<PAGE>   1

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                       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, 1999

                                       OR

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

                         COMMISSION FILE NUMBER 0-18001

                             THE PRESLEY COMPANIES
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                              <C>
                    DELAWARE                                        33-0475923
           (STATE OR JURISDICTION OF                             (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NO.)

               19 CORPORATE PLAZA                                     92660
           NEWPORT BEACH, CALIFORNIA                                (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

                                 (949) 640-6400
              (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 [X]     NO [ ]

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

<TABLE>
<CAPTION>
                                                                OUTSTANDING AT
                   CLASS OF COMMON STOCK                        AUGUST 10, 1999
                   ---------------------                        ---------------
<S>                                                             <C>
Series A, par value $.01                                          34,792,732
Series B, restricted voting convertible, par value $.01           17,402,946
</TABLE>

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<PAGE>   2

                             THE PRESLEY COMPANIES

                                     INDEX

<TABLE>
<CAPTION>
                                                                         PAGE NO.
                                                                         --------
  <S>      <C>                                                           <C>
  PART I. FINANCIAL INFORMATION

  ITEM 1.  FINANCIAL STATEMENTS:

           Consolidated Balance Sheets -- June 30, 1999 and December
             31, 1998..................................................      3

           Consolidated Statements of Operations -- Three and Six
             Months Ended June 30, 1999 and 1998.......................      4

           Consolidated Statement of Stockholders' Equity -- Six Months
             Ended June 30, 1999.......................................      5

           Consolidated Statements of Cash Flows -- Six Months Ended
             June 30, 1999 and 1998....................................      6

           Notes to Consolidated Financial Statements..................      7

  ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS.................................     16

  ITEM 3.  NOT APPLICABLE.

  PART II. OTHER INFORMATION...........................................     29

  SIGNATURES...........................................................     30
</TABLE>

                                        2
<PAGE>   3

                         PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

                             THE PRESLEY COMPANIES

                          CONSOLIDATED BALANCE SHEETS
         (IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE)
                                (NOTES 2 AND 3)

                                     ASSETS

<TABLE>
<CAPTION>
                                                               JUNE 30,      DECEMBER 31,
                                                                 1999            1998
                                                              -----------    ------------
                                                              (UNAUDITED)
<S>                                                           <C>            <C>
Cash and cash equivalents...................................   $  12,277      $  23,955
Receivables.................................................      13,601          8,613
Real estate inventories.....................................     176,522        174,502
Investments in and advances to unconsolidated joint
  ventures -- Note 4........................................      34,949         30,462
Property and equipment, less accumulated depreciation of
  $3,704 and $3,156 at June 30, 1999 and December 31, 1998,
  respectively..............................................       2,534          2,912
Deferred loan costs.........................................       2,441          3,381
Other assets................................................       3,908          2,579
                                                               ---------      ---------
                                                               $ 246,232      $ 246,404
                                                               =========      =========

                          LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable............................................   $  15,929      $  17,364
Accrued expenses............................................      25,825         27,823
Notes payable...............................................      61,290         55,393
12 1/2% Senior Notes due 2001 -- Notes 5 and 6..............     120,000        140,000
                                                               ---------      ---------
                                                                 223,044        240,580
                                                               ---------      ---------

Stockholders' equity
  Common stock:
     Series A common stock, par value $.01 per share;
      100,000,000 shares authorized; 34,792,732 issued and
      outstanding at June 30, 1999 and December 31, 1998,
      respectively..........................................         348            348
     Series B restricted voting convertible common stock,
      par value $.01 per share; 50,000,000 shares
      authorized; 17,402,946 shares issued and outstanding
      at June 30, 1999 and December 31, 1998,
      respectively..........................................         174            174
  Additional paid-in capital -- Note 1......................     118,740        116,249
  Accumulated deficit from January 1, 1994 -- Note 1........     (96,074)      (110,947)
                                                               ---------      ---------
                                                                  23,188          5,824
                                                               ---------      ---------
                                                               $ 246,232      $ 246,404
                                                               =========      =========
</TABLE>

                            See accompanying notes.

                                        3
<PAGE>   4

                             THE PRESLEY COMPANIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS)
                                  (UNAUDITED)
                                (NOTES 2 AND 3)

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED        SIX MONTHS ENDED
                                                      JUNE 30,                 JUNE 30,
                                                --------------------    ----------------------
                                                  1999        1998        1999         1998
                                                --------    --------    ---------    ---------
<S>                                             <C>         <C>         <C>          <C>
Sales
  Homes.......................................  $ 91,985    $ 71,882    $ 174,056    $ 136,273
  Lots, land and other........................     3,730       8,648        3,956       10,735
                                                --------    --------    ---------    ---------
                                                  95,715      80,530      178,012      147,008
                                                --------    --------    ---------    ---------

Operating costs
  Cost of sales -- homes......................   (76,097)    (62,247)    (144,117)    (118,997)
  Cost of sales -- lots, land and other.......    (3,066)     (8,250)      (3,741)     (10,151)
  Sales and marketing.........................    (4,385)     (4,708)      (8,460)      (9,795)
  General and administrative..................    (3,942)     (3,275)      (7,873)      (6,956)
                                                --------    --------    ---------    ---------
                                                 (87,490)    (78,480)    (164,191)    (145,899)
                                                --------    --------    ---------    ---------
Equity in income (loss) of unconsolidated
  joint ventures..............................     1,919        (129)       4,864         (155)
                                                --------    --------    ---------    ---------
Operating income..............................    10,144       1,921       18,685          954
Interest expense, net of amounts
  capitalized.................................    (1,456)     (2,262)      (3,671)      (4,893)
Financial advisory expenses -- Note 2.........      (588)         --       (1,280)          --
Other income (expense), net...................       874         570        1,541          969
                                                --------    --------    ---------    ---------
Income (loss) before income taxes and
  extraordinary item..........................     8,974         229       15,275       (2,970)
(Provision) credit for income taxes...........    (1,286)        363       (2,191)         363
                                                --------    --------    ---------    ---------
Income (loss) before extraordinary item.......     7,688         592       13,084       (2,607)
Extraordinary item -- gain from retirement of
  debt, net of applicable income taxes -- Note
  6...........................................     1,789         522        1,789          522
                                                --------    --------    ---------    ---------
Net income (loss).............................  $  9,477    $  1,114    $  14,873    $  (2,085)
                                                ========    ========    =========    =========
Basic and diluted earnings per common share:
  -- Note 1
  Before extraordinary item...................  $   0.15    $   0.01    $    0.25    $   (0.05)
  Extraordinary item..........................      0.03        0.01         0.03         0.01
                                                --------    --------    ---------    ---------
  After extraordinary item....................  $   0.18    $   0.02    $    0.28    $   (0.04)
                                                ========    ========    =========    =========
</TABLE>

                            See accompanying notes.

                                        4
<PAGE>   5

                             THE PRESLEY COMPANIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                         SIX MONTHS ENDED JUNE 30, 1999
                                 (IN THOUSANDS)
                                  (UNAUDITED)
                                (NOTES 2 AND 3)

<TABLE>
<CAPTION>
                                                        COMMON STOCK
                                            ------------------------------------                  ACCUMULATED
                                                SERIES A            SERIES B        ADDITIONAL    DEFICIT FROM
                                            ----------------    ----------------     PAID-IN       JANUARY 1,
                                            SHARES    AMOUNT    SHARES    AMOUNT     CAPITAL          1994         TOTAL
                                            ------    ------    ------    ------    ----------    ------------    -------
<S>                                         <C>       <C>       <C>       <C>       <C>           <C>             <C>
Balance -- December 31, 1998..............  34,793     $348     17,403     $174      $116,249      $(110,947)     $ 5,824
Net income................................      --       --         --       --            --         14,873       14,873
Income tax benefits relating to temporary
  differences existing prior to the quasi-
  reorganization -- Note 1................      --       --         --       --         2,491             --        2,491
                                            ------     ----     ------     ----      --------      ---------      -------
Balance -- June 30, 1999..................  34,793     $348     17,403     $174      $118,740      $ (96,074)     $23,188
                                            ======     ====     ======     ====      ========      =========      =======
</TABLE>

                            See accompanying notes.

                                        5
<PAGE>   6

                             THE PRESLEY COMPANIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
                                (NOTES 2 AND 3)

<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              --------------------
                                                                1999        1998
                                                              --------    --------
<S>                                                           <C>         <C>
Operating activities
  Net income (loss).........................................  $ 14,873    $ (2,085)
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities
     Depreciation and amortization..........................       548         621
     Equity in (income) loss of unconsolidated joint
      ventures..............................................    (4,864)        155
     Extraordinary gain on repurchase of Senior Notes.......    (2,089)       (885)
     Provision for income taxes.............................     2,491          --
     Net changes in operating assets and liabilities:
       Other receivables....................................     2,882      (2,928)
       Real estate inventories..............................     1,803      15,041
       Deferred loan costs..................................       729         707
       Other assets.........................................    (1,329)    (10,675)
       Accounts payable.....................................    (1,435)        640
       Accrued expenses.....................................    (1,998)     (1,977)
                                                              --------    --------
  Net cash provided by (used in) operating activities.......    11,611      (1,386)
                                                              --------    --------
Investing activities
  Investments in and advances to unconsolidated joint
     ventures...............................................       377     (11,340)
  Proceeds from contribution of land to joint venture.......        --      25,431
  Issuance of notes receivable..............................   (17,884)         --
  Principal payments on notes receivable....................    10,014         502
  Property and equipment, net...............................      (170)       (139)
                                                              --------    --------
  Net cash provided by (used in) investing activities.......    (7,663)     14,454
                                                              --------    --------
Financing activities
  Proceeds from borrowing on notes payable..................    92,065      75,175
  Principal payments on notes payable.......................   (89,991)    (64,645)
  Purchase of 12 1/2% Senior Notes..........................   (17,700)    (18,825)
                                                              --------    --------
  Net cash used in financing activities.....................   (15,626)     (8,295)
                                                              --------    --------
Net increase (decrease) in cash and cash equivalents........   (11,678)      4,773
Cash and cash equivalents -- beginning of period............    23,955       4,569
                                                              --------    --------
Cash and cash equivalents -- end of period..................  $ 12,277    $  9,342
                                                              ========    ========
Supplemental disclosures of cash flow information
  Cash paid during the period for interest, net of amounts
     capitalized............................................  $  5,007    $  5,300
                                                              ========    ========
  Issuance of notes payable for land acquisitions...........  $  3,823    $  2,748
                                                              ========    ========
</TABLE>

                            See accompanying notes.

