**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**
| **(Mark One)**                                                                                                                                                                          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                              | **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                              | ** ** |
| **For the  quarterly period ended June 30, 2007**                                                                                                                                       |
| ** **                                                                                                                                                                              | ** ** |
| **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**                                                                                                                                                    |

 

**CALIFORNIA COASTAL COMMUNITIES, INC.**

**(Exact name of registrant asspecified in its charter)**

| **Delaware**                              |   | **02-0426634**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer     |
| incorporation or  organization)           |   | Identification  No.) |
|                                      |   |                 |
| **6  Executive Circle, Suite 250**   |   | ** **           |
| **Irvine,  California**                   |   | **92614**            |
| (Address of  principal executive offices) |   | (Zip Code)           |

 

**(949) 250-7700**

(Registrant’s telephonenumber, including area code)

**Not applicable**

(Former name, former addressand former fiscal year, if changed from last report)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES x  NO o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| **Large accelerated filer  ****o** | **Accelerated  filer ****x** | **Non-accelerated  filer ****o** |
|-----------------------------------------|-----------------------------------|---------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Act). YES o  NO x

Indicate the number of sharesoutstanding of each of the Issuer’s classes of common stock, as of the latestpracticable date:

As of July 31, 2007, 10,855,963 shares of Common Stockpar value $.05 per share were outstanding.

 

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CALIFORNIACOASTAL COMMUNITIES, INC.

FORM10-Q

FORTHE QUARTER ENDED JUNE 30, 2007

I N D E X
| Cautionary Statement About  Forward-Looking Statements |                    |
|--------------------------------------------------------|-------------------------|
|                                                   |                    |   |
| Part I -                                          | Financial  Information: |   |
|                                                   |                    |   |
|                                                   | Item 1 -                | Consolidated Financial  Statements |   |
|                                                   |                    |   |   |
|                                                   |                    | Consolidated Balance  Sheets -   June 30, 2007 and December 31, 2006 (unaudited) |   |
|                                                   |                    |   |   |
|                                                   |                    | Consolidated  Statements of Operations -   Three and Six Months Ended June 30, 2007 and 2006 (unaudited) |   |
|                                                   |                    |   |   |
|                                                   |                    | Consolidated  Statements of Cash Flows -   Six Months Ended June 30, 2007 and 2006 (unaudited) |   |
|                                                   |                    |   |   |
|                                                   |                    | Notes to  Consolidated Financial Statements |   |
|                                                   |                    |   |   |
|                                                   | Item 2 -                | Management’s  Discussion and Analysis of Financial   Condition and Results of Operations |   |
|                                                   |                    |   |   |
|                                                   | Item 3 -                | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                                   |                    |   |   |
|                                                   | Item 4 -                | Evaluation of  Disclosure Controls and Procedures |   |
|                                                   |                    |   |   |
| Part II -                                         | Other Information:      |   |
|                                                   |                    |   |
|                                                   | Item  1 -               | Legal  Proceedings |   |
|                                                   |                    |   |   |
|                                                   | Item 1A -               | Risk Factors  That May Affect Results of Operations and Financial Condition |   |
|                                                   |                    |   |   |
|                                                   | Item 4 -                | Submission of  Matters to a Vote of Security Holders |   |
|                                                   |                    |   |   |
|                                                   | Item 6  -               | Exhibits |   |
|                                                   |                    |   |   |
| SIGNATURE                                              |                    |

 

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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This QuarterlyReport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Exchange Act of 1933 and Section 21E of theSecurities Exchange Act of 1934 that relate to future events or our futurefinancial performance. In addition, other statements we may make from time totime, such as press releases, oral statements made by our officials and otherreports that we file with the Securities and Exchange Commission may alsocontain such forward-looking statements. Undue reliance should not be placed onthese statements which involve known and unknown risks, uncertainties and otherfactors which may cause our actual results, performance or achievements to bematerially different from any future results, performances or achievementsexpressed or implied by the forward-looking statements. In some cases, you canidentify 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.

Theseforward-looking statements include, but are not limited to:

·      statements about our strategies, plans,objectives, goals, expectations and intentions;

·      information relating to anticipated operatingresults, financial resources, changes in revenues, changes in profitability,interest expense, growth and expansion, anticipated income to be realized fromour investments in unconsolidated entities;

·      the impact of demographic trends and supplyconstraints on the demand for and supply of housing;

·      housing market conditions in the geographicmarkets in which we operate;

·      the number and types of homes and number of acresof land that we may develop and sell;

·      the ability to deliver homes from backlog;

·      the timing and outcomes of regulatory approvalprocesses or administrative proceedings, which may result in delays in the landentitlement, development, construction, or the opening of new communities(including, but not limited to ongoing administrative proceedings related toour joint venture near Oxnard, California);

·      the ability to secure materials andsubcontractors;

·      the ability to produce the liquidity and capitalnecessary to expand and take advantage of opportunities in the future;

·      our ability to realize the value of our netoperating loss carry forwards;

·      our ability to continue relationships withcurrent or future partners;

·      the effectiveness and adequacy of our disclosureand internal controls;

·      the impact of recent accounting pronouncements;and

·      stockmarket valuations.

Any or all of theforward-looking statements included in this report and in any other reports orpublic statements made by us may turn out to be inaccurate. This can occur as aresult of incorrect assumptions or as a consequence of known or unknown risksand uncertainties. These risks and uncertainties include the competitiveenvironment in which we operate; local, regional and national economic conditions;the demand for homes; fluctuations in interest rates and the availability ofmortgage financing; changes in home prices; the availability and cost of landfor future growth; the availability of capital; uncertainties and fluctuationsin capital and securities markets; changes in tax laws and theirinterpretation; legal proceedings; the ability of customers to finance thepurchase of homes or sell existing homes; the availability and cost of laborand materials; the amount of our debt and the impact of restrictive covenantsin our loan agreements; adverse weather conditions; domestic and internationalpolitical events; uncertainties created by terrorist attacks; the effects ofgovernmental regulation, including regulations concerning development of land,the home building industry, sales and customer financing processes, and theenvironment; and other risks discussed in our filings with the Securities andExchange Commission. Many factors mentioned in this report or in other reportsor public statements made by us, such as government regulation and thecompetitive environment, will be important in determining our futureperformance. Consequently, actual results may differ materially from those thatmight be anticipated from our forward-looking statements. You should not placeundue reliance on any of these forward-looking statements because they arebased on current expectations or beliefs regarding future events orcircumstances, which involve known and unknown risks, uncertainties and otherfactors which may cause our actual results, performance or achievements to bematerially different from any future results, performances or achievementsexpressed or implied by these forward-looking statements.

3

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Although webelieve that our strategies, plans, objectives, goals, expectations andintentions reflected in, or suggested by these forward-looking statements arereasonable given current information available to us, we can give no assurancethat any of them will be achieved. Forward-looking statements speak only as ofthe date they are made. We undertake no obligation to publicly update anyforward-looking statements, whether as a result of new information, futureevents or otherwise. However, any further disclosures made on related subjectsin our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.

Theseforward-looking statements should be considered in light of the informationincluded in this report and our other filings with the Securities and ExchangeCommission, including, without limitation, the “Risk Factors” set forth below,as well as the description of trends and other factors in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” setforth in our Form 10-K for the year ended December 31, 2006. You should alsoread the following “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in conjunction with the unaudited consolidatedfinancial statements and the related notes that appear elsewhere in thisreport.

We assume no, andhereby disclaim any, obligation to update any of the foregoing or any otherforward-looking statements. We nonetheless reserve the right to make suchupdates from time to time by press release, periodic report or other method ofpublic disclosure without the need for specific reference to this Form 10-Q orany other report filed by us.  No suchupdate shall be deemed to indicate that other statements not addressed by suchupdate remain correct or create an obligation to provide any other updates.

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**PARTI.  FINANCIAL INFORMATION**

**ITEM 1 – FINANCIAL STATEMENTS**

CALIFORNIA COASTALCOMMUNITIES, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in millions)
| ** **                                                                                                                              | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                              | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                              | ** ** | ** **              | ** ** | ** **                  | ** ** |
| ** **                                                                                                                              | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                                              |       | $                       | 5.9        |                        | $          | 10.6 |   |
| Short-term  investments                                                                                                                 |       | —                  |       | .5                          |       |
| Restricted cash                                                                                                                         |       | 13.7                    |       | 14.6                        |       |
| Real estate  inventories                                                                                                                |       | 289.6                   |       | 264.8                       |       |
| Deferred tax  assets                                                                                                                    |       | 33.7                    |       | 34.7                        |       |
| Other assets                                                                                                                            |       | 6.1                     |       | 7.1                         |       |
|                                                                                                                                    |       |                    |       |                        |       |
|                                                                                                                                    |       | $                       | 349.0      |                        | $          | 332.3 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                          | ** ** | ** **              | ** ** | ** **                  | ** ** |
| ** **                                                                                                                              | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Liabilities:                                                                                                                            |       |                    |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                               |       | $                       | 13.9       |                        | $          | 13.1 |   |
| Senior secured  project revolver                                                                                                        |       | 38.7                    |       | 18.3                        |       |
| Senior secured  term loan                                                                                                               |       | 125.0                   |       | 125.0                       |       |
| Other project  debt                                                                                                                     |       | 47.2                    |       | 44.9                        |       |
| Other  liabilities                                                                                                                      |       | 7.4                     |       | 7.5                         |       |
|                                                                                                                                    |       |                    |       |                        |       |
| Total  liabilities                                                                                                                      |       | 232.2                   |       | 208.8                       |       |
|                                                                                                                                    |       |                    |       |                        |       |
| Commitments and  contingencies                                                                                                          |       |                    |       |                        |       |
|                                                                                                                                    |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                                             |       |                    |       |                        |       |
| Common  Stock—$.05 par value; 13,500,000 shares authorized; 10,855,963 and 10,852,708  shares issued and outstanding, respectively |       | .5                      |       | .5                          |       |
| Excess  Stock—$.05 par value; 13,500,000 shares authorized; no shares outstanding                                                  |       | —                  |       | —                      |       |
| Additional  paid-in capital                                                                                                             |       | 59.2                    |       | 62.3                        |       |
| Retained  earnings                                                                                                                      |       | 58.6                    |       | 62.2                        |       |
| Accumulated  other comprehensive loss                                                                                                   |       | (1.5                    | )          | (1.5                        | )          |
| Total  stockholders’ equity                                                                                                        |       | 116.8                   |       | 123.5                       |       |
|                                                                                                                                    |       |                    |       |                        |       |
|                                                                                                                                    |       | $                       | 349.0      |                        | $          | 332.3 |   |

 

See the accompanying notes to consolidated financialstatements.

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CALIFORNIA COASTALCOMMUNITIES, INC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS 

(in millions,except per share amounts)

(unaudited)
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                     |       |                                            |       |                                          |       |   |   |   |   |
| Homebuilding                                  |       | $                                               | 4.2        |                                          | $          | 18.8 |   | $ | 16.4 |   | $ | 46.7 |   |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Costs of sales:                               |       |                                            |       |                                          |       |   |   |   |   |
| Homebuilding                                  |       | 3.9                                             |       | 15.6                                          |       | 15.3 |   | 38.8 |   |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Loss on impairment of real estate inventories |       | —                                          |       | —                                        |       | 4.0 |   | — |   |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Gross operating (loss) profit                 |       | .3                                              |       | 3.2                                           |       | (2.9 | ) | 7.9 |   |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Selling, general  and administrative expenses |       | 1.4                                             |       | 1.4                                           |       | 3.1 |   | 3.1 |   |
| Income from  unconsolidated joint ventures    |       | (.4                                             | )          | —                                        |       | (.4 | ) | — |   |
| Other (income)  expense, net                  |       | —                                          |       | (.2                                           | )          | .1 |   | (.5 | ) |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| (Loss) income before income taxes             |       | (.7                                             | )          | 2.0                                           |       | (5.7 | ) | 5.3 |   |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| (Benefit)  provision for income taxes         |       | (.3                                             | )          | .8                                            |       | (2.3 | ) | 2.2 |   |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net (loss) income                             |       | $                                               | (.4        | )                                             | $          | 1.2 |   | $ | (3.4 | ) | $ | 3.1 |   |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net (loss)  earnings per common share:        |       |                                            |       |                                          |       |   |   |   |   |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                         |       | $                                               | (.04       | )                                             | $          | .12 |   | $ | (.32 | ) | $ | .30 |   |
| Diluted                                       |       | $                                               | (.04       | )                                             | $          | .11 |   | $ | (.32 | ) | $ | .30 |   |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Common  equivalent shares:                    |       |                                            |       |                                          |       |   |   |   |   |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                         |       | 10.9                                            |       | 10.2                                          |       | 10.9 |   | 10.2 |   |
| Diluted                                       |       | 10.9                                            |       | 10.5                                          |       | 10.9 |   | 10.5 |   |

 

See the accompanying notes to consolidated financial statements.

