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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2001

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period
from                to

Commission file number: 0-17189

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CALIFORNIA COASTAL COMMUNITIES, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of incorporation or organization)

02-0426634(I.R.S. Employer Identification No.)6 Executive Circle, Suite 250
Irvine, California(Address of principal executive offices)

92614(Zip Code)


Registrant's telephone number, including area code:(949) 250-7700

Securities registered pursuant to Section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of the Act:

Common
Stock, par value $.05 per share
(Title of Class)

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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 ý NO o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES ý NO o

The
aggregate market value of the voting stock held by non-affiliates of the registrant as of March 1, 2002 was $24,921,324.

Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
YES ý NO o

The
number of shares of Common Stock outstanding as of March 1, 2002 was 10,058,589.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the 2002 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report
on Form 10-K.

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PART I

Item 1. Business

California Coastal Communities, Inc. (the "Company") is a residential land development and homebuilding company with properties located primarily in
Southern California. The principal activities of the Company and its consolidated subsidiaries include: (i) obtaining zoning and other entitlements for land it owns and improving the land for
residential development; and (ii) single-family residential construction in Southern California. Once the residential land owned by the Company is entitled, the Company 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. During 2002, the Company will focus its immediate efforts to (i) obtain approval from the County of Orange and the California Coastal Commission ("Coastal Commission")
for development permits to build 378 homes on the upper bench of the Bolsa Chica Mesa ("Upper Mesa"), as further described in Note 5 to the Company's Financial Statements;
(ii) vigorously pursue litigation (the "Coastal Commission Lawsuit") challenging the Coastal Commission's November 2000 decision to prohibit development on the lower bench of the Bolsa
Chica Mesa ("Lower Mesa"); and (iii) maintain profitable homebuilding operations; however, the Company may also consider other strategic and joint venture opportunities. There can be no
assurance that the Company will accomplish, in whole or in part, all or any of these strategic goals.

The
Company's executive offices are located at 6 Executive Circle, Suite 250, Irvine, California 92614 (telephone: (949) 250-7700).

Principal Properties

The following sections describe the Company's principal properties.

Bolsa Chica.The Bolsa Chica Mesa property is the principal property in the Company's portfolio, representing 82% of its
assets as of December 31, 2001. The Bolsa Chica Mesa is one of the last large undeveloped coastal properties in Southern California, and is located in Orange County, approximately 35 miles
south of downtown Los Angeles. Bolsa Chica is bordered on the north and east by residential development, to the south by open space and the Bolsa Chica wetlands, and to the west by Pacific Coast
Highway, Bolsa Chica State Beach, and the Pacific Ocean. The Company owns approximately 350 acres of the 1,600 acres of undeveloped land at Bolsa Chica. The Company's holdings include 208 acres on the
Bolsa Chica Mesa, approximately 100 acres on, or adjacent to, the Huntington Mesa and 42 acres of lowlands acquired in September 1997.

In
February 1997, the Company completed the sale of its approximately 880-acre Bolsa Chica lowlands, which had previously been planned for the development of up to 900
homes and wetlands restoration, to the California State Lands Commission for $25 million. Under an interagency agreement among various state and federal agencies, these agencies have agreed to
restore the Bolsa Chica wetlands habitat utilizing escrowed funds from the Ports of Los Angeles and Long Beach. The California Coastal Commission and the State Lands Commission recently approved an
approximately $100 million wetlands restoration plan which is expected to significantly improve the views of many of the homes that the Company plans to develop on the Bolsa Chica Mesa, as
discussed below. Wetlands restoration construction is currently scheduled to commence sometime in 2003.

A
Local Coastal Program ("LCP") for development of up to 2,500 homes on the Bolsa Chica Mesa was approved by the Orange County Board of Supervisors in December 1994 and by the
Coastal Commission in January 1996. In October 1997, in response to a trial court decision in connection with a lawsuit which challenged the 1996 approvals of the Coastal Commission (the
"Coastal Act Lawsuit"), the Coastal Commission approved modifications to the LCP which eliminated the filling of Warner Pond and thereby reduced the maximum number of homes to be built from 2,500 to
no more than

2

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1,235 homes on the Bolsa Chica Mesa. The Orange County Board of Supervisors subsequently accepted the Coastal Commission's suggested modifications.

On
November 16, 2000, in response to the April 1999 Court of Appeal's decision in the Coastal Act Lawsuit which prohibited relocation of a 14-acre grove of
dying eucalyptus trees which serves as raptor habitat, the Coastal Commission held another public hearing on the LCP and decided to limit development to only the upper bench of the Bolsa Chica Mesa
(the "Upper Mesa"). The Coastal Commission's latest suggested modifications to the LCP would prohibit the Company and other landowners from development on the approximately 100-acre lower
bench of the Bolsa Chica Mesa (the "Lower Mesa"). On May 8, 2001, the County of Orange declined to consider the Coastal Commission's November 2000 suggested modifications. In their
response to the Coastal Commission, the County stated that the Commission's suggested modifications were infeasible and unacceptable. In particular, the County noted that the Commission's suggested
modifications would remove 140 acres of viable residentially-zoned land from the County's plan.

In
January 2001, the Company filed litigation (the "Coastal Commission Lawsuit") challenging the Coastal Commission's November 2000 decision to substantially change the
previously approved LCP.
The complaint alleges that the Coastal Commission arbitrarily abandoned decades of prior approvals that would have permitted development on the entire Bolsa Chica Mesa. The complaint also includes
causes of action for violation of the Company's constitutional rights of equal protection and due process, and for a public taking of its private property without compensation in contravention of the
U.S. and California Constitutions. See Item 3. "Legal Proceedings" below for further discussion.

While
the Company vigorously pursues its litigation to obtain entitlement for residential construction on the Lower Mesa, it is also pursuing approval of permits for development of the
Upper Mesa. After review of environmental, economic, marketing, construction and political considerations, the Company applied to the County of Orange in August 2001 for permits to build
single-family homes on the Upper Mesa. The Orange County Planning Commission is expected to hold a public hearing during the second quarter of 2002 regarding the site plan for development of 378 homes
on the Upper Mesa. The planned community on the Upper Mesa is currently expected to offer a broad mix of single-family home choices, ranging in size from 1,560 square feet to 4,450 square feet. This
development plan will also require approval by the Coastal Commission. The Company does not believe that the Coastal Commission process will permanently prevent it from developing a planned community
at Bolsa Chica, however, there can be no assurance in that regard, or as to when development could commence, or as to the number of acres or homes the Company would be permitted to develop, or that
further litigation or administrative delay will not result.

The
Bolsa Chica Land Trust and other environmental groups have periodically suggested that the Company consider selling the Bolsa Chica Mesa to a nonprofit corporation or the State of
California. Historically, there has been no source of funding to finance such a transaction. However, a citizens' initiative is currently gathering voters' signatures to place a $3.4 billion
bond on California's November 2002 ballot entitled the "Water Security, Clean Drinking Water, Coastal and Beach Protection Act of 2002". If sufficient voter signatures are obtained to qualify
this initiative for the November 2002 ballot, the bond initiative would include an unquantified line item for the State of California to acquire all or a portion of the Bolsa Chica Mesa. The
Company is in the process of evaluating the feasibility of this potential alternative. There can be no assurances that the bond initiative will obtain sufficient signatures to be eligible for the
November 2002 ballot; that if eligible, such a bond measure will be approved by the voters; that the Company will ever reach a mutually acceptable agreement on the price and terms of a sale of
the Bolsa Chica Mesa; or that a sale transaction will ever be completed.

Upon
completion of the Company's recapitalization (the "Recapitalization") as discussed in Note 3 to the Financial Statements, the Company applied the principles required by
Fresh-Start Reporting and

3

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the carrying value of land held for development (Bolsa Chica) was adjusted to fair value as of September 2, 1997, after consideration of the October 1997 Coastal Commission action
discussed above. The fair value was determined in 1997 using discounted estimated cash flows expected from the asset's operations and eventual disposition. In addition, given the significance of the
Bolsa Chica asset to the financial statements of the Company, the value of the Company's stock immediately following the closing of the Recapitalization was used as an indicator of value of the
subject property. Following the November 2000 Coastal Commission action, an assessment of impairment was conducted by the Company for the year ended December 31, 2000. The Company
updated its analysis as of December 31, 2001. In accordance with the Company's policy described in Note 2 to the Financial
StatementsImpairment of Long-Lived Assets and based upon the Company's assessment of estimated undiscounted future cash flows, no provision for impairment has been considered
necessary subsequent to the Recapitalization.

The
estimation process involved in the determination of value is inherently uncertain since it requires estimates as to future events and market conditions. Such estimation process
assumes the Company's ability to complete development and dispose of its real estate properties in the ordinary course of business based on management's present plans and intentions. Economic, market,
environmental and political conditions may affect management's development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the
availability of future financing for development and construction activities. At such time as the Company's homebuilding activities at Bolsa Chica commence, the Company would be required to account
for such property at the lower of cost or market, which may necessitate a write-down of its carrying value. Accordingly, the ultimate values of the Company's land held for future
development are dependent upon future economic and market conditions, the availability of financing, and the resolution of political, environmental and other related issues. The development of the
Company's Bolsa Chica Mesa project is dependent upon various governmental approvals, results of litigation and economic factors. Accordingly, the amount ultimately realized from such project may
differ materially from current estimates and the project's carrying value.

Chapman Heights.Between June 2000 and December 2001, the Company acquired 86 finished lots which are part of a
master-planned community known as Chapman Heights, in the city of Yucaipa, California. The community surrounds an operating 18-hole public golf course and is planned for a total of
approximately 2,100 homes, civic and commercial centers and two school sites. The Company opened for sales at the project in January of 2001, and has released the first 66 homes for sale. As of March
18, 2002, closings on 32 homes were completed and 21 additional homes were in escrow.

Providence Ranch.In July 2001, the Company acquired 83 finished lots in the master-planned community known as
Providence Ranch in Riverside County, California near North Corona. Providence Ranch and the adjacent community of Corona Valley, are planned for a total of 2,600 homes, and are
well-located to serve the employment centers of the greater Los Angeles area, Orange County and the Ontario international airport. The Company commenced home construction in
October 2001, and has released the first 19 homes for sale. As of March 18, 2002, 19 homes were in escrow.

Other Properties.The Company owns two acres of land zoned for commercial/industrial use in Signal Hill, California, and
approximately 62 acres of resort/residential property in Michigan. These properties are currently held for sale, subject to market conditions.

Competition.The home building industry is highly competitive and fragmented. The Company does not have a significant market
presence in any of the geographic areas where it is currently building homes or where it expects to build homes in the future. Most of the Company's competitors have substantially greater financial
resources than those of the Company, and they have much larger staffs and marketing organizations. However, the Company believes that it competes effectively in its

4

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existing markets as a result of its product design, development expertise, and its reputation as a producer of quality homes.

Property Dispositions.See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a
description of the Company's property dispositions during 2000 and 2001.

Other Income.See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description
of $6.2 million of income recognized from shares received in the initial public offering of an insurance company in connection with its demutualization.

Environmental and Regulatory Matters.Before the Company can develop a property, it must obtain a variety of discretionary
approvals from local and state governments, as well as the federal government in certain circumstances, with respect to such matters as zoning, subdivision, grading, architecture and environmental
matters. The entitlement approval process is often a lengthy and complex procedure requiring, among other things, the submission of development plans and reports and presentations at public hearings.
Because of the provisional nature of these approvals and the concerns of various environmental and public interest groups, the approval process can be delayed by withdrawals or modifications of
preliminary approvals and by litigation and appeals challenging development rights. Accordingly, the ability of the Company to develop properties and realize income from such projects could be delayed
or prevented due to litigation challenging previously obtained governmental approvals.

As
more fully described below in Item 3. Legal Proceedings, in April 1999 the California Court of Appeal overturned an August 1997 trial court judgment in the Coastal Act
Lawsuit, ruling that the Coastal Commission should not have approved removal and relocation of certain raptor habitat. In response to the court's decision, in November 2000, the Coastal
Commission decided to limit development to only the Upper Mesa. The Company has filed a lawsuit challenging the Coastal Commission's action (as further described in Item 3. Legal Proceedings)
and concurrently is seeking development permits to build 378 homes on the Upper Mesa. Therefore, the regulatory approval process for the Bolsa Chica Mesa property remains subject to litigation and
further Coastal Commission approval, and there can be no assurance that further delays will not result.

The
Company has expended and will continue to expend significant financial and managerial resources to comply with environmental regulations and local permitting requirements. Although
the Company believes that its operations are in general compliance with applicable environmental regulations, certain risks of unknown costs and liabilities are inherent in developing and owning real
estate. However, the Company does not believe that such costs will have a material adverse effect on its business, financial condition or results of operations, including the potential remediation
expenditures proposed in connection with certain indemnity obligations discussed below in "Corporate Indemnification Matters."

Corporate Indemnification Matters.The Company and its predecessors have, through a variety of transactions effected since
1986, disposed of several assets and businesses, many of which are unrelated to the Company's current operations. By operation of law or contractual indemnity provisions, the Company may have retained
liabilities relating to certain of these assets and businesses, including certain tax liabilities. (See Notes 8, 9 and 10 to the Company's Financial Statements included in this Annual Report.) A
portion of such liabilities is supported by insurance or by indemnities from certain of the Company's predecessors and currently or previously affiliated companies. The Company believes its balance
sheet reflects adequate reserves for these matters.

Employees.As of March 1, 2002 the Company and its subsidiaries had 33 employees.