                                        6
<PAGE>   7

                             THE PRESLEY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

     The unaudited consolidated financial statements of The Presley Companies
(the "Company" or "Presley") have been prepared in accordance with 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 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, 1998.

     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 generally accepted accounting
principles have been included. Operating results for the three and six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.

     The consolidated financial statements include the accounts of the Company
and all majority-owned or controlled subsidiaries and joint ventures. All
significant intercompany accounts and transactions have been eliminated.
Investments in unconsolidated joint ventures in which the Company has less than
a controlling interest are accounted for using the equity method. The accounting
policies of the joint ventures are substantially the same as those of the
Company.

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information ("Statement No. 131"). Statement No. 131
establishes new standards for segment reporting which are based on the way
management organizes segments within the Company for making operating decisions
and assessing performance. The adoption of Statement No. 131 did not affect the
results of operations or financial position of the Company.

     The Company designs, constructs and sells a wide range of homes designed to
meet the specific needs of each of its markets. For internal reporting purposes,
the Company is organized into six geographic home building regions and its
mortgage operations. Because each of the Company's geographic home building
regions has similar economic characteristics, housing products and class of
prospective buyers, the geographic home building regions have been aggregated
into a single home building segment. Mortgage company operations did not meet
the materiality thresholds which would require disclosure under Statement No.
131 for the three and six months ended June 30, 1999 and 1998, and accordingly,
are not separately reported.

     The Company evaluates performance and allocates resources primarily on the
operating income of individual home building projects. Operating income is
defined by the Company as sales of homes, lots and land; less cost of sales,
impairment losses on real estate, selling and marketing, and general and
administrative expenses. Accordingly, operating income excludes certain expenses
included in the determination of net income. Operating income from home building
operations, including income from the Company's investment in unconsolidated
joint ventures, totaled $10.1 million and $1.9 million for the three months
ended June 30, 1999 and 1998, respectively, and $18.7 million and $1.0 million
for the six months ended June 30, 1999 and 1998, respectively. All other segment
measurements are disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.

     All revenues are from external customers and no revenues are generated from
transactions with other segments. There were no customers that contributed 10%
or more of the Company's total revenues during the three and six months ended
June 30, 1999 and 1998.

                                        7
<PAGE>   8
                             THE PRESLEY COMPANIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

     Earnings per share amounts for all periods presented conform to Financial
Accounting Standards Board Statement No. 128, Earnings Per Share. Basic and
diluted earnings per common share for the three and six months ended June 30,
1999 and 1998 are based on 52,195,678 shares of Series A and Series B common
stock outstanding.

     The preparation of the Company's financial statements in conformity with
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, 1999 and December 31, 1998 and revenues and expenses for the
periods presented. Accordingly, actual results could differ materially from
those estimates in the near-term.

     Effective as of January 1, 1994, the Company completed a capital
restructuring and quasi-reorganization. The quasi-reorganization resulted in the
adjustment of assets and liabilities to estimated fair values and the
elimination of an accumulated deficit effective January 1, 1994. Income tax
benefits resulting from the utilization of net operating loss and other
carryforwards existing at January 1, 1994 and temporary differences existing
prior to or resulting from the quasi-reorganization, are excluded from the
results of operations and credited to paid-in capital. During the three and six
months ended June 30, 1999 income tax benefits of $1,586,000 and $2,491,000,
respectively, were excluded from results of operations and credited to paid-in
capital.

NOTE 2 -- COMPANY ENGAGES FINANCIAL ADVISOR AND ENTERS INTO LETTER OF INTENT
          WITH WILLIAM LYON HOMES, INC.

     The Company announced on May 5, 1998 that it had engaged Warburg Dillon
Read LLC to explore various strategic alternatives including the
refinancing/restructuring of its outstanding debt obligations or the sale of
certain, or substantially all, of its assets. In conjunction with the engagement
of the financial advisor, a Special Committee comprised of independent directors
of the Company's Board of Directors was formed to evaluate strategic
alternatives. The Company's actions were a direct result of the severe economic
conditions encountered during the past several years, together with the
Company's highly leveraged capital structure.

     Declining economic conditions began to affect the Company's primary
home-building markets in California during 1989. In view of substantial declines
in the value of certain of the Company's real estate assets since 1992, the
Company has been required to write down the book value of these real estate
assets in accordance with generally accepted accounting principles. The Company
had a loss of $89,894,000 for the year ended December 31, 1997, which included a
non-cash charge of $74,000,000 as a result of the recognition of impairment
losses on certain of the Company's real estate assets. As a result of the
substantial losses which have been realized by the Company, the Company had a
stockholders' deficit of $5,681,000 at December 31, 1997. The Company's
stockholders' equity totaled $5,824,000 and $23,188,000 at December 31, 1998 and
June 30, 1999, respectively.

     On December 31, 1998, the Company announced that, after unanimous approval
by the Special Committee of independent directors, Presley had entered into a
letter of intent with William Lyon Homes, Inc. ("William Lyon Homes") setting
forth their preliminary understanding with respect to (i) the proposed
acquisition by Presley of substantially all of the assets of William Lyon Homes
for approximately $48,000,000 together with the assumption of related
liabilities, and (ii) the concurrent purchase by William Lyon Homes pursuant to
a tender offer for not less than 40% and not more than 49% of the outstanding
shares of Presley common stock held by stockholders other than William Lyon at a
price of $0.62 per share. William Lyon Homes, which is owned by William Lyon and
his son, William H. Lyon, is a California-based homebuilder and real estate
developer with projects currently under development in Northern and Southern
California. William Lyon is Chairman of the Board of William Lyon Homes and also
Chairman of the Board of Presley. The execution of the letter of intent followed
a review over several months by the Special Committee, together

                                        8
<PAGE>   9
                             THE PRESLEY COMPANIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

with its financial and legal advisors, of strategic alternatives available to
Presley as well as a review of other proposals received from third parties.

     The letter of intent provided that, subject to the fiduciary duties of
their respective boards of directors, Presley and William Lyon Homes would
negotiate exclusively with each other toward a definitive agreement until March
31, 1999.

     On February 18, 1999, the Company announced that it had received a letter
from William Lyon proposing a modification to the previously executed letter of
intent with William Lyon Homes. Under the proposed modification, William Lyon
Homes would make a tender offer for not more than 37% of the outstanding shares
of common stock of Presley for a purchase price of $0.62 per share. In the event
that more than 37% of the outstanding shares of common stock of Presley is
tendered, William Lyon Homes would purchase shares from each tendering
stockholder on a pro rata basis. The tender offer would be conditioned upon
there being tendered and not withdrawn, a number of shares which constitutes at
least 37% of the outstanding shares of Presley. The proposed modification also
provided that the transaction would be structured to permit William Lyon or his
affiliates, prior to consummation of the transaction and consistent with
applicable securities laws, to sell shares of Presley common stock owned by them
up to a maximum of 4% of the total number of shares of Presley common stock
presently outstanding.

     On March 30, 1999, the parties amended the letter of intent to extend its
term and the period of exclusive negotiation to April 30, 1999. The condition
included in the letter of intent that the boards of directors of Presley and
William Lyon Homes must approve a definitive agreement by March 31, 1999 was
also extended to April 30, 1999. The parties agreed that William Lyon Homes
could participate in discussions and negotiations with the holders of Presley's
Series B Common Stock regarding the purchase by William Lyon Homes of such
percentage of the Series B holder's shares so as to reduce such Series B
holder's ownership interest in Presley Common Stock to between 4.9% and 5% of
Presley's outstanding Common Stock following consummation of the proposed
transactions. William Lyon Homes could also seek commitments from the Series B
holders to sell additional shares to the extent that the number of shares of
Series A Common Stock tendered in the tender offer are below the minimum
threshold set forth in a definitive agreement. William Lyon Homes was required
to notify the Special Committee regarding the details of any such discussions
and negotiations. William Lyon Homes could not enter into any agreement with any
Series B Holder prior to receiving the written approval from the Special
Committee or Presley's Board of Directors.

     On May 4, 1999, the Company announced that after approval by the Special
Committee of its Board of Directors, it had entered into a revised letter of
intent with William Lyon Homes setting forth their preliminary understanding
with respect to (i) the proposed acquisition by Presley of substantially all of
the assets of William Lyon Homes for a cash purchase price of $48,000,000 and
the assumption of all or substantially all of the liabilities of William Lyon
Homes; and (ii) the proposed purchase by William Lyon Homes of a portion of the
outstanding shares of Common Stock of Presley.

     Under the terms of the revised letter of intent, William Lyon Homes would
make offers to the holders of Presley's Series B Common Stock and a tender offer
to the holders of Presley's Series A Common Stock to purchase, for a cash
purchase price of $0.655 per share, an aggregate number of shares of Presley's
Common Stock which when added to the number of shares of Presley already owned
by William Lyon Homes and its affiliates, and after giving effect to a
disposition of up to 8% of the total number of shares of Presley Common Stock
currently outstanding by William Lyon Homes and/or its affiliates, would cause
William Lyon Homes and its affiliates to own an aggregate of approximately 49%
of the outstanding shares of Presley's Common Stock.