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CALIFORNIA COASTALCOMMUNITIES, INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(in millions)

(unaudited)
| ** **                                                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | ** **                                    |       |   |   |
| Cash flows from  operating activities:                                            |       |                                          |       |   |   |
| Net (loss) income                                                                 |       | $                                             | (3.4       | ) | $ | 3.1 |   |
| Adjustments to reconcile net (loss) income to cash  used in operating activities: |       |                                          |       |   |   |
| Stock-based compensation expense                                                  |       | —                                        |       | .1 |   |
| Distributions from unconsolidated joint ventures                                  |       | .1                                            |       | .1 |   |
| (Increase) decrease in deferred tax assets                                        |       | (2.3                                          | )          | 1.4 |   |
| Gains on sales of real estate inventories                                         |       | (1.1                                          | )          | (7.9 | ) |
| Loss on impairment of real estate inventories                                     |       | 4.0                                           |       | — |   |
| Equity in earnings of unconsolidated joint ventures                               |       | (.4                                           | )          | — |   |
| Proceeds from asset sales, net                                                    |       | 15.7                                          |       | 46.5 |   |
| Investments in real estate inventories                                            |       | (43.4                                         | )          | (52.8 | ) |
| Changes in assets and liabilities:                                                |       |                                          |       |   |   |
| Decrease (increase) in other assets                                               |       | 1.6                                           |       | (.2 | ) |
| Increase in accounts payable, accrued and other  liabilities                      |       | .7                                            |       | .4 |   |
|                                                                              |       |                                          |       |   |   |
| Cash used in operating activities                                                 |       | (28.5                                         | )          | (9.3 | ) |
|                                                                              |       |                                          |       |   |   |
| Cash flows from  investing activities:                                            |       |                                          |       |   |   |
| Sales of short-term investments                                                   |       | .5                                            |       | 51.6 |   |
| Purchases of short-term investments                                               |       | —                                        |       | (36.4 | ) |
| Investments in unconsolidated joint ventures                                      |       | (.3                                           | )          | (.4 | ) |
| Change in restricted cash                                                         |       | .9                                            |       | (1.2 | ) |
|                                                                              |       |                                          |       |   |   |
| Cash provided by investing activities:                                            |       | 1.1                                           |       | 13.6 |   |
|                                                                              |       |                                          |       |   |   |
| Cash flows from  financing activities:                                            |       |                                          |       |   |   |
| Borrowings of senior secured project revolver                                     |       | 20.4                                          |       | — |   |
| Borrowings of other project debt                                                  |       | 11.4                                          |       | 5.6 |   |
| Repayments of other project debt                                                  |       | (9.1                                          | )          | (14.8 | ) |
| Proceeds from exercise of stock options                                           |       | —                                        |       | .1 |   |
| Tax benefit from exercise of stock options                                        |       | —                                        |       | .1 |   |
| Minority interest distributions                                                   |       | —                                        |       | (.3 | ) |
|                                                                              |       |                                          |       |   |   |
| Cash provided by (used in) financing activities                                   |       | 22.7                                          |       | (9.3 | ) |
|                                                                              |       |                                          |       |   |   |
| Net decrease in  cash and cash equivalents                                        |       | (4.7                                          | )          | (5.0 | ) |
|                                                                              |       |                                          |       |   |   |
| Cash and cash  equivalents - beginning of period                                  |       | 10.6                                          |       | 7.7 |   |
|                                                                              |       |                                          |       |   |   |
| Cash and cash  equivalents - end of period                                        |       | $                                             | 5.9        |   | $ | 2.7 |   |
|                                                                              |       |                                          |       |   |   |
| Supplemental  disclosures of cash flow information:                               |       |                                          |       |   |   |
| Cash paid during the period for income taxes, net of  refunds received            |       | $                                             | .2         |   | $ | 4.7 |   |
| Cash paid during  the period for interest                                         |       | $                                             | 5.1        |   | $ | — |   |

 

See the accompanying notes to consolidatedfinancial statements.

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CALIFORNIA COASTAL COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

**Note 1 - Basis of Presentation**

The accompanying financial statements have beenprepared by California Coastal Communities, Inc. and its consolidatedsubsidiaries (the “Company”), without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations. The Company believes that theseunaudited consolidated financial statements reflect all material adjustments(consisting only of normal recurring adjustments) and disclosures necessary forthe fair presentation of the results of operations and statements of financialposition when read in conjunction with the Consolidated Financial Statementsand Notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006 and Form 10-Q for the quarterly periodended March 31, 2007. Intercompany accounts and transactions have beeneliminated.

The results for interim periods are not necessarilyindicative of the results to be expected for the full year. This reportcontains forward-looking statements. Readers are cautioned that any suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties that actual events or results may differ materiallyfrom those described herein as a result of various factors, including withoutlimitation, the factors discussed generally in this report.

**Note 2 - Significant Accounting Policies**

*Basis of Consolidation*

Certain of theCompany’s wholly-owned subsidiaries are members in joint ventures involved inthe development and sale of residential projects and residential loanproduction. The Company’s consolidated financial statements include the Company’saccounts and all of its majority-owned and controlled subsidiaries and joint ventures.The financial statements of joint ventures in which the Company has acontrolling or majority economic interest (and thus are controlled by theCompany) are consolidated with the Company’s financial statements. Minorityinterest represents the equity interest of the Company’s joint venture partnerfor one consolidated venture and is further described in Note 10 to theconsolidated financial statements included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2006. The Company’s investments inunconsolidated joint ventures are accounted for using the equity method whenthe Company does not have voting or economic control of the venture operations,as further discussed in Note 4 to the consolidated financial statements includedin the Company’s Annual Report on Form 10-K for the year ended December 31,2006.

*RealEstate*

Real estate inventories primarily consist of homesunder construction and lots under development and are carried at the lower ofcost or fair value less costs to sell. The estimation process involved in thedetermination of fair value is inherently uncertain since it requires estimatesas to future events and market conditions. Such estimation process assumes theCompany’s ability to complete development and dispose of its real estateproperties in the ordinary course of business based on management’s presentplans and intentions. Economic, market, and environmental conditions may affectmanagement’s development and marketing plans. In addition, the implementationof such development and marketing plans could be affected by the availabilityof future financing for development and construction activities. Accordingly,the ultimate values of the Company’s real estate properties depend upon futureeconomic and market conditions, and the availability of financing.

The cost of salesof multi-unit projects is generally computed using the relative salesvalue method. Interest and other carrying costs are capitalized to real estateprojects during their development and construction period.

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*Impairmentof Long-Lived Assets*

The Companyassesses the impairment of real estate inventories and other long-lived assetsin accordance with Statement of Financial Accounting Standards (“SFAS”)No. 144, *“Accounting for the Impairment or Disposalof Long-Lived Assets”*, (“SFAS 144”) which requires thatlong-lived assets be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. As provided by SFAS 144, impairment is evaluated by comparing anasset’s carrying value to the undiscounted estimated cash flows expected fromthe asset’s operations and eventual disposition. If the sum of the undiscountedestimated future cash flows is less than the carrying value of the asset, animpairment loss is recognized based on the fair value of the asset. Ifimpairment occurs, the fair value of an asset for purposes of SFAS 144 isdeemed to be the amount a willing buyer would pay a willing seller for suchasset in a current transaction.

In accordance withSFAS 144, in developing estimated future cash flows for impairment testing, theCompany has incorporated its own market assumptions including those regardinghome prices, infrastructure and home-building costs and financing costsregarding real estate inventories. Additionally, as appropriate, the Company identifies alternative coursesof action to recover the carrying value of its long-lived assets and evaluatesall likely alternatives under a probability-weighted approach as described inSFAS 144.

During the firstquarter of 2007, the Company recorded an impairment charge of $4.0 millionrelated to its real estate inventories for the remaining homes at its Woodhavenproject in Beaumont, California. To date, the Company has not recordedimpairment charges for its other projects primarily because most of its lotacquisitions were negotiated prior to 2005 (thus reflecting less expensive landprices and benefiting from home price appreciation during 2005 that exceededthe decline in home prices during 2006 and the first half of 2007). However, asrequired by SFAS 144, should market conditions further deteriorate in thefuture or other events occur that indicate the carrying amount of the Company’sreal estate inventories may not be recoverable, the Company will reevaluate theexpected cash flows from each project to determine whether any additionalimpairment exists at any point in time.

*EarningsPer Common Share*

Earnings per common share is accounted for inaccordance with SFAS No. 128, *“Earnings Per Share”*.Basic earnings per common share is computed using the weighted-average numberof common shares outstanding for the period. Diluted earnings per common shareis computed using the weighted-average number of common shares outstanding andthe dilutive effect of potential common shares outstanding. For the three andsix months ended June 30, 2006, the average market price of the Company’scommon stock exceeded the exercise price of approximately 700,000 outstandingstock options. Therefore, diluted earnings per share for the 2006 periodsinclude the dilutive effect of the weighted average number of common sharesfrom potential exercise of approximately 700,000 options.

The table belowsets forth the reconciliation of the denominator of the earnings per sharecalculation (in millions):
|                                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Shares used in  computing basic earnings per common share   |       | 10.9                                            |       | 10.2                                          |       | 10.9 |   | 10.2 |   |
| Dilutive effect of  stock options                           |       | —                                          |       | .3                                            |       | — |   | .3 |   |
| Shares used in  computing diluted earnings per common share |       | 10.9                                            |       | 10.5                                          |       | 10.9 |   | 10.5 |   |

 

*RecentAccounting Pronouncements*

In July 2006,the FASB issued FASB Interpretation No. 48,  *“Accountingfor Uncertainty in Income Taxes”*, (“FIN 48”), which prescribes arecognition threshold and measurement process for recording in the financialstatements uncertain tax positions taken or expected to be taken in a taxreturn. Additionally, FIN 48 provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosurerequirements for uncertain tax positions. The accounting provisions of FIN 48are effective for reporting periods beginning after December 15, 2006. The Company adopted FIN 48 during the first quarter of 2007 and recorded a netreduction to deferred tax assets of $3.3 million. This reduction was recordedas a $3.1 million decrease in additional paid-in capital and a $200,000decrease in retained earnings as of January 1, 2007 as a cumulative effect of achange in accounting principle.

In September 2006,the FASB issued SFAS No. 157, *“Fair Value Measurements”*(“SFAS 157”), which defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles and expands disclosuresabout fair value measurements. SFAS 157 is effective for financial statementsissued for fiscal periods beginning after November 15, 2007 (the Company’sfiscal year beginning January 1, 2008), and interim periods within those fiscalyears. The Company is currently evaluating the impact of adopting SFAS 157 onthe consolidated financial statements.

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In February 2007, the FASB issued SFAS No. 159, *“The Fair Value Option for Financial Assets and Financial Liabilities”*(“SFAS 159”), which expands the standards under SFAS 157 and provides entitiesa one-time election to measure financial instruments and certain other items atfair value. SFAS 159 is effective for financial statements issued for fiscalperiods beginning after November 15, 2007 (the Company’s fiscal year beginningJanuary 1, 2008). The Company is currently evaluating the impact of adoptingSFAS 159 on its consolidated financial statements.

**Note 3 – Real Estate Inventories**

Real estate inventories primarily consist of homesunder construction and lots under development at Brightwater and sevenadditional communities in four Southern California counties.  At June 30, 2007, real estate inventoriesaggregated 773 lots and homes, including 33 homes completed and unsold, andfive homes completed and in escrow. Real estate inventories at June 30, 2007included $186.7 million recorded for the Brightwater community which is locatedon a 105-acre parcel on a mesa north of the Bolsa Chica wetlands (“Upper Mesa”).Brightwater is under development for 356 homes as discussed below. In addition,real estate inventories include approximately 51 acres nearby which have beenoffered for dedication to the County of Orange for inclusion in the Harriet M.Weider Linear Park in conjunction with the development of Brightwater, and 51additional acres which are subject to a conservation easement. The carryingvalue of these two properties is zero. The Company capitalizes carrying costsincluding interest and property taxes, as well as direct construction costs, toreal estate inventories during the development and construction period.

The Brightwater planned community will offer a broad mix of home choices,averaging 2,860 square feet and ranging in size from 1,710 square feet to 4,140square feet.  The plan also includes 37acres of open space and conservation area. With 349 homes permitted on 68 acres of the Upper Mesa, the resultinglow-density plan equates to approximately five homes per acre, consistent andcompatible with the neighboring Huntington Beach communities.  In addition, the Company owns land adjacentto the planned Brightwater development, on which it intends to process permitsto build seven additional homes which will be included in the Brightwatercommunity. The Company completed grading during October 2006, and is currentlyconstructing infrastructure (sewer, water, storm drain, streets, utilities,etc.) Model home construction for The Trails and The Sands products wascompleted in July 2007. Construction of models for the remaining two products,The Cliffs and The Breakers, began during the first quarter of 2007 and isexpected to be completed during the fourth quarter of 2007. The Company beganselling homes in August 2007 and expects to begin delivering homes by the end of2007.  However, there can be no assurancein that regard, or as to the absence of further development or constructiondelay.

The estimation process involved in the determination of value isinherently uncertain since it requires estimates as to future events and marketconditions. Such estimation process assumes the Company’s ability to completedevelopment and disposition of its real estate properties in the ordinarycourse of business based on management’s present plans and intentions. Economicand market conditions may affect management’s development and marketing plans.In addition, the implementation of such development and marketing plans couldbe affected by the availability of future financing for development andconstruction activities. Accordingly, the amount ultimately realized from suchproject may differ materially from current estimates and the project’s carryingvalue.

Capitalizedinterest is allocated to real estate inventories when incurred and charged tocost of sales when the related property is delivered. Changes in capitalizedinterest follow (in millions):
|                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Capitalized interest,  beginning of period |       | $                                               | 13.7       |                                          | $          | 6.1 |   | $ | 10.2 |   | $ | 6.1 |   |
| Interest incurred and  capitalized         |       | 4.3                                             |       | 1.1                                           |       | 8.4 |   | 2.2 |   |
| Charged to cost of  sales                  |       | (.2                                             | )          | (.7                                           | )          | (.8 | ) | (1.8 | ) |
| Capitalized interest,  end of period       |       | $                                               | 17.8       |                                          | $          | 6.5 |   | $ | 17.8 |   | $ | 6.5 |   |

 

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**Note 4 –Senior Secured Project Revolver**

On September 15,2006, the Company entered into a three-year, $100 Million Senior SecuredRevolving Credit Agreement with KeyBank National Association, as a lender andagent for several other lenders (the “Revolving Loan”). The Revolving Loan issecured by a first trust deed on the Brightwater project, and stock pledges ofthe Company’s material subsidiaries. The Revolving Loan will fund the first$100 million of development and construction costs for the project. At the endof the second year of the term of this facility and each subsequent quarter,the commitment amount will decrease by $25 million until the commitment underthe Revolving Loan is reduced to zero by the final maturity date, September 15,2009. The Revolving Loan is also subject to earlier commitment reductions basedon 40% of the $600,000 release price on the first 50 units closed at theBrightwater project, and 40% of the $1 million release price per unitthereafter.

Availability underthe $100 million Revolving Loan is subject to the applicable borrowing baselimitations. The borrowing base limits lender advances to 50% of asset value.The borrowing base value is the appraised value of the Brightwater project,increased for costs incurred subsequent to the most recent lender appraisal andreduced by 72% of the sales value of homes sold. The initial borrowing basevalue of the Brightwater project was determined by an independent third-partyappraisal of the project on an “as-is” basis as of July 6, 2006. Certainsubsidiaries of the Company provided full unconditional guarantees. TheRevolving Loan includes financial covenants which may limit the amount that maybe borrowed. Outstanding advances bear interest at the Company’s option ateither (i) the Alternate Base rate (“Prime”) minus 25 basis points or (ii)LIBOR plus 200 basis points.

As of June 30,2007 and December 31, 2006, $38.7 million and $18.3 million, respectively,was outstanding under the Revolving Loan. As of June 30, 2007, the undrawnavailability was $61.3 million, as limited by the borrowing base formulas.Interest on the facility is calculated on the average, outstanding dailybalance and is paid monthly.  Interestincurred on the Revolving Loan for the three and six months ended June 30, 2007was $700,000 and $1.2 million, respectively, at a weighted-average interestrate of 7.32% for both periods, which reflects the Company’s elected rate ofLIBOR plus 2%.

