<PAGE>


            This Form 10-Q consists of 15 sequentially numbered pages.

                                     FORM 10-Q

                         SECURITIES AND EXCHANGE COMMISSION

                               WASHINGTON, D.C. 20549


                               ---------------------

                 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934


                   For the quarterly period ended March 31, 1998
                                                  --------------

                           Commission file number 0-17189
                                                  -------
                        CALIFORNIA COASTAL COMMUNITIES, INC.
               ------------------------------------------------------
               (Exact name of registrant as specified in its charter)


               Delaware                                         02-0426634
               --------                                         ----------
     (State or other jurisdiction of                         (I.R.S. Employer
     incorporation or organization.)                        Identification No.)


          4343 Von Karman Avenue
         Newport Beach, California                                      92660
         -------------------------                                      -----
  (Address of principal executive offices)                            (Zip Code)

Registrant's telephone number, including area code: (949) 833-3030

                         KOLL REAL ESTATE GROUP, INC.
                         ----------------------------
                    (Former name, address and fiscal year,
                         if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

                       Yes   X                        No
                            ---                           ---

     Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 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   X                        No
                            ---                           ---

The number of shares of Class A Common Stock outstanding at April 30, 1998,
including the shares being delivered to former debenture holders upon surrender
of their debenture certificates was 11,906,378.

<PAGE>


                         CALIFORNIA COASTAL COMMUNITIES, INC.

                                      FORM 10-Q

                         FOR THE QUARTER ENDED MARCH 31, 1998

                                      I N D E X
                      -----------------------------------------

<TABLE>
<CAPTION>

                                                                      Page No.
                                                                      --------
PART I -  Financial Information:

<S>       <C>                                                         <C>
          Item 1 -  Financial Statements

                    Introduction to the Financial Statements . . . . . . .3

                    Balance Sheets -
                    December 31, 1997 and March 31, 1998 . . . . . . . . .4

                    Statements of Operations -
                    Three Months Ended March 31, 1997 and 1998 . . . . . .5

                    Statements of Cash Flows -
                    Three Months Ended March 31, 1997 and 1998 . . . . . .6

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


          Item 2 -  Management's Discussion and Analysis of Financial
                    Condition and Results of Operations. . . . . . . . . 12


PART II - Other Information:


          Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . 15

          Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . 15


SIGNATURE  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>

                                          2

<PAGE>

                         CALIFORNIA COASTAL COMMUNITIES, INC.

                           PART I - FINANCIAL INFORMATION


ITEM 1 -  FINANCIAL STATEMENTS


                       INTRODUCTION TO THE FINANCIAL STATEMENTS


     The condensed financial statements included herein have been prepared by 
California Coastal Communities, Inc. and its consolidated subsidiaries (the 
"Company"), without audit, pursuant to the rules and regulations of the 
Securities and Exchange Commission.  Certain information and footnote 
disclosures normally included in financial statements prepared in accordance 
with generally accepted accounting principles have been condensed or omitted 
pursuant to such rules and regulations.  The Company believes that the 
disclosures are adequate to make the information presented not misleading 
when read in conjunction with the financial statements included in the 
Company's Annual Report on Form 10-K for the year ended December 31, 1997.

     The financial information presented herein reflects all adjustments, 
consisting only of normal recurring adjustments, which are, in the opinion of 
management, necessary for a fair presentation of the results for the interim 
periods presented. The results for interim periods are not necessarily 
indicative of the results to be expected for the full year.

                                          3
<PAGE>

                        CALIFORNIA COASTAL COMMUNITIES, INC.

                                   BALANCE SHEETS

                                   (in millions)


<TABLE>
<CAPTION>

                                                      December 31,     March 31,
                                                          1997           1998
                                                          ----           ----
     ASSETS

<S>                                                   <C>             <C>
Cash and cash equivalents. . . . . . . . . . . . .      $  7.2          $  6.2
Real estate held for development or sale . . . . .         4.0             4.0
Land held for development. . . . . . . . . . . . .       133.2           134.7
Reorganization value in excess of amounts
  allocated to net assets. . . . . . . . . . . . .         3.1             3.1
Discontinued operations. . . . . . . . . . . . . .        19.3            20.8
Other assets . . . . . . . . . . . . . . . . . . .         6.5             6.5
                                                        ------          ------

                                                        $173.3          $175.3
                                                        ------          ------
                                                        ------          ------

     LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

     Accounts payable and accrued liabilities. . .      $  3.5          $  5.2
     Other liabilities . . . . . . . . . . . . . .        29.7            30.0
                                                        ------          ------

     Total liabilities . . . . . . . . . . . . . .        33.2            35.2
                                                        ------          ------

Stockholders' equity:

     Common stock. . . . . . . . . . . . . . . . .          .6              .6
     Capital in excess of par value. . . . . . . .       140.0           140.0
     Accumulated deficit . . . . . . . . . . . . .         (.5)            (.5)
                                                        ------          ------

     Total stockholders' equity. . . . . . . . . .       140.1           140.1
                                                        ------          ------

                                                        $173.3          $175.3
                                                        ------          ------
                                                        ------          ------

</TABLE>

                   See the accompanying notes to financial statements.

                                          4

<PAGE>

                        CALIFORNIA COASTAL COMMUNITIES, INC.

                              STATEMENTS OF OPERATIONS

                      (in millions, except per share amounts)

 
<TABLE>
<CAPTION>

                                                   PREDECESSOR COMPANY       SUCCESSOR COMPANY
                                                   -------------------       -----------------
                                                       THREE MONTHS             THREE MONTHS
                                                          ENDED                    ENDED
                                                      MARCH 31, 1997           MARCH 31, 1998
                                                      --------------           --------------

<S>                                                <C>                       <C>
Revenues   . . . . . . . . . . . . . . . . . . . .       $28.9                    $  .4

Costs of Sales . . . . . . . . . . . . . . . . . .        28.7                       .1
                                                         -----                    -----

     Gross operating margin. . . . . . . . . . . .          .2                       .3

General and administrative expenses. . . . . . . .         1.4                      1.1
Interest expense . . . . . . . . . . . . . . . . .         6.3                       .3
Other expense (income), net. . . . . . . . . . . .        (3.7)                      --
                                                         -----                    -----

Loss from continuing operations before
     reorganization costs and income taxes . . . .        (3.8)                    (1.1)

Reorganization costs . . . . . . . . . . . . . . .          .2                       --
                                                         -----                    -----

Loss from continuing operations before
     income taxes. . . . . . . . . . . . . . . . .        (4.0)                    (1.1)

Provision for income taxes . . . . . . . . . . . .          .1                       --
                                                         -----                    -----

Loss from continuing operations. . . . . . . . . .        (4.1)                    (1.1)

Income (loss) from discontinued operations, net
     of income tax benefit of $0 and $0,
     respectively. . . . . . . . . . . . . . . . .         (.8)                     1.1
                                                         -----                    -----

Net (loss) income  . . . . . . . . . . . . . . . .       $(4.9)                   $  --
                                                         -----                    -----
                                                         -----                    -----

Net income per common share - basic and diluted:
    Continuing operations. . . . . . . . . . . . .         N/A                    $(.09)
    Discontinued operations. . . . . . . . . . . .         N/A                      .09
                                                                                  -----
                                                                                  $  --
                                                                                  -----
                                                                                  -----
</TABLE>
 

                 See the accompanying notes to financial statements.

                                          5
<PAGE>

                         CALIFORNIA COASTAL COMMUNITIES, INC.

                               STATEMENTS OF CASH FLOWS

                                    (in millions)

 
<TABLE>
<CAPTION>


                                                                   PREDECESSOR COMPANY        SUCCESSOR COMPANY
                                                                   -------------------        -----------------
                                                                       THREE MONTHS             THREE MONTHS
                                                                          ENDED                    ENDED
                                                                      MARCH 31, 1997           MARCH 31, 1998
                                                                      --------------           --------------

<S>                                                                <C>                        <C>
Cash flows from operating activities:
     Net income (loss) . . . . . . . . . . . . . . . . . . . . .         $(4.9)                    $ --
     Adjustments to reconcile to cash (used) provided by
        operating activities:
          Non-cash interest expense. . . . . . . . . . . . . . .           6.2                       .3
          Gains on asset sales . . . . . . . . . . . . . . . . .           (.2)                     (.3)
          Proceeds from asset sales, net . . . . . . . . . . . .          28.8                       .3
          Investments in real estate held for development or 
            sale . . . . . . . . . . . . . . . . . . . . . . . .          (1.6)                      --
          Investments in land held for development . . . . . . .           (.8)                    (1.5)
          Decrease in other assets . . . . . . . . . . . . . . .            .1                       --
          (Decrease) increase in accounts payable, accrued 
            and other liabilities. . . . . . . . . . . . . . . .          (4.6)                     1.7
                                                                          -----                   -----

