 20 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2010

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	69,499		$	131	$	1,656	$	—		$	71,286
Restricted cash		—		641			—		—		—			641
Receivables		—		15,034			316		3,149		—			18,499
Real estate inventories
Owned		—		478,010			—		10,896		—			488,906
Not owned		—		55,270			—		—		—			55,270
Property and equipment, net		—		1,230			—		—		—			1,230
Deferred loan costs		—		12,404			—		—		—			12,404
Other assets		—		612			156		—		—			768
Investments in subsidiaries		13,814		3,286			—		—		(17,100	)		—
Intercompany receivables		—		—			203,480		12		(203,492	)		—
	$	13,814	$	635,986		$	204,083	$	15,713	$	(220,592	)	$	649,004
LIABILITIES AND EQUITY
Accounts payable	$	—	$	6,221		$	27	$	656	$	—		$	6,904
Accrued expenses		—		41,435			216		71		—			41,722
Liabilities from inventories not owned		—		55,270			—		—		—			55,270
Notes payable		—		30,541			—		—		—			30,541
Senior Secured Term Loan		—		206,000			—		—		—			206,000
75/8% Senior Notes		—		66,704			—		—		—			66,704
103/4% Senior Notes		—		138,619			—		—		—			138,619
71/2% Senior Notes		—		77,867			—		—		—			77,867
Intercompany payables		—		203,355			—		137		(203,492	)		—
Total liabilities		—		826,012			243		864		(203,492	)		623,627
Equity
Stockholders’ equity (accumulated deficit)		13,814		(190,026	)		203,840		14,849		(28,663	)		13,814
Noncontrolling interest		—		—			—		—		11,563			11,563
	$	13,814	$	635,986		$	204,083	$	15,713	$	(220,592	)	$	649,004

- 21 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2011

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	51,222		$	4,382		$	2,191		$	—		$	57,795
Construction services		—			5,326			—			—			—			5,326
Management fees		—			100			—			—			(100	)		—
		—			56,648			4,382			2,191			(100	)		63,121
Operating costs
Cost of sales		—			(45,251	)		(4,078	)		(1,892	)		100			(51,121	)
Construction services		—			(4,990	)		—			—			—			(4,990	)
Sales and marketing		—			(4,465	)		(343	)		(199	)		—			(5,007	)
General and administrative		—			(5,566	)		(79	)		—			—			(5,645	)
Other		—			(5,768	)		—			(24	)		—			(5,792	)
		—			(66,040	)		(4,500	)		(2,115	)		100			(72,555	)
Equity in income of unconsolidated joint ventures		—			3,469			—			—			—			3,469
Loss from subsidiaries		(11,171	)		(122	)		—			—			11,293			—
Operating (loss) income		(11,171	)		(6,045	)		(118	)		76			11,293			(5,965	)
Interest expense, net of amounts capitalized		—			(5,197	)		—			—			—			(5,197	)
Other income (expense), net		—			122			(41	)		(4	)		—			77
Loss before provision for income taxes		(11,171	)		(11,120	)		(159	)		72			11,293			(11,085	)
Provision for income taxes		—			(10	)		—			—			—			(10	)
Consolidated net (loss) income		(11,171	)		(11,130	)		(159	)		72			11,293			(11,095	)
Less: Net income — noncontrolling interest		—			—			—			—			(76	)		(76	)
Net (loss) income attributable to William Lyon Homes	$	(11,171	)	$	(11,130	)	$	(159	)	$	72		$	11,217		$	(11,171	)

- 22 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2010

(in thousands)

	Unconsolidated												Eliminating Entries		Consolidated Company
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries
Operating revenue
Sales	$	—		$	79,916		$	6,025		$	—		$	—	$	85,941
Construction services		—			751			—			—			—		751
		—			80,667			6,025			—			—		86,692
Operating costs
Cost of sales		—			(66,390	)		(5,991	)		13			—		(72,368	)
Impairment loss on real estate assets		—			(291	)		—			—			—		(291	)
Construction services		—			(674	)		—			—			—		(674	)
Sales and marketing		—			(5,315	)		(424	)		(76	)		—		(5,815	)
General and administrative		—			(5,483	)		(89	)		(12	)		—		(5,584	)
Other		—			(1,004	)		—			—			—		(1,004	)
		—			(79,157	)		(6,504	)		(75	)		—		(85,736	)
Equity in income of unconsolidated joint ventures		—			761			—			—			—		761
(Loss) income from subsidiaries		(4,538	)		(484	)		14			—			5,008		—
Operating (loss) income		(4,538	)		1,787			(465	)		(75	)		5,008		1,717
Interest expense, net of amounts capitalized		—			(6,213	)		—			—			—		(6,213	)
Other loss, net		—			(41	)		(85	)		(37	)		—		(163	)
Consolidated net loss		(4,538	)		(4,467	)		(550	)		(112	)		5,008		(4,659	)
Less: Net loss — noncontrolling interest		—			—			—			—			121		121
Net loss attributable to William Lyon Homes	$	(4,538	)	$	(4,467	)	$	(550	)	$	(112	)	$	5,129	$	(4,538	)

- 23 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2011

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	82,913		$	7,835		$	3,621		$	—		$	94,369
Construction services		—			7,552			—			—			—			7,552
Management fees		—			165			—			—			(165	)		—
		—			90,630			7,835			3,621			(165	)		101,921
Operating costs
Cost of sales		—			(72,827	)		(7,257	)		(3,087	)		165			(83,006	)
Construction services		—			(6,827	)		—			—			—			(6,827	)
Sales and marketing		—			(8,101	)		(610	)		(385	)		—			(9,096	)
General and administrative		—			(11,769	)		(152	)		(1	)		—			(11,922	)
Other		—			(7,253	)		—			(24	)		—			(7,277	)
		—			(106,777	)		(8,019	)		(3,497	)		165			(118,128	)
Equity in income of unconsolidated joint ventures		—			3,676			—			—			—			3,676
Loss from subsidiaries		(22,396	)		(192	)		—			—			22,588			—
Operating (loss) income		(22,396	)		(12,663	)		(184	)		124			22,588			(12,531	)
Interest expense, net of amounts capitalized		—			(9,975	)		—			—			—			(9,975	)
Other income (expense), net		—			341			(89	)		(8	)		—			244
Loss before provision for income taxes		(22,396	)		(22,297	)		(273	)		116			22,588			(22,262	)
Provision for income taxes		—			(10	)		—			—			—			(10	)
Consolidated net (loss) income		(22,396	)		(22,307	)		(273	)		116			22,588			(22,272	)
Less: Net income — noncontrolling interest		—			—			—			—			(124	)		(124	)
Net (loss) income attributable to William Lyon Homes	$	(22,396	)	$	(22,307	)	$	(273	)	$	116		$	22,464		$	(22,396	)

- 24 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2010

(in thousands)

	Unconsolidated												Eliminating Entries		Consolidated Company
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non- Guarantor Subsidiaries
Operating revenue
Sales	$	—		$	113,679		$	10,124		$	—		$	—	$	123,803
Construction services		—			6,052			—			—			—		6,052
		—			119,731			10,124			—			—		129,855
Operating costs
Cost of sales		—			(93,899	)		(9,871	)		40			—		(103,730	)
Impairment loss on real estate assets		—			(291	)		—			—			—		(291	)
Construction services		—			(3,921	)		—			—			—		(3,921	)
Sales and marketing		—			(8,652	)		(653	)		(97	)		—		(9,402	)
General and administrative		—			(11,402	)		(163	)		(21	)		—		(11,586	)
Other		—			(1,898	)		—			—			—		(1,898	)
		—			(120,063	)		(10,687	)		(78	)		—		(130,828	)
Equity in income of unconsolidated joint ventures		—			1,173			—			—			—		1,173
(Loss) income from subsidiaries		(13,022	)		(546	)		12			—			13,556		—
Operating (loss) income		(13,022	)		295			(551	)		(78	)		13,556		200
Interest expense, net of amounts capitalized		—			(13,307	)		—			—			—		(13,307	)
Other income (loss), net		—			58			(145	)		16			—		(71	)
Loss before benefit from income taxes		(13,022	)		(12,954	)		(696	)		(62	)		13,556		(13,178	)
Benefit from income taxes		—			65			—			—			—		65
Consolidated net loss		(13,022	)		(12,889	)		(696	)		(62	)		13,556		(13,113	)
Less: Net loss — noncontrolling interest		—			—			—			—			91		91
Net loss attributable to William Lyon Homes	$	(13,022	)	$	(12,889	)	$	(696	)	$	(62	)	$	13,647	$	(13,022	)

- 25 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2011

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities
Net (loss) income	$	(22,396	)	$	(22,307	)	$	(273	)	$	116		$	22,588		$	(22,272	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		—			118			26			—			—			144
Equity in income of unconsolidated joint ventures		—			(3,676	)		—			—			—			(3,676	)
Equity in loss of subsidiaries		22,396			192			—			—			(22,588	)		—
Provision for income taxes		—			10			—			—			—			10
Net changes in operating assets and liabilities:
Restricted cash		—			139			—			—			—			139
Receivables		—			675			4			(1	)		—			678
Income tax refund receivable		—			—			—			—			—			—
Real estate inventories — owned		—			(5,552	)		—			1,862			—			(3,690	)
Deferred loan costs		—			1,785			—			—			—			1,785
Other assets		—			(3,115	)		8			—			—			(3,107	)
Accounts payable		—			5,090			47			(97	)		—			5,040
Accrued expenses		—			(5,506	)		6			—			—			(5,500	)
Net cash (used in) provided by operating activities		—			(32,147	)		(182	)		1,880			—			(30,449	)
Investing activities
Net change in investment in and advances to unconsolidated joint ventures		—			1,165			—			—			—			1,165
Purchases of property and equipment		—			23			(26	)		—			—			(3	)
Investments in subsidiaries		—			(183	)		—			—			183			—
Net cash provided by (used in) investing activities		—			1,005			(26	)		—			183			1,162
Financing activities
Principal payments on notes payable		—			(5,200	)		—			—			—			(5,200	)
Noncontrolling interest distributions, net		—			—			—			—			(2,209	)		(2,209	)
Advances to affiliates		—			—			(2	)		(2,210	)		2,212			—
Intercompany receivables/payables		—			(310	)		180			316			(186	)		—
Net cash (used in) provided by financing activities		—			(5,510	)		178			(1,894	)		(183	)		(7,409	)
Net decrease in cash and cash equivalents		—			(36,652	)		(30	)		(14	)		—			(36,696	)
Cash and cash equivalents at beginning of period		—			69,499			131			1,656			—			71,286
Cash and cash equivalents at end of period	$	—		$	32,847		$	101		$	1,642		$	—		$	34,590

