ITEM 7.

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

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

See Part I, Item 1, “Business” for cautionary statement regarding forward-looking information.

We are currently workinga diversified real estate development and agribusiness company committed to take advantage of existing resources and market conditions as well as to anticipate future market trends and create demand. Part of this effort includes evaluatingresponsibly using our land and water resources to meet the housing, employment, and lifestyle needs of Californians and to create value for our shareholders. In support of these objectives we have been investing in land planning and entitlement activities for new industrial and residential land developments and in infrastructure improvements within our active industrial development. Our prime asset is approximately 270,000 acres of contiguous, largely undeveloped land that, at its most southerly border, is 60 miles north of Los Angeles and, at its most northerly border, is 15 miles east of Bakersfield.

Our business model is designed to create value through the entitlement and development of land for commercial/industrial and resort/residential uses while at the same time protecting significant portions of our land for conservation purposes. We operate our business near to one of the country’s largest population centers, which is expected to continue to grow well into the future.

We currently operate in three business segments: commercial/industrial real estate development and services; resort/residential real estate development; and farming.

Commercial/industrial real estate development generates revenues from lease activities, land sales, build-to-suit building sales and leases, oil and mineral royalties and grazing leases. Resort/residential land development does not currently produce revenues but is actively involved in the land entitlement process. Farming produces revenues from the sale of grapes, almonds, pistachios, and walnuts.

For 2004, we have net income of $389,000 compared to a loss of $2,927,000 for 2003. Revenues from continuing operations for 2004 were $20,912,000, an increase of $5,664,000 when compared to 2003. Expenses from continuing operations for 2004 were $23,723,000, which is an increase of $3,263,000 when compared to $20,461,000 during 2003. Increased farming revenues of $4,827,000 and improved commercial/industrial revenue of $837,000 drove the improvement in revenue. The increase in farming revenue was due primarily to higher prices and greater production of almonds, grapes, and pistachios. Commercial/industrial revenue growth was due to improvements in oil and mineral royalties and leasing revenues. The largest component of the increase in expense was $2,144,000 of costs related to the 2004 stock incentive plan. This plan was approved in 2004 by the shareholders and provides for the granting of restricted stock and restricted stock units based uponon the evaluation. Inachievement of performance and milestone objectives. Additional increases in expense were caused by higher staffing costs and higher professional service fees. Staffing costs increased due to additional staff and to higher employee benefit costs. Professional service fees increased due to real estate entitlement activities and costs related to Sarbanes-Oxley activities, new internal audit costs, and higher external audit costs.

The results of operations from continuing operations, including interest and other income, after taxes for 2004 was a loss of $962,000, compared to a loss of $3,169,000 during 2003. Offsetting the future,loss from continuing operations in 2004 were profits from discontinued operations after taxes

of $1,351,000. The discontinued operations’ profits were generated from the gain on the sale of our investment in Pacific Almond, an almond processing plant, and to the gain on the sale of three buildings in Phoenix, Arizona.

During 2004 we completed a private placement of 1,682,981 shares of our common stock resulting in gross proceeds of $55,000,000 and net proceeds of $51,656,000. Additional information regarding the private placement is included within the Cash Flow and Liquidity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

During 2003, we had a loss of $2,927,000 compared to income of $243,000 in 2002. Revenue from continuing operations for 2003 was $15,248,000, a drop of $2,394,000 when compared to 2002. During 2003, expenses from continuing operations increased $1,622,000 when compared to 2002 expenses from continuing operations. The decline in revenue when compared to 2002 was due to farming revenue falling $1,454,000 and commercial/industrial revenue declining $940,000. Farming revenue declined due to a significant drop in pistachio production. Commercial/industrial revenue declined due primarily to revenue received in 2002 related to the sale of an easement for a natural gas pipeline. This year-to-year decline in commercial/industrial revenue was partially offset by improved oil and mineral royalties and to the growth in leasing revenue during 2003. The increase in expense during 2003 was primarily attributable to higher professional service fees, new public relations costs, higher cultural costs, and increased staffing costs. Discontinued operations for 2003 provided a net profit after tax of $242,000 compared to $100,000 in 2002. The improvement in 2003 discontinued operations was due primarily to the inclusion of losses from the final liquidation of our cattle operations in our 2002 discontinued operations total.

During 2005, we will continue to assessinvest funds toward the feasibilityachievement of entering into complementary linesentitlements for our land and for infrastructure development within our active industrial development. The process of businesssecuring entitlements for our land is a long process and refining or reconfiguring current core businesses tocould take advantage of opportunities presented and changing market conditions.

As reflected in the accompanying consolidated financial statements, we have a net loss of $2,927,000 in 2003,several years. Over this time our net income of $243,000 in 2002,will fluctuate year-to-year based upon commodity prices and net income of $294,000 in 2001.

When compared to 2002, the loss in 2003 is due to a decline in real estate operating profits, a loss from operations inproduction within our farming segment and a reduction in interest income.upon the timing of sales of land and the leasing of land within our industrial development.

Net incomeThe Management’s Discussion and Analysis of Financial Condition and Results of Operations provides the reader of our financial statements with a narrative discussion of our results of operations. It contains the results of operations for 2002 declined when comparedeach business segment of the business and is followed by a discussion of our financial position. It is useful to 2001 due to lower real estate operating profits, reduced interest income, higher corporate expenses, and losses from discontinued operations. These unfavorable variances were partially offset by improved profits from farming and equityread the business segment information in earnings of unconsolidated joint ventures.conjunction with Note 15, “Business Segments” on pages 74 through 75.

Critical Accounting Policies

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles (GAAP) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and revenues and expenses, and related disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimates that are likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have material impact on our financial condition or results of operations. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, impairment of long-lived assets, capitalization of costs, profit recognition related to land sales, and defined benefit

retirement plans. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the foregoing disclosure. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements. See also Note 1 of the Notes to the Consolidated Financial Statements, which discusses accounting policies that we have selected from acceptable alternatives.

We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of the consolidated financial statements.statements:

Revenue Recognition – The Company’s revenue is primarily derived from rental revenue from our rental portfolio, royalty revenue from mineral leases, sales of farm crops, and land sales. Revenue from leases with rent concessions or fixed escalations is recognized on a straight-line basis over the initial term of the related lease.lease unless there is a considerable risk as to collectability. The financial terms of leases are contractually defined. Royalty revenues are contractually defined and are generally based upon production. Rental revenue is not accrued when a tenant vacates the premises and ceases to make rent payments or files for bankruptcy. Revenues related to our agreements with Calpine are recognized when payable under the terms of the

lease due to construction and the uncertainty related to the timing of completion of the power plant and the beginning of plant operations.

In recognizing revenue from land sales, the Company follows the provisions in Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS No. 66, “Accounting for Sales of Real Estate,” to record these sales. SFAS No. 66 provides specific sales recognition criteria to determine when land sales revenue can be recorded. For example, SFAS No. 66 requires a land sale must be consummated with a sufficient down payment of at least 20% to 25% of the sales price depending upon the type and timeframe for development of the property sold, and that any receivable from the sale cannot be subject to future subordination. In addition, the seller cannot retain any material continuing involvement in the property sold.

At the time farm crops are harvested, contracted, and delivered to buyers and revenues can be estimated, revenues and any related inventory costs are recognized, which traditionally occurs during the third and fourth quarters of each year. Orchard (almonds, pistachios, and walnuts) revenues are based upon the contract settlement price or estimated selling price, whereas vineyard revenues are recognized at the contracted selling price. Estimated prices for orchard crops are based upon the quoted estimate of what the final market price will be by marketers and handlers of the orchard crops. This method of recognizing revenues on the sale of orchard crops is a standard practice within the agribusiness community.

For the 20032004 orchard crops, we estimated almond revenues to be $2,497,000,$5,127,000, or $1.68$2.53 per pound on average, pistachio revenue to be $589,000,$2,731,000, or $1.25$1.36 per pound, and walnut revenue to be $509,000,$387,000, or $.42$.50 per pound. These estimates not only impact the recorded revenues within our farming segment but also our recorded accounts receivable at December 31, 2003.2004. Over the last three years, prices received on almonds have ranged from $1.00 to $1.80$3.00 per pound. Pistachio

prices over the last three years have ranged from $1.05 to $1.28$1.40 per pound, and walnut prices have ranged from $.42$.45 to $.60 per pound. If we were to assume that our above estimates for 20032004 orchard crop revenues were changed to the upper end or lower end of the range we developed in the course of formulating our estimate, orchard crop revenues would have been reduced or increased by approximately $172,000,$240,000, or 4%3% of the total revenue estimate. Our final estimates were based on the midpoint of a range in which the upper and lower ends of the range were $.05 from the midpoint. As an example, the range for almonds in 20032004 was $1.63$2.48 to $1.73$2.58 per pound. If we were to change our estimate of 2004 orchard crop revenues to the low end of the estimate range, there would be no material impact on our liquidity or capital resources.