Initial loan feesand closing costs of approximately $800,000 incurred for the Revolving Loan onSeptember 15, 2006 are deferred and included in other assets and amortizedover the life of the loan. Amortization of these costs is included in thecapitalization of interest allocated to real estate inventories when incurred,and charged to cost of sales when the related homes are delivered. As of June30, 2007 and December 31, 2006, approximately $600,000 and $734,000,respectively, of deferred loan fees and closing costs related to the RevolvingLoan are included in other assets.

Under theRevolving Loan, the Company is required to comply with a number of covenants,including a leverage covenant and a minimum consolidated tangible net worthcovenant of $100 million. The Company is in compliance with thesecovenants as of June 30, 2007.

**Note 5 –Senior Secured Term Loan**

On September 15,2006, the Company entered into a five-year, $125 Million Senior Secured TermLoan Agreement with KeyBank National Association, as a lender and agent forseveral other lenders (the “Term Loan”), and on September 15, 2006, theCompany borrowed the maximum loan amount of $125 million. The proceeds wereused to fund a “special dividend” of $12.50 per share, totaling $135.7 million,to common stockholders paid on September 28, 2006. At the end of the second,third and fourth years of the term of this agreement, the commitment amountwill decrease by $15 million, $25 million, and $35 million, respectively.Thereafter, for each subsequent quarter, the Term Loan commitment amount willdecrease in four equal installments, until the commitment under the agreementis reduced to zero by the final maturity date, September 15, 2011. The TermLoan is also subject to mandatory repayments based on 60% of the $600,000release price on the first 50 units closed at the Brightwater project, and 60%of the $1 million release price per unit thereafter.

Availability underthe Term Loan is subject to the applicable borrowing base loan to valuelimitations. The loan to value limits total lender advances under the Term Loanand the Revolving Loan to 65% of asset value. This is based upon the appraisedvalue of the Brightwater project, increased for costs incurred subsequent tothe most recent lender appraisal and reduced by 72% of the sales value of homessold. The Term Loan is secured by a second trust deed on the Brightwaterproject, and a general pledge and assignment of the Company’s ownershipinterests in all material subsidiaries. All existing material subsidiaries of the Company have provided fullunconditional guarantees. The Term Loan includes financial covenants which maylimit the amount that may be outstanding. The outstanding balance bearsinterest at the Company’s option at either (i) the prime interest rate plus 25basis points, or (ii) LIBOR plus 275 basis points.

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As of June 30,2007 and December 31, 2006, $125 million was outstanding under the Term Loan.Interest on the Term Loan is calculated on the average, outstanding dailybalance and is paid monthly. Interest incurred on the Term Loan for the threeand six months ended June 30, 2007 was $2.6 million and $5.2 million,respectively, at a weighted-average interest rate of 8.07% for both periods,which reflects the Company’s elected rate of LIBOR plus 2.75%.

Initial loan feesand closing costs of $2.3 million incurred for the Term Loan onSeptember 15, 2006 are deferred and included in other assets and amortizedover the life of the loan. Amortization of these costs is included in thecapitalization of interest allocated to real estate inventories when incurred,and charged to cost of sales when the related homes are delivered. As of June30, 2007 and December 31, 2006, approximately $2.0 million and $2.2 million,respectively, of deferred loan fees and closing costs related to the Term Loanare included in other assets.

Under the TermLoan, the Company is required to comply with a number of covenants, includingcovenants related to leverage, a minimum ratio of EBITDA to interest, and aminimum consolidated tangible net worth of $100 million. The Company is incompliance with these covenants as of June 30, 2007.

Under the TermLoan agreement, the Company was required to enter into a swap agreement tohedge against risks associated with fluctuating interests rates related to$62.5 million of floating rate debt. On September 15, 2006 the Company enteredinto an interest rate swap transaction to effectively fix the interest rate on$62.5 million in floating rate debt at 8.015% per annum. The swap transactionterminates in September 2008. Since the Company does not use derivativefinancial instruments for trading purposes, the swap did not qualify for hedge accountingunder SFAS No. 133, *“Accounting for DerivativeInstruments and Hedging Activities”*. The fair value of the interestrate swap agreement represents the spread between the interest rate the Companypaid and the interest rate the Company would receive over the remaining life ofthe agreement, however, this was insignificant at June 30, 2007. The change infair value of the interest rate swap agreement during the three and six monthsended June 30, 2007 was not material. The counterparties to the interest rateswap agreement are financial institutions.

**Note 6 – Other Project Debt**

In conjunction with theacquisition of single-family residential lots, the Company’s homebuildingsubsidiary, Hearthside Homes, Inc. and its subsidiaries, enter into constructionloan agreements with commercial banks. These loan facilities finance a portion of the land acquisition and themajority of the construction of infrastructure and homes.  Each loan facility requires a guaranty ofproject completion and an environmental indemnity. The loans are secured byfirst trust deeds and bear an interest rate of prime plus three-fourths percent(9.0% at June 30, 2007), except for one loan facility for the Corona-Hellmanproject which bears interest at a rate of prime plus one-half percent (8.75% atJune 30, 2007). Some of these loan facilities have a minimum interest rateranging from 5.75% to 7.5%. During the three and six months ended June 30,2007, Hearthside Homes, Inc. did not enter into any new loan facilities.  The Company is in discussions with its lenderto extend the Beaumont loan to November 17, 2007 with options to further extendto August 17, 2008. The following amounts were available and outstanding underthese loan facilities as of June 30, 2007 and December 31, 2006 ($ inmillions):
|                 | ** ** | ** **                   | ** ** | ** **               | ** ** | ** **         | ** ** | **Outstanding at** | ** ** |
|-----------------|------------|------------------------------|------------|--------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **      | ** ** | **Amount  of Facility** | ** ** | **Number  of Lots** | ** ** | **Maturity  Date** | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
| ** **      | ** ** | ** **                   | ** ** | ** **               | ** ** | ** **         | ** ** | ** **              |       |   |   |
| Rancho Santa Fe |       | $                            | 10.4       |                     | —     |               | —     |                    | $          | — |   | $ | 3.8 |   |
| Corona-Chandler |       | 14.8                         |       | —                   |       | —             |       | —                  |       | .8 |   |
| Corona-Chandler |       | 1.9                          |       | —                   |       | —             |       | —                  |       | 1.9 |   |
| Beaumont        |       | 20.7                         |       | 86                       |       | 8/17/07            |       | 12.3                    |       | 10.7 |   |
| Lancaster       |       | 17.7                         |       | 71                       |       | 10/1/07            |       | 3.8                     |       | 2.2 |   |
| Ontario         |       | 11.7                         |       | 15                       |       | 10/19/07           |       | 3.8                     |       | 4.6 |   |
| Corona-Hellman  |       | 54.5                         |       | 151                      |       | 1/7/09             |       | 27.3                    |       | 20.9 |   |
|            |       |                         |       |                     |       |               |       |                    |       |   |   |
|            |       |                         |       |                     |       |               |       | $                       | 47.2       |   | $ | 44.9 |   |
|                 |            |                              |            |                          |            |                    |            |                         |            |  |  |  |  |  |

 

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**Note 7 -Other Liabilities**

Other liabilitieswere comprised of the following (in millions):
|                                                     | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Accrued pensions and  benefits                      |       | $                       | 4.0        |                        | $          | 4.1 |   |
| Home warranty reserves                              |       | 2.4                     |       | 2.4                         |       |
| Contingent indemnity  and environmental obligations |       | 1.4                     |       | 1.4                         |       |
| Unamortized discount                                |       | (.4                     | )          | (.4                         | )          |
|                                                |       | $                       | 7.4        |                        | $          | 7.5 |   |

 

Contingentindemnity and environmental obligations partially reflect reserves beforerelated discount (recorded pursuant to Fresh-Start Reporting) for contingentindemnity obligations for businesses disposed of by former affiliates andunrelated to the Company’s current operations.

*HomeWarranty Reserve*

The Companyprovides a home warranty reserve to reflect its contingent obligation forproduct liability. The Company generally records a provision as homes aredelivered, based upon historical and industry experience, for the items listedin the homeowner warranty manual, which does not include items that are coveredby manufacturers’ warranties or items that are not installed by the Company’semployees or contractors. The home warranty reserve activity is presented below(in millions):
|                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Balance at  beginning of period |       | $                                               | 2.4        |                                          | $          | 2.2 |   | $ | 2.4 |   | $ | 2.1 |   |
| Provision                       |       | .1                                              |       | —                                        |       | .2 |   | .2 |   |
| Payments                        |       | (.1                                             | )          | —                                        |       | (.2 | ) | (.1 | ) |
| Balance at end of  period       |       | $                                               | 2.4        |                                          | $          | 2.2 |   | $ | 2.4 |   | $ | 2.2 |   |

 

**Note 8 - Income Taxes**

The following is a summary of thetax provision (benefit):
|                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current taxes                         |       | $                                               | —     |                                          | $          | .2 |   | $ | — |   | $ | .7 |   |
| Deferred taxes                        |       | (.3                                             | )          | .6                                            |       | (2.3 | ) | 1.5 |   |
| Provision  (benefit) for income taxes |       | $                                               | (.3        | )                                             | $          | .8 |   | $ | (2.3 | ) | $ | 2.2 |   |

 

The net deferredtax balance at June 30, 2007 and December 31, 2006 is primarily composed offederal net operating losses (“NOLs”). The Company has concluded that it is “more likely than not” that theCompany will be able to generate sufficient taxable income to realize suchassets. Therefore, the Company has no valuation allowance related to thepotential utilization of its deferred tax assets due to uncertainties. Suchuncertainties include the availability of real estate for development ateconomically viable prices, government approvals, results of litigation andeconomic factors affecting the Company’s operations. The Company monitorsthese, as well as other positive and negative factors that may arise in thefuture, as it assesses the need for a valuation allowance against its deferredtax assets.

The federal NOLs available as of June 30, 2007 wereapproximately $134 million. The amount of federal NOLs which expire if notutilized is zero for 2007 and $3 million, $11 million, $49 million, $42million, and $29 million for 2008, 2009, 2010, 2011 and thereafter,respectively.

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The Internal Revenue Code (the “Code”) generallylimits the availability of NOLs if an ownership change occurs within anythree-year period under Section 382. If the Company were to experience anownership change of more than 50%, the use of all remaining NOLs wouldgenerally be subject to an annual limitation equal to the value of the Company’sequity before the ownership change, multiplied by the long-term tax-exempt rate(4.32% as of July 2007) plus (ii) recognized built-in-gains, defined as thosegains recognized within five years of the ownership change subject to anoverall limitation of the net unrealized built-in gains existing as of theownership change date. The Company believes it has net unrealized built-in gainssufficient to allow utilization of the entire net operating loss, assuming thatthe Company is able to recognize these gains within the five-year timelimitation. The Company estimates that after giving effect to varioustransactions by stockholders who hold a 5% or greater interest in the Company,it has experienced a three-year cumulative ownership shift of approximately 38%as of July 23, 2007, as computed in accordance with Section 382.

On September 18, 2006, the Company’s Board ofDirectors suspended enforcement of the Company’s charter documents thatrestrict stockholders from acquiring more than 5% of the outstanding shares ofCommon Stock. The Board determined that such restrictions were not currentlyrequired to preserve the tax benefits of the Company’s $134 million of NOLs.While the Company remains subject to Code section 382, which limits theavailability of NOLs in the event of an ownership change, the Company wouldhave five years from the date of any such ownership change to recognize its builtin gains and utilize its NOLs. With the commencement of construction atBrightwater in 2006, and the related built-in-gain of the project, the Companybelieves it will fully utilize its NOLs within the next five years if anownership change does occur; however, the Board may reinstitute the 5%ownership limitation if required by currently unanticipated events.

Pursuant to SFAS123(R), the Company has elected to recognize stock option deductions on the taxlaw ordering method, which maximizes the realization of the stock optiondeductions in the current year. While the Company realized the majority of its2006 stock option deductions, approximately $400,000 of unrealized tax benefitsrelated to stock option deductions are not reflected in the consolidatedfinancial statements. Upon realization of the tax benefits, the Company willincrease its additional paid-in capital.

*UncertainTax Positions*

The Companyadopted the provisions of FASB Interpretation No. 48, *“Accountingfor Uncertainty in Income Taxes”* (“FIN 48”), on January 1, 2007. Asa result of the implementation of FIN 48, during the first quarter of 2007, theCompany recorded a $5.1 million decrease in deferred tax assets forunrecognized tax benefits, which was offset by an increase in deferred taxassets of $1.8 million for assets re-evaluated as recognizable. The net changein deferred tax assets of $3.3 million resulted in a decrease to the January 1,2007 retained earnings balance of $200,000 and a decrease to the additionalpaid in capital balance of $3.1 million related to fresh-start accountingpursuant to a 1997 pre-packaged bankruptcy. There have been no changes to thisamount during the three and six month periods ended June 30, 2007. Of theCompany’s unrecognized tax benefits of $5.1 million at June 30, 2007, $200,000would decrease the Company’s effective tax rate if recognized. The Company doesnot believe that its unrecognized tax benefits will significantly fluctuate orchange within twelve months of the reporting date.

The Company recognizesinterest expense and penalties related to uncertain tax positions as generaland administrative expenses. As of June 30, 2007, the Company has not recordedany interest or penalties related to unrecognized tax benefits.

The tax years2003-2006 remain open to Federal and California examination, which are theCompany’s primary tax jurisdictions. The Company has utilized NOLs generatedbetween 1990 and 1994 to offset taxable income in those years and expects toutilize NOLs generated between 1994 and 1997 and in 1999 and 2006 in futureyears.

**Note 9 - Commitments and Contingencies**

*RealEstate Matters*

The Company issubject to the usual obligations associated with entering into contracts forthe purchase of land and improved home sites. The purchase of properties underthese contracts is generally contingent upon satisfaction of certainrequirements by the sellers, including obtaining applicable propertyentitlements. The Company also utilizes option contracts with third-party landsellers and financial entities as a method of acquiring land in stagedtakedowns and minimizing the use of funds from other corporate financingsources. These option contracts also help to manage the financial and marketrisk associated with land holdings. Option contracts generally require thepayment of a non-

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refundable cashdeposit of 5% to 15% of the purchase price for the right to acquire lots over aspecified period of time (usually one to two years) at predetermined prices.The Company has the right at its discretion to terminate its obligations underthese land purchase and option agreements by forfeiting the cash deposit withno further financial responsibility.  Asof June 30, 2007 and December 31, 2006, the Company has one consolidated$25,000 land option deposit.