- 26 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2010

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities
Net (loss) income	$	(13,022	)	$	(12,889	)	$	(696	)	$	(62	)	$	13,556		$	(13,113	)
Adjustments to reconcile net (loss) income to net cash provided (used in) by operating activities:
Depreciation and amortization		—			166			63			—			—			229
Impairment loss on real estate assets		—			291			—			—			—			291
Equity in income of unconsolidated joint ventures		—			(1,173	)		—			—			—			(1,173	)
Loss on disposition of fixed asset		—			—			122			—			—			122
Equity in earnings of subsidiaries		13,022			546			(12	)		—			(13,556	)		—
Benefit from income taxes		—			(65	)		—			—			—			(65	)
Net changes in operating assets and liabilities:
Restricted cash		—			460			—			—			—			460
Receivables		—			1,238			2			(79	)		—			1,161
Income tax refund receivable		—			107,054			—			—			—			107,054
Real estate inventories — owned		—			(79,641	)		—			(2,047	)		—			(81,688	)
Deferred loan costs		—			1,731			—			—			—			1,731
Other assets		—			13,357			14			—			—			13,371
Accounts payable		—			3,866			(15	)		(492	)		—			3,359
Accrued expenses		—			(286	)		(152	)		—			—			(438	)
Net cash provided by (used in) operating activities		—			34,655			(674	)		(2,680	)		—			31,301
Investing activities
Net change in investment in and advances to unconsolidated joint ventures		—			581			—			—			—			581
Purchases of property and equipment		—			96			(136	)		—			—			(40	)
Investments in subsidiaries		—			(570	)		12			—			558			—
Net cash provided by (used in) investing activities		—			107			(124	)		—			558			541
Financing activities
Proceeds from borrowings on notes payable		—			6,679			—			—			—			6,679
Principal payments on notes payable		—			(48,379	)		—			—			—			(48,379	)
Noncontrolling interest contributions, net		—			—			—			—			2,790			2,790
Advances to affiliates		—			—			(15	)		2,785			(2,770	)		—
Intercompany receivables/payables		—			(373	)		835			116			(578	)		—
Net cash (used in) provided by financing activities		—			(42,073	)		820			2,901			(558	)		(38,910	)
Net increase (decrease) in cash and cash equivalents		—			(7,311	)		22			221			—			(7,068	)
Cash and cash equivalents at beginning of period		—			115,247			111			2,229			—			117,587
Cash and cash equivalents at end of period	$	—		$	107,936		$	133		$	2,450		$	—		$	110,519

- 27 -

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 6 — Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820Fair Value Measurements and Disclosure, the Company is required to disclose the estimated fair value of financial instruments. As of June 30, 2011, 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 — For certain notes, the carrying amount is a reasonable estimate of fair value because the maturities occur within one year. Certain other notes were discounted at an interest rate that is commensurate with market rates of similar secured real estate financing.

• Seller Financing — The carrying amount is a reasonable estimate of fair value because the note originated during the current period and has a short term maturity.

• Senior Secured Term Loan — As reported in an affiliate of the lender’s Annual Report on Form 10-K for the year ending December 31, 2010, the fair value of the loan is estimated using inputs such as discounted cash flow projections, current interest rates available for similar instruments and other quantitative and qualitative factors, however this amount does not necessarily represent the amount the Company expects to pay. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different assumptions or methodologies could have a material effect on the estimated fair value amounts. Fair value includes the carrying amount of the loan plus a portion of the “make-whole” amount as defined in the related loan agreement.

• Senior Notes Payable — The Senior Notes are traded over the counter and their fair values were based upon quotes from industry sources, as of June 30, 2011.

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

	June 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and equivalents	$	34,590	$	34,590	$	71,286	$	71,286
Financial liabilities:
Construction notes payable	$	19,899	$	19,880	$	22,899	$	22,899
Seller financing		5,442		5,442		7,642		7,642
Senior Secured Term Loan due 2014	$	206,000	$	230,800	$	206,000	$	230,800
7 5/8% Senior Notes due 2012	$	66,704	$	37,748	$	66,704	$	56,785
10 3/4% Senior Notes due 2013	$	138,760	$	72,058	$	138,619	$	119,933
7 1/2% Senior Notes due 2014	$	77,867	$	39,113	$	77,867	$	56,049

Effective January 1, 2008, the Company implemented the requirements of FASB ASC Topic 820 for the Company’s financial assets and liabilities. FASB ASC Topic 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. FASB ASC Topic 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. FASB ASC Topic 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.

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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 half 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.”

Note 7 — Related Party Transactions

For the three and six months ended June 30, 2011, the Company incurred reimbursable on-site labor costs of $45,000 and $90,000, respectively, and for the three and six months ended June 30, 2010, the Company incurred reimbursable on-site labor costs of $57,000 and $119,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon. At June 30, 2011 and December 31, 2010, $60,000 and $38,000, respectively, was due to the Company for reimbursable on-site labor costs.

The Company earned fees of $91,000 and $182,000, respectively, during the three and six months ended June 30, 2011, and fees of $89,000 and $244,000, respectively, during the three and six months ended June 30, 2010, related to a Human Resources and Payroll Services contract between the Company and an entity controlled by General William Lyon and William H. Lyon. Effective April 1, 2011 upon approval by the Company’s board of directors, the Company and this entity amended the Human Resources and Payroll Services contract to provide that the affiliate will now pay to the Company a base monthly fee of $21,335 and a variable monthly fee equal to $23 multiplied by the number of active employees employed by such entity (which will initially result in a variable monthly fee of approximately $8,000). The amended contract also provides that the Company will be reimbursed by such affiliate for a pro rata share of any bonuses paid to the Company’s Human Resources staff (other than any bonus paid to the Vice President of Human Resources). The Company believes that the compensation being paid to it for the services provided to the affiliate is at a market rate of compensation, and that as a result of the fees that are paid to the Company under this contract, the overall cost to the Company of its Human Resources department will be reduced.

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 provided for an aggregate purchase price for the Aircraft of $8.3 million, (which value was the appraised fair market value of the Aircraft), which consisted 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 June 30, 2011 and December 31, 2010. The Company receives semiannual interest payments of approximately $132,000 in March and September, the most recent payment was received in March 2011. The note is due in September 2016.

For the three and six months ended June 30, 2010 and 2011, the Company incurred charges of $197,000 and $393,000, respectively, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary. The Company is considering its options in light of current usage and market conditions.

Note 8 — Income Taxes

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. In March 2010, the Company received a tax refund of $102.1 million.

The Company accounts for income taxes in accordance with 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

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

consolidated balance sheet at December 31, 2009. The Company received the balance of the refunds and interest, totaling $5.2 million in the first quarter of 2010. At December 31, 2010 and June 30, 2011, the Company has no unrecognized tax benefits.

As of January 1, 2011, the Company has gross federal and state net operating loss carry forwards totaling approximately $115.5 million and $386.3 million respectively. Federal net operating loss carry forwards will begin to expire in 2028; state net operating loss carry forwards begin to expire in 2013.

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

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

In addition, as of January 1, 2011, the Company has unused built-in losses of $7.9 million which are available to offset future income and expire in 2011. 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 2004 through 2010. The Company is subject to various state income tax examinations for calendar tax years ending 2006 through 2010.

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.

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 June 30, 2011, the Company had $0.5 million in deposits as collateral for outstanding irrevocable standby letters of credit to guarantee the Company’s financial obligations under certain contractual arrangements in the normal course of business. The standby letters of credit were secured by cash as reflected as 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 2011, 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 $83.8 million at June 30, 2011 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.

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

Land Banking Arrangements

The Company enters into purchase agreements with various land sellers. As a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s available cash or other corporate financing sources and limiting the Company’s risk, the Company transfers the Company’s right in such purchase agreements to entities owned by third parties (“land banking arrangements”). These entities use equity contributions and/or incur debt to finance the acquisition and development of the previous land being purchased. 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 could 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. FASB ASC Topic 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 June 30, 2011.

The Company participates in one land banking arrangement, which is not a VIE in accordance with FASB ASC Topic 810, but which is consolidated in accordance with FASB ASC Topic 470,Debt.Under the provisions of FASB ASC Topic 470, the Company has determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangement. The Company has recorded the remaining purchase price of the land of $47.4 million, which is included in real estate inventories not owned and liabilities from inventories not owned in the accompanying consolidated balance sheet as of June 30, 2011.

In 2011, the Company purchased 23 lots from its land banking arrangement for a total purchase price of $7.9 million. In conjunction with the purchase, the Company reduced real estate inventories not owned and liabilities from inventories not owned in the amount of $7.9 million.

Summary information with respect to the Company’s consolidated land banking arrangement is as follows as of June 30, 2011 (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		225
Purchase price	$	47,408
Forfeited deposits if lots are not purchased	$	25,234

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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, 2010.

Results of Operations

Since early 2006, the U.S. housing market has been negatively impacted by declined consumer confidence, restrictive mortgage standards, and large supplies of foreclosure, resale and new homes, among other factors. When combined with a prolonged economic downturn, high unemployment levels, and uncertainty in the U.S. economy, these conditions have contributed to decreased demand for housing, declining sales prices, and increasing pricing pressure, which hinders the Company’s ability to attract new home buyers. As a result, the Company has experienced operating losses, beginning in 2007 and continuing into 2011. Such losses resulted from a combination of reduced homebuilding gross margins, losses on land sales to generate cash flow, lower sales volume and significant non-cash impairment losses on real estate assets. On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 (“the Act”) was enacted into law, which extended and expanded the homebuyer federal tax credit until April 30, 2010. The Act, which was applicable to net new home orders under contract by April 30, 2010 and closed by September 30, 2010, favorably impacted our home sales during the early part of 2010, but also contributed to an industry-wide decline in net new home orders in the latter part of 2010 and into 2011.