     The proposed transactions are subject to various conditions, including the
successful negotiation and execution of a definitive agreement; the receipt of
opinions of Presley's advisors with respect to the fairness of

                                        9
<PAGE>   10
                             THE PRESLEY COMPANIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

the transactions to Presley and its stockholders as well as the solvency of
Presley following the consummation of the transactions; the receipt of real
estate appraisals satisfactory to Presley and William Lyon Homes with respect to
the real estate assets of William Lyon Homes; the approval of a definitive
agreement by the respective boards of directors of Presley and William Lyon
Homes by July 15, 1999; receipt of all required regulatory approvals and third
party consents, including any required lender consents; the possession of
sufficient borrowing capacity or the receipt of financing by Presley in an
amount sufficient to enable Presley to finance the transactions; the holders of
Presley's Series B Common Stock not acquiring or disposing of any beneficial
interest in Presley's Common Stock prior to closing; the purchase by William
Lyon Homes of a sufficient number of shares of Presley Common Stock to cause,
when added to the number of shares already owned and after giving effect to the
sale of up to 8% of Presley's Common Stock, William Lyon Homes to own at least
49% of Presley's Common Stock (but not more than 49.9%); and the absence of any
material adverse change in the business or financial condition of either Presley
or William Lyon Homes.

     Effective as of July 15, 1999, Presley and William Lyon Homes amended the
revised letter of intent to extend from July 15 to October 15, 1999 the term of
the letter of intent, the period of exclusive negotiations and the date by which
the respective boards of directors of Presley and William Lyon Homes must
approve a definitive agreement with respect to the proposed transactions.

     The proposed transactions were also conditioned upon certain holders of
Presley's Series B Common Stock having consented to the transactions and
executed a written agreement, in form and substance satisfactory to William Lyon
Homes and Presley, to sell shares of Presley's Series B Common Stock to William
Lyon Homes such that each holder would own less than 5% of the aggregate number
of shares of Presley's Common Stock. William Lyon Homes has advised Presley's
Special Committee that in July 1999, William Lyon Homes entered into separate
agreements with three holders of Presley's Series B Common Stock which provide
for the purchase by William Lyon Homes from these holders of 9,434,813 (subject
to adjustment as described below) of Presley's Series B Common Stock for a cash
price of $0.655 per share. The parties have agreed that if following the closing
of the sale of the Series B Common Stock pursuant to these agreements and the
closing of the transactions contemplated in the revised letter of intent, and
after giving effect to the possible disposition by William Lyon Homes and its
affiliates of up to 8% of the outstanding shares of Presley as contemplated in
the revised letter of intent, William Lyon Homes and its affiliates own less
than an aggregate of approximately 49% (but in no event more than 49.9%) of
Presley's outstanding Common Stock, then such holders of Presley's Series B
Common Stock will sell to William Lyon Homes, at a cash price of $0.655 per
share, an additional number of shares of Presley's Series B Common Stock so as
to enable William Lyon Homes and its affiliates to own approximately 49% (but in
no event more than 49.9%) of Presley's outstanding Common Stock. Each of these
holders of Presley's Series B Common Stock has also agreed that prior to the
closing of the purchase, it will not transfer, tender, or encumber any shares of
Presley's Common Stock that it owns or convert any of its remaining Series B
Common Stock. Each of these holders has also agreed that prior to the closing,
it will not acquire any beneficial interest in shares of Presley's Common Stock
or options, warrants or other rights to acquire shares of Presley's Common
Stock. William Lyon Homes has also agreed not to sell for three years any shares
of Presley Common Stock in excess of the number currently owned by William Lyon
Homes, William Lyon or their affiliates unless such sale occurs in a transaction
in which all stockholders of Presley are given the opportunity to participate
pro rata and on the same terms and conditions. The agreements with such holders
of Presley's Series B Common Stock contain conditional commitments on the part
of the selling security holders to vote their shares in favor of the proposed
merger of Presley into a wholly-owned subsidiary in which the subsidiary will be
the surviving company in the merger. The charter documents of the subsidiary
will contain provisions that will restrict certain share transfers so as to
avoid an ownership change which could result in the limitation of Presley's use
of its net operating loss carryforwards for tax purposes (see Note 3). Each of
the agreements with such holders of

                                       10
<PAGE>   11
                             THE PRESLEY COMPANIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

Presley's Series B Common Stock may be terminated by either of the parties if
the closing has not occurred by November 15, 1999. Presley is not a party to
these Series B stock purchase agreements.

     The letter of intent contemplates that each of the transactions will be
structured so as to be subject to the successful completion of the others. The
letter of intent also contemplates that the parties will structure the
transactions (including, if necessary, by imposing limitations on certain
transfers of shares) so as to avoid triggering the change of control tax
provisions that would result in the loss of Presley's net operating losses for
tax purposes. The letter of intent also contemplates that Presley's 12 1/2%
Senior Notes due 2001 will remain outstanding without modification.

     The revised letter of intent, as amended, provides that, subject to the
fiduciary duties of their respective boards of directors, Presley and William
Lyon Homes will negotiate exclusively with each other toward a definitive
agreement until October 15, 1999. The letter of intent does not constitute a
binding agreement to consummate the transactions and there can be no assurance
that the parties will enter into a definitive agreement with respect to the
transactions or that the conditions to the transactions will be satisfied.

     In connection with these events, the Company has incurred costs of
approximately $588,000 and $1,280,000 for the three and six months ended June
30, 1999, respectively, which are reflected in the Consolidated Statement of
Operations as financial advisory expenses.

NOTE 3 -- BOARD OF DIRECTORS APPROVES, SUBJECT TO STOCKHOLDER APPROVAL, MERGER
          WITH WHOLLY-OWNED SUBSIDIARY

     On July 20, 1999, Presley announced that its Board of Directors has
approved, subject to stockholder approval, a merger of Presley into a
wholly-owned subsidiary. The subsidiary will be the surviving company in the
merger.

     The principal purpose of the proposed merger is to help preserve Presley's
substantial net operating loss carryforwards and other tax benefits for use in
offsetting future taxable income or income tax by decreasing the risk of an
"ownership change" for federal income tax purposes. This will be accomplished by
imposing certain restrictions on the transfer of the surviving company's stock.
These restrictions will be similar to those imposed by several other public
companies for the purpose of preserving their tax benefits against an "ownership
change."

     As previously reported, Presley's future use of tax carryforwards would be
severely limited if there were an "ownership change," as defined by the
applicable tax laws and regulations, over any three-year period. While Presley
believes an "ownership change" has not occurred since 1994, there is a risk that
future shifts in ownership, primarily involving present or future holders of 5%
or more of Presley's shares, could result in an "ownership change" as calculated
for federal income tax purposes.

     Generally, Presley has no control over purchases or sales by investors who
acquire 5% or more of its shares. However, the merger is being proposed to
reduce the risk of an "ownership change" occurring by restricting certain
transfers of the surviving company's stock.

     In general, if the proposed merger is consummated, the transfer
restrictions will prohibit, without prior approval of the board of directors of
the surviving company, the direct or indirect disposition or acquisition of any
stock of the company by or to any holder who owns or would so own upon the
acquisition (either directly or through the tax attribution rules) 5% or more of
the surviving company's stock.

     These restrictions are intended to bind all holders of shares of Presley's
common stock outstanding at the effective time of the proposed merger. If the
proposed merger is consummated, the transfer restrictions on the shares of the
surviving company will remain in effect for at least three years unless the
surviving company's board determines that they are no longer needed to preserve
the company's tax benefits.

                                       11
<PAGE>   12
                             THE PRESLEY COMPANIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

     Transfers of shares of Presley common stock occurring prior to the
effective time of the proposed merger will not be restricted and all holders of
Presley common stock as of such effective time will receive shares of the
surviving company in exchange for their Presley shares on a proposed
one-for-five basis. However, subsequent dispositions of those company shares
will be subject to the transfer restrictions. Accordingly, if the proposed
merger is consummated, persons who are or become "5% stockholders" of Presley
for purposes of the applicable federal income tax regulations will be prohibited
from disposing of their shares or acquiring additional shares in the surviving
company while the transfer restrictions are in effect unless the express consent
of the board of directors of the surviving company is obtained.

     The proposed merger will be submitted for approval at a special meeting of
stockholders of Presley which has not yet been called. A date for the special
meeting will be set and announced at the appropriate time. The proposed merger
will require the approval of a majority of the shares of Presley's Series A and
Series B common stock, voting as a single class. No appraisal rights will be
available in connection with the transaction.

     The merger is also subject to a number of other conditions, including
receipt of necessary consents and approvals; receipt of a satisfactory opinion
as to the federal income tax effects of the merger; and consummation of the
other transactions contemplated by the letter of intent with William Lyon Homes.

     If the proposed merger is consummated, each share of Series A or Series B
common stock of Presley will be converted into the right to receive 0.2 common
shares of the surviving company and outstanding stock options of Presley will be
correspondingly adjusted. The surviving company will have substantially the same
financial position as that of Presley immediately before the merger (the merger
is expected to take effect after consummation of the transactions contemplated
in the letter of intent with William Lyon Homes). Except for the transfer
restrictions, the new shares issued by the surviving company in the merger will
have terms substantially similar to the old shares.

     Presley will solicit proxies and the offering of the new shares in the
merger will be made under the federal securities laws only pursuant to a
registration statement declared effective by the Securities and Exchange
Commission.

