This item contains forward-looking statements that involve risks and uncertainties as set forth in "Cautionary Statements About Forward-Looking Statements" at the beginning of this Quarterly Report on Form 10-Q. Actual results may differ materially from those indicated in the forward-looking statements set forth below. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A. Risk Factors" of both our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview of California Coastal Communities, Inc. and Recent Industry Events.

We are a residential land development and homebuilding company with properties owned or controlled primarily in Orange County, California and also in two other Southern California counties (Los Angeles and Riverside). Our primary asset is a 356-home luxury coastal community known as Brightwater in Huntington Beach, California. Our principal activities include:

† obtaining zoning and other entitlements for land we own;

†          improving the land for residential development; and



†          designing, constructing and selling single-family homes in Southern
California.

Once our residential land is entitled, we may build homes, sell unimproved land to other developers or homebuilders, sell improved land to homebuilders, or participate in joint ventures with other developers, investors or homebuilders to finance and construct infrastructure and homes. The majority of our homes are designed to appeal to move-up homebuyers and are generally offered for sale in advance of their construction.

During the first quarter of 2009, our homebuilding subsidiary, Hearthside Homes, Inc., completed a deed-in-lieu transaction for the Hearthside Lane project in Corona, California and recognized a pre-tax gain on debt restructuring of $20.7 million. In exchange for a $28.7 million reduction in the loan balance secured by the project, the subsidiary conveyed the remaining 134 finished lots to the lender. The subsidiary retained seven completed homes which secure the remaining note balance which is due in March 2010. Subject to certain conditions, after all seven homes have been delivered, the guaranty of this debt by Hearthside Homes will be released and any remaining balance on the note will be cancelled. As of June 30, 2009, one home had been delivered and the remaining balance on the note was $2.1 million. As of August 3, 2009, the subsidiary has delivered three of the remaining six homes. The final three homes in escrow are expected to be delivered by the end of August, at which time the note will have been repaid in its entirety.

A subsidiary of Hearthside Homes is currently in the process of disposing the remaining assets of the Woodhaven project in Beaumont, California. The loan securing the property is non-recourse to California Coastal Communities, Inc., however, the subsidiary's parent, Hearthside Homes, Inc., guaranteed payment of the debt. Hearthside Homes' subsidiary is attempting to negotiate a consensual resolution of the loan with the lender, which may involve a bulk sale of the property securing the loan. However, there can be no assurance that the lender will agree to a bulk sale in full satisfaction of the outstanding debt.

We depend on cash flows generated from operations and available borrowing capacity to fund our Brightwater development, and to meet our debt service and working capital requirements. However, our ability to continue to generate sufficient cash flows has been and will continue to be adversely affected by continued difficulties in the homebuilding industry and continued weakness of the California economy. In addition, on September 30, 2009 our borrowing capacity under the revolving loan is scheduled to be reduced to $80 million at a time when we expect to need in excess of that amount for the construction of new homes at Brightwater.

During the last five months (March - July), we have generated 20 net sales orders at Brightwater, increased construction starts during the second quarter to keep pace with sales orders, and started construction of a limited number of speculative homes which are in greater demand in today's market than contract homes that are constructed over a five to seven month period. While sales of the Trails and Sands products, which are generally under $1.0 million, have increased during the first half of 2009, sales of our larger Cliffs and Breakers homes continue to be challenged by the downturn in the housing market and limitations on jumbo-mortgage financing, which have reduced demand for homes exceeding $1.0 million. Since the majority of sales and deliveries at Brightwater have been for The Trails, which is the smallest Brightwater home product, the current product mix of home sales is not expected to generate sufficient cash flow to meet our December 31, 2009 scheduled loan repayments of $10.0 million on the revolving loan and $12.3 million on the term loan, as described in greater detail in Notes 5 and 6 to "Item 1. Financial Statements" above.