Safe Harbor, Statement Under the Private Securities Litigation Reform Act of 1995. Certain of the foregoing information and the
information following this Item 1 contains forward-looking statements

5

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that relate to future events or the Company's future financial performance. These statements involve known and unknown risks, uncertainties and other factors which may cause the Company's actual
results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can
identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", "continue", or the negative of
such terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about the Company's plans, objectives, goals, expectations and intentions, the
number and types of homes and number of acres of land that the Company may develop and sell, the timing and outcomes of litigation, regulatory approval processes or administrative proceedings
(including, but not limited to ongoing litigation and administrative proceedings in the Coastal Commission Lawsuit related to the Company's principal asset, the Bolsa Chica Mesa), the Company's
ability to continue relationships with current or future partners, the Company's ability to expend resources to comply with environmental regulations and local permitting requirements, the effect of
certain costs, contractual obligations and tax liabilities, both known and unknown, on the Company's business, results of operations and financial condition, the condition and adequacy of the
Company's properties, the Company's ability to estimate cash flow projections due to uncertainties in valuing real property, the Company's ability to acquire residential lots in order to continue
home-building operations, the adequacy of capital, financing and cash flow required to continue the Company's operations and land development activities, the future condition of the real
estate market in Southern California, market risk exposure with respect to the Company's short-term equity investments, and other statements contained herein that are not historical facts.

EXECUTIVE OFFICERS OF THE COMPANY

|Name and Title                                                      |  | Age |  | Business Experience                                                                                                                                                                                                                                         
|------------------------------------------------------------------- |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Raymond J. Pacini
President and
Chief Executive Officer             |  | 46  |  | President, Chief Executive Officer and Director of the Company since May 1998. Executive Vice President, Chief Financial Officer, Secretary and Treasurer of the Company from prior to 1996 to May 1988. Director
of Metalclad Corporation since March 1999.
|Sandra G. Sciutto
Senior Vice President and
Chief Financial Officer |  | 42  |  | Chief Financial Officer, Secretary and Treasurer of the Company since May 1998. Senior Vice President of the Company since February 1996 and Vice President and Controller of the Company from prior to 1996 to April 1998.                                 

Item 2. Properties

The Company's principal executive offices are located in Irvine, California. The Company and each of its subsidiaries believe that their properties are generally
well maintained, in good condition and adequate for their present and proposed uses. The inability to renew any short-term real property lease would not be expected to have a material
adverse effect on the Company's results of operations.

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The
principal properties of the Company and its subsidiaries, which are owned in fee unless otherwise indicated, are as follows:

|Property         |  | Location            |  | Acres |  | Present or Planned Use          
|---------------- |  | ------------------- |  | ----- |  | --------------------------------
|Irvine*          |  | Irvine, CA          |  |      |  | Headquarters                    
|Bolsa Chica      |  | Orange County, CA   |  | 350   |  | Ocean view residential community
|Chapman Heights  |  | Yucaipa, CA         |  | 19    |  | Residential community           
|Providence Ranch |  | North Corona, CA    |  | 22    |  | Residential community           
|Michigan Land    |  | Upper Peninsula, MI |  | 62    |  | Resort/residential lots         
|Signal Hill      |  | Signal Hill, CA     |  | 2     |  | Industrial land                 

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*  Leased

Item 3. Legal Proceedings

In March 1996, a lawsuit (the "Coastal Act Lawsuit") was filed in the San Francisco County Superior Court (and later removed to San Diego Superior Court)
by the Bolsa Chica Land Trust, et al. against the Coastal Commission, the Company and other Bolsa Chica landowners as real parties in interest, alleging that the Coastal Commission's approval of the
LCP in January 1996 was not in compliance with the Coastal Act and other statutory requirements. The Coastal Act Lawsuit sought to set aside the approval of the Bolsa Chica project. In
August 1997, the San Diego Superior Court rendered a judgment that returned the LCP to the Coastal Commission for further consideration in the context of two issues. The court's decision that
the Coastal Commission reconsider the LCP was based on the court's determination (i) that development of homes in the lowlands is not in compliance with the
Coastal Act, and (ii) that the Commission's findings regarding the filling of a 1.7 acre pond on the Bolsa Chica Mesa ("Warner Pond") were not in compliance with the Coastal Act. With respect
to Warner Pond, the court determined in August 1997 that the Coastal Commission failed to weigh and resolve a conflict in Coastal Act policies related to the proposed filling of Warner Pond.
The court's August 1997 decision required the Coastal Commission to reconsider its treatment of Warner Pond. In every other respect, the court denied challenges to the Coastal Commission's
approval of the LCP for development of Bolsa Chica Mesa. The court specifically approved the Coastal Commission's findings with regard to (i) the relocation of raptor habitat, (ii) the
adequacy of a buffer between the new residential development and the wetlands, and (iii) treatment of archeological resources. The August 1997 judgment was appealed by both the project
opponents and the Company as discussed below.

In
October 1997, in response to the trial court's decisions, the Coastal Commission approved modifications to the LCP which eliminated the filling of Warner Pond and thereby
reduced the maximum number of homes to be built from 2,500 to no more than 1,235 homes on the Bolsa Chica Mesa. The Orange County Board of Supervisors subsequently accepted the Coastal Commission's
suggested modifications.

In
October 1997, opponents of the Bolsa Chica Mesa project appealed the trial court's August 1997 decision on the basis that the trial court should have reversed the
Coastal Commission's January 1996 approval allowing relocation of certain raptor habitat. In April 1999, the California Court of Appeal overturned the August 1997 judgment of the
trial court with respect to the raptor habitat. The appellate court ruled that, under the Coastal Act, the Coastal Commission should not have allowed the removal and relocation of this raptor habitat.
The court order instructing the Coastal Commission on how to proceed in response to this decision was issued in June 1999.

In
November 2000, the Coastal Commission held another public hearing on the LCP in response to the court order, and decided to limit development to only the Upper Mesa. The
Coastal

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Commission's latest suggested modifications to the LCP would prohibit the Company and other landowners from development on the approximately 100-acre Lower Mesa. On May 8, 2001,
the County of Orange declined to consider the Coastal Commission's November 2000 suggested modifications. In their response to the Coastal Commission, the County stated that the Commission's
suggested modifications were infeasible and unacceptable. In particular, the County noted that the Commission's suggested modifications would remove 140 acres of viable residentially-zoned land from
the County's plan.

In
January 2001, the Company's subsidiaries filed a complaint in Orange County Superior Court challenging the Coastal Commission's November 2000 decision to substantially
change the previously approved LCP. On February 28, 2001, the Orange County Superior Court ordered that the case be reassigned to San Diego Superior Court based on the request of the Coastal
Commission. The Company's complaint alleges that the Coastal Commission arbitrarily abandoned decades of prior approvals which would have permitted development on the entire Bolsa Chica Mesa. The
complaint also includes causes of action for violation of the Company's constitutional rights of equal protection
and due process, and for a public taking of its private property without compensation in contravention of the U.S. and California Constitutions.

On
August 31, 2001, the San Diego Superior court ruled in the Company's favor following a hearing on the Coastal Commission's legal challenge to the Company's complaint. The
court's ruling allows the Company to continue its challenge to the Coastal Commission's November 2000 decision as to how to protect certain raptor habitat on the Bolsa Chica Mesa, including the
Commission's recommendation that the Lower Mesa not be developed. The court's August 31, 2001 ruling initially upheld the Coastal Commission's challenge to the portion of the complaint which
includes causes of action for violation of the Company's constitutional rights of equal protection and due process, and for a public taking of its private property without compensation in
contravention of the U.S. and California Constitutions. However, after the Company amended its complaint, the San Diego Superior Court ruled in favor of the Company on January 30, 2002, and
denied the California Coastal Commission's legal challenge against this portion of the Company's complaint. The Coastal Commission's subsequent appeal of this ruling was denied by the Court of Appeals
on March 15, 2002. As a result, the case is currently expected to be set for hearing on the merits sometime in the second half of this year; however, due to the uncertainty of the litigation
process, the Company cannot predict how long it will take to pursue its claims, or the probability for success.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

The following tables set forth information with respect to bid quotations for the Common Stock of the Company for the periods indicated as reported on the
National Market. These quotations are interdealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.

High

Low2001First Quarter

$
3.94

$
2.63Second Quarter

$
4.70

$
3.75Third Quarter

$
5.05

$
4.10Fourth Quarter

$
4.50

$
4.122000First Quarter

$
7.50

$
5.44Second Quarter

$
6.31

$
5.19Third Quarter

$
5.94

$
5.31Fourth Quarter

$
6.63

$
2.63


The
number of beneficial holders of the Company's Common Stock as of March 1, 2002 was approximately 2,700. The Company has not paid any cash dividends on its Common Stock to
date, nor does the Company currently intend to pay regular cash dividends on the Common Stock.

Item 6. Selected Financial Data

The Selected Financial Data with respect to the Company and its subsidiaries are set forth on pages 15 to 16 of this Annual Report.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations is set forth beginning on page 16 of this Annual Report.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to equity price risk on its short-term investments in publicly traded equity securities. These investments, as of
December 31, 2001, are comprised solely of common stock in Prudential Financial, Inc. received as demutualization proceeds in December 2001. The Company has not attempted to
reduce or eliminate its exposure on these securities. As of December 31, 2001, the fair value of the Company's available-for-sale securities was $7.5 million.

Item 8. Financial Statements and Supplementary Data

Financial statements, schedules and supplementary data of the Company and its subsidiaries, listed under Item 14, are submitted as a separate section of this
Annual Report, commencing on page F-2.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None

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PART III

Item 10. Directors and Executive Officers of the Registrant

Directors.The information appearing under the caption "Election of Directors" of the Company's Proxy Statement for its 2002
Annual Meeting of Stockholders is incorporated herein by reference in this Annual Report.

Executive Officers.Information with respect to executive officers appears under the caption "Executive Officers of the
Company" in Item 1 of this Annual Report.

Item 11. Executive Compensation

Information in answer to this Item appears under the caption "Compensation of Directors and Executive Officers" of the Company's Proxy Statement for its 2002
Annual Meeting of Stockholders and is incorporated herein by reference in this Annual Report.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information in answer to this Item appears under the captions "Voting Securities and Principal Holders Thereof" and "Election of Directors" of the Company's Proxy
Statement for its 2002 Annual Meeting of Stockholders, and is incorporated herein by reference in this Annual Report.

Item 13. Certain Relationships and Related Transactions

Information in answer to this Item appears under the captions "Certain Transactions" and "Compensation of Directors and Executive Officers" of the Company's Proxy
Statement for its 2002 Annual Meeting of Stockholders, and is incorporated herein by reference in this Annual Report on Form 10-K.

10

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PART IV

Item 14. Exhibits, Financial Schedules, and Reports on Form 8-K



The
following financial statements and supplementary data of the Company are included in a separate section of this Annual Report on Form 10-K commencing on the page
numbers specified below:

|                                                                                                                           |  | Page
|-------------------------------------------------------------------------------------------------------------------------- |  | ----
|Selected Financial Data                                                                                                    |  | 15  
|Management's Discussion and Analysis of Financial Condition and Results of Operations                                      |  | 16  
|Independent Auditors' Report                                                                                               |  | F-1 
|Consolidated Balance Sheets as of December 31, 2000 and 2001                                                               |  | F-2 
|Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 1999, 2000 and 2001 |  | F-3 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001                                 |  | F-4 
|Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 2000 and 2001            |  | F-5 
|Notes to Consolidated Financial Statements                                                                                 |  | F-6 



All
schedules have been omitted since they are not applicable, not required, or the information is included in the financial statements or notes thereto.



|3.01  |   | Amended and Restated Certificate of Incorporation of the Registrant, incorporated by reference to Form 8-K filed October 14, 1999.                                                                                                                                                                                           
|----- | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.02  |   | Amended By-Laws of the Registrant, incorporated by reference to Exhibit 4.03 to the Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No. 333-29883, filed August 28,
1997.                                                                                                                    
|4.01  |   | Amended and Restated Certificate of Incorporation of the Registrant, incorporated by reference to Form 8-K filed October 14, 1999.                                                                                                                                                                                           
|4.02  |   | Amended By-Laws of the Registrant, incorporated by reference to Exhibit 4.03 to the Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No. 333-29883, filed August 28,
1997.                                                                                                                    
|10.01 |   | Tax Sharing Agreement dated as of December 18, 1989, between the Registrant and The Henley Group, Inc. ("Henley Group"), incorporated by reference to Exhibit 10.03 to the Registrant's Annual Report on
Form 10-K for 1989.                                                                                                 
|10.02 |   | Tax Sharing Agreement dated as of December 15, 1988, between Wheelabrator Technologies, Inc. (formerly The Wheelabrator Group, Inc.) ("WTI") and the Registrant ("WTI Tax Sharing Agreement"), incorporated by
reference to Exhibit 10.02 to Amendment No. 3 on Form 8 to the Registrant's Registration Statement on Form 10.
|10.02 | A | Amendment No. 1 to WTI Tax Sharing Agreement dated February 14, 1994, incorporated by reference to Exhibit 10.02A to the Registrant's Annual Report on Form 10-K for 1993.                                                                                                                                                   
|10.03 |   | Tax Sharing Agreement dated as of June 10, 1992, between Henley Group and Abex Inc., incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for 1992.                                                                                                                                     