The Company has outstanding performance and suretybonds, for the benefit of city and county jurisdictions, related principally toits obligations for site improvements at various projects at June 30,2007.  The Company does not believe thatdraws upon these bonds, if any, will have a material effect on the Company’sfinancial position, results of operations or cash flows.

*OxnardLand Development Joint Venture*

In February 2003,the Company entered into two option contracts to acquire land adjacent to theCity of Oxnard in Ventura County, California aggregating approximately 168acres.  The Company is developing a landplan for the area, which also includes an additional 149 acres owned by otherlandowners, with the intention of entitling the property for residentialdevelopment and annexing it into Oxnard. During October 2003, the Company entered into a limited liabilitycompany joint venture agreement with a major financial partner to pursue theOxnard development opportunity. The Company assigned the land purchase optioncontracts to the Oxnard limited liability company (“Oxnard LLC”). HearthsideHomes, Inc., the Company’s homebuilding subsidiary, is the managing member ofthe Oxnard LLC.

The Oxnard LLC isfunded by both of its members. Hearthside Homes, Inc. made an initialcontribution of $500,000. The non-managing member also made an initialcontribution of $500,000 to the joint venture and, as of December 31, 2005, hadmade an aggregate of $4 million of first tier additional contributions. In June2007, the members agreed to provide up to an additional $5.7 million, to becontributed equally by the members, to complete the business plan. As of June30, 2007, the members have contributed an aggregate of $2.7 million ofadditional capital. During the three and six months ended June 30, 2007, themembers each contributed approximately $224,000 and $347,000, respectively, tothe Oxnard LLC.

The Company’stotal investment in the Oxnard LLC as of June 30, 2007 is $2.4 million. TheCompany expects to make additional aggregate capital contributions ofapproximately $76,000 to the Oxnard LLC during the remaining six months of2007, bringing the Company’s total expected investment to $2.5 million. Duringthe first half of 2008, the Company expects to make additional aggregatecapital contributions of approximately $1.2 million.

In addition to theland purchase options for the project property, the Oxnard LLC held a landpurchase option which controlled property which was expected to provide filldirt for the project property.  On April16, 2007, the Oxnard LLC sold the non-project land purchase option for $1.8million since the venture has contracted for an alternate source for the filldirt. The Oxnard LLC received net proceeds of approximately $700,000 in cashand a $1.0 million note receivable for this transaction. The note receivablewas collected on July 19, 2007. After paying the balance of commissions andclosing costs of $100,000, Oxnard LLC plans to utilize the proceeds to fundongoing entitlement and development costs.

While the Companyexerts a large degree of influence over the venture, the Company’s partner doeshave various substantive participating rights such as approval rights withregard to the majority of business decisions, including approval of project budgets.

*LegalProceedings*

There are various lawsuits and claims pending againstthe Company and certain subsidiaries. In the opinion of the Company’smanagement, ultimate liability, if any, will not have a material adverse effecton the Company’s financial condition or results of operations.

*GoldenState Water*

On December 14, 2006 Golden State Water Company (“GoldenState”) filed a complaint in Orange County Superior Court (the “Court”) againstthe City of Huntington Beach (the “City”) and two of the Company’s subsidiariesclaiming alleged breaches of contract.

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Following the Court’s denial of Golden State’smotion for a preliminary injunction and the Court’s ruling on Defendants’demurrer motion, the Company’s subsidiaries and the City settled this litigationduring the second quarter of 2007, pursuant to which the Company’s subsidiariespaid an immaterial amount to Golden State. The Company’s subsidiaries and the City did not admit fault or liabilitywith respect to Golden State’s claims, but agreed to settle the matter to avoidthe continued cost and uncertainty of litigation.

*California Department of Toxic Substances Control*

On October 13,2006, the California Department of Toxic Substances Control (“DTSC”) filed acivil complaint against the Company’s Hearthside Residential Corp. subsidiary (“HRC”)in the Federal District Court for the Southern Division of the Central Districtof California.  The DTSC’s complaintrequests that HRC pay for approximately $1.0 million of costs incurred by theDTSC, together with interest on that amount, primarily in connection with theoversight and remediation of PCB contamination found on residential propertiesadjacent to a 43-acre site where HRC completed the removal of PCB contaminatedsoil during September 2005.  HRC’s remediationprocess was approved by the DTSC in December 2005 when it issued a finalacceptance of the remediation work.  Thecomplaint also seeks an order for HRC to pay any future costs which may beincurred in connection with further remediation, together with court costs andattorney’s fees. This litigation is currently scheduled for a trial date in thefourth quarter of 2008.

Since May 2004,HRC has received invoices from DTSC seeking reimbursement for these costs;however, HRC contends, based upon advice of counsel, that it is not responsiblefor such costs because neither HRC nor any affiliate ever developed or builtthe neighboring residential properties, neither HRC nor any affiliate generatedthe contamination, and the contamination did not emanate from the 43-acre sitethat HRC remediated. Furthermore, HRC has also disputed such charges due to thefact that DTSC improperly submitted its bill. The Company’s subsidiary intendsto vigorously defend itself in this matter. Therefore, the Company has notaccrued for any of DTSC’s approximately $1.0 million of claims related to theseresidential properties.

See Note 7 for adiscussion of other contingencies.

*CorporateIndemnification Matters*

The Company and its former affiliates have, through avariety of transactions effected since 1986, disposed of several assets andbusinesses, many of which are unrelated to the Company’s current operations. Byoperation of law or contractual indemnity provisions, the Company may haveretained liabilities relating to certain of these assets and businesses. Thereis generally no maximum obligation or amount of indemnity provided for suchliabilities. A portion of such liabilities is supported by insurance or byindemnities from certain of the Company’s previously affiliated companies. TheCompany believes its consolidated balance sheet reflects adequate reserves forthese matters.

**Note 10 – Stock Plan**

*1993 Stock Option/Stock IssuancePlan*

The 1993 StockOption/Stock Issuance Plan (“1993 Plan”) was approved at the 1994 AnnualMeeting of Stockholders, reserving 7.5 million shares each of Series APreferred Stock and Class A Common Stock for issuance to officers, keyemployees and consultants of the Company and its subsidiaries and the non-employeemembers of the Board of Directors (the “Board”). On April 28, 1997, in connection with the Recapitalization, a new classof Common Stock replaced the Series A Preferred Stock and Class A Common Stock,and the Compensation Committee of the Board authorized the grant of stockoptions for 759,984 shares, equivalent at that time to 6% of the Company’sfully diluted equity, for certain directors and officers. At the May 2004 andJune 2006 stockholder meetings, the stockholders of the Company authorized anadditional 150,000 and 250,000 stock options, respectively, for the 1993 Plan,resulting in total authorized grants of 1,159,984.

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The Company did not grant any options during the threeand six months ended June 30, 2007. During the comparable periods of 2006, theCompany granted 2,500 and 5,000 options, respectively, with a fair value of$22,000 and $46,000, respectively. The grants vest 50% after one year and 100%after two years, and the options have a term of 10 years. Pursuant toSFAS 123 and SFAS 123(R), the Company recorded $32,000 and $70,000 ofcompensation expense during the three and six months ended June 30, 2007,respectively, which is reflected in additional paid-in capital. During the comparableperiods of 2006, the Company recorded $18,000 and $34,000 of compensationexpense. A summary of the status of theCompany’s 1993 Plan for the six months ended June 30, 2007 follows:
|                                          | ** ** | **Number of  Options** | ** ** | **Weighted-Average  Exercise  Price** | ** ** | **Weighted-Average  Remaining  Life** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| Outstanding,  January 1                  |       | 17,500                      |       | $                                     | 21.58      |                                  |       |   |
| Granted                                  |       | —                      |       | $                                     | —     |                                  |       |   |
| Exercised                                |       | —                      |       | $                                     | —     |                                  |       |   |
| Outstanding,  June 30                    |       | 17,500                      |       | $                                     | 21.58      |                                  | 8.60 years |   |
|                                     |       |                        |       |                                  |       |                                  |       |
| Fully vested and  exercisable at June 30 |       | 12,500                      |       | $                                     | 22.53      |                                  | 8.35 years |   |
| Available for future  grants at June 30  |       | 361,733                     |       |                                  |       |                                  |       |

 

As of June 30, 2007, there were 17,500 optionsoutstanding with a weighted-average exercise price of $21.58 (ranging from$13.35 to $25.99) and a weighted-average remaining life of 8.60 years.  All outstanding unvested stock options areexpected to vest. The aggregate intrinsic value of all outstanding,fully-vested and exercisable stock options at June 30, 2007 was insignificant.

The Company adopted SFAS 123(R) in the first quarterof 2006 using the modified prospective method. Similar to SFAS 123, which theCompany adopted in 2003, SFAS 123(R) requires the cost of all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values measured atthe grant date, or the date of later modification, over the requisite serviceperiod. For tax purposes, the Company expects to be entitled to a taxdeduction, subject to certain limitations, based on the fair value of certainequity awards when stock options are exercised. SFAS****123(R) requires that compensation cost be recognized in thefinancial statements based on the fair value measured at the grant date, or thedate of later modification, over the requisite service period. The cumulativecompensation cost recognized for equity awards pursuant to SFAS 123(R) andamounts that ultimately will be deductible for tax purposes are temporarydifferences as prescribed by SFAS 109,*******“Accounting for Income Taxes”*. The tax effect of compensationdeductions for tax purposes in excess of compensation cost recognized in the financialstatements, if any, will be recorded as an increase to additional paid-incapital when realized. A deferred tax asset recorded for compensation costrecognized in the financial statements that exceeds the amount that isultimately realized on the tax return, if any, will be charged to income taxexpense when the restrictions lapse or stock options are exercised or expireunless the Company has an available additional paid-in capital pool (“APIC Pool”),as defined pursuant to SFAS 123(R). The Company is required to assess whetherthere is an available APIC Pool when the stock options are exercised or expire.

SFAS 123(R) also amends SFAS 95, *“Statementof Cash Flows”*, to require companies to change the classification inthe statement of cash flows of any tax benefits realized upon the exercise ofstock options or issuance of nonvested share unit awards in excess of thatwhich is associated with the expense recognized for financial reportingpurposes. These amounts are required to be reported as a financing cash inflowrather than as a reduction of income taxes paid in operating cash flows.

In addition, SFAS123(R) requires a calculation to establish the beginning pool of excess taxbenefits, or the additional paid-in capital pool (“APIC pool”), available toabsorb any tax deficiencies recognized after the adoption of SFAS 123(R). TheCompany has elected the alternative transition method, which includes asimplified calculation method, set forth in FASB Staff Position No. FAS123(R)-3, *“Transition Election Related to Accounting for theTax Effects of Share-Based Payment Awards”* to calculate itsbeginning APIC pool.

17

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The Company estimates the fair value of its stockoptions using the Black-Scholes option pricing model (the “Option Model”). The Option Model requires the use of subjective and complex assumptions,including the option’s expected term and the estimated future price volatilityof the underlying stock, which determine the fair value of the share-basedawards.  The Company’s estimate of expected term in 2006 was determinedbased on the weighted-average period of time that options granted are expectedto be outstanding considering current vesting schedules and the historicalexercise patterns of the existing option plan.  The expected volatility assumptionused in the Option Model is based on historical volatility of the Company’sstock in accordance with guidance provided in SFAS 123(R) and SAB 107. The risk-free interest rate used in the Option Model is based on the yield ofU.S. Treasuries with a maturity closest to the expected term of the Company’sstock options.

Theweighted-average assumptions used for stock option grants during the six monthsended June 30 follows:
|                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Risk-free  interest rate  |       | n/a      |       | 4.8      | %          |
| Expected life  (in years) |       | n/a      |       | 4        |       |
| Expected  volatility      |       | n/a      |       | 20.0     | %          |
| Expected dividends        |       | None     |       | None     |       |

 

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

**Overviewof California Coastal Communities, Inc.**

We are a residentialland development and homebuilding company with properties owned or controlledin five Southern California counties (Los Angeles, Orange, Riverside, SanBernardino and Ventura). Our principal activities include:

·                  obtainingzoning and other entitlements for land we own or control through purchaseoptions or joint ventures;

·                  improvingthe land for residential development; and

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

Once ourresidential land is entitled, we may build homes, sell unimproved land to otherdevelopers or homebuilders, sell improved land to homebuilders, or participatein joint ventures with other developers, investors or homebuilders to financeand construct infrastructure and homes. The majority of our homes are designed to appeal to move-up homebuyersand are generally offered for sale in advance of their construction. During thenext 12 months, we will focus our primary efforts to:

·                  completeinfrastructure and model home construction for The Cliffs and The Breakersneighborhoods, and begin delivering homes for The Trails and The Sandsneighborhoods at our 356-home Brightwater project located on the Bolsa Chicamesa in Orange County, California;

·                  completethe entitlement process for a 168-acre joint venture project near Oxnard,California currently being planned for 554 single-family detached homes and 347attached homes (townhomes, condominiums and apartments); and

·                  maximizedeliveries and revenues of our other homebuilding operations throughoutSouthern California.

However, we mayalso consider other strategic opportunities; and there can be no assurance thatwe will accomplish, in whole or in part, all or any of these strategic goals.

Our total revenuesfor the three months ended June 30, 2007 and 2006 were $4.2 million and $18.8million, respectively, and $16.4 million and $46.7 million for the six monthsended June 30, 2007 and 2006, respectively. For the three months ended June 30,2007 and 2006, we delivered nine and 28 homes, respectively, and for the sixmonths ended June 30, 2007 and 2006, we delivered 24 and 77 homes,respectively. Our total assets as of June 30, 2007 and December 31, 2006 were$349.0 million and $332.3 million, respectively. Our homebuilding subsidiary,Hearthside Homes, Inc., has delivered over 2,000 homes to families throughoutSouthern California since its formation in 1994.

Prior to obtainingthe Coastal Development Permit for our Brightwater project in December 2005, wehistorically maintained a minimal amount of leverage. In September 2006, weobtained $225 million of debt financing as described in Notes 4 and 5 to theconsolidated financial statements in this Form 10-Q, which provided $125million to fund the $12.50 special dividend to our stockholders on September28, 2006 that is described in Note 13 to the consolidated financial statementsin our Annual Report on Form 10-K for the year ended December 31, 2006. As ofJune 30, 2007, we had $210.9 million of debt against $116.8 million of bookequity and a $184.0 million equity market capitalization.