As a result of the debt repayments made in connection with the December 2008 model homes sale and leaseback transaction, as well as home deliveries through June 30, 2009, we have met our loan repayment requirement for the term loan through September 30, 2009 and, with additional deliveries expected during the third quarter, we expect to be able to pay the amount due on the revolving loan on September 30, 2009. However, due to cash requirements for on-going home construction and scheduled debt amortization, our ability to meet the loan repayment requirements for the revolving loan and term loan through December 31, 2009 will depend on the results of negotiations with our lenders, as discussed below. Based on Brightwater sales thus far in 2009, which have been primarily for the smallest Brightwater home product (The Trails), the current product mix of home sales is not expected to generate sufficient cash flow to meet the December 31, 2009 scheduled loan repayments of $10.0 million on the revolving loan and $12.3 million on the term loan, as described in greater detail in Notes 5 and 6. Based on current projections of Brightwater closings during the nine months ending March 31, 2010, we do not expect to generate cash from operations in an amount sufficient to allow us to make the $25 million in loan repayments due on March 31, 2010. In addition, we do not expect to be able to repay the Revolving Loan by its June 30, 2010 maturity date or to make the $10.0 million Term Loan payment also due on June 30, 2010.

Therefore, we are scaling back construction of speculative homes and making further reductions in general and administrative costs in order to reduce expenditures and retain cash for required expenditures. As discussed in greater detail below in "Liquidity and Capital Resources," we are discussing amendments to our revolving and term loans with the agent bank for our loan syndicates in order to accommodate Brightwater's presently anticipated sales volume and product mix, and to provide the liquidity needed to fund construction of additional new homes. We intend to negotiate amendments that will defer the amortization payments due by December 31, 2009, provide an extension of the maturity date of the revolving loan, restructure payments due in 2010 and 2011, and modify the loan covenants of the revolving loan and term loan agreements. We are striving to complete these amendments during the fourth quarter of 2009. In addition, we continue to examine potential financial and strategic alternatives to generate capital from other sources. There can be no assurance that amended or future debt or equity financings will be available to us in an amount sufficient to enable us to meet our debt obligations or to fund our other liquidity needs, in the event that sufficient cash flow is not generated from home sales during the 12 months ending June 30, 2010.

In view of the continuing significant economic downturn in the housing market, during the remaining six months of 2009 and continuing into 2010 our new home construction will be limited to our 356-home Brightwater project located on the Bolsa Chica mesa in Huntington Beach, California; and our operations in other markets will focus on the sale of standing inventory and resolution of certain existing project loans.

During the remaining six months of 2009, our primary goals will be to:

† continue selling and delivering homes at Brightwater;

† modify our existing debt secured by the Brightwater project;

† continue evaluating potential alternatives regarding our capital structure including, but not limited to, various strategies for restructuring our debt and evaluating prospects for raising additional capital;

† complete delivery of standing inventories and thereby maximize deliveries and revenues at our other homebuilding projects in Los Angeles and Riverside counties;

† pursue consensual resolution of a subsidiary's loan default on one nonperforming inland development project in Lancaster, California; and

† pursue a bulk sale of the inland development project in Beaumont, California and negotiate satisfaction of the related subsidiary's project debt for less than 100% of the principal balance due on such debt, which matures on September 17, 2009.

There can be no assurance that we will accomplish, in whole or in part, all or any of these strategic goals or any other strategic goals or opportunities that we may pursue.

Despite the challenges of the current national homebuilding market and our inland market, we believe the potential for our Brightwater project remains high. Brightwater has not been immune to the effects of the unstable mortgage and housing markets; however, that impact appears less severe than the weakness we are seeing in our inland markets. We believe that the reduced impact is a result of Brightwater's superior coastal location, the extremely limited supply of new homes on the coast of Southern California and the absence of significant competition from other homebuilders in the Huntington Beach market due to the lack of available land for the development of new single family detached homes. We believe that Brightwater is in a location that is difficult to replace and in a market where approvals are increasingly difficult to achieve. We also believe that Brightwater has substantial embedded value that should not be sacrificed under current depressed market conditions but, rather, should be realized over time. Finally, we believe that Brightwater's demographics remain strong due to the continuing regulation-induced constraints on lot supplies and the significant number of affluent households along the coast of Southern California. Therefore, we remain optimistic about continuing sales at Brightwater.