                                       12
<PAGE>   13
                             THE PRESLEY COMPANIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

NOTE 4 -- INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES

     The Company and certain of its subsidiaries are general partners or members
in twelve joint ventures involved in the development and sale of residential
projects. Such joint ventures are not effectively controlled by the Company and,
accordingly, the financial statements of such joint ventures are not
consolidated with the Company's consolidated financial statements. The Company's
investments in unconsolidated joint ventures are accounted for using the equity
method. Condensed combined financial information of these joint ventures as of
June 30, 1999 and December 31, 1998 and for the three and six months ended June
30, 1999 and 1998 is summarized as follows:

                       CONDENSED COMBINED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               JUNE 30,      DECEMBER 31,
                                                                 1999            1998
                                                              -----------    ------------
                                                              (UNAUDITED)
<S>                                                           <C>            <C>
                                         ASSETS

Cash and cash equivalents...................................    $  3,558       $    304
Receivables.................................................         531            851
Real estate inventories.....................................     161,590        168,417
Other assets................................................       1,771          1,034
                                                                --------       --------
                                                                $167,450       $170,606
                                                                ========       ========

                             LIABILITIES AND OWNERS' CAPITAL

Accounts payable............................................    $  7,377       $  6,453
Accrued expenses............................................       4,597          2,098
Notes payable...............................................      28,460         29,024
Advances from The Presley Companies and subsidiaries........         691            655
                                                                --------       --------
                                                                  41,125         38,230
                                                                --------       --------
Owners' capital
  The Presley Companies and subsidiaries....................      34,258         29,807
  Others....................................................      92,067        102,569
                                                                --------       --------
                                                                 126,325        132,376
                                                                --------       --------
                                                                $167,450       $170,606
                                                                ========       ========
</TABLE>

                                       13
<PAGE>   14
                             THE PRESLEY COMPANIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

                  CONDENSED COMBINED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED      SIX MONTHS ENDED
                                                 JUNE 30,               JUNE 30,
                                            -------------------    -------------------
                                              1999       1998        1999       1998
                                            --------    -------    --------    -------
<S>                                         <C>         <C>        <C>         <C>
Sales
  Homes...................................  $ 32,619    $ 1,719    $ 70,536    $ 1,719
Operating costs
  Cost of sales -- homes..................   (26,764)    (1,568)    (57,595)    (1,568)
  Sales and marketing.....................    (1,165)      (307)     (2,569)      (333)
                                            --------    -------    --------    -------
Operating income..........................     4,690       (156)     10,372       (182)
Other income, net.........................        45         20         222         20
                                            --------    -------    --------    -------
Net income (loss).........................  $  4,735    $  (136)   $ 10,594    $  (162)
                                            ========    =======    ========    =======
Allocation to owners
  The Presley Companies and
     subsidiaries.........................  $  1,919    $  (129)   $  4,864    $  (155)
  Others..................................     2,816         (7)      5,730         (7)
                                            --------    -------    --------    -------
                                            $  4,735    $  (136)   $ 10,594    $  (162)
                                            ========    =======    ========    =======
</TABLE>

     Based upon current estimates, substantially all future development and
construction costs will be funded by the Company's venture partners or from the
proceeds of non-recourse construction financing obtained by the joint ventures.

NOTE 5 -- 12 1/2% SENIOR NOTES DUE 2001

     In accordance with the bond indenture governing the Company's Senior Notes
which are due in 2001, if the Company's Consolidated Tangible Net Worth is less
than $60,000,000 for two consecutive fiscal quarters, the Company is required to
offer to purchase $20,000,000 in principal amount of the Senior Notes. Because
the Company's Consolidated Tangible Net Worth has been less than $60,000,000
beginning with the quarter ended June 30, 1997, the Company would, effective on
December 4, 1997, June 4, 1998, December 4, 1998 and June 4, 1999, have been
required to make offers to purchase $20,000,000 of the Senior Notes at par plus
accrued interest, less the face amount of Senior Notes acquired by the Company
after September 30, 1997, March 31, 1998, September 30, 1998 and March 31, 1999,
respectively. The Company acquired Senior Notes with a face amount of
$20,000,000 after September 30, 1997 and prior to December 4, 1997, again after
March 31, 1998 and prior to June 4, 1998, again after September 30, 1998 and
prior to December 4, 1998 and again after March 31, 1999 and prior to June 4,
1999, and therefore was not required to make said offers.

     Each six months thereafter, until such time as the Company's Consolidated
Tangible Net Worth is $60,000,000 or more at the end of a fiscal quarter, the
Company will be required to make similar offers to purchase $20,000,000 of
Senior Notes. At June 30, 1999, the Company's Consolidated Tangible Net Worth
was $20,747,000. The Company's management has previously held discussions, and
may in the future hold discussions, with representatives of certain of the
holders of the Senior Notes with respect to modifying this repurchase provision
of the bond indenture agreement. To date, no agreement has been reached to
modify this repurchase provision. Any such change in the terms or conditions of
the bond indenture agreement requires the affirmative vote of at least a
majority in principal amount of the Senior Notes outstanding. No assurances can
be given that any such change will be made.

                                       14
<PAGE>   15
                             THE PRESLEY COMPANIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

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

NOTE 6 -- GAIN FROM RETIREMENT OF DEBT

     In April 1999, the Company purchased $20,000,000 principal amount of its
outstanding Senior Notes at a cost of $17,700,000. The net gain resulting from
the purchase was $1,789,000, after giving effect to income taxes of $300,000 and
amortization of related deferred loan costs of $211,000. Such gain is reflected
as an extraordinary item in the Company's results of operations for the second
quarter ending June 30, 1999.

                                       15
<PAGE>   16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                             THE PRESLEY COMPANIES

          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, 1998.

GENERAL OVERVIEW

     The Company announced on May 5, 1998 that it had engaged Warburg Dillon
Read LLC to explore various strategic alternatives including the
refinancing/restructuring of its outstanding debt obligations or the sale of
certain, or substantially all, of its assets. In conjunction with the engagement
of the financial advisor, a Special Committee comprised of independent directors
of the Company's Board of Directors was formed to evaluate strategic
alternatives. The Company's actions were a direct result of the severe economic
conditions encountered during the past several years, together with the
Company's highly leveraged capital structure.

     Declining economic conditions began to affect the Company's primary
home-building markets in California during 1989. In view of substantial declines
in the value of certain of the Company's real estate assets since 1992, the
Company has been required to write down the book value of these real estate
assets in accordance with generally accepted accounting principles. The Company
had a loss of $89.9 million for the year ended December 31, 1997 which included
a non-cash charge of $74.0 million as a result of the recognition of impairment
losses on certain of the Company's real estate assets. As a result of the
substantial losses which have been realized by the Company, the Company had a
stockholders' deficit of $5.7 million at December 31, 1997. The Company's
stockholders' equity totaled $5.8 million and $23.2 million at December 31, 1998
and June 30, 1999, respectively.

     On December 31, 1998, the Company announced that, after unanimous approval
by the Special Committee of independent directors, Presley had entered into a
letter of intent with William Lyon Homes, Inc. ("William Lyon Homes") setting
forth their preliminary understanding with respect to (i) the proposed
acquisition by Presley of substantially all of the assets of William Lyon Homes
for approximately $48.0 million together with the assumption of related
liabilities, and (ii) the concurrent purchase by William Lyon Homes pursuant to
a tender offer for not less than 40% and not more than 49% of the outstanding
shares of Presley common stock held by stockholders other than William Lyon at a
price of $0.62 per share. William Lyon Homes, which is owned by William Lyon and
his son, William H. Lyon, is a California-based homebuilder and real estate
developer with projects currently under development in Northern and Southern
California. William Lyon is Chairman of the Board of William Lyon Homes and also
Chairman of the Board of Presley. The execution of the letter of intent followed
a review over several months by the Special Committee, together with its
financial and legal advisors, of strategic alternatives available to Presley as
well as a review of other proposals received from third parties.

     The letter of intent provided that, subject to the fiduciary duties of
their respective boards of directors, Presley and William Lyon Homes would
negotiate exclusively with each other toward a definitive agreement until March
31, 1999.

     On February 18, 1999, the Company announced that it had received a letter
from William Lyon proposing a modification to the previously executed letter of
intent with William Lyon Homes. Under the proposed modification, William Lyon
Homes would make a tender offer for not more than 37% of the outstanding shares
of common stock of Presley for a purchase price of $0.62 per share. In the event
that more than 37% of the outstanding shares of common stock of Presley is
tendered, William Lyon Homes would purchase shares from each tendering
stockholder on a pro rata basis. The tender offer would be conditioned upon
there being tendered and not withdrawn a number of shares which constitutes at
least 37% of the outstanding shares of Presley. The proposed modification also
provided that the transaction would be

                                       16
<PAGE>   17

structured to permit William Lyon or his affiliates, prior to consummation of
the transaction and consistent with applicable securities laws, to sell shares
of Presley common stock owned by them up to a maximum of 4% of the total number
of shares of Presley common stock presently outstanding.

     On March 30, 1999, the parties amended the letter of intent to extend its
term and the period of exclusive negotiation to April 30, 1999. The condition
included in the letter of intent that the boards of directors of Presley and
William Lyon Homes must approve a definitive agreement by March 31, 1999 was
also extended to April 30, 1999. The parties agreed that William Lyon Homes
could participate in discussions and negotiations with the holders of Presley's
Series B Common Stock regarding the purchase by William Lyon Homes of such
percentage of the Series B holder's shares so as to reduce such Series B
holder's ownership interest in Presley Common Stock to between 4.9% and 5% of
Presley's outstanding Common Stock following consummation of the proposed
transactions. William Lyon Homes could also seek commitments from the Series B
holders to sell additional shares to the extent that the number of shares of
Series A Common Stock tendered in the tender offer are below the minimum
threshold set forth in a definitive agreement. William Lyon Homes was required
to notify the Special Committee regarding the details of any such discussions
and negotiations. William Lyon Homes could not enter into any agreement with any
Series B Holder prior to receiving the written approval from the Special
Committee or Presley's Board of Directors.