The U.S. housing market and broader economy remain in a period of uncertainty; however, there are signs of stabilization in certain of our local markets, though at near historically low levels.

There are indications that certain aforementioned negative trends may be slowing, however, there are also a number of factors that may further worsen market conditions or delay a recovery in the homebuilding industry, including, but not limited to: (i) high levels of unemployment, which correlates to low levels of consumer confidence; (ii) continued foreclosure activity with immeasurable shadow inventory; (iii) upward trending mortgage rates, as the current level of low mortgage rates is not expected to remain in the long-term; (iv) increased costs and standards related to FHA loans, which continue to be a significant source of homebuyer financing; (v) increase in the cost of building materials; and (vi) the lack of consumer confidence due to U.S. and global economic difficulties.

The Company continues to operate with the assumption that difficult market conditions will continue at least during 2011. The Company continues to review acquisitions of select land positions where it makes strategic and economic sense to do so, targeting finished lots in core coastal markets, near high employment centers or transportation corridors. In addition, management continues to evaluate owned lots and land parcels to determine if values support holding the parcels for future project development or selling to generate cash flow.

In Southern California, net new home orders per average sales location decreased to 12.0 during the three months ended June 30, 2011 from 14.6 for the same period in 2010. In Northern California, net new home orders per average sales location increased to 7.4 during the 2011 period from 5.2 during the 2010 period. In Arizona, net new home orders per average sales location increased to 25.5 during the three months ended June 30, 2011 from 9.7 for the same period in 2010. In Nevada, net new home orders per average sales location increased to 6.8 during the 2011 period from 6.7 during the 2010 period. In Southern California, the cancellation rate decreased to 11% in the 2011 period compared to 19% in the 2010 period. In Northern California, the cancellation rate increased to 24% in the 2011 period compared to 13% in the 2010 period. In Arizona, the cancellation rate decreased to 2% in the 2011 period compared to 15% in the 2010 period. In Nevada, the cancelation rate decreased to 13% in the 2011 period compared to 17% in the 2010 period.

The Company experienced decreased homebuilding gross margin percentages of 11.5% for the three months ended June 30, 2011 compared to 17.4% in the 2010 period particularly impacted by a decrease in Southern California’s homebuilding gross margin percentages to 12.0% in the 2011 period compared to 18.2% in the 2010 period and a decrease in Northern California’s homebuilding gross margin percentages to 9.2% in the 2011 period compared to 26.0% in the 2010 period. In Arizona, homebuilding gross margin percentages increased to 19.3% in the 2011 period from 4.7% in the 2010 period. In Nevada, homebuilding gross margin percentages decreased to 10.1% in the 2011 period from 17.5% in the 2010 period.

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Comparisons of Three Months Ended June 30, 2011 to June 30, 2010

On a consolidated basis, the number of net new home orders for the three months ended June 30, 2011 increased 5% to 201 homes from 192 homes for the three months ended June 30, 2010. The number of homes closed on a consolidated basis for the three months ended June 30, 2011, decreased 27% to 171 homes from 233 homes for the three months ended June 30, 2010. On a consolidated basis, the backlog of homes sold but not closed as of June 30, 2011 was 173, down 14% from 202 homes a year earlier. However, the backlog of homes sold but not closed increased 106% from 84 since December 31, 2010.

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 June 30, 2011 was $63.2 million, down 24% from $83.5 million as of June 30, 2010. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was 12% during the three months ended June 30, 2011 compared to 18% during the three months ended June 30, 2010. The inventory of completed and unsold homes was 25 homes as of June 30, 2011, down 70% from 83 homes at June 30, 2010, and down 77% from 107 homes at December 31, 2010.

The average number of sales locations during the quarter ended June 30, 2011 was 19, consistent with 19 in the comparable period a year ago.

The Company’s number of new home orders per average sales location increased slightly to 10.6 for the three months ended June 30, 2011 as compared to 10.1 for the three months ended June 30, 2010. This was attributable to Northern California, which increased from 5.2 per location at June 30, 2010 to 7.4 per location at June 30, 2011, Arizona, which increased to 25.5 per location at June 30, 2011 from 9.7 per location at June 30, 2010 and Nevada, which increased to 6.8 per location during the 2011 period compared to 6.7 per location in the 2010 period, offset by Southern California, which decreased to12.0 per location at June 30, 2011 from 14.6 per location at June 30, 2010.

	Three Months Ended June 30,						Increase (Decrease)
	2011			2010			Amount			%
Number of Net New Home Orders
Southern California		72			117			(45	)		(38	)%
Northern California		37			26			11			42	%
Arizona		51			29			22			76	%
Nevada		41			20			21			105	%
Total		201			192			9			5	%
Cancellation Rate		12	%		18	%		(6	)%

Net new home orders in each segment, except Southern California, increased period over period. In Southern California, net new home orders decreased 38% from 117 in the 2010 period to 72 in the 2011 period. In Nevada, net new home orders increased 105% from 20 in the 2010 period to 41 in the 2011 period.

Cancellation rates decreased to 12% for the three month period ended June 30, 2011 from 18% for the three month period ended June 30, 2010. The change includes a decrease in Southern California’s cancellation rate to 11% in the 2011 period from 19% in the 2010 period, a decrease in Arizona’s cancellation rate to 2% in the 2011 period from 15% in the 2010 period, a decrease in Nevada’s cancellation rate to 13% in the 2011 period from 17% in the 2010 period and an increase in Northern California’s cancellation rate to 24% in the 2011 period from 13% in the 2010 period.

	Three Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
Average Number of Sales Locations
Southern California		6		8		(2	)		(25	)%
Northern California		5		5		—			0	%
Arizona		2		3		(1	)		(33	)%
Nevada		6		3		3			100	%
Total		19		19		—			0	%

The average number of sales locations for the Company remained consistent for the period ending June 30, 2011 compared to the period ending 2010. Nevada doubled its average sales locations from 3 for the 2010 period to 6 for the 2011 period. Southern California decreased by 2 average sales locations and Arizona decreased by 1 sales location, due to final

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deliveries in certain projects, offset by the opening of new projects in Southern California. Northern California remained unchanged at 5 average sales locations for the 2011 and 2010 periods.

	June 30,				Increase (Decrease)
	2011		2010		Amount			%
Backlog (units)
Southern California		72		159		(87	)		(55	)%
Northern California		42		26		16			62	%
Arizona		35		11		24			218	%
Nevada		24		6		18			300	%
Total		173		202		(29	)		(14	)%

The Company’s backlog at June 30, 2011 decreased 14% from 202 units at June 30, 2010 to 173 units at June 30, 2011, primarily resulting from a decrease in net new home orders during the period driven by the Southern California division, with a 38% decrease. The decrease in backlog at quarter end reflects a decrease in the number of homes closed to 171 in the 2011 period from 233 in the 2010 period, slightly offset by a 5% increase in total net new order activity to 201 homes in the 2011 period from 192 homes in the 2010 period.

	June 30,				Increase (Decrease)
	2011		2010		Amount			%
	(dollars in thousands)
Backlog (dollars)
Southern California	$	37,496	$	70,097	$	(32,601	)		(47	)%
Northern California		16,432		10,306		6,126			59	%
Arizona		4,882		1,555		3,327			214	%
Nevada		4,360		1,535		2,825			184	%
Total	$	63,170	$	83,493	$	(20,323	)		(24	)%

The dollar amount of backlog of homes sold but not closed as of June 30, 2011 was $63.2 million, down 24% from $83.5 million as of June 30, 2010. The decrease in dollar amount of backlog during this period reflects a 14% decrease in the number of homes in backlog to 173 homes in the 2011 period compared to 202 homes in the 2010 period. In addition, the dollar amount of backlog is affected by recent average sales prices for new home orders. The Company experienced a decrease of 12% in the average sales price of homes in backlog to $365,100 as of June 30, 2011 compared to $413,300 as of June 30, 2010. The decrease in the dollar amount of backlog of homes sold but not closed as described above generally results in a decrease in operating revenues in the subsequent period as compared to the previous period.

In Southern California, the dollar amount of backlog decreased 47% to $37.5 million as of June 30, 2011 from $70.1 million as of June 30, 2010, which is attributable to a 38% decrease in net new home orders in Southern California to 72 homes in the 2011 period compared to 117 homes in the 2010 period, offset by an 18% increase in the average sales price of homes in backlog to $520,800 as of June 30, 2011 compared to $440,900 as of June 30, 2010. In Southern California, the cancellation rate decreased to 11% for the period ended June 30, 2011 from 19% for the period ended June 30, 2010.

In Northern California, the dollar amount of backlog increased 59% to $16.4 million as of June 30, 2011 from $10.3 million as of June 30, 2010, which is attributable to a 42% increase in net new home orders in Northern California to 37 homes in the 2011 period compared to 26 homes in the 2010 period, slightly offset by a 1% decrease in the average sales price of homes in backlog to $391,200 as of June 30, 2011 compared to $396,400 as of June 30, 2010. In Northern California, the cancellation rate increased to 24% for the period ended June 30, 2011 from 13% for the period ended June 30, 2010.

In Arizona, the dollar amount of backlog more than tripled to $4.9 million as of June 30, 2011 from $1.6 million as of June 30, 2010, which is attributable to a 76% increase in net new home orders in Arizona to 51 homes in the 2011 period compared to 29 homes in the 2010 period, slightly offset by a 1% decrease in the average sales price of homes in backlog to $139,500 as of June 30, 2011 compared to $141,400 as of June 30, 2010. In Arizona, the cancellation rate decreased to 2% for the period ended June 30, 2011 from 15% for the period ended June 30, 2010.