Our total revenues for the three months ended June 30, 2009 and 2008 were $10.5 million and $10.4 million, respectively, and $23.3 million and $15.4 million for the six months ended June 30, 2009 and 2008, respectively. For the three months ended June 30, 2009 and 2008 we delivered 12 and 15 homes, respectively, and for the six months ended June 30, 2009 and 2008 we delivered 19 and 23 homes, respectively. Our total assets as of June 30, 2009 and December 31, 2008 were $290.6 million and $312.5 million, respectively, with Brightwater constituting $239.7 million (82% of total assets) and $238.5 million (76% of total assets), respectively. Our homebuilding subsidiary, Hearthside Homes, Inc., has delivered over 2,100 homes to families throughout Southern California since its formation in 1994.

Prior to obtaining the Coastal Development Permit for our Brightwater project in December 2005, we historically maintained a minimal amount of leverage. In September 2006, we obtained $225 million of debt financing, as described in Notes 6 and 7 to "Item 1. Financial Statements" above, which provided $100 million for Brightwater construction and $125 million to fund a $12.50 per share special dividend paid to our stockholders in September 2006. As of June 30, 2009, we had $216.3 million of debt (including the model home financing) against $59.4 million of book equity.

We were formed in 1988 and our executive offices are located at 6 Executive Circle, Suite 250, Irvine, California 92614. Our website address is http://www.californiacoastalcommunities.com and our telephone number is
(949) 250-7700. Through our website we make available our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(d) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports are available free of charge upon request. In addition, at our website:
http://www.californiacoastalcommunities.com, we post copies of our Securities and Exchange Commission filings and press releases, as well as current versions of our code of ethics, audit committee charter and nominating committee charter.

Outlook and Operating Strategy

The financial crisis and economic recession that worsened in 2008 and exacerbated the existing downturn in the homebuilding market, has persisted during the first six months of 2009. Weakness in the homebuilding environment has continued as unemployment increased, the availability of jumbo-mortgages remains limited and the economic recession continued. Specifically, the credit markets and the mortgage industry have been experiencing a period of unparalleled turmoil and disruption characterized by bankruptcy, financial institution failure, consolidation and an unprecedented level of intervention by the United States federal government. While the ultimate outcome of these events cannot be predicted, it has made it more difficult for homebuyers to obtain acceptable financing. In addition, the supply of new and resale homes in the marketplace remained excessive for the levels of consumer demand, further challenged by an increased number of foreclosed homes offered at substantially reduced prices. These pressures in the marketplace resulted in the use of increased sales incentives and price reductions in an effort to generate sales and reduce inventory levels by us and many of our competitors.

Concern about the state of the economy and the job market continues to negatively affect consumer confidence, as unemployment rates continued to rise in almost all of the metropolitan areas tracked by the U.S. Department of Labor. The unemployment rate in California was 11.6% at the end of the second quarter of 2009 compared with 8.7% at the end of 2008, while the unemployment rate in Orange County was 9.2% in June 2009 compared with 6.5% in December 2008. These adverse conditions have now persisted to varying degrees since the beginning of 2006 and their impact is reflected in our results for the three and six months ended June 30, 2009 and 2008. We believe that the weak demand we are experiencing, particularly for homes over $1.0 million, reflects homebuyers' reluctance to make a purchasing decision until they are comfortable that home price declines are near bottom and that economic conditions have stabilized. We believe the current conditions could continue during the remaining six months of 2009 and perhaps beyond, and we expect that our operations may sustain periodic losses until the homebuilding industry and economy as a whole begin to rebound.

Thus far during 2009, the U.S. economy remains in a severe recession and the homebuilding industry continues to face adverse pressures. Weak buyer confidence and significantly tighter mortgage lending standards, coupled with an oversupply of new and existing homes for sale (boosted by foreclosures), continue to weigh on the housing market and may cause further deterioration in operating conditions and sales results. While some positive signs are occurring, such as rising stock markets and reduced number of new unemployment claims, it remains uncertain when the housing market or the broader economy will experience a meaningful recovery. Actions taken or announced by federal, state, and local governments to support housing may soften, but are not expected to reverse, the impact of these pressures.