     On May 4, 1999, the Company announced that after approval by the Special
Committee of its Board of Directors, it had entered into a revised letter of
intent with William Lyon Homes setting forth their preliminary understanding
with respect to (i) the proposed acquisition by Presley of substantially all of
the assets of William Lyon Homes for a cash purchase price of $48 million and
the assumption of all or substantially all of the liabilities of William Lyon
Homes; and (ii) the proposed purchase by William Lyon Homes of a portion of the
outstanding shares of Common Stock of Presley.

     Under the terms of the revised letter of intent, William Lyon Homes would
make offers to the holders of Presley's Series B Common Stock and a tender offer
to the holders of Presley's Series A Common Stock to purchase, for a cash
purchase price of $0.655 per share, an aggregate number of shares of Presley's
Common Stock which when added to the number of shares of Presley already owned
by William Lyon Homes and its affiliates, and after giving effect to a
disposition of up to 8% of the total number of shares of Presley Common Stock
currently outstanding by William Lyon Homes and/or its affiliates, would cause
William Lyon Homes and its affiliates to own an aggregate of approximately 49%
of the outstanding shares of Presley's Common Stock.

     The proposed transactions are subject to various conditions, including the
successful negotiation and execution of a definitive agreement; the receipt of
opinions of Presley's advisors with respect to the fairness of the transactions
to Presley and its stockholders as well as the solvency of Presley following the
consummation of the transactions; the receipt of real estate appraisals
satisfactory to Presley and William Lyon Homes with respect to the real estate
assets of William Lyon Homes; the approval of a definitive agreement by the
respective boards of directors of Presley and William Lyon Homes by July 15,
1999; receipt of all required regulatory approvals and third party consents,
including any required lender consents; the possession of sufficient borrowing
capacity or the receipt of financing by Presley in an amount sufficient to
enable Presley to finance the transactions; the holders of Presley's Series B
Common Stock not acquiring or disposing of any beneficial interest in Presley's
Common Stock prior to closing; the purchase by William Lyon Homes of a
sufficient number of shares of Presley Common Stock to cause, when added to the
number of shares already owned and after giving effect to the sale of up to 8%
of Presley's Common Stock, William Lyon Homes to own at least 49% of Presley's
Common Stock (but not more than 49.9%); and the absence of any material adverse
change in the business or financial condition of either Presley or William Lyon
Homes.

     Effective as of July 15, 1999, Presley and William Lyon Homes amended the
revised letter of intent to extend from July 15 to October 15, 1999 the term of
the letter of intent, the period of exclusive negotiations and the date by which
the respective boards of directors of Presley and William Lyon Homes must
approve a definitive agreement with respect to the proposed transactions.

     The proposed transactions were also conditioned upon certain holders of
Presley's Series B Common Stock having consented to the transactions and
executed a written agreement, in form and substance

                                       17
<PAGE>   18

satisfactory to William Lyon Homes and Presley, to sell shares of Presley's
Series B Common Stock to William Lyon Homes such that each holder would own less
than 5% of the aggregate number of shares of Presley's Common Stock. William
Lyon Homes has advised Presley's Special Committee that in July 1999, William
Lyon Homes entered into separate agreements with three holders of Presley's
Series B Common Stock which provide for the purchase by William Lyon Homes from
these holders of 9,434,813 (subject to adjustment as described below) of
Presley's Series B Common Stock for a cash price of $0.655 per share. The
parties have agreed that if following the closing of the sale of the Series B
Common Stock pursuant to these agreements and the closing of the transactions
contemplated in the revised letter of intent, and after giving effect to the
possible disposition by William Lyon Homes and its affiliates of up to 8% of the
outstanding shares of Presley as contemplated in the revised letter of intent,
William Lyon Homes and its affiliates own less than an aggregate of
approximately 49% (but in no event more than 49.9%) of Presley's outstanding
Common Stock, then such holders of Presley's Series B Common Stock will sell to
William Lyon Homes, at a cash price of $0.655 per share, an additional number of
shares of Presley's Series B Common Stock so as to enable William Lyon Homes and
its affiliates to own approximately 49% (but in no event more than 49.9%) of
Presley's outstanding Common Stock. Each of these holders of Presley's Series B
Common Stock has also agreed that prior to the closing of the purchase, it will
not transfer, tender, or encumber any shares of Presley's Common Stock that it
owns or convert any of its remaining Series B Common Stock. Each of these
holders has also agreed that prior to the closing, it will not acquire any
beneficial interest in shares of Presley's Common Stock or options, warrants or
other rights to acquire shares of Presley's Common Stock. William Lyon Homes has
also agreed not to sell for three years any shares of Presley Common Stock in
excess of the number currently owned by William Lyon Homes, William Lyon or
their affiliates unless such sale occurs in a transaction in which all
stockholders of Presley are given the opportunity to participate pro rata and on
the same terms and conditions. The agreements with such holders of Presley's
Series B Common Stock contain conditional commitments on the part of the selling
security holders to vote their shares in favor of the proposed merger of Presley
into a wholly-owned subsidiary in which the subsidiary will be the surviving
company in the merger. The charter documents of the subsidiary will contain
provisions that will restrict certain share transfers so as to avoid an
ownership change which could result in the limitation of Presley's use of its
net operating loss carryforwards for tax purposes (see Note 3). Each of the
agreements with such holders of Presley's Series B Common Stock may be
terminated by either of the parties if the closing has not occurred by November
15, 1999. Presley is not a party to these Series B stock purchase agreements.

     The letter of intent contemplates that each of the transactions will be
structured so as to be subject to the successful completion of the others. The
letter of intent also contemplates that the parties will structure the
transactions (including, if necessary, by imposing limitations on certain
transfers of shares) so as to avoid triggering the change of control tax
provisions that would result in the loss of Presley's net operating losses for
tax purposes. The letter of intent also contemplates that Presley's 12 1/2%
Senior Notes due 2001 will remain outstanding without modification.

     The revised letter of intent, as amended, provides that, subject to the
fiduciary duties of their respective boards of directors, Presley and William
Lyon Homes will negotiate exclusively with each other toward a definitive
agreement until October 15, 1999. The letter of intent does not constitute a
binding agreement to consummate the transactions and there can be no assurance
that the parties will enter into a definitive agreement with respect to the
transactions or that the conditions to the transactions will be satisfied.

     In connection with these events, the Company has incurred costs of
approximately $588,000 and $1,280,000 for the three and six months ended June
30, 1999, respectively, which are reflected in the Consolidated Statement of
Operations as financial advisory expenses.

     In accordance with the bond indenture governing the Company's Senior Notes
which are due in 2001, if the Company's Consolidated Tangible Net Worth is less
than $60 million for two consecutive fiscal quarters, the Company is required to
offer to purchase $20 million in principal amount of the Senior Notes. Because
the Company's Consolidated Tangible Net Worth has been less than $60 million
beginning with the quarter ended June 30, 1997, the Company would, effective on
December 4, 1997, June 4, 1998, December 4, 1998 and June 4, 1999, have been
required to make offers to purchase $20 million of the Senior Notes at par plus
accrued interest, less the face amount of Senior Notes acquired by the Company
after September 30, 1997,

                                       18
<PAGE>   19

March 31, 1998, September 30, 1998 and March 31, 1999, respectively. The Company
acquired Senior Notes with a face amount of $20 million after September 30, 1997
and prior to December 4, 1997, again after March 31, 1998 and prior to June 4,
1998, again after September 30, 1998 and prior to December 4, 1998 and again
after March 31, 1999 and prior to June 4, 1999, and therefore was not required
to make said offers.

     Each six months thereafter, until such time as the Company's Consolidated
Tangible Net Worth is $60 million or more at the end of a fiscal quarter, the
Company will be required to make similar offers to purchase $20 million of
Senior Notes. At June 30, 1999, the Company's Consolidated Tangible Net Worth
was $20.7 million. The Company's management has previously held discussions, and
may in the future hold discussions, with representatives of certain of the
holders of the Senior Notes with respect to modifying this repurchase provision
of the bond indenture agreement. To date, no agreement has been reached to
modify this repurchase provision. Any such change in the terms or conditions of
the bond indenture agreement requires the affirmative vote of at least a
majority in principal amount of the Senior Notes outstanding. No assurances can
be given that any such change will be made.

     As more fully discussed under Working Capital Facility, on July 6, 1998 the
Company completed an agreement with the Agent of its existing lender group under
its Working Capital Facility to (1) extend this loan facility to May 20, 2001,
(2) increase the loan commitment to $100 million, and (3) decrease the fees and
costs compared to the prior revolving facility.

     Because of the Company's obligation to offer to purchase $20 million of the
Senior Notes each six months so long as the Company's Consolidated Tangible Net
Worth is less than $60 million, the Company is restricted in its ability to
acquire, hold and develop real estate projects. The Company changed its
operating strategy during 1997 to finance certain projects by forming joint
ventures with venture partners that would provide a substantial portion of the
capital necessary to develop these projects. The Company believes that the use
of joint venture partnerships will better enable it to reduce its capital
investment and risk in the highly capital intensive California markets, as well
as to repurchase the Company's Senior Notes as described above. The Company does
not contemplate any change in this operating strategy in connection with the
transactions with William Lyon Homes as described above. The Company would
generally receive, after priority returns and capital distributions to its
partners, approximately 50% of the profits and losses, and cash flows from these
joint ventures.

     As of June 30, 1999, the Company and certain of its subsidiaries are
general partners or members in twelve joint ventures involved in the development
and sale of residential projects. Such joint ventures are not effectively
controlled by the Company and, accordingly, the financial statements of such
joint ventures are not consolidated with the Company's consolidated financial
statements. The Company's investments in unconsolidated joint ventures are
accounted for using the equity method. See Note 4 of "Notes to Consolidated
Financial Statements" for condensed combined financial information for these
joint ventures. Based upon current estimates, all future development and
construction costs will be funded by the Company's venture partners or from the
proceeds of non-recourse construction financing obtained by the joint ventures.