            Cash provided by operating activities
                 of continuing operations. . . . . . . . . . . .          23.0                       .5
                                                                          -----                   -----

            Cash used by operating activities of
                discontinued operations. . . . . . . . . . . . .         (19.3)                   (16.7)
                                                                          -----                   -----

Cash flows from financing activities:
     Borrowings of bank debt . . . . . . . . . . . . . . . . . .            .9                       --
     Repayments of bank debt . . . . . . . . . . . . . . . . . .          (9.1)                      --
     Use of restricted cash. . . . . . . . . . . . . . . . . . .            .2                       --
                                                                          -----                   -----

          Cash used by financing activities of continuing 
              operations . . . . . . . . . . . . . . . . . . . .          (8.0)                      --
                                                                          -----                   -----


          Cash provided by financing activities of
              discontinued operations. . . . . . . . . . . . . .          18.6                    15.2
                                                                          -----                   -----

Net (decrease) increase in cash and cash equivalents . . . . . .          14.3                     (1.0)

Cash and cash equivalents - beginning of period. . . . . . . . .           2.1                      7.2
                                                                          -----                   -----

Cash and cash equivalents - end of period. . . . . . . . . . . .         $16.4                    $ 6.2
                                                                          -----                   -----
                                                                          -----                   -----
</TABLE>
 
                 See the accompanying notes to financial statements.

                                          6
<PAGE>

                         CALIFORNIA COASTAL COMMUNITIES, INC.

                            NOTES TO FINANCIAL STATEMENTS


NOTE 1 - BASIS OF PRESENTATION

     On May 1, 1998, following completion of the sale of the commercial 
development business (see Note 4), Koll Real Estate Group, Inc. changed its 
name to California Coastal Communities, Inc. (the "Company"). The Company 
expects the corresponding change of its stock symbol from "KREG" to "CALC" to 
become effective on May 29, 1998.

     The accompanying financial statements should be read in conjunction with 
the Financial Statements and Notes thereto included in the Annual Report on 
Form 10-K of the Company for the year ended December 31, 1997.

NOTE 2 - RECAPITALIZATION

     On September 2, 1997, the Company completed its recapitalization (the 
"Recapitalization") which became effective 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 (referred to as 
"Successor Company" for periods after September 2, 1997) adopted the 
provisions of Statement of Position 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.

     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.

     The results of operations and cash flows for three months ended March 
31, 1997 include operations prior to completion of the Recapitalization 
(referred to as "Predecessor Company"). The results of operations and cash 
flows for the three months ended March 31, 1998 include operations subsequent 
to the Company's Recapitalization and are not comparable with prior periods 
for the reasons discussed above.

     The reorganization value of the Company's common equity was determined 
by the Company with the assistance of financial advisors after consideration 
of several factors and by reliance on various valuation methods, including 
discounted projected cash flows, and other economic and industry information 
relevant to the operations of the Company. The reorganization value of the 
Company was allocated to specific asset categories pursuant to Fresh-Start 
Reporting. Reorganization Value in Excess of Amounts Allocated to Net Assets, 
which represents the difference in the Company's estimated valuation and the 
Company's net assets at fair value, of approximately $3.1 million is 
amortized on a straight-line basis over 15 years. In addition, $13.6 million 
of Reorganization Value in Excess of Amounts Allocated to Net Assets has been 
allocated to the commercial development business, which was sold on April 30, 
1998, and is reflected in discontinued operations as of December 31, 1997 and 
March 31, 1998, net of related amortization.

     Reorganization costs during the period ended March 31, 1997 consisted 
primarily of legal, financial advisors and other professional fees and 
expenditures directly related to the Company's Recapitalization and were 
expensed as incurred.

                                          7
<PAGE>

NOTE 3 - EARNINGS (LOSS) PER COMMON SHARE

     The Company computes earnings per share in accordance with Statement of 
Financial Accounting Standards No. 128, "Earnings per Share". Earnings per 
share is computed using the weighted average number of outstanding shares of 
the Successor Company's Common Stock, including the conversion rights of all 
Debenture holders, which expire on September 2, 1998, for periods commencing 
September 2, 1997. For the period ended March 31, 1998 the weighted average 
common shares outstanding was 11.9 million shares. Earnings per share 
assuming dilution is computed using the weighted average number of common 
shares outstanding and the dilutive effect of potential common shares 
outstanding. Per share data for periods prior to September 2, 1997 have been 
omitted as these amounts do not reflect the Successor Company's current 
capital structure.