11

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|10.04  |   | Amendment to Tax Sharing Agreement dated January 25, 1999 between the Registrant and Fisher Scientific International Inc., incorporated by reference to Exhibit 10.04 to Registrant's Annual Report of
Form 10-K for 1998.                                                                               
|------ | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.05  |   | 1993 Stock Option/Stock Issuance Plan, incorporated by reference to Exhibit 10.03A to the Registrant's Annual Report on Form 10-K for 1993.                                                                                                                                                              
|10.06  |   | Deferred Compensation Plan for Non-Employee Directors of the Registrant, incorporated by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form 10.                                                                                                                               
|10.07  |   | Retirement Plan for Non-Employee Directors of the Registrant, incorporated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form 10.                                                                                                                                          
|10.08  |   | Retirement Plan of the Registrant, incorporated by reference to Exhibit 10.16 to Amendment No. 3 on Form 8 to the Registrant's Registration Statement on Form 10.                                                                                                                                        
|10.08  | A | Amendment to Retirement Plan of the Registrant dated December 8, 1993, incorporated by reference to Exhibit 10.07A to the Registrant's Annual Report on Form 10-K for 1993.                                                                                                                              
|10.08  | B | Amendment to Retirement Plan of the Registrant dated effective January 1, 2000, incorporated by reference to Exhibit 10.08B to Registrant's Annual Report on Form 10-K for 1999.                                                                                                                         
|10.08  | C | Amendment to Retirement Plan of the Registrant dated December 19, 2001.*                                                                                                                                                                                                                                 
|10.09  |   | California Coastal Communities, Inc. 401(k) Plan and Trust Agreement dated effective January 1, 2000, incorporated by reference to Exhibit 10.10 to Registrant's Annual Report on Form 10-K for
1999.                                                                                                    
|10.10  |   | Employment Agreement between the Registrant and Mr. RaymondJ. Pacini, dated as of May 1, 1998, incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.                                                                             
|10.10  | A | Extension and Modification of Employment Agreement between the Registrant and Raymond J. Pacini, dated as of December 7, 1999, incorporated by reference to Exhibit 10.11A to Registrant's Annual Report on
Form 10-K for 1999.                                                                          
|10.10  | B | Extension and Modification of Employment Agreement between the Registrant and Mr. Raymond J. Pacini, dated as of April 30, 2001, incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001.                                           
|10.11  |   | Employment Agreement between the Registrant and Ms. Sandra G. Sciutto, dated as of May 1, 1998, incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.                                                                            
|10.11  | A | Extension and Modification of Employment Agreement between the Registrant and Sandra G. Sciutto, dated as of December 7, 1999, incorporated by reference to Exhibit 10.12A to Registrant's Annual Report on
Form 10-K for 1999.                                                                          
|10.11  | B | Extension and Modification of Employment Agreement between the Registrant and Ms. Sandra G. Sciutto, dated as of April 30, 2001, incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001.                                           
|10.12  |   | Independent Contractor Consulting Agreement among the Registrant, GSSW-REO, L.C., a Texas limited liability company and Thomas W. Sabin, Jr. dated as of May 20, 1998, incorporated by reference to Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.      
|10.12A |   | Extension and Modification of Independent Contractor Consulting Agreement among the Registrant, GSSW-REO, L.C., a Texas limited liability company and Thomas W. Sabin, Jr. dated as of December 7, 1999, incorporated by
reference to Exhibit 10.13A to Registrant's Annual Report on Form 10-K for 1999.

12

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|10.12B |  | Extension and Modification of Independent Contractor Consulting Agreement among the Registrant, GSSW-REO, L.C., a Texas limited liability company and Thomas W. Sabin, Jr., dated as of April 30, 2001, incorporated by
reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13  |  | Agreement of Settlement, Compromise, and Release between AV Partnership and AV Development Corporation and the Registrant and Subsidiaries, dated as of March 27, 2001, incorporated by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.                                
|21.01  |  | Subsidiaries of the Registrant.*                                                                                                                                                                                                                                                                                                     

---

None.

*Filed
herewith.

13

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|Date: March 19, 2002 |  | CALIFORNIA COASTAL COMMUNITIES, INC.
|-------------------- |  | ------------------------------------
|                     |  | By:                                 

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the date indicated.

|Signature                                         |  | Title                                             |  | Date          
|------------------------------------------------- |  | ------------------------------------------------- |  | --------------
|                                                  |  |                                                   |  |               
|/s/PHILLIP R. BURNAMAN II(Phillip R. Burnaman II) |  | Director                                          |  | March 19, 2002
|/s/RAYMOND J. PACINI(Raymond J. Pacini)           |  | President, Chief Executive Officer and Director   |  | March 19, 2002
|/s/THOMAS W. SABIN, JR.(Thomas W. Sabin, Jr.)     |  | Director and Chairman of the Board                |  | March 19, 2002
|/s/SANDRA G. SCIUTTO(Sandra G. Sciutto)           |  | Senior Vice President and Chief Financial Officer |  | March 19, 2002
|/s/J. THOMAS TALBOT(J. Thomas Talbot)             |  | Director                                          |  | March 19, 2002

14

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Item 6. Selected Financial Data

Set forth below is selected financial data of the Company and its consolidated subsidiaries. On September 2, 1997, the Company completed a recapitalization
under Chapter 11 of the bankruptcy code (the "Recapitalization", see Note 3 to the Company's Financial Statements). The following information should be read in conjunction with the financial
statements beginning on page F-2 of this Form 10-K.

|                                       |                                                                   | Predecessor
Company |     | Successor Company
|-------------------------------------- | ----------------------------------------------------------------- | ------------------- | --- | -----------------
|
|
|
|Balance Sheet Data at period end:      |                                                                   |                     |     |                  
|                                       | Unrestricted cash, cash equivalents and short-term investments(a) |                     |     |                  
|                                       | Total assets                                                      |                     |     |                  
|                                       | Project debt(b)                                                   |                     |     |                  
|                                       | Total stockholders' equity(c)                                     |                     |     |                  
|                                       | Shares outstanding at end of
period(f)                            |                     |     |                  
|                                       | Book value per common share(f)                                    |                     |     |                  
|Statement of Operations Data:          |                                                                   |                     |     |                  
|                                       | Revenues(d)                                                       |                     | $   | 33.9             
|                                       | Income (loss) from continuing operations(e)                       |                     |     | (85.3            
|                                       | Net income (loss)(e)                                              |                     |     | 9.6              
|Per common share-basic and diluted:    |                                                                   |                     |     |                  
|                                       | Income (loss) from continuing operations(f)                       |                     |     | N/A              
|                                       | Earnings(loss) (f)                                                |                     |     | N/A              
|Weighted-average shares outstanding(f) |                                                                   |                     | N/A |                  

---

15

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the following consolidated financial statements and notes thereto which commence on page
F-2.

The
Company is a residential land development and homebuilding company with properties located primarily in Southern California. The principal activities of the Company and its
consolidated subsidiaries include: (i) obtaining zoning and other entitlements for land it owns and improving the land for residential development; and (ii) single-family residential
construction in Southern California. Once the residential land owned by the Company is entitled, the Company 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. During 2002, the Company will focus its
immediate efforts to (i) obtain approval from the County of Orange and the California Coastal Commission ("Coastal Commission")

16

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for development permits to build 378 homes on the upper bench of the Bolsa Chica Mesa ("Upper Mesa"), as further described in Note 5 to the Company's Financial Statements;
(ii) vigorously pursue litigation (the "Coastal Commission Lawsuit") challenging the Coastal Commission's November 2000 decision to prohibit development on the lower bench of the Bolsa
Chica Mesa ("Lower Mesa"); and (iii) maintain profitable homebuilding operations; however, the Company may also consider other strategic and joint venture opportunities. There can be no
assurance that the Company will accomplish, in whole or in part, all or any of these strategic goals.

During
2000 and 2001, the Company generated significant gross operating margins and cash flows from homebuilding activities on assets other than Bolsa Chica. The Company currently has
on-going Southern California projects in Yucaipa and North Corona. These homebuilding projects are expected to generate significant cash flows and modest gross operating margins during
2002. However, the Company currently has a limited inventory of entitled land available for homebuilding projects, which the Company expects may be fully developed by the first quarter of 2003, except
for completion of the North Corona project. Given this limited inventory of buildable lots, the Company is striving to maintain profitable operating results for 2002 and pursuing residential lot
acquisition opportunities. Due to delays in approvals for homebuilding at Bolsa Chica, continuation of homebuilding operations beyond 2002 is dependent upon acquisition of suitable, entitled
residential lots within the Southern California area.

Bolsa
Chica is the Company's principal asset, representing 82% of total assets at December 31, 2001. It has required and continues to require significant investments for
entitlement and land development activities. Due to the November 2000 Coastal Commission decision to limit residential development to only the Upper Mesa, the Company is faced with further
delays in implementing its plans for residential development on the Bolsa Chica Mesa. While the Company vigorously pursues its litigation to obtain entitlement for residential construction on the
Lower Mesa, it is also pursuing approval of development permits for the Upper Mesa. After review of environmental, economic, marketing, construction and political considerations, the Company applied
to the County of Orange in August 2001 for approval of a plan to build single-family homes on the Upper Mesa. The County of Orange Planning Commission is expected to hold a public hearing
during the second quarter of 2002 regarding the site plan for development of 378 homes. This development plan will also require approval by the Coastal Commission. The Company does not believe that
the Coastal Commission process will ultimately prevent it from developing a planned community at Bolsa Chica, however, there can be no assurance in that regard, or as to when development could
commence, or as to the number of acres or homes the Company will be permitted to develop, or that further litigation or administrative delay will not result.

In
addition to the Upper Mesa land, the Company holds several other Bolsa Chica parcels aggregating approximately 242 acres which may be developed as residential lots or sold as park
lands to various governmental agencies, subject to the outcome of litigation against the Coastal Commission and negotiations, if any, with potential purchasers of the various parcels. The Company
believes that those additional parcels represent substantial value to be realized upon resolution of litigation and/or through sales to third parties.

The
Bolsa Chica Land Trust and other environmental groups have periodically suggested that the Company consider selling the Bolsa Chica Mesa to a nonprofit corporation or the State of
California. Historically, there has been no source of funding to finance such a transaction. However, a citizens' initiative is currently gathering voters' signatures to place a $3.4 billion
bond on California's November 2002 ballot entitled the "Water Security, Clean Drinking Water, Coastal and Beach Protection Act of 2002". If sufficient voter signatures are obtained to qualify
this initiative for the November 2002 ballot, the bond initiative would include an unquantified line item for the State of California to acquire all or a part of the Bolsa Chica Mesa. The
Company is in the process of evaluating the feasibility of this potential alternative. There can be no assurances that the bond

17

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initiative will obtain sufficient signatures to be eligible for the November 2002 ballot; that if eligible, such a bond measure will be approved by the voters; that the Company will ever reach
a mutually acceptable agreement on the price and terms of a sale of the Bolsa Chica Mesa; or that a sale transaction will ever be completed.

Real
estate held for current development or sale and land held for future development (real estate properties) are carried at fair value as of September 2, 1997, following
adoption of Fresh-Start Reporting as discussed in Notes 1 and 2 to the Financial Statements, as adjusted by subsequent activity. The Company's real estate properties are subject to a number of
uncertainties which can affect the values of those assets. These uncertainties include litigation or appeals of regulatory approvals (as discussed above) and availability of adequate capital,
financing and cash flow. In addition, future values may be adversely affected by increases in property taxes, increases in the costs of labor and materials and other development risks, changes in
general economic conditions, including higher mortgage interest rates, and other real estate risks such as the general demand for housing and the supply of competitive products. Real estate properties
do not constitute liquid assets and, at any given time, it may be difficult to sell a particular property for an appropriate price. During the last six months of 2001 it has become apparent that both
the national and California economies are in a recession. Therefore, there can be no assurance regarding the continued health of the Southern California residential real estate market. In particular,
(i) the slow-down in the national economy during the past year, (ii) the significant decreases in the value of national stock market indices and the resulting volatility of
those markets; (iii) the events of September 11, 2001 and their effects on the economy; and (iv) potential electricity shortages and related price increases in California,
collectively appear to be exerting recessionary pressures on the California economy and may have a negative impact on the Southern California housing market.

Significant Accounting Policies

Our significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements beginning on page F-6. In applying those policies,
estimates and judgments affect the amounts at which certain assets and liabilities are recorded. We apply our accounting policies on a consistent basis. As circumstances change, they are considered in
our estimates and judgments, and future changes in circumstances could result in changes in amounts at which assets and liabilities are recorded.

Liquidity and Capital Resources.

The principal assets in the Company's portfolio are residential land which must be held over an extended period of time in order to be developed to a condition
that, in management's opinion, will ultimately maximize the return to the Company. Consequently, the Company requires significant capital to finance its real estate development and homebuilding
operations. Historically, sources of capital have included bank lines of credit, specific property financings, asset sales and available internal funds. The Company is utilizing project debt to fund
construction on the recently acquired North Corona project, and is utilizing internally generated cash to fund the Yucaipa and Bolsa Chica projects. The Company's cash on hand and cash equivalents as
of December 31, 2001 were approximately $8.7 million. The Company believes that its cash on hand and cash equivalents, future real estate sales proceeds, joint venture distributions,
potential sales of short-term investments and funds available under its credit agreement for the North Corona project will be sufficient to meet anticipated cash and capital requirements,
primarily project development costs for homebuilding projects and Bolsa Chica, and general and administrative expenses, for the next 12 months.