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In Nevada, the dollar amount of backlog increased 184% to $4.4 million as of June 30, 2011 from $1.5 million as of June 30, 2010, which is attributable to a 300% increase in the number of units in backlog to 24 in the 2011 period from 6 in the 2010 period, along with a 105% increase in net new home orders in Nevada to 41 homes in the 2011 period compared to 20 homes in the 2010 period, offset by a 29% decrease in the average sales price of homes in backlog to $181,700 as of June 30, 2011 compared to $255,800 as of June 30, 2010. In Nevada, the cancellation rate decreased to 13% for the period ended June 30, 2011 from 17% for the period ended June 30, 2010.

	Three Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
Number of Homes Closed
Southern California		60		161		(101	)		(63	)%
Northern California		39		12		27			225	%
Arizona		31		36		(5	)		(14	)%
Nevada		41		24		17			71	%
Total		171		233		(62	)		(27	)%

During the three months ended June 30, 2011, the number of homes closed decreased 27% to 171 in the 2011 period from 233 in the 2010 period. The decrease in home closings is primarily attributable to a 63% decrease in Southern California to 60 homes closed in the 2011 period compared to 161 homes closed in the 2010 period, slightly offset by a 225% increase in home closings in Northern California to 39 in the 2011 period from 12 in the 2010 period and a 71% increase in homes closed in Nevada from 24 in the 2010 period to 41 in the 2011 period. In addition, the Company was able to convert 100% of its units in backlog as of March 31, 2011 into closings during the period ending June 30, 2011.

	Three Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
	(dollars in thousands)
Home Sales Revenue
Southern California	$	30,145	$	53,640	$	(23,495	)		(44	)%
Northern California		15,501		3,319		12,182			367	%
Arizona		4,382		6,025		(1,643	)		(27	)%
Nevada		7,767		5,753		2,014			35	%
Total	$	57,795	$	68,737	$	(10,942	)		(16	)%

The decrease in homebuilding revenue of 16% to $57.8 million for the period ending 2011 from $68.7 million for the period ending 2010 is primarily attributable to (i) a decrease in revenue of $20.9 million related to a decrease in the number of homes closed to 171 during the 2011 period from 233 in the 2010 period, and (ii) an increase in revenue of $10.0 million related to an increase in the average sales price of homes closed to $338,000 during the 2011 period from $295,000 during the 2010 period. This increase is attributable to a change in product mix, which included an increase in the number of homes closed with a sale price in excess of $500,000 from 13 in the 2010 period to 50 in the 2011.

	Three Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
Average Sales Price of Homes Closed
Southern California	$	502,400	$	333,200	$	169,200			51	%
Northern California		397,500		276,600		120,900			44	%
Arizona		141,400		167,400		(26,000	)		(16	)%
Nevada		189,400		239,700		(50,300	)		(21	)%
Total	$	338,000	$	295,000	$	43,000			15	%

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The average sales price of homes closed during the 2011 period increased in two segments due primarily to a change in product mix. However, in Southern California the overall average sales price increase is primarily due to a change in product mix, in which the number of homes closed with a sale price in excess of $500,000 was 13 in the 2010 period and 50 in the 2011 period.

	Three Months Ended June 30,						Increase (Decrease)
	2011			2010
Homebuilding Gross Margin Percentage
Southern California		12.0	%		18.2	%		(6.2	)%
Northern California		9.2	%		26.0	%		(16.8	)%
Arizona		19.3	%		4.7	%		14.6	%
Nevada		10.1	%		17.5	%		(7.4	)%
Total		11.5	%		17.4	%		(5.9	)%

Homebuilding gross margin percentage during the 2011 period decreased to 11.5% from 17.4% during the 2010 period which is primarily attributable to an increase in the average cost per homes closed of 23% from $243,800 in the 2010 period to $299,000 in the 2011 period offset by a 15% increase in the average sales price of home closed of $338,000 in the 2011 period from $295,000 in the 2010 period.

Homebuilding gross margins may be negatively impacted by a weak economic environment, which includes homebuyers’ reluctance to purchase new homes, increases 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.

Construction Services Revenue

Construction services revenue, which was all recorded in Southern California, was $5.3 million in the 2011 period compared with $0.8 million in the 2010 period. See Note 1 of “Notes to Consolidated Financial Statements” for further discussion.

Impairment Loss on Real Estate Assets

The Company evaluates homebuilding assets for impairment when indicators of impairments are present. Given the current market conditions in the homebuilding industry since 2006, 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. For the three months ended June 30, 2011 there were no impairment charges recorded compared to impairment on real estate assets of $0.3 million recorded in the Arizona segment for the three months ended June 30, 2010.

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 June 30,				Increase (Decrease)
	2011		2010		Amount			%
	(dollars in thousands)
Sales and Marketing Expenses
Homebuilding
Southern California	$	2,721	$	4,194	$	(1,473	)		(35	)%
Northern California		1,173		762		411			54	%
Arizona		343		424		(81	)		(19	)%
Nevada		770		435		335			77	%
Total	$	5,007	$	5,815	$	(808	)		(14	)%

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Sales and marketing expense decreased 14% to $5.0 million in the 2011 period from $5.8 million in the 2010 period, primarily attributable to (i) a decrease in sales office and model operations expense of $0.4 million from $1.0 million in the 2010 period to $0.6 million in the 2011 period, (ii) a decrease in salesperson commissions and salaries of $0.7 million from $1.8 million in the 2010 period to $1.1 million in the 2011 period, and (iii) offset by an increase in outside broker costs of $0.2 million from $0.8 million in the 2010 period to $1.0 million in the 2011 period.

	Three Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
	(dollars in thousands)
General and Administrative Expenses
Homebuilding
Southern California	$	1,010	$	625	$	385			62	%
Northern California		365		696		(331	)		(48	)%
Arizona		478		512		(34	)		(7	)%
Nevada		586		530		56			11	%
Corporate		3,206		3,221		(15	)		(1	)%
Total	$	5,645	$	5,584	$	61			1	%

General and administrative expenses remained consistent for the period ending June 30, 2011 compared to the period ending June 30, 2010.

Other Items

Other operating costs increased to $5.6 million in the 2011 period compared to $1.0 million in the 2010 period. The increase is primarily due to outside services incurred in connection with the analysis and process of renegotiating, refinancing, repaying or restructuring debt maturities and loan terms, including covenants.

Equity in income of unconsolidated joint ventures increased to income of $3.5 million in the 2011 period from income of $0.8 million in the 2010 period, primarily due to the sale of the Company’s interest in one of its unconsolidated joint ventures.

During the period ending June 30, 2011, the Company incurred interest related to its outstanding debt of $15.2 million, of which $10.0 million was capitalized, resulting in net interest expense of $5.2 million. During the period ending June 30, 2010, the Company incurred interest related to its outstanding debt of $16.2 million, of which $10.0 million was capitalized, resulting in net interest expense of $6.2 million.

	Three Months Ended June 30,						Increase (Decrease)
	2011			2010			Amount			%
	(dollars in thousands)
(Loss) Income Before Provision for Income Taxes
Homebuilding
Southern California	$	404		$	(1,212	)	$	1,616			(133	)%
Northern California		(598	)		1,912			(2,510	)		(131	)%
Arizona		(282	)		(1,439	)		1,157			(80	)%
Nevada		(2,494	)		(921	)		(1,573	)		171	%
Corporate		(8,115	)		(2,999	)		(5,116	)		171	%
Total	$	(11,085	)	$	(4,659	)	$	(6,426	)		138	%

In Southern California, loss before provision for income taxes improved 133% to income of $0.4 million in the 2011 period from a loss of $(1.2) million in the 2010 period. The change is primarily attributable to (i) a decrease in sales and marketing expense from $4.2 million in the 2010 period to $2.7 million in the 2011 period, (ii) an increase in equity in income of unconsolidated joint ventures from $0.4 million in the 2010 period to $3.4 million in the 2011 period, (iii) offset by a decrease in homebuilding gross margins to 12.0% in the 2011 period from 18.2% in the 2010 period.

In Northern California, (loss) income before provision for income taxes changed to a loss of $(0.6) million in the 2011 period from income of $1.9 million in the 2010 period. The increase in loss is primarily attributable to a decrease in homebuilding gross margins to 9.2% in the 2011 period from 26.0% in the 2010 period in addition to an increase in sales and

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marketing expense to $1.2 million in the 2011 period from $0.8 million in the 2010 period, due to the opening of new project model complexes.

In Arizona, loss before provision for income taxes decreased 80% to a loss of $(0.3) million in the 2011 period from a loss of $(1.4) million in the 2010 period. The decrease in loss is primarily attributable to an increase in homebuilding gross margins to 19.3% in the 2011 period from 4.7% in the 2010 period in addition to a decrease in impairment on real estate assets of $0.3 million in the 2010 period with no comparable amount in the 2011 period.

In Nevada, loss before provision for income taxes increased 171% to a loss of $(2.5) million in the 2011 period from a loss of $(0.9) million in the 2010 period. The increase in loss is primarily attributable to (i) an increase in sales and marketing expense from $0.4 million in the 2010 period to $0.8 million in the 2011 period, and (ii) a decrease in homebuilding gross margins to 10.1% in the 2011 period from 17.5% in the 2010 period.

The Corporate segment is a non-homebuilding segment in which 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 increase in loss before provision for income taxes to $(8.1) million in the 2011 period from loss of $(3.0) million in the 2010 period is primarily due to outside services of $5.2 million incurred in connection with the analysis and process of renegotiating, refinancing, repaying or restructuring debt maturities and loan terms, including covenants.

Net Loss

As a result of the foregoing factors, net loss for the three months ended June 30, 2011 was $11.2 million compared to net loss for the three months ended June 30, 2010 of $4.5 million.