We were formed in1988 and our executive offices are located at 6 Executive Circle, Suite 250,Irvine, California 92614.  Our websiteaddress is http://www.californiacoastalcommunities.com and our telephone numberis (949) 250-7700. We make available through our website our annualreport on Form 10-K, quarterly reports on Form 10-Q, current reports on Form8-K, and amendments to these reports filed or furnished pursuant to Section13(d) or 15(d) of the Exchange Act as soon as reasonably practicable after theyare filed with, or furnished to, the SEC. Copies of our Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, and amendments to thesereports are available free of charge upon request. In addition, at our websitewe post current versions of or code of ethics, audit committee charter andnominating committee charter.

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**Outlook**

Our homebuilding outlook varies significantly betweenthe high-end coastal location of our Brightwater project in Huntington Beachand our inland projects.  Conditions in theInland Empire and Lancaster markets continue to be very challenging. We expectthese conditions to continue through 2008 or 2009 and we do not expect togenerate sufficient gross operating profits during the third quarter of 2007 tocover our selling, general and administrative expenses prior to the expected commencementof deliveries at our Brightwater project in the fourth quarter of 2007.

However, based oninput from realtors, appraisers and fellow homebuilders, as well as reports inthe press, it appears that high-end coastal markets are continuing to reportsteady sales and prices. In addition, we are optimistic about our Brightwater projectdue to the number of pre-qualification applications we have received to dateand the initial 12 sales reservations for The Trails and The Sandsneighborhoods (discussed below under “Our Current and FutureHomesites—Brightwater at Bolsa Chica”). We believe this project creates aunique future opportunity for us given Brightwater’s superior location, theextremely limited supply of new homes on the coast of Southern California andthe absence of significant competition from other homebuilders in theHuntington Beach market.

The housing market downturn that began in 2006continued into the first half of 2007 and is expected to continue through 2008or 2009. The sustained softness in the housing market was compounded by recentdifficulties in the subprime lending industry and the resulting tightening ofcredit available to some homebuyers. During the second quarter of 2007, net new orders decreased to 11 homescompared with 16 homes during the comparable period of 2006. Cancellations as apercentage of new orders were 35% during the second quarter of 2007, comparedwith approximately 32% for the first quarter of 2007, 41% for the fourthquarter of 2006, and 24% for the second quarter of 2006. At the same time,backlog as of June 30, 2007 decreased to 17 homes compared with 49 homes as ofJune 30, 2006 due to fewer homes in backlog at March 31, 2007 and reduced salesactivity during the first half of 2007.

This sales slowdown reflects an overall softening ofdemand for new homes, as well as an oversupply of homes available for sale. Weattribute the reduction in demand to reduced affordability of new homes due torapid price increases between 2002 and 2005 and declines in consumer confidencerelated to concerns on the part of prospective home buyers about the futuredirection of home prices, and their ability to obtain financing and sellexisting homes. In addition, speculators and investors are no longer helping tofuel demand. We try to avoid selling homes to speculators and start few homeswithout having a signed agreement of sale. As of June 30, 2007 we had standinginventory of 33 homes compared with 46 homes as of December 31, 2006 and ninehomes as of June 30, 2006.

We have also been impacted by an overall increase inthe supply of homes available for sale in our markets as certain large homebuilderscontinue to build product in excess of current demand and as speculatorsattempt to sell the homes they previously purchased. At the same time, many ofthe large national homebuilders operating in our markets are aggressivelyattempting to reduce their inventories by offering incentives and/or loweringprices, leading to lower gross margins on home sales.

As the housing market downturn continues to unfold, wecontinue to adjust and reevaluate our operating strategy to improve our marginsand liquidity. Our operating strategy includes:

·      continuingto assess our owned land position to identify those assets that should bereduced or repositioned;

·      adjustingour cost structure to today’s market conditions by rebidding subcontracts andmaterials in line with reduced demand;

·      offeringmore incentives and selective price reductions to achieve acceptable levels ofsales volume and cash flow; and

·      monitoringconstruction starts to better align with sales activity.

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Despite the housing market slowdown, we continue toremain cautiously optimistic about the future growth of our business given thepotential of our Brightwater project. The long-term outlook for homebuilding inSouthern California remains strong due to the continuing regulation-inducedconstraints on lot supplies. We have traditionally employed a conservativeapproach to managing our real estate inventories and believe we arewell-positioned, with Brightwater representing 64% of our real estate assets,to withstand the effects of the continuing market downturn.  We do not presently expect that currentweaknesses in the homebuilding market will significantly impact our Brightwaterproject given the site’s superior coastal location, the extremely limitedsupply of new homes on the coast of Southern California and the absence ofsignificant competition from other homebuilders in the Huntington Beach market.However, there can be no assurance regarding the duration of the currentdownturn in the Southern California residential real estate market.

In particular, the following events may exertrecessionary pressures on the Southern California economy and may have furthernegative impacts on the Southern California housing market: (i) the recentdifficulties in the subprime lending industry and more stringent lendingstandards which may negatively impact the ability of certain homebuyers toobtain financing, (ii) increases in foreclosures due to interest rateadjustments on variable rate or “teaser” rate mortgages and other factors, (iii)the significant increases in home prices between 2002 and 2005 and the relateddecline in the affordability of new homes in Southern California, (iv) thedecline in consumer confidence with respect to the housing market, (v) thestate of the national economy, increases in interest rates by the FederalReserve Board between mid-2004 and 2006 and the possibility of a recession inthe future, and (vi) the continued threat of inflation and potential forfurther increases in interest rates by the Federal Reserve Board.

**OurCurrent and Future Homesites**

Wecurrently have on-going Southern California homebuilding projects in:

·                  OrangeCounty in the Huntington Beach area;

·                  RiversideCounty near the cities of Corona and North Corona, and in the City of Beaumont;

·                  SanBernardino County in the City of Ontario; and

·                  NorthernLos Angeles County in the City of Lancaster.

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We started sellinghomes at our Brightwater development project in Orange County during August2007 and plan to process permits for seven homes on adjacent parcels in theCity of Huntington Beach, which would bring the total unit count up to 356. Thefollowing chart describes our current projects, their location and our lotinventories as of June 30, 2007:
| Project                     | ** ** | **Location**                     | ** ** | **6/30/07  Lot  Inventory** | ** ** |
|-----------------------------|------------|----------------------------------|------------|-----------------------------|------------|
|                        |       |                             |       |                        |       |
| Orange County:              |       |                             |       |                        |       |
| The Trails at Brightwater   |       | Huntington Beach                 |       | 62                          |       |
| The Sands at Brightwater    |       | Huntington Beach                 |       | 78                          |       |
| The Cliffs at Brightwater   |       | Huntington Beach                 |       | 107                         |       |
| The Breakers at Brightwater |       | Huntington Beach                 |       | 109                         |       |
|                        | * *   | *Subtotal  – Orange County* |       | 356                         |       |
|                        |       |                             |       |                        |       |
| Inland Empire:              |       |                             |       |                        |       |
| Chandler Ranch              |       | North Corona                     |       | 18                          |       |
| Alisal at Ontario           |       | Ontario                          |       | 15                          |       |
| Woodhaven                   |       | Beaumont                         |       | 86                          |       |
| Hearthside Lane             |       | Corona                           |       | 151                         |       |
|                        | * *   | *Subtotal  – Inland Empire* |       | 270                         |       |
|                        |       |                             |       |                        |       |
| Lancaster:                  |       |                             |       |                        |       |
| Alisal at Lancaster         |       | Lancaster                        |       | 3                           |       |
| Lancaster II                |       | Lancaster                        |       | 73                          |       |
| Quartz Hill                 |       | Lancaster                        |       | 71                          |       |
|                        | * *   | *Subtotal  – Lancaster*     |       | 147                         |       |
|                        |       |                             |       |                        |       |
|                        | * *   | *Total – All Projects*      |       | 773                         |       |

 

These homebuildingprojects are currently expected to generate cash flows and gross operatingmargins through mid-2010.  Up toapproximately 554 additional single-family lots could be available forhomebuilding operations if we obtain entitlements for our Oxnard project;however, the exact number of homes will depend on the final outcome of theentitlement process.

*Brightwater at Bolsa Chica*

The 110-acre BolsaChica upper mesa is the largest property in our portfolio, representingapproximately 64% of our real estate assets as of June 30, 2007. The BolsaChica upper mesa is one of the last large undeveloped coastal properties inSouthern California, and is located in Orange County, approximately 35 milessouth of downtown Los Angeles. Bolsa Chica is bordered on the north and east byresidential development in the City of Huntington Beach and Huntington Harbor,to the south by open space and the 1,200-acre Bolsa Chica wetlands, and to thewest by 120 acres of publicly-owned conservation land and open space on thelower bench of the Bolsa Chica mesa, Pacific Coast Highway, Bolsa Chica StateBeach, and the Pacific Ocean. Our holdings on the Bolsa Chica mesa include 68acres of developable land on the upper mesa currently under development for aresidential community known as Brightwater, 37 acres of open space andconservation area in the planned community, and five acres in the City ofHuntington Beach which are currently zoned agricultural. We are analyzingdevelopment alternatives for this 5-acre parcel and expect to submit a proposedsite plan to the City of Huntington Beach during 2007.

We also ownapproximately 104 non-developable acres on, or adjacent to, the HuntingtonMesa. Approximately 51 acres of land on the Huntington Mesa have been offeredfor dedication to the County of Orange for inclusion in the Harriet M. WeiderLinear Park in conjunction with the development of Brightwater and anadditional 51 acres are subject to a conservation easement.

The Brightwaterresidential community will offer a broad mix of home choices averaging 2,860square feet and ranging in size from 1,710 square feet to 4,140 square feet.Homes at The Trails and The Sands are currently offered at prices ranging from$1.0 to $1.3 million and the larger homes at The Cliffs and The Breakers arecurrently expected to be offered for sale beginning in the fourth quarter of2007 at prices in excess of $2 million. With 356 homes on 68

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acres of the upper mesa,the resulting low-density plan equates to approximately five homes per acre,consistent and compatible with the neighboring Huntington Beach communities. Todate, over 2,700 people have registered on our website requesting informationabout purchasing a home at Brightwater. We completed construction of eightmodel homes for The Trails and The Sands products, which range from 1,710 to2,160 square feet, in July 2007 and will hold a grand opening on August 11,2007.

As of August 5,2007, we have accepted sales reservations and deposits from 12 buyers who hadpreviously submitted prequalification applications to join our priority listfor homes at The Trails and The Sands at sales prices ranging from $1.0 to $1.3million, for homes ranging from 1,710 to 2,160 square feet.  The average home size was 1,900 square feetand the average sales price was $1,160,000 or $610 per square foot.  We anticipate first deliveries at The Trailsand The Sands in the fourth quarter of 2007 which should generate significantgross operating profits. We also currently expect to:

·                  completeconstruction of nine additional model homes for The Cliffs and The Breakers,which will range from 2,720 to 4,140 square feet, during the Fall of 2007,

·                  startselling production homes from the nine additional model homes for The Cliffsand The Breakers products during the Fall of 2007, and

·                  begindelivering homes for The Trails and The Sands by the end of 2007.

However, there can be noassurance in that regard, or as to the absence of further delays.

Weused the following facts and assumptions in estimating the value that we expectto receive from the Brightwater development project:

·                  TheBrightwater coastal development permit provides for 349 homes aggregatingapproximately 995,000 square feet.

·                  Weown land adjacent to Brightwater in the City of Huntington Beach, for which weintend to process permits to build seven additional homes which would beincluded in the Brightwater community.

·                  Wecompleted construction of model homes for The Trails and The Sands products atBrightwater during July 2007. As of August 5, 2007 we have accepted salesreservations and deposits from 12 buyers who had previously submittedprequalification applications to join our priority list for homes at The Trailsand The Sands at sales prices ranging from $1.0 to $1.3 million, for homesranging from 1,710 to 2,160 square feet. The average home size was 1,900 squarefeet and the average sales price was $1,160,000 or $610 per square foot.

·                  Thereare 62 homes at Brightwater which will have unobstructed views of the PacificOcean and/or the Bolsa Chica wetlands, including 35 homes at The Breakers, 25homes at The Cliffs and two homes at The Sands.

·                  Build-outof production homes is expected to take approximately three years.

·                  Weare currently planning to: (i) hold a public grand opening for The Trails andThe Sands communities on August 11, 2007, (ii) hold a second grand opening forThe Cliffs and The Breakers communities in the fourth quarter of 2007, and(iii) begin delivering homes at The Trails and The Sands projects by the end of2007.

·                  Wecurrently expect to deliver the majority of the Brightwater homes in 2008 and2009.

·                  Thefinished lot component of home prices ranges from 60% to 65%.

·                  Coststo improve the lots from their raw condition to finished lots, including Countypermits, City annexation fees and school fees, approximate $190,000 per lot.

·                  Thedirect costs (excluding indirect costs such as supervision, overhead, sales andmarketing, warranty, insurance, etc.) of building homes at Brightwater arecurrently expected to range from approximately $125 to $150 per square foot.

·                  Indirectcosts are expected to approximate 5 to 6% of sales revenues.

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·                  Brightwateris currently expected to generate gross margins that are approximately two tothree times our 2006 homebuilding margins of 14% due to our low carrying valuein Brightwater.

The estimationprocess involved in the determination of value is inherently uncertain becauseit requires estimates as to future events and market conditions. Thisestimation process assumes our ability to complete development and dispositionof our real estate inventories in the ordinary course of business based onmanagement’s present plans and intentions. Economic, market, and environmentalconditions may affect our development and marketing plans. The development ofBrightwater depends upon various factors. Accordingly, the amount ultimatelyrealized from the Brightwater project may differ materially from our currentestimates and the project’s carrying value.

*OxnardLand Development - Unconsolidated Joint Venture*

In February 2003,we entered into two option contracts to acquire land adjacent to the City ofOxnard in Ventura County, California aggregating approximately 168 acres. Weare developing a land plan for the area, which also includes an additional 149acres owned by other landowners, with the intention of entitling the propertyfor residential development and annexing it into Oxnard.  During October 2003, we entered into a jointventure agreement with a major financial partner to pursue the Oxnarddevelopment opportunity. We assigned the land purchase option contracts to theOxnard joint venture. Hearthside Homes, Inc., our homebuilding subsidiary, isthe manager of the Oxnard joint venture.