Actual final orchard crop selling prices are not determined for several months following the close of our fiscal year due to supply and demand fluctuations within the orchard crop markets. Adjustments for differences between original estimates and actual revenues received are recorded during the period in which such amounts become known. The net effect of these adjustments decreased farming revenue $34,000 in 2004, and increased farming revenue by $543,000 in 2003 and $25,000 in 2002 and decreased farming revenue $100,000 in 2001.2002. The large adjustment in 2003 related to 2002 crops was due to a continuing increase in almond prices prior to our final scheduled payments being received.

If we were to change our estimate of 2003 orchard crop revenues to the low end of the estimate range, there would be no material impact on our liquidity or capital resources.

Capitalization of Cost- The Company capitalizes direct construction and development costs, including predevelopment costs, interest, property taxes, insurance, and indirect project costs that are clearly associated with the acquisition, development, or construction of a project. Costs currently capitalized that in the future would be related to any abandoned development opportunities will be written off if we determine such costs do not provide any future benefits. Should development activity decrease, a portion of interest, property taxes, and insurance costs would no longer be eligible for capitalization, and would be expensed as incurred.

Allocation of Costs Related to Land Sales and Leases – When we sell or lease land within one of our real estate developments and we have not completed all infrastructure development related to the total project, we follow SFAS No. 66 and SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” to determine the appropriate costs of sales for the sold land and the timing of recognition of the sale. In the calculation of cost of sales or allocations to leased land we use estimates and forecasts to determine total costs at completion of the development project. These estimates of final development costs can change as conditions in the market change and costs of construction change.

In preparing these estimates, we use internal budgets, forecasts, and engineering reports to help us estimate future costs related to infrastructure that has not been completed. These estimates become more accurate as the development proceeds forward, due to historical cost numbers and to the continued refinement of the development plan. These estimates are updated periodically throughout the year so that, at the ultimate completion of development, all costs have been allocated. During 2004 and 2003, $.96 per square foot of cost was allocated to sold and leased land as a cost of development. Any increases to this estimate in future years will negatively impact net profits and liquidity due to an increased need for funds to complete development. If, however, this estimate decreases, net profits as well as liquidity will improve.

We believe that the estimates used related to cost of sales and allocations to leased land is a critical accounting estimate and will bebecome even more significant as we growcontinue to move forward as a real estate development company because thecompany. The estimates used are very susceptible to change from period to period, due to the fact that they require management to make assumptions about costs of

construction, absorption of product, and timing of project completion and changes to these estimates could have a material impact on the recognition of profits from the sale of land within our developments.

Impairment of Long-Lived Assets –We evaluate our property and equipment and development projects for impairment whenever indicatorswhen events or changes in circumstances indicate that the carrying value of assets contained in our financial statements may not be recoverable. The impairment exist. Accounting standards require that ifcalculation compares the sum of the future cash flows expected to result from a company’s asset, undiscounted and without interest charges, is less than the reportedcarrying value of the asset an asset impairment must be recognized. The amount ofto the impairment is determined by subtractingasset’s estimated future cash flows (undiscounted and without interest charges). If the fairestimated future cash flows are less than the carrying value of the asset, fromwe calculate an impairment loss. The impairment loss calculation compares the reportedcarrying value of the asset to the asset’s estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges). We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset will be its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited.

We currently operate in twothree segments, commercial/industrial real estate development, resort/residential real estate development, and farming. At this time, there are no assets within either of our real estate segments or our farming segmentssegment that we believe are in danger of being impaired due to market conditions.

We believe that the accounting estimate related to asset impairment is a critical accounting estimate because it is very susceptible to change from period to period; it requires management to make

assumptions about future prices, production, and costs, and the potential impact of a loss from impairment could be material to our earnings. Management’s assumptions regarding future cash flows from real estate developments and farming operations have fluctuated in the past due to changes in prices, absorption, production and costs and are expected to continue to do so in the future as market conditions change.

In estimating future prices, absorption, production, and costs, we use our internal forecasts and business plans. We develop our forecasts based on recent sales data, historical absorption and production data, as well as discussions with commercial real estate brokers and potential purchasers of our farming products.

If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to additional impairment losses that could be material to our results of operations.

Defined Benefit Retirement Plans – The plan obligations and related assets of our defined benefit retirement plan are presented in Note 1214 of the Notes to Consolidated Financial Statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. PlanPension benefit obligations and the annual pension expenserelated effects on operations are determined by independent actuaries and through the use of a number of assumptions. Keycalculated using actuarial models. Two critical assumptions in measuring the plan obligations include the– discount rate the rate of salary increases and the estimated futureexpected return on assets – are important elements of plan assets.expense and asset/liability measurement. We evaluate these critical assumptions at least annually. Other assumptions involving demographic factors such as retirement age, mortality and turnover are evaluated periodically and are updated to reflect our experience. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. The discount rate enables us to state expected future cash flows at a present value on the measurement date. In determining the discount rate, the Company utilizes the

yield on high-quality, fixed-income investments currently available with maturities corresponding to the anticipated timing of the benefit payments. Salary increase assumptions are based upon historical experience and anticipated future management actions. Asset returns are based uponTo determine the anticipated averageexpected long-term rate of earningsreturn on pension plan assets, we consider the current and expected asset allocations, as well as historical and expected returns on the invested fundsvarious categories of the plans.plan assets. At December 31, 2003,2004, the weighted-average actuarial assumption of the Company’s domestic plans consisted of a discount rate of 5%, a long-term rate of return on plan assets of 7.5%, and assumed salary increases of 4%.

The Company’s management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Company’s Board of Directors and the Audit Committee has reviewed our disclosure relating to it in this Management Discussion and Analysis.

New Accounting Pronouncements

The accounting policies adopted during 20032004 were related to new accounting pronouncements and the adoption of these policies did not have a material impact on the consolidated financial statements of the Company.

FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” was issued in November 2002. The initial recognition and measurement requirements of the interpretation are effective on a prospective basis to guarantees issued or modified after December 31, 2002. Under the requirements a guarantee would have to be recorded as a liability equal to the expected present value of the estimated probability-weighted range of contingent payments under the guarantee arrangement. At this time, this interpretation has no significant impact on our consolidated financial position since we do not have any guarantees issued or modified after December 31, 2002.

FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities,” was issued in January 2003. This interpretation addresses consolidation by business enterprises of joint ventures and special purpose entities (described as variable interest entities in this interpretation) that have certain

characteristics. We havedid not enteredenter into any arrangements with the characteristics of a variable interest entity during 2003.2003 or 2004. We are continuingcompleted our assessmentsassessment of existing joint ventures and concluded that our existing joint ventures are not variable interest entities and do not meet the consolidation requirements under FASB Interpretation No. 46.

On October 13, 2004, FASB concluded that Statement 123R, “Share-Based Payment,” which would require all companies to measure compensation cost for all share-based payments at fair value, would be effective for public companies for interim or annual periods beginning after June 15, 2005. We therefore would be required to apply Statement 123R beginning July 1, 2005. We currently follow Accounting Principals Board Opinion No. 25. “Accounting for Stock Issued to Employees” and, because the exercise price of stock options granted equals the market price of the underlying stock on the date of grant, no compensation expense has been recognized. The potential impact to the Company of FIN 46 on those joint ventures and our consolidated financial position. FIN 46 will be implemented for quarters ending after March 15, 2004.applying Statement 123R is shown in Note 8 of the Notes to the Consolidated Financial Statements.

In April 2003,November 2004, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.151, “Inventory Costs.” SFAS No. 149151 amends Accounting Research Bulletin 43 to clarify that abnormal amounts of idle facility expense, freight, handling costs, and clarifieswasted materials should be recognized as current period charges. The provisions of this statement will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. At this time, we believe the adoption of this statement will have no material impact on our results of operations or our financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities undercondition during 2005.

In December 2004, the FASB issued SFAS No. 133,152, “Accounting for Derivative InstrumentsReal Estate Time-Sharing Transactions.” SFAS No. 152 amends SFAS Nos. 66 and Hedging Activities.” The67 with regards to the recognition of revenues and costs associated with real estate time-sharing activities. This statement is generally effective for contracts entered into or modifiedfiscal years beginning after June 30, 2003 and for hedging relationships designed after June 30, 2003.15, 2005. The adoption of this statement did notwill have a material effect on the Company’sno impact to our results of operations or financial condition forbecause we do not at the year endingpresent time participate in real estate time-sharing activities.

During December 31, 2003.