Lots Owned and Controlled

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

	June 30,				Increase (Decrease)
	2011		2010		Amount			%
Lots Owned
Southern California		823		1,146		(323	)		(28	)%
Northern California		553		686		(133	)		(19	)%
Arizona		6,278		5,003		1,275			25	%
Nevada		2,730		2,704		26			1	%
Total		10,384		9,539		845			9	%
Lots Controlled(1)
Southern California		114		370		(256	)		(69	)%
Northern California		303		—		303			100	%
Arizona		—		767		(767	)		(100	)%
Total		417		1,137		(720	)		(63	)%
Total Lots Owned and Controlled		10,801		10,676		125			1	%

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

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Comparisons of Six Months Ended June 30, 2011 to June 30, 2010

On a consolidated basis, the number of net new home orders for the six months ended June 30, 2011 decreased 1% to 371 homes from 373 homes for the six months ended June 30, 2010. The number of homes closed on a consolidated basis for the six months ended June 30, 2011, decreased 23% to 282 homes from 365 homes for the six months ended June 31, 2010.

The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 14% during the six months ended June 30, 2011 compared to 18% during the six months ended June 30, 2010.

The average number of sales locations during the six months ended June 30, 2011 was 18, compared to 19 in the comparable period a year ago. The Company’s number of new home orders per average sales location increased to 20.6 for the six months ended June 30, 2011 as compared to 19.6 for the six months ended June 30, 2010.

	Six Months Ended June 30,						Increase (Decrease)
	2011			2010			Amount			%
Number of Net New Home Orders
Southern California		141			232			(91	)		(39	)%
Northern California		86			51			35			69	%
Arizona		82			51			31			61	%
Nevada		62			39			23			59	%
Total		371			373			(2	)		(1	)%
Cancellation Rate		14	%		18	%		(4	)%

Net new home orders in each segment, except Southern California, increased period over period. In Southern California, net new home orders decreased 39% from 232 in the 2010 period to 141 in the 2011 period partially attributed to a decrease in the average number of sales locations from 8 in the 2010 period to 6 in the 2011 period. In Northern California, net new home orders increased 69% from 51 in the 2010 period to 86 in the 2011 period partially attributed to an increase in the average number of sales locations to 5 in the 2011 period from 4 in the 2010 period. In Arizona, net new home orders increased 61% from 51 in the 2010 period to 82 in the 2011 period despite a decrease in the average number of sales locations from 3 in the 2010 period to 2 in the 2011 period. In Nevada, net new home orders increased 59% from 39 in the 2010 period to 62 in the 2011 period partially attributed to an increase in the average number of sales locations to 5 in the 2011 period from 4 in the 2010 period.

Cancellation rates during the 2011 period decreased to 14% from 18% during the 2010 period. The change includes a decrease in Southern California’s cancellation rate to 14% in the 2011 period from 18% in the 2010 period, a decrease in Arizona’s cancellation rate to 6% in the 2011 period from 23% in the 2010 period, a decrease in Nevada’s cancellation rate to 17% in the 2011 period from 19% in the 2010 period and an increase in Northern California’s cancellation rate to 17% in the 2011 period from 12% in the 2010 period.

	Six Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
Average Number of Sales Locations
Southern California		6		8		(2	)		(25	)%
Northern California		5		4		1			25	%
Arizona		2		3		(1	)		(33	)%
Nevada		5		4		1			25	%
Total		18		19		(1	)		(5	)%

The average number of sales locations for the Company decreased to 18 for the period ending June 30, 2011 compared to 19 for the period ending 2010. Northern California and Nevada each increased to 5 for the 2011 period from 4 for the 2010 period. Southern California decreased by 2 average sales locations and Arizona decreased by 1 sales location due to final deliveries in certain projects.

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	Six Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
Number of Homes Closed
Southern California		103		231		(128	)		(55	)%
Northern California		63		31		32			103	%
Arizona		55		57		(2	)		(4	)%
Nevada		61		46		15			33	%
Total		282		365		(83	)		(23	)%

During the six months ended June 30, 2011, the number of homes closed decreased 23% to 282 in the 2011 period from 365 in the 2010 period. The decrease in home closings is primarily attributable to a 55% decrease in Southern California to 103 homes closed in the 2011 period compared to 231 homes closed in the 2010 period, somewhat offset by a 103% increase in home closings in Northern California to 63 in the 2011 period from 31 in the 2010 period and a 33% increase in homes closed in Nevada from 46 in the 2010 period to 61 in the 2011 period. In addition, the Company was able to convert 100% of its units in backlog as of December 31, 2010 into closings during the six months ending June 30, 2011.

	Six Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
	(dollars in thousands)
Home Sales Revenue
Southern California	$	50,286	$	75,021	$	(24,735	)		(33	)%
Northern California		24,903		11,266		13,637			121	%
Arizona		7,835		10,124		(2,289	)		(23	)%
Nevada		11,345		10,188		1,157			11	%
Total	$	94,369	$	106,599	$	(12,230	)		(11	)%

The decrease in homebuilding revenue of 11% to $94.4 million for the period ending 2011 from $106.6 million for the period ending 2010 is primarily attributable to (i) a decrease in revenue of $24.2 million related to a decrease in the number of homes closed to 282 during the 2011 period from 365 in the 2010 period, and (ii) an increase in revenue of $12.0 million related to an increase in the average sales price of homes closed to $334,600 during the 2011 period from $292,100 during the 2010 period.

	Six Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
Average Sales Price of Homes Closed
Southern California	$	488,200	$	324,800	$	163,400			50	%
Northern California		395,300		363,400		31,900			9	%
Arizona		142,500		177,600		(35,100	)		(20	)%
Nevada		186,000		221,500		(35,500	)		(16	)%
Total	$	334,600	$	292,100	$	42,500			15	%

The average sales price of homes closed during the 2011 period increased in two segments due primarily to a change in product mix. However, in Southern California the overall average sales price increase is primarily due to a change in product mix, in which the number of homes closed with a sale price in excess of $500,000 was 13 in the 2010 period and 75 in the 2011 period.

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	Six Months Ended June 30,						Increase (Decrease)
	2011			2010
Homebuilding Gross Margin Percentage
Southern California		13.3	%		17.7	%		(4.4	)%
Northern California		9.0	%		26.4	%		(17.4	)%
Arizona		14.8	%		5.1	%		9.7	%
Nevada		11.0	%		16.2	%		(5.2	)%
Total		12.0	%		17.3	%		(5.3	)%

Homebuilding gross margin percentage during the 2011 period decreased to 12.0% from 17.3% during the 2010 period which is primarily attributable to an increase in the average cost per homes closed of 22% from $241,500 in the 2010 period to $294,300 in the 2011 period offset by a 15% increase in the average sales price of home closed of $334,600 in the 2011 period from $292,100 in the 2010 period.

Homebuilding gross margins may be negatively impacted by a weak economic environment, which includes homebuyers’ reluctance to purchase new homes, increases 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.

Construction Services Revenue

Construction services revenue, which was all recorded in Southern California, was $7.6 million in the 2011 period compared with $6.1 million in the 2010 period. See Note 1 of “Notes to Consolidated Financial Statements” for further discussion.

Impairment Loss on Real Estate Assets

The Company evaluates homebuilding assets for impairment when indicators of impairments are present. Given the current market conditions in the homebuilding industry since 2006, 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. For the six months ended June 30, 2011 there were no impairment charges recorded compared to impairment on real estate assets of $0.3 million recorded in the Arizona segment for the six months ended June 30, 2010.

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.

	Six Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
	(dollars in thousands)
Sales and Marketing Expenses
Homebuilding
Southern California	$	4,679	$	6,525	$	(1,846	)		(28	)%
Northern California		2,310		1,357		953			70	%
Arizona		610		652		(42	)		(6	)%
Nevada		1,497		868		629			72	%
Total	$	9,096	$	9,402	$	(306	)		(3	)%

Sales and marketing expense decreased 3% to $9.1 million in the 2011 period from $9.4 million in the 2010 period, primarily attributable to a decrease in sales office and model operations expense of $0.2 million from $1.8 million in the 2010 period to $1.6 million in the 2011 period and a decrease in salesperson commissions and salaries of $0.4 million from $2.5 million in the 2010 period to $2.1 million in the 2011 period, offset by an increase in outside broker costs of $0.3 million from $1.4 million in the 2010 period to $1.7 million in the 2011 period.

- 41 -

	Six Months Ended June 30,				Increase (Decrease)
	2011		2010		Amount			%
	(dollars in thousands)
General and Administrative Expenses
Homebuilding
Southern California	$	2,059	$	1,914	$	145			8	%
Northern California		815		1,232		(417	)		(34	)%
Arizona		954		1,100		(146	)		(13	)%
Nevada		1,256		1,005		251			25	%
Corporate		6,838		6,335		503			8	%
Total	$	11,922	$	11,586	$	336			3	%

General and administrative expenses increased slightly to $11.9 million in the 2011 period from $11.6 million in the 2010 period,

Other Items

Other operating costs increased to $7.3 million in the 2011 period compared to $1.9 million in the 2010 period. The increase is primarily due to outside services of $6.1 million incurred in connection with the analysis and process of renegotiating, refinancing, repaying or restructuring debt maturities and loan terms, including covenants, slightly offset by a reduction in property tax expense incurred on projects in which development was temporarily suspended in the 2010 period, some of which were later restarted or sold.

Equity in income of unconsolidated joint ventures increased to income of $3.7 million in the 2011 period from income of $1.2 million in the 2010 period, primarily due to the sale of the Company’s interest in one of its unconsolidated joint ventures.

During the period ending June 30, 2011, the Company incurred interest related to its outstanding debt of $29.9 million, of which $19.9 million was capitalized, resulting in net interest expense of $10.0 million. During the period ending June 30, 2010, the Company incurred interest related to its outstanding debt of $31.9 million, of which $18.6 million was capitalized, resulting in net interest expense of $13.3 million.