NOTE 4 - DISPOSITION

     On April 30, 1998 the Company completed the sale of its commercial 
development business to Koll Development Company LLC ("KDC") and NorthStar 
Capital Investment Corp. for (1) $33.4 million in cash, which included 
approximately $3.4 million for 1998 activity and (2) the assumption by KDC of 
all liabilities related to the business. KDC is a newly formed limited 
liability company, whose members include the Company's former Chairman and 
Chief Executive Officer, Donald M. Koll and its former President, Richard M. 
Ortwein, along with an affiliate of NorthStar Capital Investment Corp. Upon 
completion of the transaction Messrs. Koll and Ortwein resigned from their 
positions with the Company and Raymond J. Pacini, the Company's Chief 
Financial Officer since 1992, was appointed as the new President and Chief 
Executive Officer. The Company expects to realize a gain of approximately 
$9.5 million from this transaction during the second quarter.

     The following pro forma financial data as of March 31, 1998 gives effect 
to the sale of the commercial development business, including accruals for 
estimated fees of the Company's investment bankers and legal counsel, and 
estimated taxes payable, offset by deferred income related to a $1 million 
deposit received from KDC, as if the transaction had occurred on March 31, 
1998 (in millions):

<TABLE>
<CAPTION>
                                          HISTORICAL   ADJUSTMENTS    PRO FORMA
                                          ----------   -----------    ---------
<S>                                       <C>          <C>            <C>
     Assets:
          Cash . . . . . . . . . . . . .   $   6.2       $ 30.3        $ 36.5
          Discontinued operations. . . .      20.8        (20.8)         --
          All other assets . . . . . . .     148.3         --           148.3
                                           -------       ------        ------
                                           $ 175.3       $  9.5        $184.8
                                           -------       ------        ------
                                           -------       ------        ------

     Total liabilities . . . . . . . . .   $  35.2       $ --          $ 35.2
     Stockholders' equity. . . . . . . .     140.1          9.5         149.6
                                           -------       ------        ------
                                           $ 175.3       $  9.5        $184.8
                                           -------       ------        ------
                                           -------       ------        ------
</TABLE>

     Discontinued operations is comprised of the following (in millions):

<TABLE>
<CAPTION>

                                                DECEMBER 31,   MARCH 31,
                                                  1997           1998
                                                  ----           ----
<S>                                             <C>            <C>
     Restricted cash . . . . . . . . . . . . .   $   .2       $    .2
     Real estate held for development or sale.     87.9         101.2
     Reorganization value in excess of amounts
       allocated to net assets . . . . . . . .     13.3          13.0
     Other assets. . . . . . . . . . . . . . .      8.5           9.3
     Accounts payable and other liabilities. .    (13.1)         (9.5)
     Bank debt . . . . . . . . . . . . . . . .    (74.6)        (89.8)
     Minority interest . . . . . . . . . . . .     (2.9)         (3.6)
                                                 ------        -------
     Net assets. . . . . . . . . . . . . . . .   $ 19.3       $  20.8
                                                 ------        -------
                                                 ------        -------
</TABLE>

     Revenues related to discontinued operations were $2.0 million and $27.2
million for the three months ended March 31, 1997 and 1998, respectively. The
net loss from discontinued operations for the three months ended March 31, 1997
was $.8 million. Net income from discontinued operations for the three months
ended March 31, 1998, was $1.1 million.

                                          8
<PAGE>

NOTE 5 - LAND HELD FOR DEVELOPMENT

     The Company owns approximately 340 acres located in Orange County,
California adjacent to the Pacific Ocean and the Bolsa Chica lowlands (which
were sold by the Company to the State of California as described below),
surrounded by the City of Huntington Beach and approximately 35 miles south of
downtown Los Angeles. The Company's holdings include approximately 200 acres to
be developed on a mesa north of the Bolsa Chica lowlands ("Warner Mesa"),
approximately 100 acres on, or adjacent to, the Huntington mesa and
approximately 40 acres of lowlands which were acquired in September 1997.

     The planned community at Warner Mesa is expected to offer a broad mix of
home choices, including primarily single-family homes, as well as townhomes, at
a wide range of prices. A Local Coastal Program ("LCP") for development of up to
3,300 homes (up to 2,500 on Warner Mesa and up to 900 on the Bolsa Chica
lowlands, which were subsequently sold as discussed below) was approved by the
Orange County Board of Supervisors in December 1994 and by the California
Coastal Commission (the "Coastal Commission") in January 1996.