In May 2003,2004, the FASB issued SFAS No. 150, “Accounting153, “Exchanges of Nonmonetary Assets.” This statement addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for Certain Financial Instrumentsnonmonetary exchanges of similar productive assets and replaces it with Characteristicsan exception for exchanges that do not have commercial substance. This statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of both Liabilities and Equity.” SFAS No. 150 established standards for how an issuer classifies and measures certain financial instruments with characteristicsthe entity are expected to change significantly as a result of both liabilities and equity. Thethe exchange. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim periodexchanges occurring in fiscal periods beginning after June 15, 2003.2005. The adoption of this statement did notwill have a material effectno impact on the Company’sour results of operations orand financial condition for the year ending December 31, 2003.due to historically having no nonmonetary asset exchanges.

Results of Operations by Segment

We evaluate the performance of our operating segments separately to monitor the different factors affecting financial results. Each segment is subject to review and evaluation as we monitor current market conditions, market opportunities, and available resources. The performance of each segment is discussed below.

Real Estate. Real estateEstate – Commercial/Industrial

Commercial/industrial segment profits of $806,000$2,027,000 in 2004 were $290,000, or 13% less than 2003 segment profits. The decline in segment profit is due to an increase in expenses during 2004 that more than offset the growth in revenue during the year. Overall for 2004, revenue grew by $837,000 and expenses increased by $1,127,000. The improvement in revenue during 2004 is attributable to increases in oil and mineral royalties of $900,000 and an overall improvement in leasing revenue of $400,000. These improvements were partially offset by gains from the sale of land during 2003. Oil and mineral royalty revenue grew due to higher oil prices, higher oil production from oil leases, and to increased cement and rock production from tenants. Lease revenue improved during 2004 due primarily to additional revenue from the power plant lease. Power plant lease revenue increased due to the ending of a grace period during 2004 that was related to the timing of construction of the plant. Expenses are higher in 2004 due primarily to increases in staffing costs. These increases in expense are tied to our increase in activities related to industrial development and the entitlement of land as well as to the costs attributable to a new stock incentive plan. During 2004, staffing costs increased $524,000 due to additional staff related to property management and maintenance and to $390,000 of cost related to the 2004 stock incentive plan. Our 2004 stock incentive plan provides for the granting of restricted stock and restricted stock units based on the achievement of performance and milestone objectives. Costs related to this plan will continue forward for the next several years. Please refer to Note 9 of the Notes to the Consolidated Financial Statements for more information.

Future activities within the commercial/industrial segment will be focused on the marketing and development of commercial/industrial product and the obtaining of final entitlements for the TIC-East development. During 2004 and 2003 the market for our industrial product was slowed first by a downturn in activity due to market conditions in 2003 were $1,866,000,and then by a reluctance of firms to commit to expansion as the economy was beginning to improve in 2004. As a relatively new competitor within the commercial/industrial market, our marketing efforts have been focused on educating potential users to the logistical benefits of our site and to the success that current tenants and owners within our development have had. We believe that as California’s population continues to grow and the economy continues its expansion we will begin to see an increase in

industrial activity at Tejon Industrial Complex. Our development fits very well within the logistics model that companies are beginning to use that favors larger single site buildings rather than a number of decentralized smaller distribution centers. Buildings of 1.0 million square feet or 70%, less than 2002larger are difficult to build in Los Angeles due to the number of acres necessary for a building of that size. We believe that our ability to provide land parcels to support buildings of that size will provide us with a potential marketing advantage. During February 2005, we signed a letter of intent with Rockefeller Group International to create a Foreign Trade Zone within our development and to enter into a joint venture to develop buildings for sale or lease to end users.

The commercial/industrial segment profits.will continue to experience increases in costs, net of amounts capitalized, primarily related to professional service fees, marketing costs, commissions, planning costs, and staffing costs as we continue to increase real estate activities and pursue development opportunities.

The actual timing and completion of entitlement- and development-related activities is difficult to predict due to the uncertainties of the approval process and market factors. These types of real estate development activities and costs could continue over several years as we develop our land holdings. We will also continue to evaluate land resources to determine the highest and best uses for our land holdings. Future sales of land are dependent on market circumstances and specific opportunities. Our goal in the future is to increase land value and create future revenue growth through planning and development of commercial and industrial properties.

Commercial/industrial segment profits declined $1,232,000 in 2003 to $2,317,000. The decline in segment profits during 2003 iswas due to a decline in revenues during 2003 and an increase in segment expenses.expenses during 2003. The decrease in revenues during 2003 iswas attributable to the receipt in 2002 of $1,375,000 related to the sale of an easement related to a natural gas pipeline, lower gains from the sale of real estate in 2003 of $369,000 due to fewer acres sold, and to a $600,000 reduction in rent from the power plant lease during 2003. In any given year, we can be approached byit is possible that a utility, oil company, or telecommunications company may approach us for access to our land to lay cable or pipe. When this happens, we create revenues through the sale of an easement, as we did in 2002. These opportunities do not happen each year and it is impossible to accurately predict when the next easement sale opportunity will arise. The decline in revenue from the power plant lease during 2003 was due to the timing of the plant becoming operational. The power plant lease allowsallowed for a twelve-month grace period that began in July 2003 ($100,000 per month) in the event construction iswas not completed and the plant iswas not operational. Whether or not the plant is operational, contractual payments are scheduled to resume in July 2004. At this time it is anticipated that the plant will become operational during the summer in 2004. Expenses are higher in 2003 due to the continuing increase in activities related to our land development and entitlement activities. Consulting costs and public relations expenses related to development activities increased $356,000 during 2003. Insurance costs increased $145,000 in 2003 due to the continuing increase in costs related to liability and property insurance and also to higher insurable values within the TIC development. Property taxes increased $140,000 due primarily to higher assessed values and to special taxes related to a community facilities district. Expenses also increased $170,000 during 2003 due to higher permit fees, insurance costs, associated with farming fallow groundproperty taxes, and land maintenance costs within the TIC-East development as we continue to work on securing entitlements for development of that project. During 2003 we also capitalized $170,000 lessTIC – East development. These increases in costs related to salaries and indirect costs due to time

being shifted to real estate activities not directly related to the current active projects. The above unfavorable variancesexpense were partially offset by reduced fixed water costs during 2003. Land maintenance costs increased due to costs of keeping the land clean of debris and tumbleweeds in preparation of development of the land. Water costs declined due to credits received from a local water district. Also, helping to offset the above unfavorable revenue variance discussed above was the continuing growth of lease revenues, increased oil and mineral revenues and higher service and amenity revenues. Lease revenue improved $600,000$271,000 during 2003 due to new leases in 2003 and to a full year’s lease revenue related to 2002 new leases. Oil and mineral revenues grew $301,000$292,000 in 2003 due to a continuedan increase in oil and cement plant production. Service and amenity revenues increased $467,000$341,000 due to the growth of hunting lease revenues and property management revenues.

See Part I, Item 1 - “Business – Real Estate Operations” for a further discussion of real estate development activities.

Real Estate – Resort/Residential

Our resort/residential segment activities include design planning and entitlement activities related to our potential residential developments, the Centennial development and TMV. The resort/residential segment had operating losses of $1,987,000 in 2004, an improvement of $178,000 from the prior year. The decrease in expense was due to lower staffing costs of $360,000 because of a reduction in staff resulting from a realignment of the division and to lower marketing and public relations costs due to the timing of beginning a new public relations program during the last half of 2004. These favorable variances were partially offset by an increase in professional service fees of $232,000. The increase in professional service fees is connected to our development activities and to legal costs related to habitat conservation plans we are developing.

Near term activities within this segment will be focused on obtaining entitlements for the Centennial project which is located in Los Angeles County, and the filing for entitlements in Kern County for TMV. The resort/residential segment will experience an increase in costs in the future related to professional service fees, public relations costs, and staffing costs as we continue the entitlement process for the above developments. The timing and completion of entitlement related activities are difficult to predict due to the uncertainties of the approval process and the likelihood of litigation upon approval of our entitlements in the future. Our goal through this process is to increase the value of our land and create future revenue opportunities through resort and residential development.

Segment operating losses during 2003 were $2,165,000, an increase in loss of $781,000 when compared to 2002 operating losses. The increase in loss was due primarily to increases in professional service fees, public relations costs, reduced capitalization of salaries and indirect costs, and an increase in operating costs such as utilities, insurance, and property taxes. Professional service fees increased $172,000 due to expanded entitlement activities. Public relations costs increased $316,000 due to the start of a new campaign to inform the public of our long-term vision for the Company and of our conservation efforts. We capitalized $170,000 less in costs related to salaries and indirect costs due to time being shifted to real estate functions not directly related to the current active projects.

See Part I, Item 1 – “Business – Real Estate Operations” for a further discussion of real estate development activities.

Farming

Farming segment profits of $3,772,000 in 2004 increased $5,105,000 when compared to a loss of $1,333,000 in 2003. The improvement in 2004 segment profits is due to increases in pistachio, almond and grape revenue as well as a reduction in cultural costs and fixed water costs. Cultural costs declined $372,000 primarily due to the timing of recognition of costs related to 2004 harvested almonds that were contracted for sale but are not scheduled for delivery until 2005. Fixed water costs fell $219,000 due to credits received during 2004 related to 2003 costs.