The
Company's recently completed homebuilding projects (Sandover, Rancho San Pasqual and the Fairbanks Highlands joint venture) generated positive cash flows aggregating
$19.1 million during 2001. Since December 31, 2001, delivery of all of the final four homes at the Fairbanks Highlands project

18

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generated approximately $.8 million in additional cash flow. Through December 31, 2001, the Company had utilized approximately $6.0 million of the cash generated by these mature
homebuilding projects to fund acquisition and construction of the Yucaipa project, and used $3.4 million to fund a portion of the Company's acquisition of the new North Corona project, with the
balance being funded by a new construction loan. The Company's homebuilding operations are currently forecasted to generate approximately $10 million of cash flow during 2002, based on present
economic conditions, market and financing assumptions, which is expected to be more than adequate to fund current project development costs and general and administrative expenses this year. The
Company is actively pursuing residential lot acquisition opportunities which would be financed by a combination of the Company's cash on hand and new construction loans.

Financial Condition.



The $1.8 million increase in cash and cash equivalents from approximately $6.9 million at the prior year end to $8.7 million as of
December 31, 2001 primarily reflects net proceeds from 90 homes delivered during the year and cash distributions received from the Fairbanks Highlands joint venture, offset by
net repayments of construction loans on the Company's 16-home Sandover project in Huntington Beach, California and the Rancho San Pasqual project, spending on project development and
construction costs, as well as other activity presented in the Statements of Cash Flows.

Short-term
investments reflect equity securities classified as available-for-sale. Since the Company was a policyholder in an insurance company which
demutualized in 2001, it received shares of common stock in connection with the demutualization and Initial Public Offering ("IPO"). As a result of this transaction, the Company recognized other
income of $6.2 million in 2001, based on the value of shares received at the IPO price. As of December 31, 2001, the Company also recorded $1.3 million of other comprehensive
income for an unrealized gain, representing the difference between the closing market price of the common stock at year end and the IPO price.

Restricted
cash as of December 31, 2001 reflects collateral for a letter of credit obtained by the Company to secure certain indemnity obligations under a tax sharing agreement
with a former affiliate.

The
$7.4 million decrease in real estate held for current development or sale reflects $32.1 million charged to cost of sales for deliveries of an aggregate of 90 homes at
the Company's Rancho San Pasqual, Sandover and Yucaipa projects. These charges were partially offset by an aggregate of $24.7 million of infrastructure and homebuilding costs invested in all
three homebuilding projects, as well as a new project in North Corona, CA, during the year.

The
$5.3 million increase in land held for future development reflects investment in the Bolsa Chica Mesa project during 2001, primarily for attorneys and other consultants
engaged in the entitlement process.

Other
assets decreased by $5.1 million, primarily reflecting cash distributions received in excess of investment income from the Fairbanks Highlands joint venture and a reduction
in prepaid pension cost.

Accounts
payable and accrued liabilities decreased by $.8 million, to a balance of $3.1 million as of December 31, 2001, primarily reflecting decreased construction
activities at the Rancho San Pasqual and Sandover projects and a decrease in accrued consulting costs for the Bolsa Chica project.

The
$5.9 million decrease in project debt reflects aggregate repayments of $15.5 million made primarily in conjunction with home deliveries at the Rancho San Pasqual and
Sandover projects, partially offset by $9.6 million borrowed under bank loans for infrastructure and home construction costs at the Rancho San Pasqual, Sandover and North Corona projects. As of
December 31, 2001, the

19

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bank loans for the Rancho San Pasqual and Sandover projects have been fully repaid and the outstanding balance relates only to the North Corona project.

The
balance of other liabilities decreased by $8.0 million primarily resulting from (i) a $1.6 million reduction in the valuation allowance attributable to
utilization of pre-reorganization net operating losses (NOLs) due to a successful federal NOL carryback claim, (ii) reductions in liabilities for estimated exposure for federal and
state income taxes and interest aggregating $5.5 million (see Note 9 to the Financial Statements), (iii) the payment of a $3.75 million court-approved litigation settlement
regarding the Company's former AV Partnership investment and related contribution notes payable to the partnership and (iv) $.7 million of expenditures on other items. These decreases
were partially offset by increases of $3.0 million in reserves for certain contingent liabilities, including unfunded benefits for former directors, the Company's defined benefit pension plan,
certain indemnity obligations and an environmental issue.

The
$5.4 million increase in capital in excess of par value reflects pre-reorganization NOL valuation allowances reversed as the underlying NOLs were utilized to
offset (i) federal income taxes of approximately $1.6 million in a successful NOL carryback claim and (ii) a deferred income tax provision of $3.8 million (see
Note 9). In addition, equity reflects a decrease of $.1 million from other comprehensive loss, including an increase in minimum pension liability of $1.4 million, largely offset
by $1.3 million from unrealized gains on securities available for sale.



The $1.1 million increase in cash and cash equivalents primarily reflects the maturity of short-term investments, cash distributions received
from the unconsolidated Fairbanks joint venture and proceeds from home sales at the Rancho San Pasqual project, partially offset by spending on project development costs for Bolsa Chica, and the
Company's homebuilding project in Yucaipa, California which is unencumbered and has been internally financed since the costs of borrowing are significantly greater than the Company's return on cash
and short-term investments, as well as other activity presented in the Statements of Cash Flows.

The
$1.5 million decrease in restricted cash reflects the release of a portion of the collateral for a letter of credit obtained by the Company to secure certain indemnity
obligations under a tax sharing agreement with a former affiliate.

The
$6.3 million increase in real estate held for current development or sale reflects an aggregate of $24.0 million of infrastructure and home-building costs
for the Company's 112-home Rancho San Pasqual project in Escondido, California, the 16-home Sandover project in Huntington Beach, California, and the purchase of 29 lots in the
Yucaipa project, as well as home-building costs on the Yucaipa project. These investments were partially offset by $17.7 million charged to cost of sales for deliveries of 61 homes
at the Rancho San Pasqual project, and one home at the Sandover project during the year.

The
$5.5 million increase in land held for future development reflects investment in the Bolsa Chica project during the year, primarily for attorneys and other consultants engaged
in the entitlement process.

Other
assets increased by $.4 million, primarily reflecting the increased investment in the unconsolidated Fairbanks Highlands joint venture reflecting the Company's share of
income in excess of cash distributions received by the Company, partially offset by the release of collateral held under an insurance indemnity agreement and the collection of income tax refunds
receivable.

Accounts
payable and accrued liabilities increased by $2.0 million, to a balance of $4.0 million as of December 31, 2000, primarily reflecting increased construction
activity at the Rancho San Pasqual, Sandover and Yucaipa projects.

20

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The
$1.6 million increase in project debt reflects $18.2 million borrowed under bank loans for infrastructure and home construction costs at the Rancho San Pasqual and
Sandover projects, offset by repayments of $16.6 million made in conjunction with home deliveries at the Rancho San Pasqual and Sandover projects.

The
$4.6 million decrease in other liabilities primarily reflects (i) the resolution of a contingent environmental liability for a superfund site in January 2000,
and (ii) the settlement of a lawsuit regarding a partnership investment in January 2001, as further described below.

In
January 2000, a transaction was completed with the Charter Township of Calumet, Michigan (the "Township"), whereby the Company donated approximately 160 acres of its land in
Michigan, and certain other assets, to the Township. The donation was made in exchange for the Township's agreement to make a borrow source available to the U.S. Environmental Protection Agency
("EPA") for soil cover to be used in the EPA's implementation of remedial actions on that portion of the conveyed property which is a portion of a superfund site. The Township also assumed certain
other liabilities and provided the Company with certain indemnities in connection with the transaction. The Company believes its liabilities, if any, with respect to this superfund site have been
discharged as a result of this transaction. Accordingly, the Company recognized other income of $1.1 million, which represents elimination of a reserve for an indemnity obligation, net of
unamortized discount, during the first quarter of 2000.

In
January 2001, the Company entered into a court-approved litigation settlement regarding its AV Partnership investment and related contribution notes payable to the partnership,
which had a recorded
balance in other liabilities of $7.1 million. In settlement of the contribution notes payable, the Company agreed to pay $3.75 million and to indemnify its former partner with respect to
any long-term home warranty matters and any future construction defects claims, estimated to be approximately $1.0 million, regarding 1,202 homes built by the Company's subsidiary
under contract to the joint venture. As a result of this settlement, the Company recognized other income of $2.1 million for the year ended December 31, 2000, in accordance with
generally accepted accounting principles.

Results of Operations

The nature of the real estate development business is such that individual real estate transactions often cause significant fluctuations in operating results from
quarter to quarter and year to year.



The Company reported revenues of $39.0 million and gross operating profit of $6.1 million for 2001, compared with revenues of $23.0 million
and gross operating profit of $4.8 million for 2000. Revenues in the current year reflect deliveries of an aggregate of 90 homes in Southern California, including 51 homes at the Company's
112-home Rancho San Pasqual project in Escondido, 15 homes at the Sandover project on the Bolsa Chica Mesa in Huntington Beach, and 24 homes at the Yucaipa project. Revenues in the prior
year primarily reflect deliveries of 61 homes at the Rancho San Pasqual project. The gross margin of 16% for the year ended December 31, 2001 reflects the aggregate margin on all three projects
as compared to the gross margin of 21% for the prior year from only the Rancho San Pasqual project, which had a lower land basis.

The
$.8 million decrease in income from unconsolidated joint ventures for the year ended December 31, 2001 of $3.7 million as compared to $4.5 million in the
year 2000 reflects the delivery of 36 homes at Fairbanks Highlands at a higher average price during the current year, as compared with deliveries of 53 homes in the prior year.

The
Company does not expect to repeat its 2001 financial performance in 2002 due to a declining inventory of entitled lots. However, the Company is actively pursuing residential lot
acquisition

21

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opportunities and will strive to maintain profitable operations for 2002, although there can be no assurances in this regard.

Other
income, net of $3.8 million for the current year represents a decrease of $.5 million as compared to 2000. The year 2001 primarily reflects $6.2 million of
non-recurring income from the receipt of
securities as demutualization proceeds as discussed above, partially offset by $2.4 million of expense from changes in estimates for an indemnity obligation for a disposed business, retirement
benefits for former directors and an environmental issue. The year 2000 results primarily reflect a $2.1 million gain on the January 2001 settlement of litigation related to the
Company's investment in AV Partnership and $1.1 million of non-recurring other income from a January 2000 transaction whereby the Company donated approximately 160 acres of
its land in Michigan, and certain other assets, in exchange for an assumption of certain liabilities and certain indemnities related to a superfund site. In addition, the year 2000 results reflect
income from reversal of reserves of $.6 million for expiring home warranties and the full recognition of deferred income of $.5 million on the 1996 land sale to the Fairbanks Highlands
joint venture.

For
the years ended December 31, 2000 and 2001, pursuant to Fresh-Start Reporting, deferred income tax provisions of $4.2 and $3.8 million, respectively, are reflected in
the statement of operations, while equivalent tax benefits from the reduction in the valuation allowance for utilization of pre-reorganization NOLs are reflected by increasing the
Company's capital in excess of par value. During the year ended December 31, 2001, the Company also recorded reductions in contingent tax liabilities totaling $5.5 million, creating
equivalent tax benefits, partially offset by other tax provision items (see Note 9 to the Financial Statements).



The Company reported revenues of $23.0 million, resulting in gross operating profit of $4.8 million for the year ended December 31, 2000
compared with no revenues or gross operating profit in the 1999 period. Revenues in the 2000 period primarily reflect the delivery of 61 homes at the Rancho San Pasqual project in Escondido,
California, and one home delivered at the Sandover project.

Selling,
general and administrative expenses of $3.4 million decreased by $.1 million compared to the 1999 period, reflecting a decrease in compensation and professional
services expenses, partially offset by an increase in selling costs charged for the Rancho San Pasqual and Sandover projects in the 2000 period.

The
decrease in interest expense from $.8 million in 1999 to $.3 million in the 2000 period primarily reflects (1) the absence of interest incurred in 1999 related
to settlement of litigation over a joint venture interest sold in 1992, (2) the April 1999 cessation of interest accruals on capital contribution notes due to AV Partnership and
(3) reduced amortization of discount on liabilities which was recorded under Fresh-Start Reporting in connection with the Company's 1997 Recapitalization, due to resolution of certain
discounted liabilities.

The
$4.5 million of income from unconsolidated joint venture in the 2000 period reflects the Company's share of profits in the 93-home Fairbanks Highlands joint
venture. The venture delivered 53 homes during the year ended December 31, 2000.

The
increase in other income, net from $2.6 million in the 1999 period to $4.3 million for the year ended December 31, 2000 primarily reflects the
January 2000 transaction with the Township, the settlement of AV Partnership litigation, expiring home warranties and recognition of deferred profit in 2000 from the 1996 sale of the Fairbanks
property, all described above. These increases were partially offset by the absence in 2000 of non-recurring income from a change in estimate for an indemnity obligation on a disposed
business, recovery of legal expenses related to settled construction defects litigation and a reduction in interest income due to lower cash balances.

22

---

The
benefit for deferred income taxes for the year ended December 31, 1999 was offset by a corresponding valuation allowance. For the year ended December 31, 2000, pursuant
to Fresh-Start reporting, a deferred income tax provision of $4.2 million is reflected in the statement of operations, while the offsetting realization of a tax benefit from reduction in the
valuation allowance for utilization of pre-reorganization NOLs is reflected by increasing the Company's capital in excess of par value.

Gain
from discontinued operations for the 1999 period reflects income tax refunds for overpayment of 1998 alternative minimum taxes.