	Six Months Ended June 30,						Increase (Decrease)
	2011			2010			Amount			%
	(dollars in thousands)
(Loss) Income Before Provision for Income Taxes
Homebuilding
Southern California	$	(2,128	)	$	(5,876	)	$	3,748			(64	)%
Northern California		(1,822	)		2,623			(4,445	)		(169	)%
Arizona		(1,059	)		(2,461	)		1,402			(57	)%
Nevada		(4,888	)		(1,931	)		(2,957	)		153	%
Corporate		(12,365	)		(5,533	)		(6,832	)		123	%
Total	$	(22,262	)	$	(13,178	)	$	(9,084	)		69	%

In Southern California, loss before provision for income taxes improved 64% to a loss of $(2.1) million in the 2011 period from a loss of $(5.9) million in the 2010 period. The decrease in loss is primarily attributable to a decrease in sales and marketing expense from $6.5 million in the 2010 period to $4.7 million in the 2011 period, offset by a decrease in homebuilding gross margins to 13.3% in the 2011 period from 17.7% in the 2010 period.

In Northern California, (loss) income before provision for income taxes changed to a loss of $(1.8) million in the 2011 period from income of $2.6 million in the 2010 period. The increase in loss is primarily attributable to a decrease in homebuilding gross margins to 9.0% in the 2011 period from 26.4% in the 2010 period in addition to an increase in sales and marketing expense to $2.3 million in the 2011 period from $1.4 million in the 2010 period, due to the opening of new project model complexes.

In Arizona, loss before provision for income taxes decreased 57% to a loss of $(1.1) million in the 2011 period from a loss of $(2.5) million in the 2010 period. The decrease in loss is primarily attributable to an increase in homebuilding gross margins to 14.8% in the 2011 period from 5.1% in the 2010 period in addition to impairment of $0.3 million in the 2010 period with no comparable amount in the 2011 period.

- 42 -

In Nevada, loss before provision for income taxes increased 153% to a loss of $(4.9) million in the 2011 period from a loss of $(1.9) million in the 2010 period. The increase in loss is primarily attributable to (i) an increase in sales and marketing expense from $0.9 million in the 2010 period to $1.5 million in the 2011 period, (ii) an increase in general and administrative expense from $1.0 million in the 2010 period to $1.3 million in the 2011 period, (iii) and a decrease in homebuilding gross margins to 11.0% in the 2011 period from 16.2% in the 2010 period.

The Corporate segment is a non-homebuilding segment in which 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 increase in loss before provision for income taxes to $(12.4) million in the 2011 period from loss of $(5.5) million in the 2010 period is primarily due to outside services of $6.1 million incurred in connection with the analysis and process of renegotiating, refinancing, repaying or restructuring debt maturities and loan terms, including covenants.

Net Loss

As a result of the foregoing factors, net loss for the six months ended June 30, 2011 was $22.4 million compared to net loss for the six months ended June 30, 2010 of $13.1 million.

Financial Condition and Liquidity

Since early 2006, the U.S. housing market has been negatively impacted by declined consumer confidence, restrictive mortgage standards, and large supplies of foreclosure, resale and new homes, among other factors. When combined with a prolonged economic downturn, high unemployment levels, and uncertainty in the U.S. economy, these conditions have contributed to decreased demand for housing, declining sales prices, and increasing pricing pressure, which hinders the Company’s ability to attract new home buyers. As a result, the Company has experienced operating losses, beginning in 2007 and continuing into 2011. Such losses resulted from a combination of reduced homebuilding gross margins, losses on land sales to generate cash flow, lower sales volume and significant impairment losses on real estate inventories.

The U.S. housing market and broader economy remain in a period of uncertainty; however, there are signs of stabilization in certain of our local markets, though at near historically low levels.

There are indications that certain aforementioned negative trends may be slowing, however, there are also a number of factors that may further worsen market conditions or delay a recovery in the homebuilding industry, including, but not limited to: (i) high levels of unemployment, which correlates to low levels of consumer confidence; (ii) continued foreclosure activity with immeasurable shadow inventory; (iii) upward trending mortgage rates, as the current level of low mortgage rates is not expected to remain in the long-term; (iv) increased costs and standards related to FHA loans, which continue to be a significant source of homebuyer financing; (v) increase in the cost of building materials; and (vi) the lack of consumer confidence due to U.S. and global economic difficulties.

The Company continues to operate with the assumption that difficult market conditions will continue at least during 2011. The Company continues to review acquisitions of select land positions where it makes strategic and economic sense to do so, targeting finished lots in core coastal markets, near high employment centers or transportation corridors. In addition, management continues to evaluate owned lots and land parcels to determine if values support holding the parcel for future project development or selling to generate cash flow.

In Southern California, net new home orders per average sales location decreased to 12.0 during the three months ended June 30, 2011 from 14.6 for the same period in 2010. In Northern California, net new home orders per average sales location increased to 7.4 during the 2011 period from 5.2 during the 2010 period. In Arizona, net new home orders per average sales location increased to 25.5 during the three months ended June 30, 2011 from 9.7 for the same period in 2010. In Nevada, net new home orders per average sales location increased to 6.8 during the 2011 period from 6.7 during the 2010 period. In Southern California, the cancellation rate decreased to 11% in the 2011 period compared to 19% in the 2010 period. In Northern California, the cancellation rate increased to 24% in the 2011 period compared to 13% in the 2010 period. In Arizona, the cancellation rate decreased to 2% in the 2011 period compared to 15% in the 2010 period. In Nevada, the cancelation rate decreased to 13% in the 2011 period compared to 17% in the 2010 period.

The Company experienced decreased homebuilding gross margin percentages of 11.5% for the three months ended June 30, 2011 compared to 17.4% in the 2010 period particularly impacted by a decrease in Southern California’s homebuilding gross margin percentages to 12.0% in the 2011 period compared to 18.2% in the 2010 period and a decrease in Northern California’s homebuilding gross margin percentages to 9.2% in the 2011 period compared to 26.0% in the 2010

- 43 -

period. In Arizona, homebuilding gross margin percentages increased to 19.3% in the 2011 period from 4.7% in the 2010 period. In Nevada, homebuilding gross margin percentages decreased to 10.1% in the 2011 period from 17.5% in the 2010 period.

For the period ended June 30, 2011, the Company experienced a decrease in homebuilding revenues of 16% from the prior year period due to a 27% decrease in the number of homes closed, offset by a 15% increase in the average price of homes closed. In response to the declining demand for housing in the homebuilding industry, the management of the Company continues to focus on generating positive cash flow, reducing overall debt levels and improving liquidity. Management of the Company intends to manage cash flow by reducing inventory levels and expenditures for temporarily suspended projects. For the period ended June 30, 2011, the Company’s net cash used in operations was $30.4 million.

In reaction to the declining market, the Company temporarily suspended the development, sales and marketing activities at certain of its projects which are in the early stages of development. The Company has concluded that this strategy was necessary under the prevailing market conditions at the time and believes that it will allow the Company to market the properties at some future time when market conditions may have improved. As of June 30, 2011, two of these projects had been restarted and are actively selling. As markets continue to improve, management continues to evaluate and analyze the market place to potentially activate the remaining suspended projects in 2011 and beyond.

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. California Lyon currently has outstanding 7⁵/8% Senior Notes due 2012, 10³/4% Senior Notes due 2013, 7¹/2% Senior Notes due 2014, and a 14% Term Loan due 2014. The Company, California Lyon and their subsidiaries have financed, and may in the future finance, certain projects and land acquisitions with construction loans secured by real estate inventories, seller-provided financing and land banking transactions.

Under the Term Loan, the Senior Notes and the Company’s other debt obligations, the Company and its subsidiaries are subject to a number of covenants, including financial covenants. The Company’s recent financial performance (including the $111.9 million non-cash impairment write-down for 2010) has made it more difficult for the Company to comply with these covenants. If the Company is unable to comply with its covenants and obligations under any of these instruments, and is not able to enter into amendments eliminating or modifying the covenants or obtain waivers from the holders of the instruments, the holders of one or more of the debt instruments could cause the acceleration of the debt instruments and require the Company to repay all principal and interest owing under the debt instruments. In addition, the acceleration of maturity under one debt instrument could result in the holders of other debt instruments having the right to accelerate the maturity of those debt instruments.

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. There is no assurance, however, that future cash flows will be sufficient to meet the Company’s future capital needs. In addition, 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 Notes obligations, Term Loan and other indebtedness. In addition, the terms of existing or future indentures and credit or other agreements governing the Company’s Senior Note obligations, revolving credit facilities and other indebtedness may restrict the Company from pursuing any of these alternatives.

Term Loan

William Lyon Homes, Inc., a California corporation and wholly-owned subsidiary of the Company (“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 $206.0 million, secured by substantially all of the assets of California Lyon, the Company (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 in October 2009, and its second installment of $75.0 million in December 2009. Under the Term Loan Agreement, California Lyon is 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. California Lyon is currently in compliance with the above requirements. 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 redemption of the Senior Notes, were $34.6 million. A portion of the $75.0 million proceeds from the second installment was used to fund additional land acquisitions in 2009 and 2010.

The Term Loan bears interest at a rate of 14.0%. However, the Term Loan Agreement also provides that, upon any repayment of any portion of the principal amount under the Term Loan (whether or not at maturity), California Lyon will 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 Term 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.

Upon any prepayment of any portion of the Term Loan prior to its scheduled maturity (other than any prepayment required in connection with a payment of all or any portion of the outstanding principal balance of any of indentures governing the Senior Notes (the “Senior Notes Indentures”), the Term Loan Agreement provides that California Lyon 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 is scheduled to 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 Term Loan outstanding as the Repaid Senior Note Principal bears to the entire amounts then outstanding under all of the Senior Notes Indentures. All or a portion of the Term Loan may also be accelerated upon certain other events described in the Term Loan Agreement. The lenders waived the requirement for such repayment in connection with the Senior Note redemptions which occurred from 2008 to 2010 and which are described below.

The Term Loan Agreement requires that the Company’s Minimum Tangible Net Worth (as defined therein) not fall below $75.0 million at the end of any two consecutive fiscal quarters. However, as discussed below, the Company has obtained temporary relief with respect to this covenant. The Term Loan Agreement also contains covenants that limit the ability of California Lyon and the Company to, without prior approval from Lenders, 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 Notes 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 at least $75.0 million (this covenant was modified as described below);

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• 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) unrestricted 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 June 30, 2011 is detailed in the table set forth below (dollars in millions):

Covenant and Other Requirements	Actual at June 30, 2011			Covenant Requirements at June 30, 2011
Tangible Net Worth (1)	$	(9.7	)	³$75.0
Ratio of Term Loan to Borrowing Base		54.5	%	£60%
Secured Indebtedness (as a percentage of collateral value)		58.0	%	£60%
Excluded Assets	$	11.0		£$20.0

(1) Tangible Net Worth was calculated based on the stated amount of equity less intangible assets of $10.6 million as of June 30, 2011. This covenant has been amended as described below.