     Based on information currently available to it at December 31, 1998, the
Company had a net operating loss carryforward for Federal tax purposes of
approximately $126.2 million, of which $5.1 million expires in 2007, $17.5
million expires in 2008, $27.4 million expires in 2009, $35.8 million expires in
2010, $13.7 million expires in 2011, $16.4 million expires in 2012 and $10.3
million expires in 2018 (included in the $126.2 million is $33.1 million of net
operating loss carryforward that is limited due to a prior ownership change).
The Company's ability to utilize the tax benefits associated with its net
operating loss carryforward will depend upon the amount of its otherwise taxable
income and may be limited in the event of an "ownership change" under federal
tax laws and regulations. The Company presently cannot prohibit such ownership
changes from occurring. In addition, the amount of net operating loss
carryforward has not been audited or otherwise validated by the Internal Revenue
Service and may be challenged.

     The ability of the Company to meet its obligations on its indebtedness will
depend to a large degree on its future performance which in turn will be
subject, in part, to factors beyond its control, such as prevailing economic
conditions, mortgage and other interest rates, competition, construction defect
or other litigation, weather, the occurrence of events such as landslides, soil
subsidence and earthquakes that are uninsurable, not

                                       19
<PAGE>   20

economically insurable or not subject to effective indemnification agreements,
availability of labor and homebuilding materials, changes in governmental laws
and regulations, and the availability and cost of land for future development.
At this time, the Company's degree of leverage may limit its ability to meet its
obligations, withstand adverse business or other conditions and capitalize on
business opportunities.

     The Company has announced that it has received notification from the New
York Stock Exchange that the Securities and Exchange Commission has approved
amendments to the NYSE's continued listing standards. While these new continued
listing standards took effect on July 27, 1999, the SEC is soliciting comments
on these new standards for a 90-day period. The NYSE has stated that it expects
permanent approval of the standards as currently drafted. Under these new
standards, the Company would be considered "below criteria" if it has:

     - Total market capitalization of less than $50 million and total
       stockholders' equity of less than $50 million.

     - Average market capitalization of less than $15 million over a consecutive
       30-day trading period; and

     - Average closing price of less than $1 over a consecutive 30 trading-day
       period.

     The NYSE has notified the Company that it is below these new criteria. The
NYSE has further informed the Company that failure to raise its stock price
above $1.00 per share within six months will result in immediate suspension of
trading and application to the SEC for delisting. In addition, the Company will
have 45 days from the date of the NYSE's notification to present a business plan
to the NYSE that will demonstrate compliance with all aspects of the other two
criteria within 12 months of the date of the NYSE's notification. If the NYSE
accepts the Company's business plan, the Company will be monitored for quarterly
compliance with its plan. If the Company fails to achieve the quarterly
milestones or if at the completion of the 12 months it is not in compliance with
the new continued listing criteria, the Company will be suspended from trading
on the NYSE and application will be made to the SEC for delisting. If the
Company achieves all quarterly milestones and meets the NYSE continued listing
criteria at the end of the 12 month period, the Company will be considered in
"good standing" and no longer subject to business plan review. However, the
Company would be subject to the NYSE's on-going listing review policies and
procedures. If the business plan is not accepted by the NYSE or the Company
elects not to submit a business plan, the Company will be subject to immediate
trading suspension and subsequent delisting procedures.

     The Company has notified the NYSE that it intends to submit a business plan
within the 45 day period. There can be no assurance, however, that the business
plan will be accepted by the NYSE; that the Company will achieve the quarterly
milestones included in the plan; or that the Company will comply with the new
continued listing criteria at the completion of the 12 month period.

                                       20
<PAGE>   21

RESULTS OF OPERATIONS

  OVERVIEW AND RECENT RESULTS

     Homes sold, closed and in backlog for the Company and its unconsolidated
joint ventures as of and for the periods presented are as follows:

<TABLE>
<CAPTION>
                                                   AS OF AND FOR       AS OF AND FOR
                                                  THE THREE MONTHS     THE SIX MONTHS
                                                   ENDED JUNE 30,      ENDED JUNE 30,
                                                  ----------------    ----------------
                                                   1999      1998      1999      1998
                                                  ------    ------    ------    ------
<S>                                               <C>       <C>       <C>       <C>
Number of homes sold
  Company.....................................       462       559       928     1,080
  Unconsolidated joint ventures...............       143        63       331        81
                                                  ------    ------    ------    ------
                                                     605       622     1,259     1,161
                                                  ======    ======    ======    ======
Number of homes closed
  Company.....................................       438       395       839       732
  Unconsolidated joint ventures...............        96         2       212         2
                                                  ------    ------    ------    ------
                                                     534       397     1,051       734
                                                  ======    ======    ======    ======
Backlog of homes sold but not closed at end of
  period
  Company.....................................       588       744       588       744
  Unconsolidated joint ventures...............       237        86       237        86
                                                  ------    ------    ------    ------
                                                     825       830       825       830
                                                  ======    ======    ======    ======
Dollar amount of backlog of homes sold but not
  closed at end of period (in millions):
  Company.....................................    $120.0    $159.4    $120.0    $159.4
  Unconsolidated joint ventures...............      95.7      45.0      95.7      45.0
                                                  ------    ------    ------    ------
                                                  $215.7    $204.4    $215.7    $204.4
                                                  ======    ======    ======    ======
</TABLE>

     Homes in backlog are generally closed within three to six months. The
dollar amount of backlog of homes sold but not closed as of June 30, 1999 was
$215.7 million, as compared to $204.4 million as of June 30, 1998 and $199.7
million as of March 31, 1999. The cancellation rate of buyers who contracted to
buy a home but did not close escrow at the Company's projects was approximately
19% during 1998 and approximately 17% during the first six months of 1999.

     The number of homes sold for the quarter ended June 30, 1999 decreased 3
percent to 605 units from 622 a year ago. For the second quarter of 1999, the
number of homes sold decreased 7 percent to 605 from 654 units in the first
quarter of 1999. The number of homes closed in the second quarter of 1999
increased 35 percent to 534 from 397 in the first quarter of 1998. The backlog
of homes sold as of June 30, 1999 was 825, down slightly from 830 units a year
earlier, and up 9 percent from 754 units at March 31, 1999. The Company's
inventory of completed and unsold homes as of June 30, 1999 has decreased by 21
percent to 23 units from 29 units as of March 31, 1999.

     The decrease in net new home orders for the three months ended June 30,
1999 as compared to the three months ended June 30, 1998 is primarily the result
of a decrease in the number of sales locations to 40 at June 30, 1999 from 49 at
June 30, 1998, offset by improved market conditions in substantially all of the
Company's markets. The increase in net new homes orders and closings for the
first six months of 1999 as compared with the first six months of 1998 is
primarily the result of improved market conditions in substantially all of the
Company's markets.

     In general, housing demand is adversely affected by increases in interest
rates and housing prices. Interest rates, the length of time that assets remain
in inventory, and the proportion of inventory that is financed affect the
Company's interest cost. If the Company is unable to raise sales prices
sufficiently to compensate for higher costs or if mortgage interest rates
increase significantly, affecting prospective buyers' ability to

                                       21
<PAGE>   22

adequately finance home purchases, the Company's sales, gross margins and net
results may be adversely impacted. To a limited extent, the Company hedges
against increases in interest costs by acquiring interest rate protection that
locks in or caps interest rates for limited periods of time for mortgage
financing for prospective homebuyers.

  COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO THREE MONTHS ENDED JUNE 30,
1998

     Total sales (which represent recorded revenues from closings) for the three
months ended June 30, 1999 were $95.7 million, an increase of $15.2 million
(18.9%) from sales of $80.5 million for the three months ended June 30, 1998.
Revenue from sales of homes increased $20.1 million to $92.0 million in the 1999
period from $71.9 million in the 1998 period. This increase was due primarily to
an increase in the number of units closed and an increase in the average sales
prices of homes to $210,000 in the 1999 period from $182,000 in the 1998 period.

     Total operating income increased from $1.9 million in the 1998 period to
$10.1 million in the 1999 period. The excess of revenue from sales of homes over
the related cost of sales increased by $6.3 million to $15.9 million in the 1999
period from $9.6 million in the 1998 period. This increase was primarily due to
(1) an increase in the number of units closed, (2) changes in product mix and
(3) an improvement in margins at certain of the Company's projects as a result
of increased sales prices. Sales and marketing expenses decreased by $0.3
million to $4.4 million in the 1999 period from $4.7 million in the 1998 period
primarily as a result of reductions in advertising and sales office/model
operation expenses, offset by increased direct sales expenses related to the
increased sales volume. General and administrative expenses increased by $0.6
million to $3.9 million in the 1999 period from $3.3 million in the 1998 period,
primarily as a result of additional accruals for increased employee bonuses
based upon the improved operating results of the Company, offset by increased
reimbursement of overhead expenses from joint ventures. Equity in income of
unconsolidated joint ventures amounting to $1.9 million was recognized in the
1999 period, compared to an insignificant loss in the comparable period for
1998. The Company did not begin investing in unconsolidated joint ventures until
the fourth quarter of 1997 and no significant operating results were realized in
the second quarter of 1998.

     Total interest incurred decreased $2.5 million (31%) from $8.0 million in
the 1998 period to $5.5 million in the 1999 period primarily as a result of a
decrease in the average amount of outstanding debt. Net interest expense
decreased to $1.5 million in the 1999 period from $2.3 million in the 1998
period as a result of the decrease in the average amount of outstanding debt.

     As a result of the Company's engagement of a financial advisor in May 1998
as described previously, the Company has incurred costs of approximately $0.6
million for the three months ended June 30, 1999.