Safe Harbor, Statement Under the Private Securities Litigation Reform Act of 1995.Certain of the foregoing information
contains forward-looking statements that relate to future events or the Company's future financial performance. These statements involve known and unknown risks, uncertainties and other factors which
may cause the Company's actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking
statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts",
"potential", "continue", or the negative of such terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about the Company's plans,
objectives, goals, expectations and intentions, the number and types of homes and number of acres of land that the Company may develop and sell, the timing and outcomes of litigation, regulatory
approval processes or administrative proceedings (including, but not limited to ongoing litigation and administrative proceedings in the Coastal Commission Lawsuit related to the Company's principal
asset, the Bolsa Chica Mesa), the Company's ability to continue relationships with current or future partners, the Company's ability to expend resources to comply with environmental regulations and
local permitting requirements, the effect of certain costs, contractual obligations and tax liabilities, both known and unknown, on the Company's business, results of operations and financial
condition, the condition and adequacy of the Company's properties, the Company's ability to estimate cash flow projections due to uncertainties in valuing real property and market conditions
generally, the Company's ability to acquire residential lots in order to continue home-building operations, the adequacy of capital, financing and cash flow required to continue the
Company's operations and land development activities, the future condition of the real estate market in Southern California, market risk exposure with respect to the Company's short-term
equity investments, the Company's ability to maintain profitable operations, and other statements contained herein that are not historical facts.

23

---

INDEPENDENT AUDITORS' REPORT

To The Board of Directors and Stockholders

of
California Coastal Communities, Inc.:

We
have audited the accompanying consolidated balance sheets of California Coastal Communities, Inc. and its subsidiaries (the "Company") as of December 31, 2001 and 2000,
and the related consolidated statements of operations and comprehensive income (loss), cash flows, and changes in stockholders' equity for each of the years ended December 31, 2001, 2000 and
1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of California Coastal Communities, Inc. and its
subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000 and 1999, in conformity with
accounting principles generally accepted in the United States of America.

As
discussed in Note 2, the Company carries its land held for future development at cost, with write-downs to fair value in the event of impairment. The value estimation process
is inherently uncertain and relies to a considerable extent on future events and market conditions. As discussed in Note 5, the development of the Company's Bolsa Chica project is dependent
upon various governmental approvals, results of litigation and economic factors. Accordingly, the amount ultimately realized from such project may differ materially from current estimates as well as
the project's carrying value.

Deloitte &
Touche LLP

Costa
Mesa, California

March 15,
2002

F-1

---



CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

|                                                                                                                                 |                                          | December 31       |      
|-------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ----------------- | -----
|
|
|ASSETS                                                                                                                           |                                         
|Cash and cash equivalents                                                                                                        |                                          | $                 | 6.9  
|Short-term investments                                                                                                           |                                          |                   |     
|Restricted cash                                                                                                                  |                                          |                   | 1.9  
|Real estate held for current development or sale                                                                                 |                                          |                   | 21.4 
|Land held for future development                                                                                                 |                                          |                   | 142.0
|Other assets                                                                                                                     |                                          |                   | 6.5  
|                                                                                                                                 |                                          |                   |      
|                                                                                                                                 |                                          | $                 | 178.7
|                                                                                                                                 |                                          |                   |      
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                             |                                         
|Liabilities:                                                                                                                     |                                          |                   |      
|                                                                                                                                 | Accounts payable and accrued liabilities |                   | $    
|                                                                                                                                 | Project debt                             |                   |      
|                                                                                                                                 | Other liabilities                        |                   |      
|                                                                                                                                 |                                          |                   |      
|                                                                                                                                 |                                          | Total liabilities |      
|                                                                                                                                 |                                          |                   |      
|Commitments and Contingencies                                                                                                    |                                          |                   |      
|Stockholders' equity:                                                                                                            |                                          |                   |      
|Common Stock$.05 par value; 18,000,000 and 11,000,000 shares authorized, respectively; 10,058,589 shares issued and outstanding |                                          |                   | .5   
|Excess Stock$.05 par value; 18,000,000 and 11,000,000 shares authorized, respectively; no shares outstanding                    |                                          |                   |     
|Capital in excess of par value                                                                                                   |                                          |                   | 134.4
|Retained earnings                                                                                                                |                                          |                   | 7.7  
|Accumulated other comprehensive income (loss)                                                                                    |                                          |                   |     
|                                                                                                                                 |                                          |                   |      
|                                                                                                                                 | Total stockholders' equity               |                   |      
|                                                                                                                                 |                                          |                   |      
|                                                                                                                                 |                                          | $                 | 178.7
|                                                                                                                                 |                                          |                   |      

See
independent auditors' report and accompanying notes to consolidated financial statements.

F-2

---



CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS  AND COMPREHENSIVE INCOME (LOSS)

|                                                        |                                                                            | For the Years Ended
December 31, |     
|------------------------------------------------------- | -------------------------------------------------------------------------- | -------------------------------- | ----
|
|
|Revenues                                                |                                                                            | $                                |    
|Cost of sales                                           |                                                                            |                                  |    
|                                                        |                                                                            |                                  |     
|                                                        | Gross operating profit                                                     |                                  |     
|Selling, general and administrative expenses            |                                                                            |                                  | 3.5 
|Interest expense                                        |                                                                            |                                  | .8  
|Income from unconsolidated joint ventures               |                                                                            |                                  |    
|Other income, net                                       |                                                                            |                                  | (2.6
|                                                        |                                                                            |                                  |     
|                                                        | Income (loss) from continuing operations before income taxes               |                                  |     
|Provision (benefit) for income taxes                    |                                                                            |                                  | .1  
|                                                        |                                                                            |                                  |     
|                                                        | Income (loss) from continuing operations                                   |                                  |     
|Discontinued operations:                                |                                                                            |                                  |     
|                                                        | Gain on disposition, net of income taxes of ($.2), $0 and $0, respectively |                                  |     
|                                                        |                                                                            |                                  |     
|Net income (loss)                                       |                                                                            | $                                | (1.6
|Other comprehensive income (loss):                      |                                                                            |                                  |     
|                                                        | Unrealized gain on short-term investments                                  |                                  |     
|                                                        | Minimum pension liability adjustment                                       |                                  |     
|                                                        |                                                                            |                                  |     
|                                                        |                                                                            |                                  |    
|                                                        |                                                                            |                                  |     
|Comprehensive income (loss)                             |                                                                            | $                                | (1.6
|                                                        |                                                                            |                                  |     
|Net earnings (loss) per common share-basic and diluted: |                                                                            |                                  |     
|                                                        | Continuing operations                                                      |                                  | $   
|                                                        | Discontinued operations                                                    |                                  |     
|                                                        |                                                                            |                                  |     
|Net earnings (loss) per common share-basic and diluted  |                                                                            | $                                | (.15
|                                                        |                                                                            |                                  |     

See
independent auditors' report and accompanying notes to consolidated financial statements.

F-3

---



CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                         |                                                                                                                            | For the Years Ended
December 31,                                        |      
|------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | -----
|
|
|Cash flows from operating activities:                                    |                                                                                                                            |                                                                         |      
|                                                                         | Net income (loss)                                                                                                          |                                                                         | $    
|                                                                         | Adjustments to reconcile to cash provided by (used in) operating activities:                                               |                                                                         |      
|                                                                         |                                                                                                                            | Non-cash interest expense                                               |      
|                                                                         |                                                                                                                            | Interest income on restricted cash                                      |      
|                                                                         |                                                                                                                            | Deferred income taxes                                                   |      
|                                                                         |                                                                                                                            | Gains on real estate sales                                              |      
|                                                                         |                                                                                                                            | Proceeds from real estate sales, net                                    |      
|                                                                         |                                                                                                                            | Gain on receipt of securities from demutualization of insurance company |      
|                                                                         | Changes in assets and liabilities:                                                                                         |                                                                         |      
|                                                                         |                                                                                                                            | Investments in real estate held for current development or sale         |      
|                                                                         |                                                                                                                            | Investment in land held for future development                          |      
|                                                                         |                                                                                                                            | Decrease (increase) in other assets                                     |      
|                                                                         |                                                                                                                            | Decrease in accounts payable, accrued and other liabilities             |      
|                                                                         |                                                                                                                            |                                                                         |      
|                                                                         |                                                                                                                            | Cash provided by (used in) operating activities                         |      
|                                                                         |                                                                                                                            |                                                                         |      
|Cash flows from investing activities:                                    |                                                                                                                            |                                                                         |      
|                                                                         | Purchase of short-term investments                                                                                         |                                                                         |      
|                                                                         | Maturity of short-term investments                                                                                         |                                                                         |      
|                                                                         |                                                                                                                            |                                                                         |      
|                                                                         |                                                                                                                            | Cash provided by (used in) investing activities                         |      
|                                                                         |                                                                                                                            |                                                                         |      
|Cash flows from financing activities:                                    |                                                                                                                            |                                                                         |      
|                                                                         | Borrowings of project debt                                                                                                 |                                                                         |      
|                                                                         | Repayments of project debt                                                                                                 |                                                                         |      
|                                                                         | Deposit of restricted cash                                                                                                 |                                                                         |      
|                                                                         | Release of restricted cash                                                                                                 |                                                                         |      
|                                                                         | Repurchases of common stock                                                                                                |                                                                         |      
|                                                                         |                                                                                                                            |                                                                         |      
|                                                                         |                                                                                                                            | Cash provided by (used in) financing activities                         |      
|                                                                         |                                                                                                                            |                                                                         |      
|Net increase (decrease) in cash and cash equivalents                     |                                                                                                                            |                                                                         | (20.8
|Cash and cash equivalentsbeginning of year                              |                                                                                                                            |                                                                         | 26.6 
|                                                                         |                                                                                                                            |                                                                         |      
|Cash and cash equivalentsend of year                                    |                                                                                                                            | $                                                                       | 5.8  
|                                                                         |                                                                                                                            |                                                                         |      
|Supplemental disclosures of cash flow information:                       |                                                                                                                            |                                                                         |      
|                                                                         | Cash paid during the period for income taxes, net of refunds received                                                      |                                                                         | $    
|Supplemental disclosures of non-cash investing and financing activities: |                                                                                                                            |                                                                         |      
|                                                                         | Unrealized gain on short-term investments recorded as other comprehensive income (loss)                                    |                                                                         |      
|                                                                         | Minimum pension liability adjustment recorded as other comprehensive income (loss)                                         |                                                                         |      
|                                                                         | Utilization of pre-Reorganization net operating losses to offset federal tax liabilities, credited to stockholders' equity |                                                                         |      

See
independent auditors' report and accompanying notes to consolidated financial statements.

F-4

---



CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

|                           |                                                        | Common
Stock |    | Capital in
Excess of
Par Value |   | Retained
Earnings |      | Accumulated
Other
Comprehensive
Income (Loss) |      | Total |  
|-------------------------- | ------------------------------------------------------ | ------------ | -- | ------------------------------ | - | ----------------- | ---- | --------------------------------------------- | ---- | ----- | -
|
|Balance at January 1, 1999 |                                                        | $            | .6 |                                | $ | 138.4             |      | $                                             | 3.7  |       | $
|                           | Net loss                                               |              |    |                               |   |                   |     |                                               |      | (1.6  | )
|                           | Stock repurchases                                      |              |    | (.1                            | ) |                   | (8.2 | )                                             |      |      |  
|                           |                                                        |              |    |                                |   |                   |      |                                               |      |       |  
|Balance December 31, 1999  |                                                        |              | .5 |                                |   | 130.2             |      |                                               | 2.1  |       |  
|                           | Net income                                             |              |    |                               |   |                   |     |                                               |      | 5.6   |  
|                           | Utilization of pre-reorganization net operating losses |              |    |                               |   |                   | 4.2  |                                               |      |      |  
|                           |                                                        |              |    |                                |   |                   |      |                                               |      |       |  
|Balance December 31, 2000  |                                                        |              | .5 |                                |   | 134.4             |      |                                               | 7.7  |       |  
|                           | Net income                                             |              |    |                               |   |                   |     |                                               |      | 11.1  |  
|                           | Other comprehensive income (loss)                      |              |    |                               |   |                   |     |                                               |      |      |  
|                           | Utilization of pre-reorganization net operating losses |              |    |                               |   |                   | 5.4  |                                               |      |      |  
|                           |                                                        |              |    |                                |   |                   |      |                                               |      |       |  
|Balance December 31, 2001  |                                                        | $            | .5 |                                | $ | 139.8             |      | $                                             | 18.8 |       | $
|                           |                                                        |              |    |                                |   |                   |      |                                               |      |       |  

See
independent auditors' report and accompanying notes to consolidated financial statements.

F-5

---



CALIFORNIA COASTAL COMMUNITIES, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1Formation and Basis of Presentation

The principal activities of California Coastal Communities, Inc. and its consolidated subsidiaries (the "Company", formerly known as Koll Real Estate
Group, Inc., The Bolsa Chica Company and Henley Properties Inc.) include: (i) obtaining zoning and other entitlements for land it owns and improving the land for residential
development; and (ii) single-family residential construction in Southern California. Once the residential land owned by the Company is entitled, the Company 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.

On
December 31, 1989, The Henley Group, Inc. separated its business into two public companies through a distribution to its Class A and Class B common
stockholders of all of the common stock of a newly formed Delaware corporation to which The Henley Group, Inc. had contributed its non-real estate development operations, assets and
related liabilities. The new company was named The Henley Group, Inc. ("Henley Group") immediately following the distribution. The remaining company was renamed Henley Properties Inc.
("Henley Properties") and consisted of the real estate development business and assets of Henley Group, including its principal subsidiary Signal Landmark.