The management of the Company, with the approval of the board of directors, has retained the services of an outside consulting firm to institute and implement all required programs to accomplish management’s objectives and to work with management in the analysis and process of renegotiating, refinancing, repaying or restructuring debt maturities and loan terms, including covenants. In addition, the Company is currently working through the process of refinancing its debt using the investment banking community. The Company has requested proposals for a debt financing to use in some combination of debt refinance or capital restructuring of the Term Loan and the Senior Notes.

Management of the Company continues to analyze its liquidity based on its current capital structure and existing cash forecast as well as factoring in the potential of acceleration of the Term Loan. Assuming that the Company is successful in obtaining continued waivers of the consolidated tangible net worth covenant in the Term Loan, management believes the Company has adequate sources of liquidity to fund its operations and meet its obligations for at least the next year, from the date of this filing.

As reported on the Company’s current report on Form 8-K dated March 18, 2011, the Company reached an agreement with the Lenders under the Term Loan that amended the Term Loan to permit the Company’s tangible net worth to fall below $75.0 million for two consecutive quarters. As reported on the Company’s current report on Form 8-K dated April 21, 2011, the Company reached a subsequent agreement with the Lenders under the Term Loan to waive any non-compliance with the tangible net worth covenant and with certain other technical requirements through July 19, 2011, subject to certain terms and conditions. In addition, as reported on the Company’s current report on Form 8-K dated July 18, 2011, the Company reached a subsequent agreement with the Lenders under the Term Loan to waive any non-compliance with the tangible net worth covenant and with certain other technical requirements through September 16, 2011, subject to certain terms and conditions.

Except as noted above, as of and for the period ending June 30, 2011, the Company is in compliance with the covenants under the Term Loan.

If market conditions deteriorate, the Company believes that its ability to comply with financial covenants contained in the Company’s Term Loan will continue to be negatively impacted. Under these circumstances, the Company could be required to seek additional covenant relief to avoid future noncompliance with the financial covenants in the Term Loan Agreement. 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 then be required to repay.

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The foregoing summary is not a complete description of the Term Loan and is qualified in its entirety by reference to the Term Loan Agreement.

Senior Notes

During the year ended December 31, 2010, California Lyon redeemed, in privately negotiated transactions (i) $30.0 million principal amount of its outstanding 10³/4% Senior Notes at a cost of $25.9 million plus accrued interest, (ii) $0.5 million principal amount of its outstanding 7⁵/8% Senior Notes at a cost of $0.4 million plus accrued interest, and (iii) $6.8 million principal amount of its outstanding 7¹/2% Senior Notes at a cost of $5.1 million plus accrued interest. The Lenders under the Term Loan consented to these redemptions and waived their right to require any prepayment of the Term Loan in connection therewith. The net gain resulting from these redemptions, after giving effect to amortization of related deferred loan costs and other fees, was approximately $5.6 million.

After giving effect to these Senior Note redemptions, in addition to all prior Senior Note redemptions, California Lyon now has the following principal amounts of Senior Notes outstanding (in thousands):

	June 30, 2011
7 5/8% Senior Notes due December 15, 2012	$	66,704
10 3/4% Senior Notes due April 1, 2013		138,760
7 1/2% Senior Notes due February 15, 2014		77,867
	$	283,331

7 ⁵/8% Senior Notes

On November 22, 2004, California Lyon issued $150.0 million principal amount of the 7 ⁵/8% Senior Notes, resulting in net proceeds to the Company of approximately $148.5 million. Of the initial $150.0 million, $66.7 million in aggregate principal amount remained outstanding as of June 30, 2011 and the date hereof. In August 2010, the Company redeemed, in a privately negotiated transaction, $0.5 million principal amount of its outstanding 7 ⁵/8% Senior Notes at a cost of $0.4 million plus accrued interest.

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 $2.5 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 accrued and unpaid interest, if any.

10 ³/4% Senior Notes

On March 17, 2003, California Lyon issued $250.0 million of 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 redemption 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, $138.8 million aggregate principal amount remained outstanding as of June 30, 2011 and the date hereof. In July 2010, the Company redeemed, in a privately negotiated transaction, $10.5 million principal amount of its outstanding 10 ³/4% Senior Notes at a cost of $9.0 million plus accrued interest. In August 2010, the Company redeemed, in privately negotiated transactions, $19.5 million principal amount of its outstanding 10  ³/4% Senior Notes at a cost of $16.9 million plus accrued interest.

Interest on the 10 ³/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding principal amount of the 10 ³/4% Senior Notes, the Company’s semi-annual interest payments are $7.4 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 accrued and unpaid interest, if any.

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7 ¹/2% Senior Notes

On February 6, 2004, California Lyon issued $150.0 million principal amount of the 7 ¹/2% Senior Notes, resulting in net proceeds to the Company of approximately $147.6 million. Of the initial $150.0 million, $77.9 million aggregate principal amount remained outstanding as of June 30, 2011 and the date hereof. In August 2010, the Company redeemed, in a privately negotiated transaction, $6.8 million principal amount of its outstanding 7  ¹/2% Senior Notes at a cost of $5.1 million plus accrued interest.

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 $2.9 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 Senior Notes are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by the Company, and by all of the Company’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 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.

Under the Senior Notes Indentures, 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. The tangible net worth for any fiscal quarter may not be counted more than once in determining whether California Lyon must make such an offer to purchase. Any such offer to purchase must be made within 65 days after the second quarter ended for which the Company’s tangible net worth is less than $75.0 million. However, California Lyon may reduce the principal amount of the notes to be purchased by the aggregate principal amount of all notes previously redeemed.

The Company’s consolidated tangible net worth was less than $75.0 million as of December 31, 2010, March 31, 2011 and June 30, 2011.

The Company previously determined and calculated that California Lyon’s redemptions of Senior Notes during the period from 2008 to 2010 reduced California Lyon’s repurchase obligations resulting from the Company’s consolidated tangible net worth being less than $75.0 million as of December 31, 2010 and March 31, 2011 as follows: California Lyon would not be obligated to repurchase any of the 7 ⁵/8% Senior Notes, as a result of California Lyon’s previous redemption of $83.3 million in aggregate principal amount of the 7 ⁵/8% Senior Notes; California Lyon would not be obligated to repurchase any of the 10 ³/4% Senior Notes, as a result of California Lyon’s previous redemption of $110.7 million in aggregate principal amount of the 10 ³/4% Senior Notes; and California Lyon would not be obligated to repurchase any of the 7 ¹/2% Senior Notes, as a result of California Lyon’s previous redemption of $72.1 million in aggregate principal amount of the 7 ¹/2% Senior Notes.

Since the Company’s consolidated tangible net worth as of March, 31, 2011 cannot be counted more than once in determining whether California Lyon must make an offer to repurchase any of the Senior Notes, two applicable fiscal quarters had not passed, and accordingly the requirement to make such an offer was not triggered, as of June 30, 2011, notwithstanding the fact that the Company’s consolidated tangible net worth was less than $75.0 million as of that date.

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

The Senior Notes Indentures contain covenants that limit the ability of the Company and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of the Company’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 the Company’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 June 30, 2011, the Company was in compliance with the Senior Notes 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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Prior Redemptions of the Senior Notes

During the year ended December 31, 2010, California Lyon redeemed, in privately negotiated transactions, $37.3 million principal amount of its outstanding Senior Notes at a cost of $31.3 million, plus accrued interest. The net gain resulting from the redemptions, after giving effect to amortization of related deferred loan costs, was $5.6 million.

On June 10, 2009, California Lyon consummated a cash tender offer (the “Tender Offer”) to redeem a portion of its outstanding Senior Notes, on the terms and subject to the conditions set forth in its offer to redeem, as amended. The principal amount of Senior Notes redeemed by California Lyon on settlement of the Tender Offer totaled $53.2 million, including $29.1 million of the 7 ⁵/8% Senior Notes, $2.4 million of the 10 ³/4% Senior Notes, and $21.7 million of the 7  ¹/2% Senior Notes. The aggregate Tender Offer consideration paid totaled $14.9 million, plus accrued interest. The net gain resulting from the Tender Offer, after closing costs, was $37.0 million.

Also, during 2009 the Company redeemed, in privately negotiated transactions, a total of $103.7 million principal amount of the outstanding Senior Notes at a cost of $62.1 million, plus accrued interest. The net gain resulting from the redemption, after giving effect to amortization of related deferred loan costs, was $41.1 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity” and Note 5 of “Notes to Consolidated Financial Statements” for more information relating to the Senior Notes of the Company.

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

Construction Notes Payable

As of June 30, 2011, the Company had two construction notes payable with outstanding principal totaling $19.9 million. One of the notes matured July 1, 2011 and bears interest at rates based on either LIBOR or prime with an interest rate floor of 6.5%. The outstanding principal balance of the note was $11.9 million as of June 30, 2011. Interest is calculated on the average daily balance and is paid following the end of each month. While the Company was previously required to maintain minimum tangible net worth of $90.0 million under this note, the Company and the lender have amended the note to eliminate the tangible net worth covenant in exchange for a principal payment of $2.0 million, which was made in April 2011. During the second quarter, the Company and the lender agreed to extend the maturity of the loan to January 2012 in exchange for a principal payment of $2.0 million, which was paid on July 1, 2011. The Company is required to make an additional principal payment of $0.9 Million in September 2011, and the interest rate floor will decrease to 6.0%.

The other construction note had a remaining balance at June 30, 2011 of $8.0 million, which will mature in May 2015. The loan bears interest payable monthly at a fixed rate of 12.5%, with quarterly principal payments of $500,000. The interest rate decreases to 10.0% when the principal balance is reduced to $7.5 million.