     Other income (expense), net increased to $0.9 million in the 1999 period
from $0.6 million in the 1998 period primarily as a result of increased income
from mortgage operations and design center operations.

  COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED JUNE 30, 1998

     Total sales (which represent recorded revenues from closings) for the six
months ended June 30, 1999 were $178.0 million, an increase of $31.0 million
(21%) from sales of $147.0 million for the six months ended June 30, 1998.
Revenue from sales of homes increased $37.8 million to $174.1 million in the
1999 period from $136.3 million in the 1998 period. This increase was due
primarily to an increase in the number of units closed and an increase in the
average sales prices of homes to $207,500 in the 1999 period from $186,200 in
the 1998 period.

     Total operating income increased from $1.0 million in the 1998 period to
$18.7 million in the 1999 period. The excess of revenue from sales of homes over
the related cost of sales increased by $12.6 million, to $29.9 million in the
1999 period from $17.3 million in the 1998 period. This increase was primarily
due to (1) an increase in the number of units closed, (2) changes in product mix
and (3) an improvement in margins at certain of the Company's projects as a
result of increased sales prices. Sales and marketing expenses decreased by $1.3
million to $8.5 million in the 1999 period from $9.8 million in the 1998 period
primarily as a result of reductions in advertising and sales office/model
operation expenses, offset by increased direct sales

                                       22
<PAGE>   23

expenses related to the increased sales volume. General and administrative
expenses increased by $0.9 million to $7.9 million in the 1999 period from $7.0
million in the 1998 period, primarily as a result of additional accruals for
increased employee bonuses based upon the improved operating results of the
Company, offset by increased reimbursement of overhead expenses from joint
ventures. Equity in income of unconsolidated joint ventures amounting to $4.9
million was recognized in the 1999 period, compared to an insignificant loss in
the comparable period for 1998. The Company did not begin investing in
unconsolidated joint ventures until the fourth quarter of 1997 and no
significant operating results were realized in the first six months of 1998.

     Total interest incurred decreased $5.0 million (30%) from $16.7 million in
the 1998 period to $11.7 million in the 1999 period as a result of a decrease in
the average amount of outstanding debt. Net interest expense decreased to $3.7
million in the 1999 period from $4.9 million in the 1998 period as a result of
the decrease in the average amount of outstanding debt.

     As a result of the Company's engagement of a financial advisor in May 1998
as described previously, the Company has incurred costs of approximately $1.3
million for the six months ended June 30, 1999.

     Other income (expense), net increased to $1.5 million in the 1999 period
from $1.0 million in the 1998 period primarily as a result of increased income
from mortgage operations and design center operations.

FINANCIAL CONDITION AND LIQUIDITY

     The Company provides for its ongoing cash requirements principally from
internally generated funds from the sales of real estate and from outside
borrowings and, beginning in 1997, by joint venture financing from newly formed
joint ventures with venture partners that provide a substantial portion of the
capital required for certain projects. The Company currently maintains the
following major credit facilities: 12 1/2% Senior Notes (the "Senior Notes"); a
secured revolving lending facility (the "Working Capital Facility"); and a
revolving line of credit relating to Carmel Mountain Ranch, its wholly-owned
joint venture partnership (the "CMR Facility").

     The letter of intent with William Lyon Homes includes the proposed
acquisition by Presley of substantially all of the assets of William Lyon Homes
for approximately $48.0 million and the assumption of all or substantially all
of the liabilities of William Lyon Homes. The letter of intent is conditioned
upon, among other things, the receipt of financing by Presley in an amount
sufficient to finance the transaction. Presley intends to finance this
transaction through additional borrowings under its Working Capital Facility.
The Company's strategy of financing other projects through the use of joint
ventures will not change.

     The ability of the Company to meet its obligations on the Senior Notes
(including the repurchase obligation described in General Overview above) and
its other 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. The Company's degree of leverage may limit its
ability to meet its obligations, withstand adverse business conditions and
capitalize on business opportunities.

     The Company will in all likelihood be required to refinance the Senior
Notes and the Working Capital Facility when they mature, and no assurances can
be given that the Company will be successful in that regard.

  SENIOR NOTES

     The Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 for the sale of $200.0 million of 12 1/2%
Senior Notes which became effective on June 23, 1994. The offering closed on
June 29, 1994 and was fully subscribed and issued. The following discussion of
the Senior Notes should be read in conjunction with the Registration Statement
as filed with the Securities and Exchange Commission.

     The 12 1/2% Senior Notes due 2001 (the "Senior Notes") were offered by The
Presley Companies, a Delaware corporation ("Delaware Presley" or the "Company"),
and are unconditionally guaranteed on a senior basis by Presley Homes (formerly
The Presley Companies), a California corporation and a wholly-owned subsidiary
of Delaware Presley ("California Presley"). However, California Presley has
granted

                                       23
<PAGE>   24

liens on substantially all of its assets as security for its obligations under
the Working Capital Facility and other loans. Because the California Presley
guarantee is not secured, holders of the Senior Notes are effectively junior to
borrowings under the Working Capital Facility with respect to such assets.
Delaware Presley and its consolidated subsidiaries are referred to collectively
herein as "Presley" or the "Company". Interest on the Senior Notes is payable on
January 1 and July 1 of each year, commencing January 1, 1995.

     Except as set forth in the Indenture Agreement (the "Indenture"), the
Senior Notes were not redeemable by Presley prior to July 1, 1998. Thereafter,
the Senior Notes are redeemable at the option of Delaware Presley, in whole or
in part, at the redemption prices set forth in the Indenture.

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

     As described above in General Overview, Presley is required to offer to
repurchase certain Senior Notes at a price equal to 100% of the principal amount
plus any accrued and unpaid interest to the date of repurchase if Delaware
Presley's Consolidated Tangible Net Worth is less than $60.0 million for any two
consecutive fiscal quarters, as well as from the proceeds of certain asset
sales.

     Upon certain changes of control as described in the Indenture, Presley must
offer to repurchase Senior Notes at a price equal to 101% of the principal
amount plus accrued and unpaid interest, if any, to the date of repurchase. The
letter of intent with William Lyon Homes described above contemplates that the
transaction would be structured so as to not constitute a change of control as
described in the Indenture.

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

  WORKING CAPITAL FACILITY

     On July 6, 1998 California Presley completed an agreement with the Agent of
its existing lender group under its Working Capital Facility to (1) extend this
loan facility to May 20, 2001, (2) increase the loan commitment to $100.0
million, and (3) decrease the fees and costs compared to the prior revolving
facility.

     The collateral for the loans provided by the Working Capital Facility
continues to include substantially all real estate and other assets of the
Company (excluding assets of partnerships and the portion of the partnership
interests in Carmel Mountain Ranch partnership which are currently pledged to
other lenders). The borrowing base is calculated based on specified percentages
of book values of real estate assets. The borrowing base at June 30, 1999 was
approximately $102.0 million; however, the maximum loan under the Working
Capital Facility, as stated above, is limited to $100.0 million. The principal
outstanding under the Working Capital Facility at June 30, 1999 was $46.0
million. In addition, $2.8 million of available loan capacity is restricted for
letters of credit outstanding under the Working Capital Facility.

     Pursuant to the terms of the Working Capital Facility, outstanding advances
bear interest at the "reference rate" of Chase Manhattan Bank plus 2%. An
alternate option provides for interest based on a specified overseas base rate
plus 4.44%, but not less than 8%. In addition, the Company pays a monthly fee of
0.25% on the average daily unused portion of the loan facility.

     Upon completion of the new Working Capital Facility agreement, the Company
paid a one-time, non-refundable Facility Fee of $2.0 million, as well as a
yearly non-refundable Administrative Fee of $100,000.

     The Working Capital Facility requires certain minimum cash flow and pre-tax
and pre-interest tests. The Working Capital Facility also includes negative
covenants which, among other things, place limitations on the

                                       24
<PAGE>   25

payment of cash dividends, merger transactions, transactions with affiliates,
the incurrence of additional debt and the acquisition of new land as described
in the following paragraph.

     Under the terms of the Working Capital Facility, the Company may acquire
new improved land for development of housing units of no more than 300 lots in
any one location without approval from the lenders if certain conditions are
satisfied. The Company may, however, acquire any new raw land or improved land
provided the Company has obtained the prior written approval of lenders holding
two-thirds of the obligations under the Working Capital Facility.

     The Working Capital Facility requires that mandatory prepayments be made to
reduce the outstanding balance of loans to the extent of all funds in excess of
$20.0 million in the principal operating accounts of the Company.

  CMR FACILITY

     Carmel Mountain Ranch ("CMR"), the partnership that owns the Carmel
Mountain Ranch master-planned community, is a California general partnership and
is 100% owned by the Company. Effective in March 1995, the development and
construction of CMR, a consolidated joint venture, is financed through a
revolving line of credit. The revolving line of credit consists of several
components relating to production units, models and residential lots. At June
30, 1999, the revolving line of credit had an outstanding balance of $0.9
million. Availability under the line is subject to a number of limitations, but
in any case cannot exceed $5.0 million. Interest on the outstanding balance is
at prime plus 1.00%. In April 1999, the maturity date of this line was extended
to November 16, 1999.

  SELLER FINANCING

     Another source of financing available to the Company is seller-provided
financing for land acquired by the Company. At June 30, 1999, the Company had
various notes payable outstanding related to land acquisitions for which seller
financing was provided in the amount of $7.4 million within the Company's
Arizona, New Mexico and Nevada regions.

  OTHER NOTES PAYABLE

     Other notes payable of $7.0 million are comprised of collateralized
mortgage obligations secured by first mortgage notes receivable.