Grape revenues increased $761,000 due primarily to increases in the prices received for our grapes. Prices increased 81% in 2004 over the average price received in 2003. The increase in price is attributable to the statewide production of grapes coming into line with the demand for producing

wine. Over the last few years grape producers, because of low prices, have been eliminating acreage from production to help minimize the over supply of grapes. The supply and demand pattern began to change in 2004 resulting in improved prices to grape producers. We expect the improvement in prices to carry over into 2005.

Almond revenue increased $1,565,000 during 2004 when compared to 2003 due to significantly higher prices and to improved production. Prices increased 51% on average compared to 2003 to a high of $3.00 per pound. Production during 2004 increased 272,000 pounds when compared to 2003. The increase in price is related to the continuing increase in demand worldwide for almonds and the low value of the dollar, which has helped to increase exports. This growth in demand kept pace with the increasing production of almonds within California. On average, we continue to expect production to increase for almonds within California as new trees are planted and young trees begin to produce more product. This increase in production can impact pricing if demand for the product does not keep pace. Thus far in 2005, the price for almonds continues to remain at historically high levels. We do not expect mid $2.00 per pound prices for almonds over an extended period of time but do expect prices to remain high for most of 2005 due to current demand levels.

Pistachio revenue increased significantly to $2,731,000 during 2004 from $598,000 in 2003. Pistachios are an alternate-bearing crop with one year having high production followed by a lower production year. 2004 was a high production year with the volume of production increasing 1,530,000 pounds over 2003. Production improved in 2004 due to 2004 being the high production year of the alternate-bearing production cycle for pistachios. Prices for pistachios also increased approximately $.12 per pound over 2003. The increase in price is attributable to improving demand for pistachios and to very low industry inventory levels from the prior year due to very low production during 2003 for the industry. We expect our 2005 revenues from pistachios to decline when compared to 2004 due to low production because of the alternate-bearing production cycle of pistachios.

All of our crops are sensitive to the size of each year’s world crop. Large crops in California and abroad can depress prices. With current grape production more in line with demand, the pressure on prices has been alleviated at the present time and grape prices should stabilize at increased levels. Our long-term projection is that crop production, especially of almonds and pistachios, will increase on a statewide basis over time because of new plantings, which could negatively impact future prices if the growth in demand does not continue to keep pace with production. A positive factor for the almond industry is that demand for product has remained very strong both in the United States and in export markets and at this time this trend is expected to continue. However, a sudden increase in the value of the dollar could negatively impact exports and hurt the current pricing for almonds.

During 2003, the farming segment sustained a loss of $1,333,000, a decrease of $1,796,000 when compared to 2002 segment profits. The decline during 2003 when compared to 2002 was due to a decrease in pistachio revenues of $2,150,000 and reduced rental revenues of $170,000. Also contributing to the decline in segment profits was an increase in cultural costs of $397,000 and higher insurance costs of $174,000. These unfavorable variances were partially offset by an increase in almond revenues of $789,000, an improvement in grape revenue of $174,000, and lower staffing costs of $48,000.

Pistachio revenue declined due to a significant drop in production during 2003. Production fell in 2003 from the record high production of 2002 due to the alternate-bearing nature of the crop and poor weather during the early part of the crop’s growing season. Offsetting some of the loss in production in 2003 were higher prices for our pistachios. The price we received in 2003 was $1.25 per pound, compared to $1.15 per pound in 2002. The increase in price was driven by lower statewide production within California.

Almond revenues increased during 2003 due to a large increase in prices for our almonds, and to the receipt of $534,000 because of higher final prices related to the 2002 crop. The average price we received for our almonds in 2003 was $1.68 per pound, as compared to a $1.03 per pound in the prior year. Our production for 2003, declined along with statewide production when compared to the prior year primarily due to poor weather during the bloom cycle for the trees. This decline in production in 2003 along with the growing demand for almonds, led to the increase in 2003 prices. The improvement in grape revenues during 2003 is primarily related to an improvement in the prices we received for our crop.

For a further discussion of the farming operations, refer to Part I, Item I, “Business - Farming Operations.”

Interest

Interest income of $1,026,000 increased $660,000 due to a significant increase in funds invested throughout 2004. The additional funds were the result of a private placement of common stock completed in May of 2004. These new funds were invested in various types of marketable securities, the maturity dates of which were structured to match future estimated needs within our real estate segments. Interest and investment income of $366,000 fell $429,000 during 2003, due primarily to lower interest rates on funds invested and to fewer funds being invested. For liquidity management purposes, a large portion of the funds invested were invested into securities with very short maturity dates and therefore the interest earned was much less than the prior year.

Interest expense was $76,000 compared to interest expense of $113,000 in 2003. These interest expense amounts are included in discontinued operations. Interest incurred and paid during 2004 was $646,000 compared to $1,013,000 in 2003 and $1,381,000 in 2002, of which $570,000, $900,000, and $1,247,000 were capitalized, respectively. During 2004, we paid $881,000 in fees as the result of the defeasance of debt associated with the three buildings sold during 2004. This expense is shown in discontinued operations.

Interest expense for 2003 was $113,000, compared to interest expense of $134,000 in 2002, all of which is included in discontinued operations. Interest expense declined slightly, due primarily to lower average rates on credit line debt outstanding. Interest incurred and paid in 2003 was $1,013,000, compared to $1,381,000 in 2002, of which $900,000 and $1,247,000 were capitalized, respectively.

Corporate Expenses

Corporate expenses during 2004 were $6,623,000, an increase of $2,592,000 when compared to 2003 corporate expenses. This increase is due to higher staffing costs, increased professional service fees, and stock compensation costs. Staffing costs increased $619,000 due to higher benefit costs such as medical insurance and retirement plans, and an increase in staff. Professional service

fees increased $432,000 due to costs associated with Sarbanes-Oxley Section 404, the establishment of an internal audit function, and higher audit fees. Stock compensation costs of $1,557,000 are associated with the 2004 stock incentive plan. Our 2004 stock incentive plan provides for the granting of restricted stock and restricted stock units based on the achievement of performance and milestone objectives. Costs related to this plan will continue forward for the next several years. Please refer to Note 9 of the Notes to the Consolidated Financial Statements for more information.

Corporate expenses in 2003 were $4,032,000, an increase of $208,000 when compared to 2002 corporate expenses. Corporate expenses increased due to higher staffing and benefit costs ($175,000), higher professional service fees ($54,000), increased maintenance costs ($178,000), and higher depreciation expense ($36,000). These cost increases were partially offset by reduced charitable contributions ($62,000) and an increase in general and administrative allocations to operating divisions ($174,000). Staffing and benefit costs increased primarily because of higher expenses associated with our defined benefit plan.

Equity in Unconsolidated Joint Ventures

During 2004 we recognized net earnings of $7,000 from unconsolidated joint ventures. Our portion of earnings consisted of profits from the Petro joint venture of $996,000, losses from the Tejon Dermody joint venture of $690,000, and losses from the Centennial joint venture of $299,000. The operations at Petro improved over 2003 due to improved margins on fuel sales and to a full year of operations within a new convenience store. The Tejon Dermody losses are directly related to the vacancy of the building within that joint venture during 2004 other than for short-term temporary leases. The loss within the Centennial joint venture is related to a farming project within the Centennial planning area. We receive 60% of the earnings and losses in Petro and 50% of earnings and losses within the Centennial and Tejon Dermody joint ventures.

During 2003, we recognized a loss in unconsolidated joint ventures of $348,000. This loss is primarily due to a loss within the Tejon Dermody joint venture of $961,000 due to the loss of a tenant in our building and the write-off of the unamortized lease costs related to the tenant that left. The tenant in the joint venture building filed for Chapter 11 bankruptcy protection during early May 2003. The lease was terminated and the building became vacant during September 2003. Due to this vacancy, revenues in the Tejon Dermody joint venture will bewere significantly impacted. Given current market conditions, it could take several months before the building is released. In addition, the Centennial joint venture lost $171,000 related to a farming project within the Centennial planning area. Offsetting these losses was an increase in profit at the Petro joint venture. During 2003, we recognized $784,000 in profits from the operations of the Petro Travel Plaza joint venture. This improvement over the prior year is due to a continuing increase in volume of transactions and to improved margins on diesel sales.

Near term activities withinDiscontinued Operations

Discontinued operations consist of the real estate segment will be focused onoperations of Pacific Almond, an almond processing plant, three commercial buildings in Phoenix, Arizona that were being held for sale, and, in 2002 the development of commercial/industrial products, obtaining entitlements for the Centennial project in Los Angeles County, and the filing for entitlements for Tejon Mountain Village. The sales, leasing, and marketing of Tejon Industrial Complex has been slowed by the downturn inremaining activity related to distributionthe liquidation of our cattle operation. During April 2004, we sold our interest in Pacific Almond to our partner in that joint venture pursuant to the buy/sell provisions in the joint venture agreement. Under the purchase agreement, we received $1,747,000 for our interest in the joint venture and manufacturing facilities. During 2003, this market segmentthe buyer assumed all responsibility for the assets and liabilities of the joint venture. The gain on the sale of our interest in Pacific Almond is approximately $800,000 before taxes.