On
July 16, 1992, a subsidiary of Henley Properties merged with and into Henley Group (the "Merger") and Henley Group became a wholly owned subsidiary of Henley Properties. In the
Merger, Henley Properties, through its Henley Group subsidiary, received net assets having a book value as of July 16, 1992 of approximately $45.3 million. In connection with the Merger,
Henley Properties was renamed The Bolsa Chica Company.

On
September 30, 1993, a subsidiary of The Bolsa Chica Company acquired the domestic real estate development business and related assets of The Koll Company. In connection with
this acquisition, The Bolsa Chica Company was renamed Koll Real Estate Group, Inc.

On
September 2, 1997, the Company completed a recapitalization which resulted in the exchange of all the then existing Debentures, Series A Preferred Stock and
Class A Common Stock into new Common Stock. In addition, upon the recapitalization, the Company adopted the provisions of Statement of Position ("SOP") No. 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting"). The recapitalization is further described in Note 3.

On
April 30, 1998, the Company sold its commercial development business. Immediately following the sale, Koll Real Estate Group, Inc. was renamed California Coastal
Communities, Inc.

The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts
of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform with the current year
presentation.

Note 2Significant Accounting Policies



The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents.

F-6

---



Restricted cash as of December 31, 2001 consists of cash equivalents held as collateral for a letter of credit obtained by the Company to secure certain
indemnity obligations under a tax sharing agreement with a former affiliate.



Short-term investments consist of equity securities classified as available-for-sale.
Available-for-sale securities are stated at fair market value, with unrealized gains and losses reported in other comprehensive income. Realized gains and losses and declines
in value judged to be other-than-temporary on available-for-sale securities are included in other income. The Company is exposed to equity price risk on
its short-term investments in publicly traded equity securities. As of December 31, 2001, these investments are comprised solely of common stock in a large public insurance company
received as demutualization proceeds in December 2001. The Company has not attempted to reduce or eliminate its exposure on these securities.



Real estate held for current development or sale is carried at the lower of cost, or fair value less costs to sell. Land held for future development is carried at
cost, with write-downs to fair value only in the event of impairment as described under "Impairment of Long-Lived Assets." The estimation process involved in the determination of fair
value is inherently uncertain since it requires estimates as to future events and market conditions. Such estimation process assumes the Company's ability to complete development and dispose of its
real estate properties in the ordinary course of business based on management's present plans and intentions. Economic, market, environmental and political conditions may affect management's
development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the availability of future financing for development and construction
activities. Accordingly, the ultimate values of the Company's real estate properties are dependent upon future economic and market conditions, the availability of financing, and the resolution of
political, environmental and other related issues.

The
cost of sales of multi-unit projects is generally computed using the relative sales value method. Interest cost is capitalized to real estate projects during their
development and construction period.



The Company assesses the impairment of land held for future development and other long-lived assets in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121"), which requires an
impaired asset to be written down to fair value. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. As provided by SFAS 121, impairment is evaluated by comparing an asset's carrying value to the undiscounted estimated cash flows expected from the asset's operations and
eventual disposition. If the sum of the undiscounted estimated future cash flows is less than the carrying value of the asset, an impairment loss is recognized based on the fair value of the asset. If
an impairment occurs, the fair value of an asset for purposes of SFAS 121 is deemed to be the amount a willing buyer would pay a willing seller for such asset in a current transaction. On
September 2, 1997,

F-7

---

the Company completed its recapitalization pursuant to court confirmation of a Prepackaged Plan of Reorganization, and the Company applied the principles required by the American Institute of
Certified Public Accountant's SOP 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting") and the carrying value of real estate
properties was adjusted to fair value (see Note 3). Following the California Coastal Commission's November 2000 suggested modifications to the Bolsa Chica Local Coastal Program to limit
development to only the upper bench of the Company's 208-acre Bolsa Chica Mesa (see Note 5), the Company evaluated this asset's carrying value. The Company updated its analysis as
of December 31, 2001. Since the undiscounted estimated future cash flows from the upper bench of the Bolsa Chica Mesa and the Company's additional 242 acres at Bolsa Chica exceed its carrying
value, there has been no impairment.



The Company accounts for income taxes on the liability method. Deferred income taxes are determined based on the difference between the financial statement and
tax bases of assets and liabilities, using enacted tax rates in effect in the years in which these differences are expected to reverse. The liability method requires an evaluation of the probability
of being able to realize the future benefits indicated by such asset. A valuation allowance related to the deferred tax asset is recorded when it is more likely than not that some portion or all of
the deferred tax asset will not be realized.



Sales are recorded using the full accrual method when title to the real estate sold passes to the buyer and the buyer has made an adequate financial commitment.
When it is determined that the earnings
process is not complete, income is deferred using the installment or cost recovery methods of accounting.



The weighted average common shares outstanding was 10.1 for the years ended December 31, 2000 and 2001, respectively. Earnings (loss) per share, assuming
dilution, is computed using the weighted average number of common shares outstanding and the dilutive effect of potential common shares outstanding.



Other comprehensive income (loss) items under SFAS No. 130 are transactions recorded in stockholders' equity during the year, excluding net income (loss)
and transactions with stockholders. The components of other comprehensive income (loss) are disclosed in the consolidated statements of operations without tax effect due to the Company's net operating
loss (NOL) carryforwards.



In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets. "SFAS No. 141 was effective after June 30, 2001 and SFAS 142 was effective January, 2002. The new standards are not expected to have a significant impact on the
Company's financial statements.

F-8

---

In
August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15,
2002. This new standard is not expected to have a significant impact on the Company's financial statements.

Also
in August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". This new statement also supersedes certain aspects of APB 30, "Reporting the Results of OperationsReporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", with regard to reporting the effects of a disposal of a segment of a business and
will require expected future operating losses from discontinued operations to be reported in discontinued operations in the period incurred (rather than as of the measurement date as presently
required by APB 30). In addition, more dispositions may qualify for discontinued operations treatment. SFAS No. 144 retains the requirements of SFAS No. 121 whereby an impairment loss is
recognized if the carrying value of the asset is not recoverable from its undiscounted cash flows or fair values are less than carrying values. The provisions of this statement are required to be
applied for fiscal years beginning after December 15, 2001. This new standard is not expected to have a significant impact on the Company's financial statements.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 3Recapitalization

On September 2, 1997, the Company completed its recapitalization (the "Recapitalization") pursuant to a prepackaged plan of reorganization that was
confirmed by the U.S. Bankruptcy Court for the District of Delaware on August 19, 1997. The prepackaged plan was filed by the Company, excluding all of its subsidiaries and affiliates,
contemporaneously with a voluntary petition for relief under Chapter 11 of the bankruptcy code on July 14, 1997. The Recapitalization had previously received over 95% approval of each class of
stock and bondholders that voted through a public solicitation process in June 1997. On September 2, 1997, the effective date of the Recapitalization, the Company adopted the provisions
of SOP No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting") as promulgated by the American Institute of Certified Public
Accountants in November 1990. Accordingly, all assets and liabilities were revalued to reflect their reorganization value, approximating their fair value at the effective date of the
Recapitalization. In addition, the accumulated deficit of the Company was eliminated and its capital structure recast in conformity with the Recapitalization, and as such, the Company has recorded the
effects of the Recapitalization and Fresh-Start Reporting as of the effective date.

F-9

---

The
Recapitalization provided for a restructuring of the Company's capital structure. The only impaired parties under the Recapitalization were the holders of (a) the Company's
12% Senior Subordinated Pay-In-Kind Debentures due March 15, 2002 ("Senior Debentures"), (b) the Company's 12% Subordinated Pay-In-Kind
Debentures due March 15, 2002 ("Subordinated Debentures") (collectively, the "Debentures"), (c) liquidated, non-contingent claims, and (d) equity securities of the
Company. The prepackaged plan did not alter the Company's obligations to its other creditors, including its trade creditors, customers, employees, holders of contingent and unliquidated claims,
holders of guaranty claims, and parties to contracts with the Company. Under the Recapitalization, Senior Debenture holders and Subordinated Debenture holders received 56 shares and 28 shares,
respectively, for each $1,000 of principal amount of their Debentures outstanding as of March 15, 1997, and holders of liquidated, non-contingent claims received 56 shares for each
$1,000 of their claims (all after consolidation of all outstanding shares of preferred and common stock into a single class of newly issued common stock and a reverse split transaction).

Upon
implementation of the Recapitalization, $216.9 million book value of Debentures and other liabilities subject to compromise were cancelled in exchange for equity, resulting
in an $89.5 million extraordinary gain on extinguishment of debt. This gain was partially offset by $57.1 million of net adjustments to revalue all assets and liabilities to reflect fair
value as of September 2, 1997 as required by Fresh-Start Reporting.

Note 4Acquisition

In November 1994, the Company acquired the stock of Kathryn G. Thompson Company ("KGTC") and related assets. The principal activities of the acquired
business, now known as Hearthside Homes, Inc., are residential land development and homebuilding, focusing on the entry-level and move-up market segments. The principal project of
the business, at the time of the acquisition, was a 49% general partnership interest in a 230-acre project planned for approximately 1,200 residential units in Aliso Viejo in southern
Orange County ("AV Partnership"). In addition to third-party construction project financing, the partnership owed a significant amount of participating mortgages with preference to the Company's
equity interest. These mortgages, held by the entity's other 49% general partner, gave that partner a controlling interest, and limited the Company's 49% interest to a non-controlling one
and therefore the equity method of accounting was used to account for the partnership investment.

In
accordance with the equity method of accounting, the Company's initial investment in the partnership was reduced by its share of partnership losses as incurred, with offsetting
allowances recorded to reflect the limitation of the Company's obligation to fund losses. Accordingly, the Company's 1999 results of operations reflect only accrued interest on the capital
contribution notes due to the partnership, as the Company's net investment in AV Partnership was $0. The partnership was dissolved in 2001 at no gain or loss to the Company.

In
connection with the acquisition of the partnership interest, the Company guaranteed approximately $4.8 million principal amount of capital contribution notes due to AV
Partnership. In 1999, the Company disputed the enforceability of the guarantee, and the Company and the partnership commenced litigation regarding the enforceability of the guarantee. On
January 25, 2001, the Company
entered into a court-approved litigation settlement regarding its AV Partnership investment and related contribution notes payable to the partnership. In settlement of the contribution notes payable,
the

F-10

---

Company paid $3.75 million and indemnified its former partner with respect to any long-term home warranty matters and any future construction defects claims, estimated to be
approximately $1.0 million, regarding 1,202 homes built by the Company's subsidiary under contract to the joint venture. The Company had provided a reserve for the notes, including accrued
interest thereon, through the original maturity date, of $7.1 million at December 31, 1999. As a result of this settlement, the Company recognized other income of $2.1 million for
the year ended December 31, 2000.

Summarized
financial information of AV Partnership is presented below at December 31, 2000 and for the years ended December 31, 1999 and 2000 (in millions, except home
closings):

1999

2000Balance Sheet Data:Total assets




$
1.7Total project debt and other liabilities





(14.9
)Partners' deficit




$
(13.2
)Statement of Operations Data:Revenues

$
46.5

$
18.9Expenses


(44.9
)

(23.7
)Net income (loss)

$
1.6

$
(4.8
)Home Closings


156


71


Note 5Land Held for Future Development

The Company owns approximately 350 acres located in Orange County, California overlooking the Pacific Ocean and the Bolsa Chica wetlands (which were sold by the
Company to the State of California in 1997), surrounded by the City of Huntington Beach and approximately 35 miles south of downtown Los Angeles. The Company's holdings include 208 acres on a mesa
north of the Bolsa Chica wetlands ("Bolsa Chica Mesa"), approximately 100 acres on, or adjacent to, the Huntington Mesa and 42 acres of lowlands which were acquired by the Company in
September 1997.

A
Local Coastal Program ("LCP") for development of up to 2,500 homes on the Bolsa Chica Mesa was approved by the Orange County Board of Supervisors in December 1994 and by the
California Coastal Commission (the "Coastal Commission") in January 1996. In October 1997, in response to a trial court decision in connection with a lawsuit which challenged the 1996
approvals of the Coastal Commission (the "Coastal Act Lawsuit"), the Coastal Commission approved modifications to the LCP which eliminated the filling of Warner Pond and thereby reduced the maximum
number of homes to be built from 2,500 to no more than 1,235 homes on the Bolsa Chica Mesa. The Orange County Board of Supervisors subsequently accepted the Coastal Commission's suggested
modifications.

On
November 16, 2000, in response to the April 1999 Court of Appeal's decision in the Coastal Act Lawsuit which prohibited relocation of a 14-acre grove of
dying eucalyptus trees which serves as raptor habitat, the Coastal Commission held another public hearing on the LCP and decided to limit development to only the upper bench of the Bolsa Chica Mesa
(the "Upper Mesa"). The Coastal Commission's latest suggested modifications to the LCP would prohibit the Company and other landowners from development on the approximately 100-acre lower
bench of the Bolsa Chica Mesa

F-11

---

(the "Lower Mesa"). On May 8, 2001, the County of Orange declined to consider the Coastal Commission's November 2000 suggested modifications. In their response to the Coastal
Commission, the County stated that the Commission's suggested modifications were infeasible and unacceptable. In particular, the County noted that the Commission's suggested modifications would remove
140 acres of viable residentially-zoned land from the County's plan.