We currentlyexpect the residential development plan to include approximately 760single-family detached lots and approximately 630 attached residential units(townhomes, condominiums and apartments); however, these numbers are subject tochange during the course of the entitlement process. Approximately 554 of thesingle-family lots and approximately 347 of the attached units would bedeveloped on the 168 acres of optioned land that we currently expect the Oxnardjoint venture to purchase.  Thesingle-family detached product is currently expected to range fromapproximately 1,700 square feet to 3,000 square feet and the attached units arecurrently expected to range from approximately 1,450 square feet to 1,575square feet. A market study in June 2007 estimated average home prices for theproject of approximately $601,000, or an average of $288 per square foot.

The optioncontracts give the Oxnard joint venture two years, plus up to three and onehalf additional years through the exercise of extensions, to completeentitlement activities before purchasing the land. The Oxnard joint venture hasthe right to terminate these option agreements by forfeiting the cash deposits.The Oxnard joint venture is striving to obtain approval of its plan from theOxnard City Council in the fourth quarter of 2007 and approval of annexationinto the City of Oxnard from the Local Agency Formation Commission in the firstquarter of 2008; however, delays could be encountered. If the Oxnard jointventure completes the entitlement process in the time frame set forth above,and decides to build homes (rather than sell lots), most of the homes would bedelivered between 2010 and 2012, based on current expectations and assumptions.The Oxnard joint venture has exercised six six-month extensions, extending thecurrent closing date for the option contracts to February 2008, and there isone remaining six-month extension through August 2008.

The Oxnard jointventure is funded by both of its members. Hearthside Homes, Inc. made an initial contribution of $500,000. Thenon-managing member also made an initial contribution of $500,000 to the jointventure and, as of December 31, 2005, had made an aggregate of $4 million offirst tier additional contributions. In June 2007, the members agreed toprovide up to an additional $5.7 million, to be contributed equally by themembers, to complete the business plan. As of June 30, 2007, the members havecontributed an aggregate of $2.7 million of additional capital. During thethree and six months ended June 30, 2007, the members each contributedapproximately $224,000 and $347,000, respectively, to the joint venture.

Our totalinvestment in the venture as of June 30, 2007 is $2.4 million. We expect tomake additional aggregate capital contributions of approximately $76,000 to thejoint venture during the remaining six months of 2007, bringing our totalexpected investment in the venture to $2.5 million.  During the first half of 2008, we expect tomake additional aggregate capital contributions of approximately $1.2 million.

In addition to theland purchase options for the project property, the Oxnard joint venture held aland purchase option which controlled property which was expected to providefill dirt for the project property.  OnApril 16, 2007, the Oxnard joint venture sold the non-project land purchaseoption for $1.8 million since the venture has contracted for an alternate sourcefor the fill dirt. The Oxnard joint venture received net proceeds ofapproximately $700,000 in cash and a $1.0 million note receivable for thistransaction. The note receivable was collected on July 19, 2007. After payingthe balance of commissions and closing costs of $100,000, Oxnard LLC plans toutilize the proceeds to fund ongoing entitlement and development costs.

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After payment of a10% preferred return on invested capital to us and our partner, the first $8million of profits are allocated 75% to our partner and 25% to us, and profitsover $8 million and losses over $5 million are generally allocated on a 50/50basis in accordance with the operating agreement. The first $5 million oflosses are generally allocated 80% to our partner and 20% to us.

While we exert alarge degree of influence over the joint venture, our partner does have varioussubstantive participating rights such as approval rights with regard to themajority of business decisions, including approval of project budgets.

*Homebuilding*

We delivered ninehomes during the second quarter of 2007, compared with 24 deliveries during thecomparable period of 2006. We acquired no single-family residential lots during2006 or the first half of 2007. After several years of dramatic home priceappreciation in Southern California, we saw price depreciation during 2006 inthe Inland Empire (Corona, Ontario and Beaumont) and Lancaster markets. Thistrend continued in the first half of 2007 and we expect it to continue in thesemarkets throughout the year. Therefore, we have further reduced sales pricesand offered incentives for a number of our homes which are not yet in escrow inresponse to our competition and to reflect current market pricing. The pricereductions are expected to result in significantly reduced gross profits forthe Inland Empire and Lancaster markets.

Deliveries ofhomes at our Brightwater project in coastal Huntington Beach are expected tocommence in the fourth quarter of 2007.

Our homebuildingprojects are described below:
| ** **           | ** ** | ** **                   | ** ** | ** **      | ** ** | ** **       | ** ** | ** **         | ** ** | **Deliveries**        | ** ** |
|----------------------|------------|------------------------------|------------|-----------------|------------|------------------|------------|--------------------|------------|-----------------------|------------|
| ** **           | ** ** | ** **                   | ** ** | ** **      | ** ** | ** **       | ** ** | ** **         | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
| ** **           | ** ** | ** **                   | ** ** | ** **      | ** ** | ** **       | ** ** | ** **         | ** ** | **Ended**             | ** ** | **Ended** | ** ** |
| ** **           | ** ** | ** **                   | ** ** | **Land**        | ** ** | **Commenced**    | ** ** | **Commenced**      | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** |
| ** **           | ** ** | **Location**                 | ** ** | **Acquisition** | ** ** | **Construction** | ** ** | **Sales**          | ** ** | **2007**              | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                 |       |                         |       |            |       |             |       |               |       |                  |       |   |   |   |   |   |   |
| Completed  Projects  |       | Rancho  Santa Fe / Riverside |       | n/a             |       | n/a              |       | n/a                |       | —                |       | 6 |   | 6 |   | 7 |   |
|                 |       |                         |       |            |       |             |       |               |       |                  |       |   |   |   |   |   |   |
| Active Projects      |       |                         |       |            |       |             |       |               |       |                  |       |   |   |   |   |   |   |
| Brightwater          |       | Huntington  Beach            |       | 1970            |       | 2006             |       | 2007               |       | —                |       | — |   | — |   | — |   |
| Chandler Ranch       |       | North  Corona                |       | 2004            |       | 2005             |       | 2005               |       | 4                     |       | 6 |   | 7 |   | 44 |   |
| Alisal at  Ontario   |       | Ontario                      |       | 2005            |       | 2005             |       | 2006               |       | —                |       | — |   | 2 |   | — |   |
| Woodhaven            |       | Beaumont                     |       | 2005            |       | 2005             |       | 2006               |       | 1                     |       | — |   | 1 |   | — |   |
| Hearthside Lane      |       | Corona                       |       | 2005            |       | 2005             |       | 2007               |       | —                |       | — |   | — |   | — |   |
| Alisal at  Lancaster |       | Lancaster                    |       | 2004            |       | 2004             |       | 2005               |       | 3                     |       | 16 |   | 5 |   | 26 |   |
| Quartz Hill          |       | Lancaster                    |       | 2005            |       | 2006             |       | 2006               |       | 1                     |       | — |   | 3 |   | — |   |
| Lancaster II         |       | Lancaster                    |       | 2005            |       | 2008             | (a)        | 2008               | (a)        | —                |       | — |   | — |   | — |   |
|                 | * *   | * *                     |       |            |       |             |       | *Total Deliveries* |       | 9                     |       | 28 |   | 24 |   | 77 |   |

 

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(a) Planned

*HuntingtonBeach.*  We completedconstruction of the first eight model homes for The Trails and The Sandsproducts which range from 1,710 to 2,160 square feet during July 2007. We acceptedsales reservations and deposits for 12 homes at sales prices ranging from $1.0 millionto $1.3 million in a pre-opening release on August 4, 2007 to buyers who hadpreviously submitted prequalification applications to join our priority listfor homes at The Trails and The Sands. The average home size was 1,900 squarefeet and the average sales price was $1,160,000 or $610 per square foot. Weexpect to begin delivering The Trails and The Sands homes at the end of 2007.

*Corona.*  We acquired 83 lots in North Corona in May2004. Following construction of infrastructure, during April 2005, we beganconstruction of homes averaging 3,160 square feet. We opened for sales duringthe third quarter of 2005 and delivered 58 homes during 2006 at an averageprice of $600,000.  During the first halfof 2007, we delivered seven homes at an average price of $559,000. We deliveredtwo additional homes at an average price of $615,000 during July 2007. As ofJuly 30, 2007, four homes are in escrow at an average price of $598,000 and eightadditional homes are completed and have been released for sale.

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During April 2005,we acquired 151 additional lots in Corona. Following construction of infrastructure, construction of five modelhomes averaging 3,600 square feet on lots of approximately 7,200 square feetbegan during the fourth quarter of 2006. These models were completed duringApril 2007, and we released the first six production phase homes for sale atthe April 21, 2007 grand opening and the balance of the first phase in June2007. As of July 30, 2007, eight homes are in escrow at an average price of$592,000 and four additional homes have been released for sale.

*Ontario.*  During April 2005, we acquired 26 lots in theCity of Ontario in Riverside County, California. This small community of homes,averaging 3,380 square feet, is an infill site situated very close to theprojects we completed in the City of Chino in 2005. Construction of the firstphase of 13 homes began during the fourth quarter of 2005, and we opened forsales during March 2006. We delivered nine homes during 2006 at an averageprice of $675,000, and two homes during the first half of 2007 at an averageprice of $673,000. As of July 30, 2007, three homes are in escrow at a price of$683,000 and five additional homes are completed or under construction and havebeen released for sale.

*Beaumont*.We acquired 102 lots in the City of Beaumont during the third quarter of 2005.Following construction of infrastructure, construction of homes averaging 2,500square feet began during the first quarter of 2006, and sales commenced duringMarch 2006. We delivered 15 homes during 2006 at an average price of$387,000.  During the second quarter of2007 we delivered one additional home at a price of $396,000. As of July 30,2007, two homes are in escrow at an average price of $375,000 and 18 additionalhomes are completed or under construction and have been released for sale.

During the firstquarter of 2007, we recorded an impairment charge of $4.0 million related toour real estate inventories for the remaining homes at our Beaumont project.The impairment charge reflected our expectations about selling prices and grossmargins for the project. As required by SFAS 144, should market conditionsfurther deteriorate, we will reevaluate the expected cash flows from thisproject to determine whether any additional impairment exists.

*Lancaster.*   We acquired 104 lots in the City ofLancaster in northern Los Angeles County during May 2004. We began constructionof model homes averaging approximately 2,850 square feet during the thirdquarter of 2004 and opened for home sales in January 2005.  During 2005, we delivered 55 homes at anaverage price of $406,000. We delivered 41 homes during 2006 at an averageprice of $448,000, and we delivered five homes during the first half of 2007 atan average price of $420,000. As of July 30, 2007 two homes are in escrow at anaverage price of $371,000 and the final home is under construction and has beenreleased for sale.

In April 2005, weacquired an additional 73 unentitled lots in Lancaster. The entitlement processis near completion; however, we have determined that the construction start forthe 73-unit project, which has no recorded loan, will be deferred until salesactivity in the market has improved.

In December 2005,we acquired 77 additional lots in an area known as Quartz Hill in the City ofLancaster. The homes in this community are on 10,000 square foot lots and willaverage 3,640 square feet. Construction of models began in May 2006 and weopened for sales during July 2006. During 2006, we delivered three homes at anaverage price of $537,000. We delivered three homes during the first half of2007 at an average price of $494,000. As of July 30, 2007 four homes are inescrow at an average price of $497,000 and 10 additional homes are completed orunder construction and have been released for sale.

**Critical Accounting Policies**

In the preparationof the consolidated financial statements, we applied accounting principlesgenerally accepted in the United States of America. The application ofgenerally accepted accounting principles may require management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying results. Listed below are those policies andestimates that we believe are critical and require the use of complex judgmentin their application. In particular, our critical accounting policies andestimates include the evaluation of the impairment of long-lived assets and theevaluation of the probability of being able to realize the future benefitsindicated by our significant federal tax net operating losses, as discussedfurther in Notes 2 and 8 to the consolidated financial statements.

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*Basis ofConsolidation*

Certain of ourwholly-owned subsidiaries are members in joint ventures involved in thedevelopment and sale of residential projects and residential loan production.Our consolidated financial statements include our accounts and all of ourmajority-owned and controlled subsidiaries and joint ventures. The financialstatements of joint ventures in which we have a controlling or majorityeconomic interest (and thus are controlled by us) are consolidated with our financialstatements. Minority interest represents the equity interest of our jointventure partner for one consolidated venture and is further described in Note10 to the consolidated financial statements included in our Annual Report onForm 10-K for the year ended December 31, 2006. Our investments inunconsolidated joint ventures are accounted for using the equity method when wedo not have voting or economic control of the venture operations, as furtherdiscussed in Note 4 to the consolidated financial statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2006.

*Impairmentof Long-Lived Assets*

We assess theimpairment of real estate inventories and other long-lived assets in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 144, *“Accounting for the Impairment or Disposal of Long-Lived Assets,”*(“SFAS144”) which requires that long-lived assets be reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of an assetmay not be recoverable. As provided by SFAS 144, impairment is evaluated bycomparing an asset’s carrying value to the undiscounted estimated cash flowsexpected from the asset’s operations and eventual disposition. If the sum ofthe undiscounted estimated future cash flows is less than the carrying value ofthe asset, an impairment loss is recognized based on the fair value of theasset. If impairment occurs, the fair value of an asset for purposes of SFAS144 is deemed to be the amount a willing buyer would pay a willing seller forsuch asset in a current transaction.

In accordance withSFAS 144, in developing estimated future cash flows for impairment testing, weincorporated our own market assumptions including those regarding home prices,infrastructure and home-building costs and financing costs regarding realestate inventories.  Additionally, asappropriate, we identify alternative courses of action to recover the carryingvalue of our long-lived assets and evaluate all likely alternatives under a probability-weightedapproach as described in SFAS 144.

During the firstquarter of 2007, we recorded an impairment charge of $4.0 million related toour real estate inventories for the remaining homes at our Woodhaven project inthe City of Beaumont. To date, we have not recorded impairment charges for ourother projects primarily because most of our lot acquisitions were negotiatedprior to 2005 (thus reflecting less expensive land prices and benefiting fromhome price appreciation during 2005 that exceeded the decline in home pricesduring 2006 and the first quarter of 2007). However, as required by SFAS 144, should market conditions furtherdeteriorate in the future or other events occur that indicate the carryingamount of our real estate inventories may not be recoverable, we willreevaluate our expected cash flows from each project to determine whether anyadditional impairment exists at any point in time.