In May 2004, the Company determined that it was very slowan appropriate time to liquidate our investment in the three commercial buildings in Phoenix due to economicfavorable market conditions and redirect those funds into our core real estate development business. These buildings sold during November 2004, resulting in a gain of $1,258,000 after all transaction costs.

Total revenues from discontinued operations for the year of 2004 were $12,266,000, compared to $3,058,000 for the same period of 2003. Revenue from discontinued operations during 2004 consists of $1,109,000 of revenue from Pacific Almond and $11,157,000 of revenue from the buildings in Phoenix. This compares to $1,888,000 of revenue from Pacific Almond and $1,170,000 in revenue from the buildings in Phoenix during the year as well as a general resistance by firms to commit to any expansion at this time. Thus far in 2004 we have begun to see ansame period of 2003. The increase in inquiries regarding our site as a potential location for distribution facilities. We believe that as California’s population continues to grow and the economy improves, we will begin to see an increase in industrial activity at Tejon Industrial Complex. Our development fits very well within the new logistics model that companies are beginning to use that favors larger single site buildings rather than a number of decentralized smaller distribution centers. Buildings of 1.0 million square feet or larger are difficult to build in Los Angelesrevenue from Pacific Almond is due to the numberrecognition of acres necessaryan $800,000 gain on the sale of our interest. This gain is partially offset by by the inclusion of only three months of activity in 2004 revenue while 2003 includes a full year of revenue. The reason for a building ofthe difference in revenue generated from the buildings is that size. We believe that our abilityrevenue includes $10,500,000 related to provide land parcels to support buildings of that size will provide us with a potential marketing advantage. Helping to offset the slowness in industrial development was continued growth and activity within the commercial/retail segmentsale of the market. Two new tenants opened for businessbuildings in TIC-West in 2003, Panda Express and a second Mobil gas and convenience store. Based on the continuing growth of traffic on Interstate 5 and the success of current retail tenants, we believe that the retail component of our development will continue to grow into the future.November 2004.

Discontinued operations during 2004 provided net income of $1,351,000 or $.09 per share, diluted, compared to a net income of $242,000 or $.02 per share, diluted, for the same period in 2003. The Real Estate segment will continue to experience increases in costs, net of amounts capitalized,improvement from the prior year is primarily related to professional service fees, marketing costs, commissions, planning costs, and staffing costs as we continue to increase real estate activities and pursue development opportunities.

The actual timing and completion of entitlement- and development-related activities is difficult to predict due to the uncertaintiesrecognition of the approval process and market factors. These types of real estate development activities and costs could continue over several years as we develop our land holdings.

We will also continue to evaluate land resources to determine the highest and best uses for our land holdings. Future sales of land are dependent on market circumstances and specific opportunities. Our goal in the future is to increase land value and create future revenue growth through planning and development of commercial, industrial, resort and residential programs.

Segment operating profits within real estate during 2002 were $2,672,000, a decrease of $899,000 when compared to 2001 segment profits. The decline in segment profits during 2002 was due primarily to an increase in segment expenses and reduced revenues associated with the power plant lease. Revenuesgain from the power plant agreement declined approximately $2,400,000 during 2002 due to the earning of milestone payments in 2001 related to easements and usesale of our land. Expenses increased due tointerest in Pacific Almond and the continued expansion of our real estate activities. Marketing and transaction costs related to our development projects increased $437,000 during 2002. Property management costs, which included costs related to leased property and expenses associated withgains from the managementsale of the ranch, had a net increase of $452,000 during 2002. Staff costs increased $287,000 during 2002 due to the timing of hiring staff during 2001, and insurance costs allocated to real estate increased $242,000 due to a hardening of general liability and property insurance markets over the last two years.buildings in Phoenix. These unfavorable variancesimprovements were partially offset by increases in lease revenues, oilthe loss from operations of Pacific Almond for the first three months of 2004 and mineral royalties, easement sales, and land sales. Lease revenues increased $232,000to one of the buildings sold being vacant throughout 2004.

Discontinued operations for 2003 provided net income of $242,000 compared to net income of $100,000 for the same period of 2002. The improvement from the prior year is primarily due to three new leases coming on-line duringthe fact that the 2002 and to a full year of grazing lease revenue. Oil and mineral royalties grew $452,000 when compared to 2001 due to higher oil prices and increased productiondiscontinued operations contained losses related to the cement plant lease. During 2002, we also received a $1,375,000 easement payment related to a natural gas pipeline that crossesfinal liquidation of our land and we sold approximately 5.8 acres of land, recognizing a gain of approximately $891,000.

Equity in earnings of unconsolidated real estate joint ventures increased $340,000 during 2002 due primarily to continued improvements in operations at Petro Travel Plaza. Results of operations at the Petro Travel Plaza joint venture increased $512,000 compared to the prior year due to an increase in volume of activity and improved margins on gasoline and diesel sales. These joint venture profits were partially offset by a loss of $172,000 within the Tejon Dermody joint venture. This loss was the result of depreciation and interest expense for the entire development, and costs early in 2002 associated with leasing one-half of the building within the venture being greater than the revenue generated from leasing one-half of the building.

See Part I, Item 1 - “Business – Real Estate Operations” for a further discussion of real estate development activities.cattle operations.

Farming. During 2003, the farming segment sustained a loss of $1,506,000, a decrease of $2,196,000 when compared to 2002 segment profits. The decline during 2003 is due to a decrease in pistachio revenues of $2,150,000, reduced revenue from the almond processing plant of $303,000, and reduced rental revenues of $117,000. Also contributing to the decline in segment profits was an increase in cultural costs of $397,000, higher insurance costs of $174,000, and increased costs at the almond processing plant of $174,000. These unfavorable variances were partially offset by an increase in almond revenues of $789,000, an improvement in grape revenue of $174,000, lower staffing costs of $48,000, and reduced water costs of $107,000.Income Taxes

Pistachio revenue declined due toOur effective tax rate for financial statement purposes is 23% for 2004 after taking into consideration permanent and temporary timing differences resulting in a significant drop in production during 2003. Pistachios are an alternate bearing crop with one year having high production followed bytax expense of $116,000. This tax expense consists of a lower production year.

Production fell in 2003 from the record high production of 2002 due to the alternate bearing nature of the crop and to poor weather during the early part of the crop’s growing season. Offsetting some of the loss in production in 2003 are higher prices for our pistachios. The price we are receiving in 2003 is $1.25 per pound, compared to $1.15 per pound in 2002. The increase in price is driven by lower statewide production within California.

Almond revenues increased during 2003 due to a large increase in prices for our almonds, and to the receipt of $534,000tax benefit related to higher final pricescontinuing operations of $784,000 and a tax expense of $900,000 related to the 2002 crop. The average price we are receiving for our almonds in 2003 is $1.68 per pound, as compared to a $1.03 per pound in the prior year. Prices each year are driven by production and demand for the crop. Our production for 2003, as well as the statewide production, declined when compared to the prior yeardiscontinued operations. Permanent tax differences primarily due to poor weather during the bloom cycle for the trees. This decline in production, along with the continuing demand for almonds, led to the increase in pricing we are now seeing. The improvement in grape revenues during 2003 is primarily related to an improvement in the prices we received for our crop.

Revenues declined at our almond processing plant due primarily to the timing of sale of almond hulls. Costs at the almond plant increased in 2003 due to the processing of the 2002 almond crop during 2003 because of an increase in the number of pounds processed at the plant in 2002.

All of our crops are sensitive to the size of each year’s world crop. Large crops in California and abroad can depress prices. With lower statewide grape production, the current pressure on prices due to an oversupply of grapes could begin to be alleviated over the next couple of years. Almond production is also down across the state during 2003 due to heavy rains during the bloom cycle. A positive factor for the almond industry is that demand for product has remained very strong both in the United States and in export markets, and, with a smaller crop than last year’s record statewide crop, prices for almonds have begun to rise. Our long-term projection is that crop production, especially of almonds and pistachios, will increase on a statewide basis over time because of new plantings, which could negatively impact future prices if the growth in demand does not continue to keep pace with production. The potential increase in almond production will positively impact our almond processing operation because of more almonds being available to process.

Farming segment profits of $690,000 in 2002 increased $2,034,000 when compared to a loss of $1,343,000 in 2001. The improvement in 2002 segment profits was due to an increase in almond revenues of $1,610,000, higher pistachio revenues of $994,000, improved walnut revenues of $203,000, and an increase in revenues of $120,000 at our almond processing plant. These increases in revenues were partially offset by increased cultural costs and by higher operating costs at Pacific Almond, our almond processing plant. Cultural costs increased $660,000 due to higher harvesting costs and pest control costs. Net operating costs at Pacific Almond grew $568,000 due primarily to additional staffing and supply costs related to an increase in depletion allowances are the number of almonds processed atreason for the plant. Partially offsetting these increases in cost was a reduction in fixed water costs of $295,000.

