Disturbance of coastal sage scrub in southern California has led to extensive displacement of native shrubs by exotic annual grasses. The initial conversion from shrubland to exotic grassland is typically associated with disturbance caused by intense grazing, high fire frequency, or mechanical vegetation removal. While native shrubs have been shown to recolonize annual grasslands under some conditions, other annual grasslands are persistent and show no evidence of shrub recolonization. This study examined the mechanisms by which annual grasses may exclude native shrubs and persist after release from disturbance. Grass density was manipulated in experimental plots to achieve a series of prescribed densities. Artemisia californica, a dominant native shrub, was seeded or planted into the plots and responses to the grass density treatments were measured over two growing seasons. A. californica germination, first season growth, and survival were all negatively related to the density of neighboring annual grasses. The most probable mechanism underlying the reduction of first season growth and survival was depletion of soil water by the grasses. The effects of the grasses on A. californica were no longer significant in the second season. The results of this study indicate that Mediterranean annual grasses reduce recruitment and can persist by inhibiting post-disturbance establishment of A. californica from seed. Although succession alone may not return disturbed annual grasslands to their former shrubland composition, the results suggest that restoration can be achieved by using container plantings or grass removal followed by seeding.