In addition, the recently enacted California tax credit (which does not contain income or first-time buyer restrictions and is limited to new homes) appears to have boosted demand somewhat; however, the federal stimulus plan has not had much impact on the homebuilding industry due to its income and first-time buyer restrictions. As of August 3, 2009, approximately 78% of the $100 million in California tax credits has been issued and approximately 3,500 additional tax credit applications are being processed, which the California Franchise Tax Board anticipates will utilize all of the remaining tax credits. Key housing metrics, including starts, new home sales and existing home sales may continue to weaken or remain stagnant during the remaining six months of 2009. We therefore expect fierce price competition to persist in our inland markets throughout 2009 and into 2010. This could lead to inventory impairments in amounts which we are unable to presently predict or estimate.

We are also concerned about the dislocation in the secondary mortgage market. We maintain relationships with various mortgage providers and, with few exceptions, the mortgage providers that furnish our customers with mortgages continue to issue new commitments. Our buyers generally have been able to obtain adequate financing but the number of potential home buyers that can qualify under the tightened lending standards has diminished. The availability of certain mortgage financing products continues to be constrained due to increased scrutiny of once commonly-used mortgage products such as sub-prime, Alt-A, and other non-prime mortgage products. Further, the interest rates on jumbo mortgages continue to be significantly greater than interest rates on conforming mortgages, with spreads approximating 1% compared with historical spreads in the range of only .25% to .35%. Mortgage market liquidity issues and higher borrowing rates may impede some of our home buyers from closing, while others may find it more difficult to sell their existing homes as their buyers face the problem of obtaining a mortgage. Because we cannot predict the short-and long-term liquidity of the credit markets, we continue to caution that, with the uncertainties in these markets, the pace of home sales could remain depressed or slow further until these markets improve.

While standing inventory in our inland markets has been reduced from 14 homes as of June 30, 2008 to four homes as of June 30, 2009, the price reductions and additional incentives have resulted in impairment reserves and significantly reduced gross profits for our inland projects. In response to the ongoing crisis in the housing market and national credit markets, during the first six months of 2009 we have:

† terminated further inland market construction activity until those markets improve;

† reduced sales prices and offered incentives for all of our inland homes in order to eliminate our standing inventory;

† completed a deed-in-lieu transaction for our subsidiary's Hearthside Lane project in Corona, which resulted in a pre-tax gain on debt restructuring of $20.7 million;

† continued negotiations with our lender in an attempt to reach a consensual resolution of our subsidiary's loan default on the Las Colinas property in Lancaster;

† offered our remaining Beaumont models and lots for sale to attempt to reach a consensual resolution of our subsidiary's loan which matures in September 2009.

We expect these changes to produce tangible benefits in the form of selling, general and administrative expense reductions in future quarters, and we will continue to reduce these costs. We expect to continue to operate with fewer active communities until we see reasonable signs of a housing market recovery. Although we took an inventory impairment charge of $3.2 million related to our inland project in Beaumont, California during the six months ended June 30, 2009, if market conditions decline further, we may need to take additional charges for inventory impairments in future quarters. In addition, our results for the remaining six months of 2009 could be adversely affected if general economic conditions do not improve or continue to deteriorate, if consumer confidence remains weak or declines further, if job losses continue or accelerate, if foreclosures or distressed sales increase, or if consumer mortgage lending becomes less available or more expensive, any or all of which would further diminish the prospects for a recovery in housing markets.

We believe that stability in the credit and capital markets and an eventual renewal of confidence in the national economy will play a major role in any turnaround in the homebuilding and mortgage lending industries. We also believe that a meaningful improvement in housing market conditions will require the restoration of consumer and credit market confidence that will support a decision to buy a home, which will in turn require a sustained decrease in inventory levels, price stabilization and reduced foreclosure rates.