     On February 14, 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, 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. 
  
     A lawsuit (the "CEQA Lawsuit") challenging the approvals of the Board of
Supervisors was filed in January 1995. After remanding the matter to the Board
of Supervisors for additional processing and findings, in January 1997 the court
entered a judgment in favor of the Company. Plaintiffs in the CEQA Lawsuit have
appealed the court's decision and the appeal is pending. The California Court 
of Appeal has notified the parties that a hearing will be held in June 1998, 
and the Company currently anticipates that a decision on this appeal may be 
rendered during the third quarter of 1998.

     In March 1996, a lawsuit (the "Coastal Act Lawsuit") was filed challenging
the approvals of the Coastal Commission. The judgment in the Coastal Act Lawsuit
was entered by the court in August 1997, and required the Coastal Commission to
reconsider the filling of a 1.7 acre pond on the Warner Mesa ("Warner Pond") and
development of any homes in the Bolsa Chica lowlands. On October 9, 1997, in
response to the court's decision, the Coastal Commission approved modifications
to the LCP which eliminated the filling of Warner Pond and thereby reduced the
maximum density from 2,500 homes to no more than 1,235 homes on the mesa. On
November 18, 1997 and February 3, 1998, the Orange County Board of Supervisors
accepted the Coastal Commission's suggested modifications.

   On February 20, 1998, the court ruled that the Coastal Commission should 
not have narrowed the scope of public comments during the Coastal 
Commission's October 1997 hearing, and ordered the Coastal Commission to hold 
a third hearing on the LCP. There are numerous appeals now pending with 
respect to the Coastal Act Lawsuit. In addition, the Company has appealed the 
trial court's latest decision, and is pursuing all other available legal and 
administrative options. In May 1998, the Court of Appeal ordered that all 
pending appeals be consolidated and heard on an expedited basis. The Company 
currently anticipates that a decision on these appeals may be rendered during 
the fourth quarter of 1998. The litigation process will delay the previously 
planned start of infrastructure construction beyond December 31, 1998; 
however, the Company is unable to predict the length of such delay at this 
time. The Company does not believe that the litigation process will 
permanently prevent the Company from completing the Warner Mesa project; 
however, there can be no assurance in that regard or that further delays will 
not result.

     Upon completion of the Company's Recapitalization as discussed in Note 
2, the Company applied the principles required by Fresh-Start Reporting and 
the carrying value of land held for development (Warner Mesa) was adjusted to 
fair value as of September 2, 1997, after consideration of the October 9, 
1997 Coastal Commission action discussed above. 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 fair 
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.

                                          9
<PAGE>



NOTE 6 - BANK DEBT

     During the first quarter of 1997, the Company fully repaid the outstanding
loan balance of approximately $7.1 million under a letter of credit and
reimbursement agreement with Nomura Asset Capital Corporation. A prepayment of
$.6 million was made in January in connection with a sale of Rancho San Pasqual
lots, and the remaining balance was repaid upon the sale of the Bolsa Chica
lowlands.

     Cash payments for interest on bank debt were approximately $.1 million for
the three months ended March 31, 1997.

NOTE 7 - 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, which for September 1997 was 5.45%.

     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 is 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 $286 million as of September 2, 1997 have been reduced by 
approximately $81 million, resulting in remaining NOLs available of 
approximately $205 million as of September 2, 1997. As reduced, and subject 
to any disallowance resulting from the proposed IRS adjustments discussed 
below, the Company's NOL carryovers will be fully deductible against 
post-reorganization income provided there is not a second ownership change as 
discussed below, and subject to the general rules regarding expiration of 
NOLs. Assuming that Section 382(1)(5) applies, the NOLs available as of March 
31, 1998 are approximately $223 million.

     If the Company were to experience another ownership change within two years
of the September 2, 1997 effective date of the Recapitalization, as the result
of a 50 percentage point change in ownership, the second ownership change would
not qualify for Section 382(l)(5) treatment and the use of all remaining NOLs
would be disallowed. Pursuant to Section 382(l)(5)(D), the Section 382
Limitation from and after the second ownership change would be zero, and thus
would eliminate the availability of any remaining unused portion of the $205
million of NOLs which existed as of September 2, 1997.