Almond revenues increased during 2002 due primarily to higher productionreduced effective tax rate when compared to the prior year. The increase in production was due to excellent weather during the bloom period for almonds and to 335 acres of almonds producing their first full crop. Almond prices for 2002 were also slightly higher than the prior year due to stronger demand for the product. Included within the increase in almond revenues is approximately $231,000 of earnings related to the receipt of crop insurance proceeds related to the 2001 crop.

Pistachio revenues were higher in 2002 due to a continuing improvement in production and to improved prices when compared to 2001. Production increased due to excellent weather during the growing season and to production being higher than expected from our young pistachio orchard. Pistachios are generally an alternate bearing crop, meaning that a year of low production follows a year of high production. The improvement in walnut revenue was due to improved production, better pricing, and the receipt of $135,000 of crop insurance proceeds related to the 2001 crop.2003.

For 2004, we have a further discussionnet deferred tax asset of $311,000. This amount is primarily made up of short-term temporary differences such as deferred revenue, accrued expenses, and prepaid expenses. Our long-term temporary differences net to a deferred tax asset of $190,000. Due to the farming operations, refer to Part I, Item I, “Business - Farming Operations.”nature of our net deferred tax assets, we believe they will be utilized in future years through our operations.

Interest. Interest and investment incomeDuring 2003, we had an effective tax rate of $366,000 fell $526,000 during 2003, due primarily to lower interest rates on funds invested and to fewer funds38%, resulting in a tax benefit of $1,828,000 for the year. This tax benefit created a net operating loss carryforward, which is being invested. For liquidity management purposes, a large portion of the funds invested were invested into securities with very short maturity dates and therefore the interest earned was much less than the prior year.used in 2004.

Risk Factors.

Interest and investment income during 2002 fell approximately $1,000,000, due to fewer funds being invested and to lower interest rates on funds invested. The decline in funds invested was due to the liquidation of debt in 2001 and to expenditures on property and equipment that reduced cash available for investment in 2002.

Interest expense for 2003 is $113,000, compared to interest expense of $134,000 in 2002, of which $18,000 was included in discontinued operations. Interest expense declined slightly, due primarily to lower average rates on credit line debt outstanding. Interest incurred and paid in 2003 was $1,013,000, compared to $1,381,000 in 2002, of which $900,000 and $1,247,000 were capitalized, respectively.

Interest expense for 2002 was $134,000, of which $18,000 is included in discontinued operations, compared to interest expense of $1,136,000 in 2001, of which $441,000 is included in discontinued operations. Interest expense declined due to lower average outstanding amounts on credit lines and the capitalization of interest expense due to the growth of our real estate development activities. Interest incurred and paid in 2002 was $1,381,000, compared to $2,602,000 in 2001, of which $1,247,000 and $1,466,000 were capitalized, respectively.

Corporate Expenses. Corporate expenses in 2003 are $4,031,000, an increase of $207,000 when compared to 2002 corporate expenses. Corporate expenses increased due to higher staffing and benefit costs ($175,000), higher professional service fees ($54,000), increased maintenance costs ($178,000), and to higher depreciation expense ($36,000). These cost increases were partially offset by reduced charitable contributions ($62,000) and to an increase in general and administrative allocations to operating divisions ($174,000). Staffing and benefit costs increased primarily because of higher expenses associated with our defined benefit plan.

Corporate expenses during 2002 were $3,824,000, an increase of $477,000 when compared to 2001 corporate expenses. The increase was due to higher staffing and benefit costs ($190,000), increased professional service fees ($66,000), higher community and charitable donations ($109,000), and an increase in insurance costs ($106,000).

Discontinued Operations.During April 2001, the Company finalized its plan for the sale of its cattle and feedlot division. Since then, we have disposed of our cattle and feedlot operations, which provided capital for real estate development activities and helped to reduce outstanding debt. While the sale of livestock assets provided significant working capital, it also resulted in a loss of significant revenues, even after taking into account the revenue stream from grazing leases that we have entered into in connection with the sales of the breeding herd. During April 2002, we completed the process of liquidating the remaining stocker cattle herd. There were no discontinued operation assets at December 31, 2003 or at December 31, 2002. Discontinued operations for 2002 generated a loss of $249,000 or $0.02 per share diluted. The loss is due to losses on much of the cattle being sold during the first quarter of 2002 because of lower feeder cattle prices.

Inflation, Risks, and Related Factors Affecting Forward-Looking Information.The risks and uncertainties described below are not the only ones facing our company. If any of the following risks actually occurs, our business, financial condition, results of operations or future prospects could be materially adversely affected. Our strategy, focused on more aggressive development of our land, involves significant risk and could result in operating losses.

Cyclical Industry.We are involved in a cyclical industry and are affected by changes in general and local economic conditions. The real estate development industry is cyclical and is significantly affected by changes in general and local economic conditions, including:

The process of development of a project begins and financial and other resources are committed long before a real estate project comes to market, which could occur at a time when the real estate market is depressed. It is also possible in a rural area like ours that no market for the project will develop as projected.

Interest Rates.Higher interest rates can have a significant impact on the real estate industry. Higher interest rates generally impact the real estate industry by making it harder for buyers to qualify for financing, which can lead to a decrease in the demand for residential, commercial or industrial sites. Any decrease in demand will negatively impact our proposed developments. Any downturn in the economy or consumer confidence can also be expected to result in reduced housing demand and slower industrial development, which would negatively impact the demand for land we are developing.

Government ActionsWe are subject to various land use regulations and Land Use Regulations.require governmental approvals for our developments that could be denied. In planning and developing our land, we are subject to various local, state, and federal statutes, ordinances, rules and regulations concerning zoning, infrastructure design, subdivision of land, and construction. All of our new developments require amending existing general plan and zoning designations, so it is possible that our entitlement applications could be denied.denied or subjected to unfavorable conditions. Denial or imposition of unfavorable conditions could result from political factors unrelated to the actual merits or environmental impacts of the developments. In addition, the zoning that ultimately is approved could include density provisions or other restrictions or mitigation measures that would limit the number of homes and other structures that could be built within the boundaries of a particular area, which would adversely impact the financial returns from a given project. The Los Angeles County Planning Department recently released a set of draft amendments to the Los Angeles County General

Plan whichthat would extend a planning overlay designation called “Sensitive Ecological Areas” to cover most of the footprint of the Centennial project. It is not clear at this early stage what chance this draft has of being adopted by the county Board of Supervisors and being upheld by a reviewing court or what its impact on Centennial would be, but if adopted and upheld it would likely involve additional processing time, studies, and findings by county officials, could have an adverse impact similar to the density provisions described above and, as aat worst, case, could provide a pretext for denying the Centennial application. In addition, many states, cities and counties (including neighboring Ventura County) have in the past approved various “slow growth” or “urban limit line” measures. If that were to occur in

Third-party litigation could increase the jurisdictions governing the Company’s land use, our future real estate development activities could be significantly adversely affected.

A state agency has recently released an environmental document for a proposed $37 billion high speed-rail system for California. There are two routes proposed between Los Angelestime and Bakersfield, both of which traverse Tejon Ranch. One would run at the northern tip of the ranch, which would not affect any development plans, and one would run along Interstate 5, which would have a significant, adverse affect on twocost of our projects. This route would run next to Tejon Lake, could have significant impacts on the viability of Tejon Mountain Village during the system’s construction period, and could possibly impair the ability of this area ultimately to support recreational amenities. This route also runs through TIC-East. The economic effect of these impacts should be largely offset by the significant condemnation award and severance damages that the Company should receive for the taking of some of its most valuable land, but the outcome of such condemnation proceedings cannot be assured and the proceedings are likely to be protracted. A bond measure to fund this rail system is currently set to appear on the November 2004 California statewide ballot, but the governor has called for it to be removed from the ballot due to California’s current fiscal condition and observers believe that is likely to happen, although its removal cannot not assured.

Litigation.development efforts. The land use approval processes we must follow to ultimately develop our projects have become increasingly complex. Moreover, the statutes, regulations and ordinances governing the approval processes provide third parties the opportunity to challenge the proposed plans and approvals. As a result, the prospect of third-party challenges to planned real estate developments provides additional uncertainties in real estate development planning and entitlements.entitlement. Third-party challenges in the form of litigation would, by their nature, adversely affect the length of time and the cost required to obtain the necessary approvals. In addition, adverse decisions arising from any litigation would increase the costs and length of time to obtain ultimate approval of a project and could adversely affect the design, scope, plans and profitability of a project.