Seller Financing

At June 30, 2011, the Company had $5.4 million of notes payable outstanding related to a land acquisition for which seller financing was provided, which is included in notes payable in the accompanying consolidated balance sheet. The seller financing note is due at various dates through 2012 and bears 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

As a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s available cash or 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 land being purchased. 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 could be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider, general housing market conditions and geographic preferences.

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In addition, the Company participates in one land banking arrangement that is not a VIE in accordance with FASB ASC 810, but which is consolidated in accordance with FASB ASC Topic 470,Debt.Under the provisions of FASB ASC 470, the Company has determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangements. Therefore, the Company has recorded the remaining purchase price of the land of $47.4 million, which is included in real estate inventories not owned and liabilities from inventories not owned in the accompanying balance sheet as of June 30, 2011.

In 2011, the Company purchased 23 lots from its land banking arrangement for a total purchase price of $7.9 million. In conjunction with the purchase, the Company reduced real estate inventories not owned and liabilities from inventories not owned in the amount of $7.9 million.

Summary information with respect to the Company’s land banking arrangements is as follows as of June 30, 2011 (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		225
Purchase price	$	47,408
Forfeited deposits if lots are not purchased	$	25,234

Joint Venture Financing

The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in Critical Accounting Policies — Variable Interest Entities, certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements as of and for the six months ended June 30, 2011 and 2010. Because the Company did not consolidate or de-consolidate any variable interest entities as a result of adoption, the adoption of FASB ASC 810 did not affect the Company’s consolidated net income. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). 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 June 30, 2011, the Company’s investment in and advances to unconsolidated joint ventures was $0.3 million and the venture partners’ investment in such joint ventures was $0.3 million. As of June 30, 2011, these joint ventures had repaid all financing from construction lenders.

Assessment District Bonds

In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable interest rates when compared to the Company’s other sources of funds and the fact that the bonds are sold, administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible for the assessments on its land. When the Company’s homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. See Note 11 of “Notes to Consolidated Financial Statements.”

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Cash Flows — Comparison of Six Months Ended June 30, 2011 to Six Months Ended June 30, 2010

Net cash (used in) provided by operating activities decreased to a use of $(30.4) million in the 2011 period from a source of $31.3 million in the 2010 period. The change was primarily a result of (i) an increase in real estate inventories-owned of $3.7 million in the 2011 period compared to an increase of $81.7 million in the 2010 period, (ii) a decrease in income tax refunds receivable of $107.0 million in the 2010 period with no comparable amount in the 2011 period, (iii) an increase in other assets of $3.1 million in the 2011 period compared to a decrease of $13.4 million in the 2010 period, and (iv) consolidated net loss of $22.3 million in the 2011 period compared to consolidated net loss of $13.1 million in the 2010 period.

Net cash provided by investing activities increased to $1.2 million in the 2011 period from $0.5 million in the 2010 period. The change was primarily a result of an increase in distributions of income from unconsolidated joint ventures of $1.2 million in the 2011 period compared to $0.8 million in the 2010 period.

Net cash used in financing activities decreased to $7.4 million in the 2011 period from $38.9 million in the 2010 period, primarily as a result of the decrease in net paydowns to $5.2 million in the 2011 period from $48.4 million in the 2010 period. In addition, distributions to noncontrolling interests increased to $2.2 million in the 2011 period compared to contributions from noncontrolling interests of $2.8 million in the 2010 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, 2010.

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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 June 30, 2011		Backlog at June 30, 2011 (2) (3)		Lots Owned as of June 30, 2011(4)		Homes Closed for the Year Ended June 30, 2011		Sales Price Range(5)
SOUTHERN CALIFORNIA
San Diego County:
San Diego
Pasado Del Sur		2009		25		23		2		2		3	$	515,000 - 560,000
Pasado Del Sur II		2010		64		64		0		0		18	$	523,000 - 560,000
Carlsbad
Blossom Grove		2010		32		31		0		1		15	$	530,000 - 590,000
Mirasol at La Costa Greens		2010		71		23		15		48		6	$	600,000 - 690,000
San Bernardino County:
Fontana
Rosabella		2007		114		114		0		0		1	$	225,000 - 260,000
Orange County:
Irvine
Ivy		2009		135		135		0		0		16	$	375,000 - 454,000
San Carlos II		2010		92		45		9		47		19	$	310,000 - 470,000
Santa Ana
Canopy Lane		2011		38		0		19		38		0	$	495,000 - 580,000
Tustin
Astoria		2012		4		0		0		4		0
Los Angeles County:
Hawthorne
360 South Bay (6):
The Flats		2010		188		30		15		158		5	$	330,000 - 510,000
The Courts		2010		118		57		6		61		20	$	460,000 - 570,000
The Rows		2011		94		0		0		94		0	$	700,000 - 810,000
The Lofts		2013		123		0		0		123		0	$	525,000 - 775,000
The Gardens		2013		102		0		0		102		0	$	755,000 - 980,000
Azusa
Rosedale
Gardenia		2011		81		0		4		81		0	$	300,000 - 400,000
Sage Court		2011		64		0		2		64		0	$	290,000 - 395,000
SOUTHERN CALIFORNIA TOTAL				1,345		522		72		823		103
NORTHERN CALIFORNIA
Contra Costa County:
Pittsburgh
Vista Del Mar
Villages		2007		102		50		0		52		0	$	296,000 - 355,000
Venue		2007		132		68		5		64		10	$	330,000 - 365,000
Victory		2008		25		14		0		11		0	$	680,000 - 745,000
Antioch
Waterford		2011		130		0		0		130		0	$	265,000 - 310,000
Placer County:
Whitney Ranch, Rocklin
Twin Oaks		2006		92		92		0		0		2	$	400,000 - 470,000
Sacramento County:
Elk Grove
Magnolia Lane (Maderia)		2010		90		19		2		71		10	$	250,000 - 300,000
San Joaquin County:
The Ranch @ Mossdale Landing, Lathrop		2010		168		34		8		134		12	$	195,000 - 235,000
Santa Clara County:
The Gardens, San Jose		2010		40		30		10		10		19	$	580,000 - 595,000
Solano County:
Enclave at Paradise Valley, Fairfield		2010		100		19		17		81		10	$	350,000 - 415,000
NORTHERN CALIFORNIA TOTAL				879		326		42		553		63

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Project (County or City)	Year of First Delivery		Estimated Number of Homes at Completion (1)		Cumulative Units Closed as of June 30, 2011		Backlog at June 30, 2011 (2) (3)		Lots Owned as of June 30, 2011(4)		Homes Closed for the Year Ended June 30, 2011		Sales Price Range(5)
ARIZONA
Maricopa County:
Lyon’s Gate, Gilbert
Pride		2006		650		509		15		141		30	$	104,000 - 131,000
Acacia		2007		365		203		20		162		23	$	142,000 - 178,000
Future Products		2013		213		0		0		213		0
Arroyo @ Coldwater Ranch, Peoria		2009		20		20		0		0		2	$	132,000 - 168,000
Queen Creek
Hastings Property
Villas		2013		337		0		0		337		0	$	113,000 - 137,000
Manor		2013		141		0		0		141		0	$	159,000 - 218,000
Estates		2013		153		0		0		153		0	$	229,000 - 281,000
Church Farms North		2016		2,314		0		0		2,314		0	$	109,000 - 399,000
Lehi Crossing, Mesa		2013		914		0		0		914		0	$	199,000 - 464,000
Rancho Mercado, Phoenix		2016		1,903		0		0		1,903		0	$	110,000 - 324,000
ARIZONA TOTAL				7,010		732		35		6,278		55
NEVADA
Clark County:
North Las Vegas
The Cottages		2004		360		326		2		34		10	$	112,000 - 130,000
Serenity Ridge		2012		88		0		0		88		0	$	380,000 - 455,000
Tularosa at Mountain’s Edge		2011		140		4		9		136		4	$	183,000 - 213,000
Las Vegas
Carson Ranch
East Series I		2006		116		116		0		0		1	$	219,000 - 254,000
West Park
Villas		2006		107		107		0		0		12	$	155,000 - 184,000
Courtyards		2006		92		91		0		1		9	$	177,000 - 213,000
Flagstone
Crossings		2011		77		5		4		72		5	$	268,000 - 307,000
Commons		2011		37		9		2		28		9	$	198,000 - 230,000
Rhapsody		2012		63		0		0		63		0	$	179,000 - 201,000
The Fields at Aliente		2011		60		4		1		56		4	$	183,000 - 217,000
Nye County:
Pahrump
Mountain Falls
Series I		2011		116		7		6		109		7	$	117,000 - 150,000
Series II		2013		218		0		0		218		0	$	169,000 - 200,000
Future Projects		2014		1,925		0		0		1,925		0
NEVADA TOTAL				3,399		669		24		2,730		61
GRAND TOTALS				12,633		2,249		173		10,384		282

(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 June 30, 2011, all 167 represent homes completed or under construction.

(4) Lots owned as of June 30, 2011 include lots in backlog at June 30, 2011.

(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 June 30, 2011. The Company consolidated the purchase price of the lots in accordance with Interpretation No. 46, and considers the lots owned at June 30, 2011.

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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, 2010, 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 six months ended June 30, 2011, 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, 2010.

Recently Issued Accounting Standards

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s Annual Report on Form 10-K for the year ended December 31, 2010, 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, 2010.

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.

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

Item 4T.

Not Applicable

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WILLIAM LYON HOMES

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The Company’s Annual Report on Form 10-K for the year ended December 31, 2010, 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, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. (Removed and Reserved)

Item 5. Other Information

None

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
101	The following materials from William Lyon Homes’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income; (iii) Condensed Consolidated Statements of Cash Flows; (iv) Condensed Consolidated Statements of Shareholders’ Equity; and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text

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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: August 12, 2011	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
101	The following materials from William Lyon Homes’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income; (iii) Condensed Consolidated Statements of Cash Flows; (iv) Condensed Consolidated Statements of Shareholders’ Equity; and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text

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