In
January 2001, the Company filed a complaint in Orange County Superior Court challenging the Coastal Commission's November 2000 decision to substantially change the
previously approved LCP. On February 28, 2001, the Orange County Superior Court ordered that the case be reassigned to San Diego Superior Court based on the request of the Coastal Commission.
The Company's complaint alleges that the Coastal Commission arbitrarily abandoned decades of prior approvals that would have permitted development on the entire Bolsa Chica Mesa. The complaint also
includes causes of action for violation of the Company's constitutional rights of equal protection and due process, and for a public taking of its private property without compensation in
contravention of the U.S. and California Constitutions.

On
August 31, 2001, the San Diego Superior court ruled in the Company's favor following a hearing on the Coastal Commission's legal challenge to the Company's complaint. The
court's ruling allows the Company to continue its challenge to the Commission's November 2000 decision as to how to protect certain raptor habitat on the Bolsa Chica Mesa, including the
Commission's recommendation that the Lower Mesa not be developed. The court's August 31, 2001 ruling initially upheld the Coastal Commission's challenge to the portion of the complaint which
includes causes of action for violation of the Company's constitutional rights of equal protection and due process, and for a public taking of its private property without compensation in
contravention of the U.S. and California Constitutions. However, after the Company amended its complaint, the San Diego Superior Court ruled in favor of the Company on January 30, 2002 and
denied the California Coastal Commission's legal challenge against this portion of the Company's complaint. The Coastal Commission's subsequent appeal of this ruling was denied by the Court of Appeals
on March 15, 2002. As a result, the case is currently expected to be set for hearing on the merits sometime in the second half of this year; however, due to the uncertainty of the litigation
process, the Company cannot predict how long it will take to pursue its claims, or the probability for success.

While
the Company vigorously pursues its litigation to obtain entitlement for residential construction on the Lower Mesa, it is also pursuing approval of permits for development of the
Upper Mesa. After review of environmental, economic, marketing, construction and political considerations, the Company applied to the County of Orange in August 2001 for permits to build
single-family homes on the Upper Mesa. The County of Orange Planning Commission is expected to hold a public hearing during the second quarter of 2002 regarding the site plan for development of 378
homes on the Upper Mesa. The planned community on the Upper Mesa is expected to offer a broad mix of single-family home choices, ranging in size from 1,560 square feet to 4,450 square feet. This
development plan will also require approval by the Coastal Commission. The Company does not believe that the Coastal Commission process will permanently prevent it from developing a planned community
at Bolsa Chica, however, there can be no assurance in that regard, or as to when development could commence, or as to the number of acres or homes the Company would be permitted to develop, or that
further litigation or administrative delay will not result.

F-12

---

Upon
completion of the Company's recapitalization (the "Recapitalization") as discussed in Note 3, the Company applied the principles required by Fresh-Start Reporting and the
carrying value of land held for development (Bolsa Chica) was adjusted to fair value as of September 2, 1997, after consideration of the October 1997 Coastal Commission action discussed
above. The fair value was determined in 1997 using discounted estimated cash flows expected from the asset's operations and eventual disposition. In addition, given the significance of the Bolsa Chica
asset to the financial statements of the Company, the value of the Company's stock immediately following the closing of the Recapitalization was used as an indicator of value of the subject property.
Following the November 2000 Coastal Commission action, an assessment of impairment was conducted by the Company for the year ended December 31, 2000. The Company updated its analysis as
of December 31, 2001. In accordance with the Company's policy described in Note 2Impairment of Long-Lived Assets and based upon the Company's assessment of
estimated undiscounted future cash flows, no provision for impairment has been considered necessary subsequent to the Recapitalization.

The
estimation process involved in the determination of value is inherently uncertain since it requires estimates as to future events and market conditions. Such estimation process
assumes the Company's ability to complete development and dispose of its real estate properties in the ordinary course of business based on management's present plans and intentions. Economic, market,
environmental and political conditions may affect management's development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the
availability of future financing for development and construction activities. At such time as the Company's homebuilding activities at Bolsa Chica commence, the Company would be required to account
for such property at the lower of cost or market, which may necessitate a write-down of its carrying value. Accordingly, the ultimate values of the Company's land held for future
development are dependent upon future economic and market conditions, the availability of financing, and the resolution of political, environmental and other related issues. The development of the
Company's Bolsa Chica Mesa project is dependent upon various governmental approvals, results of litigation and economic factors. Accordingly, the amount ultimately realized from such project may
differ materially from current estimates and the project's carrying value.

Note 6Investments in Unconsolidated Joint Ventures

The Company's investments in unconsolidated joint ventures represent a significant portion of its other assets. These joint ventures are 50% or less owned and,
accordingly are accounted for using the equity method and are not consolidated with the Company's consolidated financial statements. The Company's former investment in AV Partnership is described in
Note 4, along with condensed financial information. Condensed financial information regarding the Company's investment in the 93-home Fairbanks Highlands joint venture (San Diego,
California) and its investment in a residential loan

F-13

---

production partnership with a major commercial bank are summarized as follows (in millions, except home closings):

1999

2000

2001Balance Sheet Data:Total assets




$
26.2

$
4.0Total project debt and other liabilities





(6.2
)

(1.4
)Venturers' capital




$
20.0

$
2.6Statement of Operations Data:Revenues

$


$
61.8

$
51.2Expenses


(.4
)

(47.0
)

(40.2
)Net income (loss)

$
(.4
)
$
14.8

$
11.0Home closings





53


36


During
2000 and 2001, the Company received $3.6 million and $7.2 million, respectively, in aggregate cash distributions from the Fairbanks Highlands joint venture and
$.1 million in 2001 from the residential loan production partnership.

Note 7Project Debt

In January and April 2001, Signal Landmark, a consolidated subsidiary, made final repayments on earlier construction loans on the Rancho San Pasqual
project in Escondido, California and the Sandover project in Huntington Beach, California, respectively. In March 2001, Signal Landmark entered into a new construction loan agreement with a
commercial bank to finance construction of final phases and the model homes at the Company's 112-home Rancho San Pasqual. The Company borrowed and fully repaid approximately
$5.7 million under this $6 million loan facility. The final repayment was made from proceeds upon the sale of homes in July 2001. The obligation was secured by a deed of trust on
the Rancho San Pasqual project and required principal repayments upon the sale of homes.

In
conjunction with the July 20, 2001 acquisition of 83 single-family residential lots in North Corona, California, the Company's homebuilding subsidiary, Hearthside
Homes, Inc., entered into a construction loan agreement with a commercial bank to finance the project. The $10.9 million loan facility is secured by a deed of trust on the North Corona
project and requires principal repayments upon the sale of homes. The loan bears an interest rate of prime plus three-fourths percent (5.5% at December 31, 2001) and matures on July 19,
2002. As of December 31, 2001, approximately $3.1 million had been drawn under this facility.

For
the years ended December 31, 2000 and 2001, approximately $1.0 million and approximately $.3 million, respectively, of construction period interest was
capitalized to projects in the construction stage.

F-14

---

Note 8Other Liabilities

Other liabilities were comprised of the following as of December 31 (in millions):

2000

2001Net deferred taxes and other tax liabilities

$
13.6

$
6.8Accrued pensions and benefits


2.8


3.7Obligation on capital contribution notes


3.7


Home warranty reserves


1.2


1.2Accrued indemnity and other contingent obligations


3.5


4.9Unamortized discount


(1.6
)

(1.4
)$
23.2

$
15.2


The
decrease in net deferred taxes and other tax liabilities reflects resolution of certain contingent liabilities described in Note 9. The decrease in the obligation on capital
contribution notes reflects the litigation settlement described in Note 4. Accrued indemnity obligations primarily reflect reserves before related discount (recorded pursuant to Fresh-Start
Reporting) for contractual indemnity obligations for disposed businesses unrelated to the Company's current operations. The indemnities cover certain
known and unidentified potential claims by third parties including, but not limited to, health-related issues claimed to be caused in connection with work in facilities with which the disposed
business were connected.

Note 9Income Taxes

Upon completion of the Recapitalization, the Company experienced an "ownership change" under Section 382 of the Internal Revenue Code (the "Code") as a
result of the increase in the percentage of the Company's stock by value held by certain persons (including creditors who exchanged debt for stock) of more than 50 percentage points at any time
during a three-year period. Subsequent to an ownership change, the Company's annual use of its net operating losses ("NOLs") is generally limited to the value of the Company's equity
immediately before the ownership change multiplied by the long-term tax-exempt rate. However, Section 382(l)(5) of the Code, the "bankruptcy exception," provides that if
the ownership change occurs through a bankruptcy, such as the Company's Recapitalization which utilized a prepackaged plan, and if the continuing shareholders and "qualifying creditors" before the
ownership change own at least 50% of the Company's stock after the ownership change, the general limitations of Section 382 will not apply. "Qualifying creditors" generally must have held their
debt at least 18 months before the prepackaged plan was filed on July 14, 1997, or the debt must have arisen in the ordinary course of the Company's business.

The
Company believes that it qualifies for the "bankruptcy exception" of Section 382(l)(5). Under this exception, the Company was required to reduce its NOLs by (i) the
amount of interest accrued on any debt exchanged for stock in the bankruptcy proceeding during the year of the proceeding and the three prior taxable years and (ii) an additional amount
required to make the total reduction equal to the amount of cancellation of indebtedness income realized. Accordingly, the Company's NOLs of approximately $271 million as of September 2,
1997 were reduced by approximately $79 million. As reduced, the Company's NOL carryovers will be fully deductible against post-reorganization income, subject to the general rules
regarding change of ownership as discussed below, and expiration of NOLs. The federal NOLs available as of December 31, 2001 are approximately $188 million, including
pre-Reorganization NOLs of approximately $175 million, after reflecting activity subsequent to

F-15

---

September 2, 1997 and the settlement with the IRS discussed below. The amount of NOLs which expire if not utilized is $13 million, $20 million and $155 million for 2005,
2006 and thereafter, respectively.

The
Company remains subject to the general rules regarding a change of ownership under Section 382 of the Code, which limit the availability of NOLs if an ownership change occurs
within any three-year period. If the Company were to experience another ownership change, the use of all remaining NOLs would generally be subject to an annual limitation equal to the
value of the Company's equity before the ownership change, multiplied by the long-term tax-exempt rate. The Company estimates that after giving effect to various transactions
by stockholders who hold a 5% or greater interest in the Company, and the Company's repurchase of an aggregate of approximately 1.4 million shares in June 1999, it has experienced a
three-year cumulative ownership shift as computed in accordance with Section 382 of approximately 20%.

In
response to an unsolicited written consent from a majority of its stockholders, the Company amended its certificate of incorporation on October 14, 1999 in order to preserve
the ability of the Company to utilize its tax loss carryforwards. Since the Company's use of its NOLs would be severely restricted if it experiences an ownership change of 50% or more, the Company's
majority stockholders requested that the Board of Directors enact the amendments, which have been determined to be in the best interest of the Company and its stockholders. The amendments prohibit
future purchases of the Company's common stock by persons who would become new 5% holders, and also prohibit current holders of over 5% from increasing their positions, except in certain permissible
circumstances which would not jeopardize the Company's ability to use its NOLs. While these amendments reduced the Company's risk of an ownership change occurring due to the acquisition of shares by
5% stockholders, the risk remains that an ownership change could result from the sale of shares by existing 5% stockholders.

F-16

---

The
tax effects of items that gave rise to significant portions of the deferred tax accounts for the years ended December 31 (in millions) are as follows:

2000

2001Deferred tax assets:Real estate held for development or sale and real estate joint ventures (due to asset revaluations and interest capitalized for tax purposes)

$
.5

$
Accruals/reserves not deductible until paid


2.9


4.5Net operating loss and alternative minimum tax credit carryforwards


69.6


66.3State income tax provisions deductible when paid for Federal tax purposes


1.4


1.3Valuation allowance


(56.4
)

(54.1
)$
18.0

$
18.0


2000

2001Deferred tax liabilities:Land held for future development (principally due to accounting for a prior business combination, partially offset by asset revaluations in 1995 and 1997)

$
19.4

$
19.0Unrealized gain on securities





2.7Other


2.6


.6$
22.0

$
22.3


The
Company has established a valuation allowance related to the potential utilization of its deferred tax assets due to uncertainties that preclude it from determining that it is more
likely than not that the Company will be able to generate sufficient taxable income to realize such assets. Such uncertainties include the availability of real estate for development at economically
viable prices, government approvals, results of litigation and economic factors affecting the Company's operations. The Company monitors these as well as other positive and negative factors that may
arise in the future, as it assesses the need for a valuation allowance against its deferred tax assets. Recognition of tax benefits from future potential reductions in valuation allowances
attributable to any utilization of pre-Reorganization NOLs would be excluded from results of operations and credited to capital in excess of par value. The portion of the valuation
allowance allocated to pre-Reorganization NOLs is approximately $49.0 million as of December 31, 2001.

Net
deferred tax liabilities at December 31, 2000 and 2001 are primarily comprised of state net deferred tax liabilities and are included in other liabilities.

F-17

---



Note 9Income Taxes (Continued)

The
following is a summary of the income tax provision (benefit) applicable to income (loss) from continuing operations for the years ended December 31 (in millions):

1999

2000

2001Income Tax Provision (benefit):Current taxes

$
.1

$
.1

$
.4Deferred taxes








.3Deferred taxesequivalent amount credited to capital in excess of par value





4.2


3.8Reduction in contingent tax liabilities








(5.5
)$
.1

$
4.3

$
(1.0
)


The
principal items accounting for the difference in taxes on income computed at the statutory rate and as recorded, are as follows for the years ended December 31 (in millions):

1999

2000

2001Provision (benefit) for income taxes at statutory rate

$
(.6
)
$
3.5

$
3.5State income taxes, net


.1


.7


.4Reduction in contingent tax liabilities








(5.5
)Increase in federal valuation allowance


.6





.7All other items, net





.1


(.1
)$
.1

$
4.3

$
(1.0
)


For
the years ended December 31, 2000 and 2001, pursuant to Fresh-Start reporting, deferred income tax provisions of $4.2 million and $4.1 million are reflected in
the statement of operations. The realization of a tax benefit from utilization of pre-Reorganization NOL, through a reduction in the valuation allowance, is reflected by increasing the
Company's capital in excess of par value by $4.2 million and $3.8 million in 2000 and 2001, respectively.