*IncomeTaxes*

We account forincome taxes on the liability method. Deferred income taxes are determinedbased on the difference between the financial statement and tax bases of assetsand liabilities. The liability method requires an evaluation of the probabilityof being able to realize the future benefits indicated by deferred tax assets,such as tax net operating losses. A valuation allowance related to the deferredtax asset is recorded when it is more likely than not that some portion or allof the deferred tax asset will not be realized. Given the significance of ourhistorical federal tax net operating losses, as discussed in Note 8 to theconsolidated financial statements, the application of our policy in evaluatingthe expected future benefit of net operating losses is critical. In applyingthose policies, estimates and judgments affect the amounts at which certainassets and liabilities are recorded. We apply our accounting policies on aconsistent basis. As circumstances change, they are considered in our estimatesand judgments, and future changes in circumstances could result in changes in amountsat which assets and liabilities are recorded.

We remain subject to the general rules of Section 382 of the InternalRevenue Code, which limit the availability of net operating losses if anownership change occurs. If we were to experience another ownership change, theamount of net operating losses available would generally be limited to anannual amount equal to (i) the value of our equity immediately before theownership change, multiplied by the long-term tax-exempt rate (4.32% as of July2007) plus (ii) recognized built-in-gains, defined as those gains recognizedwithin five years of the ownership change subject to an overall limitation ofthe net unrealized built-in gains existing as of the ownership change date. Webelieve we have net unrealized built-in gains sufficient to allow utilizationof the entire net operating loss, assuming that we are able to recognize thesegains within the five-year time limitation. We estimate that as of July 23,2007, we have experienced a three-year cumulative ownership shift ofapproximately 38%, as computed in accordance with Section 382.

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*HomebuildingRevenues and Cost of Sales*

Our homebuildingoperation generates revenues from the sale of homes to homebuyers. The majorityof these homes are designed to appeal to move-up homebuyers and the homes aregenerally offered for sale in advance of their construction. Sales contractsare usually subject to certain contingencies such as the buyer’s ability toqualify for financing. Revenue from the sale of homes is recognized at closingwhen title passes to the buyer, and the earnings process is complete. As aresult, our revenue recognition process does not involve significant judgmentsor estimates. However, we do rely on certain projections and estimates todetermine the related construction costs and resulting gross margins associatedwith revenues recognized. The cost of sales is recorded based upon totalestimated costs within a subdivision and allocated using the relative salesvalue method. Our construction costs are comprised of direct and allocatedcosts, including estimated costs for future warranties and indemnities. Ourestimates are based on historical results, adjusted for current factors.

*LitigationReserves*

We and certain ofour subsidiaries have been named as defendants in various cases arising in thenormal course of business and regarding assets and businesses disposed of by usor our former affiliates. See Note 9 in our consolidated financial statementsincluded in this Quarterly Report. We have reserved for costs expected to beincurred with respect to these cases based upon information provided by ourlegal counsel. There can be no assurance that total litigation costs actuallyincurred will not exceed the amount of such reserve.

**Recent Accounting Pronouncements**

See discussion regarding recent accountingpronouncements in Note 2 to the consolidated financial statements.

**Results of Operations**

The following tables set forth key operating andfinancial data for our homebuilding operations for the three and six monthsended June 30, 2007 and 2006.
| Backlog as of June 30,    | ** ** |
|---------------------------|------------|
| **Homes in Backlog** | ** ** | **Value** | ** ** | **Average Selling Price** | ** ** |
| ** **                | ** ** | **($ in millions)** | ** ** | **($ in thousands)** | ** ** |
| **2007**                  | ** ** | **2006** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** |
| 17                        |       | 49 |   | (65.3)% |   | $ | 9.7 |   | $ | 39.8 |   | (75.6)% |   | $ | 569 |   | $ | 813 |   | (30.0)% |   |
|                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

* *
| Homes Delivered                                     | ** ** |
|-----------------------------------------------------|------------|
| ** **                                          | ** ** |
| **Three Months Ended June 30,** | ** ** |
| **Homes Delivered**                            | ** ** | **Value** | ** ** | **Average Selling Price** | ** ** |
| ** **                                          | ** ** | **($ in millions)** | ** ** | **($ in thousands)** | ** ** |
| **2007**                                            | ** ** | **2006** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** |
| 9                                                   |       | 28 |   | (67.9)% |   | $ | 4.2 |   | $ | 18.8 |   | (77.7)% |   | $ | 467 |   | $ | 671 |   | (30.5)% |   |
|                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| Six Months Ended June 30, | ** ** |
|-----------------------------------------------|------------|
| **Homes Delivered**                      | ** ** | **Value** | ** ** | **Average Selling Price** | ** ** |
| ** **                                    | ** ** | **($ in millions)** | ** ** | **($ in thousands)** | ** ** |
| **2007**                                      | ** ** | **2006** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** |
| 24                                            |       | 77 |   | (68.8)% |   | $ | 16.4 |   | $ | 46.7 |   | (64.9)% |   | $ | 683 |   | $ | 607 |   | 12.6% |   |
|                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*Three Months Ended June 30, 2007 Compared with theThree Months Ended June 30, 2006*

We reported revenues of $4.2 million and grossoperating profit of $300,000 for the second quarter of 2007, compared with$18.8 million in revenues and gross operating profit of $3.2 million for thesecond quarter of 2006. Revenues in the current period reflect deliveries ofnine homes, including four homes at the Chandler Ranch project in North Corona,three homes at our Alisal project in Lancaster, and one each at our Las Colinasproject in Quartz Hill and our Woodhaven project in Beaumont. The comparableperiod of the prior year reflects deliveries of 28 homes, including 16 homes atthe Alisal project in Lancaster and six homes each at the Chandler Ranchproject and the Rancho Santa Fe project. The 30.5% decrease in the average sellingprice (see table above) primarily reflects the completion of our higher-endRancho Santa Fe project in the first quarter of 2007, as well as sales pricereductions that were necessary to be competitive in today’s challenging housingmarket. We generated $2.9 million less in gross operating profit from homesales during the second quarter of 2007 compared with 2006 as a result ofdelivering 19 fewer homes and reduced margins due to the continuing real estateslowdown which has resulted in lower selling prices. The current quarter’shomebuilding gross margin of 7.1% is lower than the comparable 2006 periodgross margin of 17.0% and fourth quarter 2006 margin of 9.5% primarily due tosales price reductions and the use of incentives in order to move standinginventory and be competitive in today’s market.

The $400,000 increase in income from unconsolidatedjoint ventures during the second quarter of 2007 reflects the sale of anon-project land purchase option by the Oxnard joint venture in April 2007 (seeNote 9 of Notes to Financial Statements).

The $200,000 decrease in other expense (income), netduring the second quarter of 2007 compared with the second quarter of 2006primarily reflects a $100,000 reduction in interest income on short-terminvestments and a $100,000 increase in real estate holding costs.

*Six Months Ended June 30, 2007 Compared with theSix Months Ended June 30, 2006*

We reported revenues of $16.4 million and grossoperating loss of $2.9 million for the six months ended June 30, 2007, comparedwith $46.7 million in revenues and gross operating profit of $7.9 million forthe comparable period of 2006. Revenues in the first half of 2007 reflectdeliveries of 24 homes, including seven homes at our Chandler Ranch project inNorth Corona, six homes at our completed Rancho Santa Fe project, five homes atour Alisal project in Lancaster, three homes at our Las Colinas project inQuartz Hill, two homes at our Alisal project in Ontario and one home at ourWoodhaven project in Beaumont. The comparable period of the prior year reflectsdeliveries of 77 homes, including 44 at our Chandler Ranch project, 26 homes atour Alisal project in Lancaster, six homes at our completed Rancho Santa Feproject and one home at our Jasper Ranch project.

Gross operating loss for the first half of 2007includes an impairment charge of $4.0 million related to the remaining homes atour Beaumont project. This impairment charge reflects our expectations aboutselling prices and gross margins for the project. As required by SFAS 144,should market conditions further deteriorate in the future or other eventsoccur that indicate the carrying amount of our real estate inventories may notbe recoverable, we will reevaluate our expected cash flows from each project todetermine whether any additional impairment exists at any point in time.

We generated $6.8 million less in gross operatingprofit from home sales during the six months ended June 30, 2007 compared withthe comparable period of 2006 as a result of delivering 53 fewer homes andreduced margins due to the continuing real estate slowdown which has resultedin lower selling prices. The homebuilding gross margin for the first six monthsof 2007 of 6.7% is lower than the comparable 2006 period gross margin of 16.9%and fourth quarter 2006 margin of 9.5% primarily due to sales price reductionsand the use of incentives in order to move standing inventory and becompetitive in today’s market.

The $400,000 increase in income from unconsolidatedjoint ventures during the first half of 2007 reflects the sale of a non-projectland purchase option by the Oxnard joint venture in April 2007 (see Note 9 ofNotes to Financial Statements).

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The $600,000 increase in other expense (income), netduring the first six months of 2007 compared with the comparable period of 2006primarily reflects a $300,000 reduction in interest income on short-terminvestments, a $200,000 increase in warranty costs for a completedunconsolidated project, and a $100,000 increase in legal expense related to theGolden State Water litigation described in Note 9 of Notes to FinancialStatements.

*PaymentsUnder Contractual Obligations*

We have entered into certain contractual obligationsto make future payments for items such as loans, project debt, and leaseagreements.  A summary of the paymentsdue under specified contractual obligations, aggregated by category ofcontractual obligation, for specified time periods is presented below as ofJune 30, 2007 (in millions):
|                         | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
|-------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | ** ** | ** ** | **Less**                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **More** | ** ** |
| ** **              | ** ** | ** ** | ** ** | **than 1**                           | ** ** | **1-3** | ** ** | **4-5** | ** ** | **than 5** | ** ** |
| ** **              | ** ** | **Total**  | ** ** | **year**                                  | ** ** | **years** | ** ** | **years** | ** ** | **years** | ** ** |
| Revolving loan  (a)     |       | $          | 47.2       |                                      | $          | 5.6 |   | $ | 41.6 |   | $ | — |   | $ | — |   |
| Term loan (a)           |       | 137.9      |       | 9.3                                       |       | 78.6 |   | 50.0 |   | — |   |
| Other project  debt (a) |       | 54.4       |       | 25.6                                      |       | 28.8 |   | — |   | — |   |
| Operating leases        |       | 1.5        |       | .3                                        |       | .7 |   | .5 |   | — |   |
| Total                   |       | $          | 241.0      |                                      | $          | 40.8 |   | $ | 149.7 |   | $ | 50.5 |   | $ | — |   |

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(a)          Amounts includeestimated interest expense which is calculated based on forecasted debtbalances and the applicable interest rate at June 30, 2007.

Our purchasecontracts which are made in the normal course of our homebuilding business forland acquisition and construction subcontracts are generally cancelable atwill. Other contractual obligations including our tax liabilities (includingunrecognized tax benefits recorded pursuant to FIN 48), accrued benefitliability for a frozen retirement plan and other accrued pensions, homewarranty reserves and contingent indemnity and environmental obligations areestimated based on various factors. Payments are not due as of a given date,but rather are dependent upon the incurrence of professional services, thelives of annuitants and other factors. The estimation process involved in thedetermination of carrying values of these obligations is inherently uncertainsince it requires estimates as to future events and contingencies. We haveprovided additional disclosure in Item 1. “Legal Proceedings” and in Note 9 toour consolidated financial statements in this Quarterly Report.

**Liquidity and Capital Resources**

Year-over-year changes in the principal components of our liquidity andcapital resources are as follows (in millions, except percentages):
|                                                  | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **June 30,**              | ** ** |
| ** **                                       | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Cash and cash  equivalents                       |       | $                              | 5.9        |   | $ | 2.7 |   |
| Short-term  investments                          |       | —                         |       | 15.1 |   |
| Cash used in  operating activities               |       | (28.5                          | )          | (9.3 | ) |
| Cash provided by  investing activities           |       | 1.1                            |       | 13.6 |   |
| Cash provided by (used  in) financing activities |       | 22.7                           |       | (9.3 | ) |
|                                                  |            |                                |            |  |  |  |  |

 

Theprincipal assets in our portfolio are residential land which must be held overan extended period of time in order to be developed to a condition that, inmanagement’s opinion, will ultimately maximize our return. Consequently, werequire significant capital to finance our real estate development andhomebuilding operations. Historically, sources of capital have included loanfacilities secured by specific projects, asset sales and available internalfunds. Our unrestricted cash and cash equivalents as of June 30, 2007aggregated $5.9 million. During the first half of 2007, we primarily utilizedinternally generated cash to fund new construction at our homebuilding projectsother than Brightwater in order to reduce the negative arbitrage betweeninterest costs on project debt compared with interest income earned onshort-term investments.

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OnSeptember 15, 2006 we obtained the $100 million Senior Secured Project Revolver(the “Revolving Loan”) as a construction facility to finance infrastructure andhomebuilding activities at Brightwater as further described in Note 4 to theconsolidated financial statements. This loan is funding the first $100 millionof development and construction costs for the Brightwater project. Availabilityunder the $100 million Revolving Loan is subject to the applicable borrowingbase limitations and includes financial covenants which may limit the amountthat may be borrowed. The initial borrowing base value of the Brightwaterproject was determined by an independent third-party appraisal of the projecton an “as-is” basis, which was $302 million as of July 6, 2006. This appraisalreflects substantial value in excess of the book value of $142 million as ofJune 30, 2006. Outstanding advances bear interest at our option at either (i)the Alternate Base rate (“Prime”) minus 25 basis points or (ii) LIBOR plus 200basis points.

We havesubstantial borrowing capacity available to us. As of June 30, 2007, based onconstruction in place, the immediately available borrowing capacity on ourRevolving Loan and other project debt construction loan facilities isapproximately $2.6 million and $9.0 million, respectively.  The additional facility availability forfuture construction costs is $58.7 million for Brightwater and approximately$35.5 million for other projects. We repaid $6.6 million of loans on the RanchoSanta Fe and Chandler projects in full during the first quarter of 2007. DuringApril and July 2007, we extended the maturity dates for the $29.4 million ofloans on the Ontario and Lancaster projects, respectively, to October 2007.

We are utilizinginternally generated cash and joint venture contributions to fund the Oxnardland development project. We currently expect to make aggregate additionalcapital contributions of approximately $76,000 to the Oxnard joint ventureduring the remaining six months of 2007, bringing our total expected investmentin the venture to $2.5 million (see Note 9 to the consolidated financialstatements). During the first half of 2008, we expect to make additionalaggregate capital contributions of approximately $1.2 million.

We believe thatour cash and cash equivalents, future real estate sales proceeds, and fundsavailable under our current credit agreements will be sufficient to meetanticipated operating and capital investment requirements and projectdevelopment costs for homebuilding projects, the Oxnard land developmentproject, and general and administrative expenses, for at least the next 12months.