As the housing market downturn continues to unfold, we continue to adjust and reevaluate our operating strategy in an effort to reduce standing inventories while monitoring our margins and liquidity. Recognizing the challenges presented by the downturn in the homebuilding market, our current operating strategy includes:

† adjusting our cost structure to today's market conditions by reducing our headcount and overhead and rebidding subcontracts and materials in line with reduced demand;

† exercising tight control over cash flows;

† changing sales and marketing efforts to generate additional traffic;

† offering more incentives and price reductions to reduce standing inventories and achieve acceptable levels of sales volume and cash flow;

† ceasing construction and sales efforts at our inland projects where we are unable to generate acceptable levels of sales volume and cash flow until the housing market improves;

† limiting construction starts to better align product available for sale with sales activity; and

† seeking to balance our short-term goal of selling homes in a depressed market and our long-term goal of maximizing the value of our communities.

During the three and six months ended June 30, 2009, we delivered 12 and 19 homes, respectively, and as of August 3, 2009, six additional homes have been delivered and 16 additional homes are in escrow, as discussed further under "Our Current and Future Homesites" below.

Despite the challenges of the current California homebuilding market, we believe the potential for our Brightwater project remains high. Brightwater has not been immune to the effects of the unstable mortgage and housing markets; however, that impact appears less severe than the weakness we have seen in our inland markets. Brightwater continues to have significant weekly traffic and the number of prospects considered to be motivated buyers appears to have increased since the end of the quarter. We believe that the reduced impact is a result of Brightwater's superior coastal location, the extremely limited supply of new homes on the coast of Southern California and the absence of significant competition from other homebuilders in the Huntington Beach market due to the lack of available land for the development of new single family detached homes. We believe that Brightwater is in a location that is difficult to replace and in a market where approvals are increasingly difficult to achieve. We also believe that Brightwater has substantial embedded value that should not be sacrificed under current depressed market conditions but, rather, should be realized over time. Finally, we believe that Brightwater's demographics remain strong due to the continuing regulation-induced constraints on lot supplies and the significant number of affluent households along the coast of Southern California. Therefore, we remain optimistic about continuing sales at Brightwater.

We currently believe that market conditions will continue to be challenging throughout 2009 and into 2010, as unemployment rates are rising, foreclosure activity continues to be significant and consumer confidence continues to be eroded. Although substantially reduced home prices and relatively low consumer mortgage interest rates for conforming loans have improved housing affordability, many potential homebuyers remain tepid about purchasing a home in this unstable economic environment. This demand-side dynamic, in conjunction with rising foreclosures, is sustaining the oversupply of unsold new and existing homes and competitive pricing pressures that have generated the extremely challenging conditions our industry has experienced since the beginning of 2006. We remain hopeful that the federal government's initiatives to stabilize the credit markets and restore confidence in the financial system and economy will be effective.

In view of the continuing significant economic downturn in the housing market, during the remaining six months of 2009 our new home construction will be limited to our 356-home Brightwater project located on the Bolsa Chica mesa in Huntington Beach, California. We expect that continuing operations in our inland markets will focus on the sale of standing inventory with no construction starts. In addition, we are attempting to negotiate a consensual resolution with our lender with respect to a loan default on our subsidiaries' Las Colinas (Lancaster) property and we are attempting to sell our Beaumont property in satisfaction of the related project debt. However, there can be no assurance that these strategies or any alternatives will prove successful.

While it is difficult to predict when a housing market and economic recovery will occur, we believe we have responded with the right strategies to the current and expected near-term housing market environment. We continue to evaluate additional operating and financing strategies to position ourselves for future opportunities. Longer term, we believe favorable demographics and population growth in southern California and a continuing desire for home ownership will drive demand for new homes in our markets, which will allow us to capitalize on the recovery in those markets when it comes.

In the ordinary course of doing business, we must make estimates and judgments that affect decisions on how we operate and on the reported amounts of assets, liabilities, revenues and expenses. These estimates include, but are not limited to, those related to impairment of assets; capitalization of costs to inventory; cost of sales including estimates for financing, warranty, and other costs; and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, we evaluate and adjust our estimates based on the information then currently available. Actual results may differ from these estimates, assumptions and conditions.

Finally, our operating results during the remaining six months of 2009 could be adversely affected if housing, credit market, or general economic conditions . . .