Tax Matters

In 1995, the Internal Revenue Service ("IRS") proposed material audit adjustments with respect to the tax returns of the Company and its consolidated
subsidiaries, including formerly affiliated entities, for the years ended December 31, 1989, 1990 and 1991. The adjustments proposed by the IRS, could have
resulted in Federal tax liability, before interest, of approximately $17 million and disallowance of up to $132 million of NOL carryforwards. The Company disagreed with the positions
taken by the IRS and filed protests with the IRS to contest the proposed adjustments. In December 1998, the Company executed a settlement agreement with the IRS with respect to the proposed
adjustments described above. As a result of this agreement, in February 1999 the Company paid $759,000 (which included $280,000 of tax and $479,000 of interest through January 1999), net
of the Company's refund claim for 1992 NOL carrybacks of approximately $1.6 million, in full settlement of such claims. Under this settlement agreement approximately $10 million of the
Company's NOL carryforwards were disallowed. The Company utilized $8.1 million of NOL carryback from 1992 to 1991 in connection with its refund claim. In June 2001, the Company received
a refund of $28,000, including interest, indicating

F-18

---

acceptance by the IRS of the refund claim. Accordingly, pursuant to Fresh-Start Reporting, the Company recorded utilization of approximately $1.6 million of pre-Reorganization NOL,
resulting in an equivalent amount credited to capital in excess of par value.

The
Company has reviewed the extent of potential accompanying state tax liability adjustments and does not believe that any such adjustments would have a negative material impact on the
Company's financial statements. Certain of the state jurisdictions in which the Company filed amended returns for 1989, 1990 and 1991 have accepted such returns, thereby reducing the Company's
exposure to potential claims. In conjunction with periodic reviews of the adequacy of reserves for estimated state income tax exposure, the Company reduced its reserves by approximately
$3.2 million and $2.3 million in the second and fourth quarters of 2001, respectively. The reduction in contingent liabilities is reflected in the income tax provision (benefit).

Note 10Commitments and Contingencies

Legal Proceedings

See Note 5 for a discussion of pending litigation relating to the California Coastal Commission's decision to prohibit development on the Lower Mesa of
Bolsa Chica.

There
are various other lawsuits and claims pending against the Company and certain subsidiaries. In the opinion of the Company's management, ultimate liability, if any, will not have a
material adverse effect on the Company's financial condition or results of operations.

Lease Obligations

For the years ended December 31, 1999, 2000 and 2001 the Company incurred rents of approximately $115 thousand, $234 thousand and
$241 thousand, respectively. Future minimum noncancelable operating lease payments for the years ending December 31, 2002, 2003 and 2004 are approximately $131 thousand,
$139 thousand and $229 thousand, respectively, and thereafter such amounts are zero.

Corporate Indemnification Matters

The Company and its predecessors have, through a variety of transactions effected since 1986, disposed of several assets and businesses, many of which are
unrelated to the Company's current operations. By operation of law or contractual indemnity provisions, the Company has retained liabilities relating to certain of these assets and businesses. Many of
such liabilities are supported by insurance or by indemnities from certain of the Company's predecessors and currently or previously affiliated companies. The Company believes its balance sheet
reflects adequate reserves for these matters.

F-19

---

Note 11Retirement Plans

The Company adopted a retirement savings plan effective January 1, 2000 pursuant to Section 401(k) of the Code, and participants may contribute a
portion of their compensation to their respective retirement accounts, in an amount not to exceed the maximum allowed under the Code. Prior to January 1, 2000, the Company participated in a
similar plan sponsored by a former affiliate. All participants in the previous plan were allowed to transfer their balances to the Company sponsored plan effective January 1, 2000. The new plan
provides for certain matching contributions by the Company for non-highly compensated employees, as defined in the Internal Revenue Code, which commenced in January 2000. Plan participants are
immediately vested in their own contributions.

The
Company has a noncontributory defined benefit retirement plan which covered substantially all employees of the Company prior to September 30, 1993 who had completed one year
of continuous employment. The benefit accrual for all participants was terminated on December 31, 1993. Net periodic pension cost was as follows for the years ended December 31 (in
millions):

1999

2000

2001Service cost

$


$


$
Interest cost


.3


.4


.4Expected return on assets


(.5
)

(.6
)

(.4
)Net amortization and deferral








Net periodic pension income

$
(.2
)
$
(.2
)
$



The
development of the projected benefit obligation for the plan at December 31, 2000 and 2001 is based on the following assumptions: a discount rate of 7.5% and 6% for 2000 and
2001, respectively and an expected long-term rate of return on assets of 9% and 7% for 2000 and 2001, respectively. The change in these assumptions from 2000 to 2001 resulted in a
$.7 million increase in the benefit obligation, as set forth in the table below. Assets of the plan are invested primarily in stocks, bonds, short-term securities and cash
equivalents.

F-20

---

The
funded status and accrued pension cost at December 31, 2000 and 2001 for the defined benefit plan were as follows (in millions):

2000

2001Benefit obligation:Benefit obligation at beginning of year

$
4.8

$
4.8Service cost





Interest cost


.4


.4Actuarial (gain) loss


.1


.4Change in assumptions





.7Benefits paid


(.5
)

(.5
)Benefit obligation at end of year

$
4.8

$
5.8Plan assets:Fair value of plan assets at end of prior year

$
6.3

$
6.1Net return on plan assets


.3


(.3
)Benefits paid


(.5
)

(.5
)Fair value of plan assets at end of year

$
6.1

$
5.3Funded status

$
1.3

$
(.5
)Unrecognized net actuarial (gain) loss


(.4
)

1.4Prepaid benefit cost


.9


.9Additional minimum liability charged to other comprehensive income (loss)





(1.4
)Prepaid benefit cost (accrued benefit liability)

$
.9

$
(.5
)


Note 12Capital Stock

Common Stock

In June 1999, the Company repurchased an aggregate of 1,419,021 shares at an average cost of $5.85 per share or approximately $8.3 million in
(i) an unsolicited private transaction and (ii) a reverse and a forward split transaction, which cashed out holders of less than 100 shares as of June 18, 1999, as approved by the
Company's stockholders at the 1999 Annual Meeting.

On
October 14, 1999, pursuant to an unsolicited written consent from a majority of the Company's stockholders, the Company adopted certain amendments to its certificate of
incorporation. The amendments authorized 18,000,000 shares of a second class of stock, ("Excess Stock") to be issued under certain circumstances. The effect of the amendments is to prohibit the
acquisition of the Company's Common Stock by anyone who would become a 5% stockholder or by existing 5% stockholders, except in certain permissible circumstances which would not significantly increase
the risk of an Ownership Change (as defined by the Internal Revenue Code of 1986, as amended) and would not, therefore, jeopardize the Company's ability to use its $188 million of NOLs (see
Note 9). While these amendments reduced the Company's risk of an Ownership Change occurring due to the acquisition of shares by 5% stockholders, the risk remains that an Ownership Change could
result from the sale of shares by existing 5% stockholders.

F-21

---

At
the May 2000 Annual Meeting, the Company's shareholders approved a reduction in authorized shares of both Common Stock and Excess Stock from 18,000,000 shares to 11,000,000
shares.

Warrants

In December 1999, the Company issued warrants for an aggregate of 48,000 shares to two consultants in partial compensation for their services. The warrants
were issued with exercise prices at market prices, averaging $6.92 per share, and vested after one year. The warrants remain exercisable through December 2003. The fair value of the warrants is
not material to the financial statements.

Note 13Stock Plans

1993 Stock Option/Stock Issuance Plan

The 1993 Stock Option/Stock Issuance Plan ("1993 Plan") was approved at the 1994 Annual Meeting of Stockholders, reserving 7.5 million shares each of
Series A Preferred Stock and Class A Common Stock for issuance to officers, key employees and consultants of the Company and its subsidiaries and the non-employee members of
the Board. On April 28, 1997, in connection with the Recapitalization, the Compensation Committee of the Company's Board of Directors authorized the grant of stock options for 759,984 shares,
equivalent at that time to 6% of the Company's fully diluted equity, for certain directors and officers.

In
1998, options for 569,988 shares were terminated in connection with the Company's sale of its commercial development business and new options for 295,000 shares were granted. During
1999, options aggregating 270,000 shares were issued to certain officers and directors of the Company and its subsidiaries. These options have a term of ten years and vested 50% after one year and the
remaining 50% after two years.

In
May 2001, all outstanding options to purchase an aggregate of 754,996 shares of the Company's common stock were re-priced to $4.50 per share, which represented a
premium of approximately 12.5% above the average closing price over the previous 30 days. The shares, which were granted to certain directors and officers, carried previous exercise prices of
$9.25 per share on 484,996 options granted in 1997 and 1998, and $7.00 per share on 270,000 options granted in 1999. In accordance with Financial Accounting Standards Board Interpretation
No. 44 "Accounting for Certain Transactions Involving Stock Compensation" the modification of the options requires that they be accounted for as variable awards, which measures compensation
expense as the difference between the option price and the quoted market price of the Company shares. Future increases in the fair value of the Company's common stock above $4.50 per share would
result in compensation expense. At December 31, 2001, the options had a weighted-average remaining life of 6.8 years.

A
summary of the status of the Company's stock option plan as of December 31, 2001 follows:

Options Outstanding

Number of Options

Weighted-Average
Exercise PriceOptions fully vested and exercisable at December 31, 2001

754,996

$
4.50Options available for future grants at December 31, 2001

4,988


F-22

---

The
Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its plan. Accordingly, no compensation expense
has been recognized for its stock-based compensation plans other than for performance-based awards. The fair value of the options granted in 1999 is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend yield, volatility of 27%, risk-free interest rate of 6.24%, and an expected life of 3 years. The fair
value of the options granted was estimated to be $.5 million ($1.85 per option) for options granted in 1999. Had compensation cost for the Company's stock option plan been determined based upon
the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation", 1999, 2000 and 2001 net
income (loss) would have been as follows (in millions, except per share amounts):

|                                 |                         | 1999                                 |   | 2000 |      | 2001
|-------------------------------- | ----------------------- | ------------------------------------ | - | ---- | ---- | ----
|
|Net income (loss) from           |                         |                                      |   |      |      |     
|                                 | Continuing operations   |                                      | $ | (1.8 | )    | $   
|                                 | Discontinued operations |                                      |   | .2   |      |     
|                                 |                         |                                      |   |      |      |     
|                                 |                         | Net income (loss)                    |   | $    | (1.6 | )   
|                                 |                         |                                      |   |      |      |     
|Earnings (loss) per share-basic: |                         |                                      |   |      |      |     
|                                 | Continuing operations   |                                      | $ | (.17 | )    | $   
|                                 | Discontinued operations |                                      |   | .02  |      |     
|                                 |                         |                                      |   |      |      |     
|                                 |                         | Net earnings (loss) per common share |   | $    | (.15 | )   
|                                 |                         |                                      |   |      |      |     

F-23

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Note 14Unaudited Quarterly Financial Information

The following is a summary of quarterly financial information for 2000 and 2001 (in millions, except per share amounts):

|                                           |  | First |      | Second |   | Third |  | Fourth |      | Full
Year |  
|------------------------------------------ |  | ----- | ---- | ------ | - | ----- |  | ------ | ---- | --------- | -
|2001                                       |  |       |      |        |   |       |  |        |      |           |  
|Revenues(a)                                |  | $     | 12.0 |        | $ | 13.3  |  | $      | 7.4  |           | $
|Cost of sales                              |  |       | 10.0 |        |   | 11.4  |  |        | 5.9  |           |  
|Gross operating profit                     |  |       | 2.0  |        |   | 1.9   |  |        | 1.5  |           |  
|Net income(b)                              |  |       | 1.1  |        |   | 4.4   |  |        | 1.0  |           |  
|Other comprehensive income (loss)          |  |       |     |        |   |      |  |        |     |           |  
|Earnings per common share                  |  | $     | .11  |        | $ | .44   |  | $      | .10  |           | $
|Weighted-average common shares outstanding |  |       | 10.1 |        |   | 10.1  |  |        | 10.1 |           |  

|                                           |  | First |      | Second |   | Third |  | Fourth |      | Full
Year
|------------------------------------------ |  | ----- | ---- | ------ | - | ----- |  | ------ | ---- | ---------
|2000                                       |  |       |      |        |   |       |  |        |      |          
|Revenues(a)                                |  | $     |     |        | $ | 7.4   |  | $      | 7.1  |          
|Cost of sales                              |  |       |     |        |   | 5.8   |  |        | 5.6  |          
|Gross operating profit                     |  |       |     |        |   | 1.6   |  |        | 1.5  |          
|Net income(c)                              |  |       | .4   |        |   | 1.1   |  |        | 1.0  |          
|Earnings per common share                  |  | $     | .04  |        | $ | .11   |  | $      | .10  |          
|Weighted-average common shares outstanding |  |       | 10.1 |        |   | 10.1  |  |        | 10.1 |          

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F-24

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