We are subject tothe usual obligations associated with entering into contracts for the purchaseof land and improved homesites. The purchase of properties under thesecontracts is generally contingent upon satisfaction of certain requirements bythe sellers, including obtaining applicable property entitlements. We alsoutilize option contracts with third-party land sellers and financial entitiesas a method of acquiring land in staged takedowns and minimizing the use offunds from other corporate financing sources. These option contracts also helpto manage the financial and market risk associated with land holdings. Purchaseand option contracts generally require the payment of a non-refundable cashdeposit of 5% to 15% of the purchase price for the right to acquire lots over aspecified period of time (usually one to two years) at predetermined prices. Wehave the right at our discretion to terminate our obligations under these landpurchase and option agreements by forfeiting the cash deposit with no furtherfinancial responsibility. As of June 30, 2007, we have one consolidated landoption deposit for $25,000 which is non-refundable. In addition, ourunconsolidated Oxnard joint venture has land deposits of $2.0 million.

We may enter intoland development and homebuilding joint ventures from time to time as a meansof expanding our market opportunities, establishing strategic alliances,managing our risk profile and leveraging our capital base. These joint venturesmay obtain secured acquisition, development and construction financing, whichminimize the use of funds from other corporate financing sources.

*June 30,2007 Compared with December 31, 2006*

Cash used in homebuilding operations of $28.5 millionfor the first half of 2007 primarily reflects investments in real estateinventories and construction costs of $43.4 million offset by real estate salesproceeds of $15.7 million from deliveries of 24 homes. The primary sources ofcash during the first six months of 2007 were $20.4 million of borrowings fromour Senior Secured Project Revolver (“Revolver”) and $2.3 million of borrowingsof other project debt in excess of repayments. These items, as well as otheractivity presented in the Statements of Cash Flows, resulted in a $4.7 milliondecrease in cash and cash equivalents.

The $900,000 decrease in restricted cash reflects therelease of collateral for costs related to the construction of projectinfrastructure for two homebuilding projects in the Inland Empire andLancaster.

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The $1.0 million decrease in deferred tax assetsprimarily reflects the $3.3 million adjustment recorded upon the adoption ofFIN 48 discussed in Note 8 of Notes to Consolidated Financial Statements,partially offset by a $2.3 million tax benefit for additional net operatinglosses generated during the first half of 2007.

The $1.0 million decrease in other assets primarilyreflects the receipt of $1.1 million related to cancelled and replaced projectinsurance policies.

**Off Balance Sheet Financing**

In the ordinarycourse of business, we enter into land option contracts in order to procureland for the construction of homes. The use of such option agreements allows usto reduce the risks associated with land ownership and development; reduce ourfinancial commitments, including interest and other carrying costs; andminimize land inventories. Under such land option contracts, we will fund aspecified option deposit or earnest money deposit in consideration for theright to purchase land in the future, usually at a predeterminedprice.  Our liability is generally limited to forfeiture of thenonrefundable deposits, letters of credit and other nonrefundable amountsincurred. As of June 30, 2007, we have one consolidated land option deposit of$25,000 and no third party guarantees.

Wealso acquire land and conduct residential construction activities throughparticipation in joint ventures in which we hold less than a controllinginterest. Through joint ventures, we reduce and share our risk and also reducethe amount invested in land, while increasing our access to potential futurehome sites. The use of joint ventures also, in some instances, enables us toacquire land which we might not otherwise obtain or access on as favorableterms, without the participation of a strategic partner. While we view the useof unconsolidated joint ventures as beneficial to our homebuilding activities,we do not view them as essential to those activities.

Ourinvestment in unconsolidated joint ventures totaled $2.4 million and $1.7million at June 30, 2007 and December 31, 2006, respectively. These jointventures had total assets of $9.1 million and $9.5 million as of June 30, 2007and December 31, 2006, respectively, which included land deposits of $2.0million and $2.5 million, respectively. In certain instances, we may providevarying levels of guarantees on debt of unconsolidated joint ventures. As of June30, 2007, we provide no guarantees on debt of unconsolidated joint ventures.

Underthe requirements of FASB Interpretation No. 46(R), “*Consolidationof Variable Interest Entities*” (“FIN 46(R)”), certain of our landoption contracts may create a variable interest for us, with the land sellerbeing identified as a VIE.  In compliancewith FIN 46(R), we analyze our land option contracts and other contractualarrangements and consider whether we should consolidate the fair value ofcertain VIEs from which we are purchasing land under option contracts. As ofJune 30, 2007, we had no deposits with VIEs.

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ITEM 3 - QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

We utilize variable rate debt financing for acquisition, development andconstruction of homes. The interest rates on our debt approximate the currentrates available for secured real estate financing with similar terms andmaturities, and as a result, their carrying amounts approximate fair value.While changes in interest rates generally do not impact the fair market valueof the debt instrument, they do affect our earnings and cash flows. Holding ourvariable rate debt balance of $148.4 million constant as of June 30,2007, each one point percentageincrease in interest rates would result in an increase in variable rateinterest incurred for the next 12 months of approximately $1.5 million.

We are exposed tomarket risks related to fluctuations in interest rates on our outstandingvariable rate debt. Other than an interest rate swap used to manage ourexposure to changes in interest rates on $62.5 million of our variablerate-based Term Loan, we did not utilize swaps, forward or option contracts oninterest rates, or other types of derivative financial instruments as of orduring the quarter ended June 30, 2007. We do not enter into or holdderivatives for trading or speculative purposes.

 Under the Term Loan agreement, we wererequired to enter into a swap agreement to hedge against risks associated withfluctuating interest rates related to $62.5 million of floating rate debt. OnSeptember 15, 2006 we entered into an interest rate swap transaction toeffectively fix the interest rate on $62.5 million in floating rate debt at8.015% per annum for two years. The swap transaction terminates in September2008. Since we do not use derivative financial instruments for tradingpurposes, the swap did not qualify for hedge accounting under SFAS No. 133. Thefair value of the interest rate swap agreement represents the spread betweenthe interest rate we paid and the interest rate we would receive over theremaining life of the agreement; however, this was not considered material atJune 30, 2007. The change in fair value of the interest rate swap agreementduring the quarter ended June 30, 2007 was not material to us. Thecounterparties to the interest rate swap agreement are financial institutions.

You should beaware that many of the statements contained in this section are forward lookingand should be read in conjunction with our disclosures under the heading “CautionaryStatement About Forward-Looking Statements.”

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ITEM 4 -   EVALUATION OF DISCLOSURE CONTROLS ANDPROCEDURES

*ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures*

Our chiefexecutive officer and chief financial officer, with the assistance ofmanagement, evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended) as of the end of the period covered by thisreport (the “Evaluation Date”). Based on that evaluation, our chief executiveofficer and chief financial officer concluded that, as of the Evaluation Date,our disclosure controls and procedures were effective to ensure thatinformation required to be disclosed in our reports under the Exchange Act, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to management, including our chief executive officer and chieffinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

However, no matterhow well a control system is conceived and operated, it can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. In addition, the design of a control system must reflect the fact thatthere are resource constraints and the benefits of controls must be consideredrelative to costs.  Therefore, nocost-effective control system and no evaluation of controls can provideabsolute assurance that all control issues and instances of misstatements dueto error or fraud, if any, within our company have been detected.

*Changes in Internal Controls*

There have been nochanges in our internal control over financial reporting during the threemonths ended June 30, 2007 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

PARTII - OTHER INFORMATION

ITEM1 -                LEGAL PROCEEDINGS

See Notes 7 and 9 to the consolidated financialstatements above, and “Item 1 - Business - Corporate Indemnification Matters”and “Item 3 - Legal Proceedings” in our Annual Report on Form 10-K for the yearended December 31, 2006.

ITEM1A -             RISK FACTORS THAT MAYAFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Set forth below is a discussion of the materialchanges in our risk factors as previously disclosed in Item 1A ofPart I of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006; however, the risks and uncertainties described in the Form10-K are not the only ones facing us. Other events that we do not currentlyanticipate or that we currently deem immaterial also may affect our results ofoperations and financial condition.

The informationpresented below updates, and should be read in conjunction with, the riskfactors and other information disclosed in our December 31, 2006 Form 10-K.

As previouslydisclosed in a risk factor contained in our December 31, 2006 Form 10-K, inrecent periods we reported declines in the volume of homes sold, which reflectcontinued deteriorating market conditions in the homebuilding industry and suchdeterioration is expected to continue in the future. These trends became morepronounced during the first half of 2007, and we experienced a significantdecline in sales orders in all of the principal areas in which we are currentlyselling homes. We attribute these developments to, among other things, adecline in homebuyer demand due to lower consumer confidence in the consumerreal estate market, recent problems in the subprime mortgage market, decreasesin the affordability of homes in the Inland Empire and Lancaster markets,increased inventory of new and used homes for sale, and pricing pressures resultingfrom the imbalance between supply and demand in the Inland Empire and Lancastermarkets. These developments have had and may continue to have a materialadverse effect on our results of operations. During the quarter endedMarch 31, 2007, we recorded $4.0 million of impairments to real estateinventories at our home project in Beaumont, California due to challengingmarket conditions. If market conditions do not improve in future periods, wemay decide not to pursue development and construction in additional areas, andthe value of existing land holdings may continue to decline, which could leadto further write-offs for land impairments.

***Anearthquake or other natural disaster, terrorist act or nuclear accident couldadversely affect our business.***

Our Brightwaterproject, which recently commenced sales and represents 64% of our real estateassets as of June 30, 2007, is located in a high risk geographical area forearthquakes. In addition, all of our other real estate assets are in Californiaand could be directly or indirectly impacted by the event of an earthquake. Ourreal estate assets are also located in areas that are subject to the risks ofwildfires, floods and other natural disasters; and they are also in proximityto urban and coastal areas which have, in recent years, been high riskgeographical areas for terrorism and threats of terrorism. Finally, our realestate assets are located within 40 miles of the San Onofre nuclear powerfacility. Future earthquakes or other natural disasters, acts of terrorism ornuclear accidents could result in the destruction or loss of our real estateassets or adversely impact the demand for our homes and could, thereafter,materially impact the availability or cost of any insurance we might obtain to protectagainst these events. Any earthquake or other natural disaster, terroristattack, or nuclear accident, whether or not insured, could have a materialadverse effect on our financial performance, the market value of our commonstock and our ability to pay dividends.

***Quarterlyresults may fluctuate and may not be indicative of future quarterlyperformance.***

Our quarterlyoperating results could fluctuate; therefore, you should not rely on pastquarterly results to be indicative of our performance in future quarters.Factors that could cause quarterly operating results to fluctuate include,among others, the risk factors in this Report on Form 10-Q and those set forthin our December 31, 2006 Form 10-K.

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The following riskfactor was provided in our Report on Form 10-Q for the quarter ended March 31,2007 and was added to Item 1A of the December 31, 2006 Form 10-K:

***If any taxing authorities are successful in asserting taxpositions that are contrary to our positions, our income tax provision andother tax reserves may be insufficient.***

In order todetermine our provision for income taxes and for our reserves for federal,state, local and other taxes we must use significant judgment and there may bematters for which the ultimate tax outcome is uncertain. Therefore, noassurance can be given that the final tax authority review will not bematerially different than that which is reflected in our income tax provisionand other tax reserves. Any adverse differences could have a material adverseeffect on our income tax provision or benefits, or other tax reserves, in theperiod in which such determination is made and, consequently, on our net incomefor such period. To provide for potential tax exposures, we maintain reservesfor tax contingencies based on reasonable estimates of our potential exposurewith respect to the tax liabilities that may result from such audits. However,if the reserves are insufficient upon completion of any audit process, therecould be an adverse impact on our financial position and results of operations.

ITEM4 -                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

OurAnnual Meeting of stockholders was held on May 15, 2007. A quorum of commonstock was present in person or by proxy. The following proposals were approvedby the requisite vote of our stockholders entitled to vote, as follows:

**Proposal No. 1**:  *The Director Proposal*. The director proposal recommended election of four directors to aone-year term. Set forth below is a table of how the votes were cast for eachnominee, which constituted the affirmative votes for all nominees, by theholders of at least 81.9% of the outstanding common stock represented in personor by proxy at the Annual Meeting.
| Name                    | ** ** | **Votes Cast “For Nominee”** | ** ** | **Votes “Withheld”** | ** ** |
|-------------------------|------------|-------------------------------------------------------|------------|-------------------------------------|------------|
|                    |       |                                                  |       |                                |       |
| Geoffrey W.  Arens      |       | 9,429,152                                             |       | 789,291                             |       |
| Phillip R.  Burnaman II |       | 9,429,215                                             |       | 789,228                             |       |
| Raymond J.  Pacini      |       | 9,429,365                                             |       | 789,078                             |       |
| Thomas W. Sabin, Jr.    |       | 9,358,108                                             |       | 860,335                             |       |

**Proposal No. 2**:     *The Auditor Proposal*.   The holders of common stock cast 10,072,984votes “for” and 65,742 votes “against” the proposal to ratify the appointmentof Deloitte & Touche, LLP as our independent registered public accountingfirm for the fiscal year ending December 31, 2007. Such votes constituted theaffirmative vote “for” the Auditor Proposal by the holders of approximately98.6% of the outstanding common stock represented in person or by proxy at theAnnual Meeting. There were 79,717 abstentions and no broker non-votes by theholders of shares of common stock with respect to the Auditor Proposal.

ITEM6 -                EXHIBITS
|   | 31.1 | Section 302 Certificate of Raymond J. Pacini, Chief  Executive Officer of California Coastal Communities, Inc.                                                  |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 31.2 | Section 302 Certificate of Sandra G. Sciutto, Chief  Financial Officer of California Coastal Communities, Inc.                                                  |
|   | 32.1 | Section 906 Certificate of Raymond J. Pacini, Chief  Executive Officer and Sandra G. Sciutto, Chief Financial Officer of  California Coastal Communities, Inc.* |

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*              Thesecertifications are being furnished solely to accompany this report pursuant to18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 ofthe Securities Exchange Act of 1934, as amended, and are not to be incorporatedby reference into any filing of the Company, whether made before or after thedate hereof, regardless of any general incorporation language in such filing.

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**SIGNATURE**

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

 
| Date: August 6, 2007 | CALIFORNIA COASTAL COMMUNITIES, INC. |
|----------------------|--------------------------------------|
|                 |                                 |   |
|                 |                                 |   |
|                 | By:                                  | */s/ Sandra G. Sciutto* | * * |
|                 |                                 | SANDRA G.  SCIUTTO |
|                 |                                 | Senior Vice  President and |
|                 |                                 | Chief Financial Officer |

 

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