  JOINT VENTURE FINANCING

     As of June 30, 1999, the Company and certain of its subsidiaries are
general partners or members in twelve joint ventures involved in the development
and sale of residential projects. Such joint ventures are not effectively
controlled by the Company and, accordingly, the financial statements of such
joint ventures are not consolidated with the Company's financial statements. The
Company's investments in unconsolidated joint ventures are accounted for using
the equity method. See Note 4 of "Notes to Consolidated Financial Statements"
for condensed combined financial information for these joint ventures. The
majority of these projects are currently in the initial development stages and,
based upon current estimates, all future development and construction costs will
be funded by the Company's venture partners or from the proceeds of non-recourse
construction financing obtained by the joint ventures.

     As of June 30, 1999, the Company's investment in such joint ventures was
approximately $34.3 million and the Company's venture partners' investment in
such joint ventures was approximately $92.1 million. In addition, certain joint
ventures have obtained financing from land sellers or construction lenders which
amounted to approximately $28.5 million at June 30, 1999.

  ASSESSMENT DISTRICT BONDS

     In some locations in which the Company develops its projects, assessment
district bonds are issued by municipalities to finance major infrastructure
improvements and fees. Such financing has been an important

                                       25
<PAGE>   26

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 Presley's homes or
other properties are sold, the assessments are either prepaid or the buyers
assume the responsibility for the related assessments.

  CASH FLOWS -- COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED
  JUNE 30, 1998

     Net cash provided by (used in) operating activities changed from a use of
$1.4 million in the 1998 period to a source of $11.6 million in the 1999 period
primarily as a result of increased income and reductions in real estate
inventories.

     Net cash provided by (used in) investing activities changed from a source
of $14.5 million in the 1998 period to a use of $7.7 million in the 1999 period
primarily as a result of decreased proceeds received from investments in and
advances to unconsolidated joint ventures.

     Net cash used in financing activities increased from $8.3 million in the
1998 period to $15.6 million in the 1999 period primarily as a result of
increased principal payments on notes payable.

IMPACT OF YEAR 2000

     The term "year 2000 issue" is a general term used to describe the
complications that may be caused by existing computer hardware and software that
were designed without consideration for the upcoming change in the century. If
not corrected, such programs may cause computer systems and equipment to fail or
to miscalculate data. Due to the year 2000 issue, the Company has undertaken
initiatives to modify or replace portions of its existing computer operating
systems so that they will function properly with respect to dates in the year
2000 and thereafter.

     To date, the Company's year 2000 compliance effort has been focused on its
core business computer applications (i.e., those systems that the Company is
dependent upon for the conduct of day-to-day business operations). The Company
determined that the highest priority project based on greatest business risk and
greatest technical effort should be the conversion and upgrade of the Company's
JD Edwards accounting systems (the "JD Edwards Programs"). The Company acquired
and installed a year 2000 compliant version of the software in October 1998 and
completed extensive testing of such software and developed programs to convert
its current applications to the new version of the software. The Company
completed this conversion effective on June 30, 1999. The conversion had minimal
effects on the Company's systems and the cost incurred in that connection was
not material. As such, the Company's efforts are 100% complete with respect to
this primary system.

     The Company has undertaken an assessment of other internal systems used by
the Company in various of its operations. Internal systems used by the Company
in its mortgage company operations, payroll processing and banking interfaces
were all converted during 1998 to systems which are year 2000 compliant and as
such, the Company's efforts are 100% complete with respect to these systems. The
implementation had minimal effect on its systems and the costs incurred in that
connection were not material. Internal systems used by the Company in its design
center operations are currently being converted to a system which is year 2000
compliant. This implementation is expected to be completed no later than August
31, 1999 and the cost incurred in that connection will not be material.

     As part of these projects, the Company's relationships with suppliers,
subcontractors, financial institutions and other third parties are being
examined to determine the status of their year 2000 issue efforts as related to
the Company. As a general matter, the Company is vulnerable to significant
suppliers' inability to remedy their own year 2000 issues. Furthermore, the
Company relies on financial institutions, government agencies (particularly for
zoning, building permits and related matters), utility companies,
telecommunication service companies and other service providers outside of its
control. There is no assurance that such third parties will not suffer a year
2000 business disruption and it is conceivable that such failures could, in
turn, have a material adverse effect on the Company's liquidity, financial
condition and results of operations.

                                       26
<PAGE>   27

     The Company acknowledges that its failure to resolve a material year 2000
issue could result in the interruption in, or a failure of, certain normal
business activities or operations. Such failures could materially and adversely
affect the Company's results of operations. Although the Company considers its
exposure to the year 2000 issue from third party suppliers as generally low, due
to the uncertainty of the year 2000 readiness of third party suppliers, the
Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. In addition, the Company could be
materially impacted by the widespread economic or financial market disruption by
year 2000 computer system failures at government agencies on which the Company
is dependent for zoning, building permits and related matters. Possible risks of
year 2000 failure could include, among other things, delays or errors with
respect to payments, third party delivery of materials and government approvals.
The Company's year 2000 project is expected to significantly reduce the
Company's level of uncertainty and exposure to the year 2000 issue. To date, the
Company has not identified any operating systems, either of its own or of a
material third party supplier, that present a material risk of not being year
2000 ready or for which a suitable alternative cannot be implemented.

     Management will consider the necessity of implementing a contingency plan
to mitigate any adverse effects associated with the year 2000 issue. The
Company's ability to complete the year 2000 modifications outlined above prior
to any anticipated impact on its operating systems is based on numerous
assumptions of future events and is dependent upon numerous factors, including
the ability of third party software and hardware suppliers and manufacturers to
make necessary modifications to current versions of their products, the
availability of resources to install and test the modified systems and other
factors. Accordingly, there can be no assurance that these modifications will be
successful.

     The Company has incurred approximately $200,000 in connection with its year
2000 initiatives. The Company estimates its future costs related to its year
2000 initiatives to be less than $100,000. The Company currently anticipates
that all of its operating system will be year 2000 ready well before January 1,
2000, and that the year 2000 issue will not have a material adverse effect upon
the Company's liquidity, financial position or results of operations.

INFLATION

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

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
and stockholders during presentations about the Company are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). Statements which are predictive in nature, which depend
upon or refer to future events or conditions, or which include words such as
"expects", "anticipates", "intends", "plans", "believes", "estimates", "hopes",
and similar expressions constitute forward-looking statements. In addition, any
statements concerning future financial performance (including future revenues,
earnings or growth rates), ongoing business strategies or prospects, and
possible future Company actions, which may be provided by management are also
foward-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. Forward-looking
statements are not guarantees of future performance or results. The Company has
no specific intention to update these statements and does not undertake any
obligation to update any forward-looking statements in this Quarterly Report on
Form 10-Q or elsewhere.

                                       27
<PAGE>   28

     Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements due to a number of factors. The
principal factors that could cause the Company's actual performance and future
events and actions to differ materially from such forward-looking statements
include, but are not limited to, changes in general economic conditions either
nationally or in regions in which the Company operates, whether an ownership
change occurs which results in the limitation of the Company's ability to
utilize the tax benefits associated with its net operating loss carryforward,
IRS challenges to its net operating loss carryforward, changes in home mortgage
interest rates, 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 or the Company's ability to obtain entitlements to develop
property, whether a definitive agreement with William Lyon Homes is executed and
consummated, whether the Company is able to refinance the outstanding balances
of Senior Notes and Working Capital Facility at their respective maturities, the
availability and cost of land for future growth, and construction defect or
other building related litigation.

                                       28
<PAGE>   29

                             THE PRESLEY COMPANIES

                           PART II. OTHER INFORMATION

ITEMS 1, 2, 3 AND 5.

     Not applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Company's Annual Meeting of Holders of Common Stock was held on May 10,
1999. At this meeting the Holders of Common Stock ratified the selection of
Ernst & Young LLP to serve as the Company's auditors for the fiscal year ending
December 31, 1999. With respect to this proposal, 43,658,623 votes were cast
for, 45,250 votes were cast against, and 51,290 votes abstained (including
broker non-votes).

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS.

   10.34(1)  Letter Amendment to Revised Letter of Intent dated July 15, 1999 by
             and among William Lyon Homes, Inc., a California corporation, The
             Presley Companies, a Delaware corporation and Presley Homes, a
             California corporation.

     27        Financial Data Schedule
---------------
(1) Previously filed as an exhibit to the Company's Report on Form 8-K dated
    July 20, 1999 and incorporated herein by this reference.

(b) REPORTS ON FORM 8-K.

     JULY 20, 1999. A Report on Form 8-K was filed by the Company in reference
to the announcement by the Company of an extension of a letter of intent with
William Lyon Homes, Inc. and the approval, subject to stockholder approval, by
the Company's Board of Directors of a merger of the Company with a wholly-owned
subsidiary.

                                       29
<PAGE>   30

                             THE PRESLEY COMPANIES

                                   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.

Date: August 11, 1999                     By:      /s/ DAVID M. SIEGEL
                                            ------------------------------------
                                                      DAVID M. SIEGEL
                                                   Senior Vice President,
                                                Chief Financial Officer and
                                                          Treasurer
                                               (Principal Financial Officer)

Date: August 11, 1999                     By:    /s/ W. DOUGLASS HARRIS
                                            ------------------------------------
                                                     W. DOUGLASS HARRIS
                                            Vice President, Corporate Controller
                                               (Principal Accounting Officer)

                                       30
<PAGE>   31

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                               DESCRIPTION
-------                              -----------
<C>          <S>
 10.34(1)    Letter Amendment to Revised Letter of Intent dated July 15,
             1999 by and among William Lyon Homes, Inc., a California
             corporation, The Presley Companies, a Delaware corporation
             and Presley Homes, a California corporation.
    27       Financial Data Schedule
</TABLE>

---------------
(1) Previously filed as an exhibit to the Company's Report on Form 8-K dated
    July 20, 1999 and incorporated herein by this reference.