Environmental RegulationWe are subject to environmental regulations and Opposition.opposition from environmental groups that could cause delays and increase the costs of our development efforts or preclude such development entirely. Environmental laws that apply to a given site can vary greatly according to the site’s location and condition, present and former uses of the site, and the presence or absence of sensitive elements like wetlands and endangered species. Environmental laws and conditions may result in delays, cause us to incur additional costs for compliance, mitigation and processing land use applications, or preclude development in specific areas. In addition, in California third parties have the ability to file litigation challenging the approval of a project, which they usually do by alleging inadequate disclosure and mitigation of the environmental impacts of the project. While we have worked with representatives of various environmental interests and wildlife agencies to minimize and

mitigate the impacts of itsour planned projects, certain groups opposed to development have made clear they intend to oppose our projects vigorously, so litigation challenging their approval is expected. The issues most commonly cited in opponents’ public comments include the poor air quality of the San Joaquin Valley air basin, potential impacts of projects on the California condor and other endangered species, presumed removal of oak trees, and the potential for our lands to function as wildlife movement corridors. In addition, certain military commanders have sent correspondence opposing the Centennial project because it would limit their usecorridors, potential impacts of low-level training flight routes that traverse over Tejon Ranch.our projects on traffic and air quality in Los Angeles County, and criticism of proposed developments in rural areas as being “sprawl”.

Real Estate Inventory Risk.Until governmental entitlements are received, we will have a limited inventory of real estate. OurEach of our four current and planned real estate projects, the Tejon Industrial Complex – West and East, Centennial and the Tejon Mountain Village, all involve obtaining governmental entitlements. A delay in obtaining governmental entitlements could lead to additional costs related to these developments and improvingpotentially lost opportunities for the sale of lots for sale to developers or, in the case of Tejon Industrial Complex, endand land users. The value of these lots can fluctuate significantly as a result of changing economic and market conditions.

Development Competition.We are in competition with several other developments for customers and residents. Within our real estate activities, we are in direct competition for customers with other industrial sites in Northern, Central, and Southern California. We are also in competition with other highway interchange locations using Interstate 5 and State Route 99 for commercial leasing opportunities. Centennial ultimately would compete with other residential housing options in the region, such as developments in the Santa Clarita Valley, Lancaster, Palmdale, and Bakersfield.TejonBakersfield. Tejon Mountain Village will compete generally for discretionary dollars that consumers will allocate to recreation and second homes, so its competition will range over a greater area and range of projects.

Geographic Concentration.Our developable land is concentrated entirely in California. All of our developable land is in California. Any adverse change in the economic climate of California, or our region of that state, and any adverse change in the political or regulatory climate of California, or the counties where our land is located, could adversely affect our real estate development activities. Ultimately, our ability to sell or lease lots may decline as a result of weak economic conditions or restrictive regulations.

Key Personnel.We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

prospects.We currently depend heavily on the services of Robert A. Stine, our President and Chief Executive Officer, and a number of other key management personnel. The loss of Mr. Stine’s services or that of other key personnel could materially and adversely affect our results of operations, financial condition, or our ability to pursue land development. Our success will also depend in part on our ability to attract and retain additional qualified management personnel. Competition for such personnel is strong in the real estate and land development industry and we may not be successful in attracting or retaining the personnel we require.

Only a Limited Market Existslimited market exists for Tejon Ranchour Common Stock Whichwhich could lead to Price Volatility.price volatility.The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market of our common stock.

Concentrated Ownershipownership of our Common Stock Createscreates a Riskrisk of Sudden Changesudden change in our Share Price.share price.As of March 11, 2004,2005, directors and members of our executive management team beneficially owned or controlled approximately 52%48% of our common stock. Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock. The sale by any of our large shareholders of a significant portion of that shareholder’s holdings could have a material adverse effect on the market price of our common stock. In addition, the registration of any significant amount of additional shares of our common stock will have the immediate effect of increasing the public float of our common stock and any such increase may cause the market price of our common stock to decline or fluctuate significantly.

Inflation.Inflation can have a significant adverse effect on our operations. Inflation can have a major impact on our farming operations. The farming operations are most affected by escalating costs and unpredictable revenues (due to an oversupply of certain crops) and very high irrigation water costs. High fixed water costs related to our farm lands will continue to adversely affect earnings. Prices received for many of our products are dependent upon prevailing market conditions and commodity prices. Therefore, it is difficult for us to accurately predict revenue, just as we cannot pass on cost increases caused by general inflation, except to the extent reflected in market conditions and commodity prices.

Within our real estate operations, our lease portfolio is protected to some extent from inflation, since percentage rent clauses and Consumer Price Index increases in our leases tend to adjust rental receipts for inflation.

Other RisksWe may encounter other risks that could impact our ability to develop our land. We may also encounter other difficulties in developing our land, including:

Cash Flow and Liquidity. Our strong financial position allows us to pursue our growth strategies of land entitlement and development. Accordingly, we have established well defined priorities for our available cash, including investing in core business segments to achieve profitable future growth. To enhance shareholder value, we will continue to make investments in our real estate segments to secure land entitlement approvals and provide funds for land development activities. Within our farming segment, we will make investments as needed to improve efficiency and add capacity to its operations when it is profitable to do so.

Our cash, cash equivalents and short-term marketable securities totaled approximately $20,570,000$64,392,000 at December 31, 2003, a decrease2004, an increase of $4,670,000$43,822,000 from the corresponding amount at the end of 2002.2003. Cash and marketable securities increased during the year due primarily to the completion of the private placement on May 6, 2004 for 1,234,187 shares for common stock at a price per share of $32.41 and two subsequent exercises of options in the form of additional investment rights to purchase 308,546 additional shares of common stock at a per share price of $32.41 and 140,248 additional shares of common stock at a per share price of $35.65. The private placement resulted in gross proceeds to the Company of $55.0 million and net proceeds of approximately $51.6 million. In addition to the private placement funds, we received $2.4 million in reimbursements from a local Community Facilities District, approximately $4.5 million in net proceeds from the sale of three buildings in Phoenix and $1.7 million in proceeds from the sale of Pacific Almond. The increased investment in marketable securities was directed into either government securities, agency securities, or corporate securities with a credit rating of “A” or better. The maturity dates for these new investments were structured to match future estimated investment needs within our real estate segments. These increases in cash were partially offset by capital expenditures and the repayment of long-term debt. Cash, cash equivalents and short-term marketable securities decreased during 2003 due primarily to the net loss from operations and land development project costs. These outflows were partially offset by funds from the exercise of stock options, proceeds from the sale of real estate and an increase in mortgage debt. Cash, cash equivalents and short-term marketable securities increased during 2002 due to the liquidation of the remaining discontinued assets, the receipt of bond reimbursement proceeds, proceeds from land sales, and funds from the exercise of stock options. These increases were partially offset by property and equipment expenditures, land development project costs, and the financing of receivables and inventories.

The following table summarizes the cash flow activities for the last three years:

In 2003, net2004, our operations provided $236,000 of cash provided by operating activities was $52,000, comparedreflecting improved business results, especially when non-cash stock compensation costs are added back to net cash used of $899,000 in 2002 and cash providedoperations. These funds from operating activitiesresults were partially offset by the significant increase in accounts receivable for 2004. Accounts receivable increased due to receivables from farming operations growing as a result of $1,694,000 in 2001.

increased production and higher prices within almonds and pistachios. During 2003, the net cash provided fromused in operations was the direct result of the prepayment of 2004 grazing leases,net loss for the year and a reduction of accounts receivable that were partially offset by an increase in deferred tax assets. During 2002,

In 2004, we used $51,780,000 for investing, primarily reflecting investments in marketable securities of $69,023,000 and capital investment spending of $6,664,000. These uses of funds were partially offset by $2,422,000 of proceeds from a large increase in receivables, due to a large pistachio crop, a reduction in payableslocal community facility district as reimbursement of public infrastructure development within TIC-West and income taxes, and the recognitionmaturities of the equity in earnings of unconsolidated joint ventures resulted in the use of cash from operations.

marketable securities. Cash used in investing activities in 2003 was $6,732,000,$6,733,000, compared to $4,171,000 and $17,822,000 used$4,042,000 in 2002 and 2001, respectively.2002. The increase in 2003 over 2002 is due primarily to a reduction in proceeds from real estate sales during 2003 and to the receipt in 2002 of proceeds from a local community facility district as reimbursement of infrastructure development costs within the TIC-West development that was partially offset by a reduction in capital expenditures. The decrease in cash used in investing activities between 2002 and 2001 was due to proceeds from the sale of real estate, reimbursement of funds from a local community facilities district and reduced capital expenditures. Capital expenditures were $6,664,000 in 2004, compared to $8,354,000 in 2003 compared to $10,240,000and $10,111,000 in 2002 and $17,441,000 in 2001.2002. Capital expenditures for these years were primarily dominated by investment withinin our real estate projects. Capital investments in our real estate projects are primarily related to infrastructure development and to the capitalization of costs related to various activities in preparation for the filing of entitlements for our real estate projects. We anticipate that our capital expenditureinvestment requirements for 20042005 will be approximately $12,000,000 to $14,000,000. These estimated requirementsinvestments include approximately $8,000,000$7,500,000 of infrastructure and entitlement investment at TIC-West and East, $2,500,000$3,800,000 to $3,000,000$4,200,000 in planning entitlement costs related to the Tejon Mountain Village development, and approximately $1,400,000$1,020,000 of investment within our farm operations to complete the development of an almond orchard and a grape vineyard and for the replacement of equipment. A portion of the infrastructure costs related to TIC-West will not be spent if planned absorption of land does not take place.