     If the Company experiences or expects a successive ownership change prior
to the filing of its 1997 tax return, a determination could be made to elect out
of Section 382(l)(5), which would preserve some of the NOL carryovers. The
election out of Section 382(l)(5) would be irrevocable and must be made by the
due date (including any extensions of time) of the Company's 1997 tax return and
would bind the Company without regard to whether or not subsequent ownership
changes (expected or not) occur. If the Company elects out of Section 382(l)(5)
or if the requirements of such section are not met, the general rules of Section
382 would apply.  However, in determining the limitation placed on the Company's
annual use of its net operating losses under those general rules, Section
382(l)(6) provides that the value of the equity of the Company immediately
before the ownership change would be deemed to include the increase in the value
of the Company's equity resulting from any surrender or cancellation of
creditors' claims due to implementation of the Recapitalization. Accordingly,
assuming the Company's post-Recapitalization equity market value of
approximately $140 million, and the long-term tax exempt rate for September 1997
of 5.45%, Section 382(l)(6) would limit the Company's utilization of its NOLs to
approximately $7.6 million per year, plus any built-in gains recognized during
the five year period following the ownership change. In summary, under Section
382(l)(5), the Company would have approximately $205 million of NOLs available
as of September 2, 1997, which the Company has estimated could be fully utilized
over the next ten years (1998-2007), whereas

                                          10
<PAGE>

under Section 382(l)(6) only approximately $76 million of NOLs would be 
available to the Company during that time frame, due to the annual limitation 
described above.

     The Internal Revenue Service ("IRS") has completed its examinations of the
tax returns of the Company and its consolidated subsidiaries, including formerly
affiliated entities, for the years ended December 31, 1989, 1990 and 1991. With
respect to each examination, the IRS has proposed material audit adjustments.
The Company disagrees with the positions taken by the IRS and has filed a
protest with the IRS to vigorously contest the proposed adjustments. After
review of the IRS's proposed adjustments, the Company estimates that, if upheld,
the adjustments could result in Federal tax liability, before interest, of
approximately $17 million (net of amounts which may be payable by former
affiliates pursuant to tax sharing agreements). The IRS proposed adjustments, if
upheld, could result in a disallowance of up to $132 million of available NOL
carryforwards, of which none are recognized after consideration of the valuation
allowance, as of March 31, 1998. The Company has not determined the extent of
potential accompanying state tax liability adjustments should the proposed IRS
adjustments be upheld. The Company's protest was filed in August 1995 and is
still being considered by the IRS Appeals Division. Management currently
believes that the IRS's positions will not ultimately result in any material
adjustments to the Company's financial statements. The Company is prepared to
pursue all available administrative and judicial appeal procedures with regard
to this matter and the Company is advised that its dispute with the IRS could
take up to five years to resolve.

     Cash payments for federal, state and local income taxes were approximately
$.1 million for the periods ended March 31, 1997 and 1998.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

GUARANTEES OF COMMERCIAL PROJECT DEBT

     As of March 31, 1998, the Company had guaranteed approximately $286.8 
million of the commercial development business' project loans from various 
banks for construction of commercial projects. On April 30, 1998, upon 
completion of sale of the commercial development business, all of these 
guarantees were assumed by KDC and the Company was released from most of its 
guarantee obligations by the respective banks. The Company has not been 
released by certain banks from the remaining guarantees aggregating 
approximately $22.7 million. KDC has fully indemnified the Company against 
any and all liability with respect to these guarantees, and has obtained a 
letter of credit in favor of the Company in the amount of $1.1 million to 
secure any such obligation.

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<PAGE>

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

GENERAL

     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                     OPERATIONS

     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; (ii) single-family residential construction 
in Southern California; and (iii) providing residential real estate 
development services to third parties. Once the residential land owned by the 
Company is entitled, the Company may 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 April 30, 1998, the Company sold its 
commercial development business as further described in Note 4 to the 
Company's Financial Statements, and accordingly the financial statements have 
been reclassified to present the commercial development business as 
discontinued operations. The Company's immediate strategic goals are to (i) 
successfully appeal the February 20, 1998 court decision which ordered a 
third hearing before the California Coastal Commission (the "Coastal 
Commission") to approve the Warner Mesa (formerly known as Bolsa Chica mesa) 
project; (ii) complete the permitting for development of Warner Mesa; and 
(iii) commence infrastructure construction on Warner Mesa as soon as 
possible; 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.

     Historically, the Company has not been able to generate significant 
gross operating margins or cash flows from operating activities due to the 
nature of its principal assets. The substantial majority of the Company's 
assets is residential land which has required significant investments before 
the land could be sold to homebuilders or developed in joint ventures. In 
addition, the relatively high book value of these assets has resulted in 
sales approximating break-even. Pursuant to Fresh Start Reporting, 
implementation of the Recapitalization through the prepackaged plan resulted 
in a write-down of Warner Mesa to fair value (which will reduce future costs 
of sales) and therefore, once the litigation delays are overcome and the 
entitlement process is completed, the Company expects to begin generating 
profits from the Warner Mesa project. However, with the February 1998 court 
decision which ordered a third hearing before the Coastal Commission to 
approve the LCP, the Company is faced with further delays in implementing its 
plans for residential development on Warner Mesa. Furthermore, due 
to the uncertainties associated with the appeals process, the Company is 
unable to predict the length of such delays at this time.

     Real estate held for development or sale and land held for development 
(real estate properties) are carried at fair value as of September 2, 1997, 
following adoption of Fresh-Start Reporting as discussed in Note 3, as 
adjusted by subsequent activity. The Company's real estate properties are 
subject to a number of uncertainties which can affect the fair 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 demand for housing generally 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. 
Recently, the strengthened economy of California has resulted in improvement 
in the real estate market, and the number of potential purchasers and capital 
sources interested in Southern California residential properties appears to 
have increased, resulting in improving prices.  However, there can be no 
assurance regarding the continued health of the California economy and the 
strength and longevity of current conditions affecting the residential real 
estate market.

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 operations.

     Historically, sources of capital have included bank lines of credit, 
specific property financings, asset sales and available internal funds. The 
Company has reported losses since 1991, with the exception of 1993 results 
which included gains on dispositions and extinguishment of debt, and 1997 
results which included an extraordinary gain on extinguishment of debt, and 
except for the projected gain on disposition of the commercial development 
business in 1998, expects to report losses until such time as sales can 
commence at Warner Mesa. In

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<PAGE>

addition, the Company's capital expenditures for project development and 
infrastructure are significant. The Company completed the sale of its 
commercial development business on April 30, 1998 as further described in 
Note 4 to the Company's Financial Statements, which provided substantial 
liquidity to fund project development costs for Warner Mesa and general and 
administrative expenses. The following pro forma financial data as of March 
31, 1998 gives effect to the sale of the commercial development business, 
including accruals for estimated fees of the Company's investment bankers and 
legal counsel, and estimated taxes payable, offset by deferred income related 
to a $1 million deposit received from KDC, as if the transaction had occurred 
on March 31, 1998 (in millions):

<TABLE>
<CAPTION>

                                          HISTORICAL   ADJUSTMENTS   PRO FORMA
                                          ----------   -----------   ---------
<S>                                       <C>          <C>           <C>
     Assets:
          Cash . . . . . . . . . . . . .  $    6.2       $ 30.3       $  36.5
          Discontinued operations. . . .      20.8        (20.8)           --
          All other assets . . . . . . .     148.3           --         148.3
                                          --------        ------      --------
                                          $  175.3       $  9.5       $ 184.8
                                          --------        ------      --------
                                          --------        ------      --------

     Total liabilities . . . . . . . . .  $   35.2       $   --       $  35.2
     Stockholders' equity. . . . . . .       140.1          9.5         149.6
                                          --------        ------      --------
                                          $  175.3       $  9.5       $ 184.8
                                          --------        ------      --------
                                          --------        ------      --------
</TABLE>

FINANCIAL CONDITION

     MARCH 31, 1998 COMPARED WITH DECEMBER 31, 1997

     The $1.0 million decrease in cash and cash equivalents primarily reflects
spending for project development costs for Warner Mesa, and general and
administrative expenses, offset by net proceeds from the sale of two commercial
development projects and an industrial building in Naples, Florida during the
first quarter of 1998, and the receipt of a $1.0 million deposit in connection
with the sale of the commercial development business which was completed on
April 30, 1998, as well as other activity presented in the Statements of Cash
Flows.

     The $1.5 million increase in land held for development reflects investment
in the Warner Mesa project during the first quarter.

     The $1.7 million increase in accounts payable and accrued liabilities
primarily reflects the deposit received in connection with the sale of the
commercial development business.

RESULTS OF OPERATIONS

     The nature of the Company's business is such that individual transactions
often cause significant fluctuations in operating results from year to year. 
In addition, the Company's completion of the Recapitalization has 
significantly deleveraged its capital structure. Furthermore, the restatement 
of assets and liabilities to reflect fair value as of September 2, 1997 under 
Fresh-Start Reporting will reduce future costs of sales for Warner Mesa, while 
increasing interest and amortization expense related to discounted 
liabilities and Reorganization Value in Excess of Amounts Allocated to Net 
Assets.

THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
1997

     The decrease in revenues from $28.9 million in the 1997 period to $.4 
million in the 1998 period and the decrease in the related costs of sales 
from $28.7 million in the 1997 period to $.1 million in the 1998 period 
reflect the first quarter 1997 sale of the Bolsa Chica lowlands to the State 
of California for $25 million and the $3.1 million sale of a build-to-suit 
project in Signal Hill, California, compared with the sale of an industrial 
building in Naples, Florida in the first quarter of 1998.

     Except for the remaining 35 phase I residential lots at Rancho San 
Pasqual in Escondido, California which were sold on April 3, 1998 to a 
homebuilder for approximately $1.6 million, the Company does not currently 
expect to report any further revenues during the remainder of 1998, primarily 
due to the litigation delays with respect to the Warner Mesa project. The 
Company is completing plans to build homes on the 112 lots remaining in phase 
II at Rancho San Pasqual which are expected to open for sales in 1999.


                                          13
<PAGE>

     General and administrative expenses in the first quarter of 1997 include
approximately $.2 million of non-recurring costs incurred in connection with the
exchange offer for the Company's subordinated debentures.

     The decrease in interest expense reflects the absence in the first 
quarter of 1998 of (i) interest on the subordinated debentures after they 
were cancelled on September 2, 1997, the effective date of the 
Recapitalization, and (ii) interest on bank debt which was repaid in February 
1997. The $.3 million of noncash interest expense in the first quarter of 
1998 reflects interest expense on (i) discounted liabilities under 
Fresh-Start Reporting and (ii) capital contribution notes due to a 
partnership.

     The absence of other expense, net for the three months ended March 31, 
1998 primarily reflects amortization of Reorganization Value in Excess of Net 
Assets offset by interest income. The $3.7 million in other income, net for 
the three months ended March 31, 1997 primarily reflects nonrecurring income 
from (i) the sale of a minority interest in a privately held company, and 
(ii) gains recognized in connection with the settlement of certain claims.

     The benefits for income taxes for the three months ended March 31, 1997 and
1998 have been offset by corresponding valuation allowances.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     NONE.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

     Certain of the foregoing information as well as certain information set
forth in Part II of this report under the heading "Legal Proceedings" is forward
looking in nature and involves risks and uncertainties that could significantly
impact the ability of the Company to achieve its currently anticipated goals and
objectives. These risks and uncertainties include, but are not limited to
litigation or appeals of regulatory approvals (including appeals of the trial
court decisions in the CEQA Lawsuit and the Coastal Act Lawsuit related to the
Company's principal asset, Warner Mesa), injunctions prohibiting implementation
of approved development plans pending the outcome of litigation, 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 demand for housing generally 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. Other significant risks and uncertainties are discussed in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.

                                          14
<PAGE>

                            PART II - OTHER INFORMATION


ITEM 1 -       LEGAL PROCEEDINGS

     See Note 5 of "Notes to Financial Statements" included herein and 
"Item 1 - Business - Corporate Idemnification Matters" and "Item 3 - 
Legal Proceedings" in the Company's Annual Report on Form 10-K for the 
year ended December 31, 1997.

ITEM 6 -       EXHIBITS AND REPORTS ON FORM 8-K

     (a)    Exhibits:

     10.1      Employment Agreement dated as of May 1, 1998 between the 
               Registrant and Mr. Raymond J. Pacini.

     10.2      Employment Agreement dated as of May 1, 1998 between the 
               Registrant and Ms. Sandra G. Sciutto.

     27.1      Financial Data Schedule.

     (b)       Reports on Form 8-K:

               Current Report on Form 8-K dated February 20, 1998 attaching a
               press release announcing the Registrant's plans to appeal the San
               Diego Superior Court's ruling that the California Coastal
               Commission did not fully comply with the requirements of the
               Coastal Act when it reconsidered the Bolsa Chica Local Coastal
               Program Amendment during a hearing in October 1997.

                                      SIGNATURE


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



                                        CALIFORNIA COASTAL COMMUNITIES, INC.



Date  May 14,  1998                 By: /s/   Sandra G. Sciutto
      ---------------                   ------------------------------------
                                        SANDRA G. SCIUTTO
                                        Senior Vice President and
                                        Chief Financial Officer


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