During 2004, financing activities provided $44,160,000 in cash primarily due to net proceeds of $51,656,000 from the above mentioned private placement and proceeds from the exercise of stock options of $2,607,000. A portion of these funds were used during the year to eliminate the outstanding balances on our line of credit. Cash provided by financing activities was $3,068,000$3,277,000 in 2003, compared to $1,462,000$1,810,000 in 2002, and $24,235,000 in 2001.2002. The increase in 2003 when compared to 2002 iswas due to additional proceeds from the exercise of stock options and to proceeds from a mortgage related to a leased building. The decline in cash provided by financing activities between 2002 and 2001 is due primarily to the completion of a stock rights offering in January 2001.

It is difficult to accurately predict cash flows due to the nature of our businesses and fluctuating economic conditions. Our earnings and cash flows will be affected from period to period by the commodity nature of our farming operations and to the timing of sales and leases of property within our development projects. The timing of sales and leases within our development projects is difficult to predict due to the time necessary to complete the development process and negotiate sales or lease contracts. Often, this nuance of land development can lead to particular years or periods having more or less earnings than comparable periods. Based on our experience, we believe we will have adequate cash flows and cash balances over the next twelve months to fund internal operations.

Capital Structure and Financial Condition. Management considers our financial structure and condition solid. At December 31, 2003,2004, total capitalization was $91,034,000,$132,585,000, consisting of $16,391,000$492,000 of debt and $74,643,000$132,093,000 of equity and resulting in a debt-to-total-capitalization ratio of 18.01%less than one percent which is slightly greater thana significant improvement over the prior year’s debt-to-total-capitalization ratio.ratio of 18.01%. The increaseimprovement in the ratio during 20032004 is due largely to the renegotiation of our credit facility with Wells Fargo that resulted in a portioncompletion of the debt being classified asprivate placement described above and the repayment of long-term rather than short-term debt anddebt.

On May 6, 2004, we completed the private placement. We also granted the investors two options to purchase an aggregate of 448,794 shares of common stock in the form of additional investment rights. The first additional investment rights were exercised on September 3, 2004 in exchange for 308,546 shares of common stock at a purchase price $32.41. The second additional investment rights were exercised on December 6, 2004 in exchange for 140,248 shares of common stock at a purchase price of $35.65. Please refer to the addition of mortgage debt related to a leased facility.

Our debt primarily consists of a long-term revolving line of credit and mortgages8-K filed on projects.May 7, 2004 for additional information.

We have a long-term revolving line of credit of $30,000,000 that, as of December 31, 2003,2004, had anno outstanding balance of $10,000,000. This credit facility bears an interest rate that floats with changes in the lending bank’s prime interest rate.balance. At the Company’s option, the interest rate on this line of credit can be fixed at 1.50% over a selected LIBOR rate or float at .75% less than the bank’s prime lending rate. During the term of this credit facility, we can borrow at any time and partially or wholly repay any outstanding borrowings and then re-borrow, as necessary. TheAny outstanding principal balance of this credit facility is due and payable in full on June 5, 2006. The proceeds from this credit facility are being used to fund real estate development infrastructure, real estate entitlement activities, and farming assets on our land.2007. This note is secured by all of our farm acreage. The remainingoutstanding long-term debt, less current portion of $264,000,$23,000, is $6,127,000$469,000 at December 31, 2003.2004. This remaining debt is being used to fund commercial buildings in Phoenix, Arizona, our almond processing plant, and a build-to-suit building. The note obligation used to purchase the buildings in Phoenix is secured by mortgages on the buildings, has a balance of $4,594,000 and is payable in equal monthly installments through April 2009. The loan used to purchase the almond processing plant in 2000 has a balance of $1,260,000, with the final payment due February 1, 2010. The final note is for a loan that providesprovide long-term financing for a building being leased to Starbucks. The current balance of this note is $513,000 with a maturity date of May 1, 2018. The remaining long-term debt is related to the financing of equipment.

Contractual Cash Obligations.

The following table summarizes our contractual cash obligations and commercial commitments over the next five years:

The categories above include purchase obligations and other long-term liabilities reflected on our balance sheet under GAAP. A “purchase obligation” is defined in Item 303(a)(5)(ii)(D) of Regulation S-K as “an agreement to purchase goods or services that is enforceable and legally binding on [us] and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.” Based on this definition, the table above includes only those contracts that include fixed or minimum obligations. It does not include normal purchased, which are made in the ordinary course of business.

Our cash contract commitments consist of contracts in various stages of completion related to infrastructure development within our industrial developments, entitlement costs related to our industrial and residential development projects, and a company public relations campaign. These

commitments do not include any on-going operational costs such as utilities and maintenance contracts for equipment. At the present time, we do not have any capital lease obligations or purchase obligations outstanding. Our operating lease obligations are primarily for office equipment, a small land lease, and three vehicles and average approximately $2,000$7,000 per monthmonth.

As discussed in Note 14 to the Consolidated Financial Statements, we have long-term liabilities for employee retirement plans. The payments related to the next two years.supplemental retirement plan are not included above since they are dependent upon when the employee retires or leaves the Company. In addition, minimum pension funding requirements are not included above as such amounts are not available for all periods presented. We estimate that we will contribute approximately $350,000 to the pension plan in 2005. During 2004, we made approximately $350,000 in pension plan contributions.

Off-Balance Sheet Arrangements

The following table shows contingent obligations we have with respect to unconsolidated entities in which we have an interest, and also a local Community Facilities District.

The standby letter of credit is related to the issuance of Community Facility District bonds by the Tejon Ranch Public Facilities Financing Authority, a joint-powers authority created by Kern County and the Tejon-Castac Water District. The standby letter of credit is in place to provide additional credit enhancement and covers approximately two years worth of interest on the outstanding bonds. The annual cost for this letter of credit is approximately $50,000 per year. This letter of credit will not be drawn upon unless we, as the largest landowner in the district, fail to make our property tax payments. This letter of credit is for a two-year period and will be renewed if necessary in 2005.

The guarantees consist of a $1,615,000$6,000,000 guarantee related to the debt of Petro Travel Plaza LLC, an unconsolidated limited liability company in which we are equity owners with Petro Stopping Centers, L.P. Total debt in the venture is approximately $13,061,000 and is related to the long-term financing of the facility. This guarantee will be reduced over the next two years as the principal balance on the loan is reduced through scheduled debt payments. The remaining $6,000,000 of guarantees relate to debt within the Tejon Dermody Industrial LLC, an unconsolidated joint venture, formed to construct and market a 650,000651,000 square foot building at the Tejon Industrial Complex. Total debt in the venture is approximately $12,000,000$12,021,000 and was used in the construction of the building. In the joint venture agreement, each partner agreed to guarantee one half of the outstanding debt through the term of the loan. This loan has a current maturity date of March 31, 2004. The loan is currently matures in the process of being extended to January 2006. At this timeWe believe it is unlikely that we believe that neither of the guarantees nor the standby letter of credit will ever be called upon.required to make payments under this guarantee.

Our current and future capital resource requirements will be provided primarily from current cash and marketable securities, cash flow from ongoing operations, proceeds from the sale of developed parcels, potential sale of assets, additional use of debt, proceeds from the reimbursement of public infrastructure costs through the Community Facilities District bond debt, and the issuance of common stock. As noted above, we have $20,570,000$64,392,000 in cash and securities and $20,000,000$30,000,000 available on credit lines to meet any short-term liquidity needs. We continue to expect that substantial future investments will needbe required in order to be

made in future years indevelop our land assets to secure entitlements and develop the land.assets. In order to meet these long-term capital requirements, we willmay need to secure additional debt financing and continue

to renew our existing credit facilities. In addition to debt financing, we will use other capital alternatives such as joint ventures with financial partners, sales of assets, and the issuance of common stock. There is no assurance that we can obtain financing from any of these sources or that we can obtain financing at favorable terms. We believe we have adequate capital resources to fund our cash needs and our capital investment requirements over the next few years.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flows of the Company due to adverse changes in financial or commodity market prices or rates. We are exposed to market risk in the areas of interest rates and commodity prices.

Financial Market Risks

Our exposure to financial market risks includes changes to interest rates and credit risks related to marketable securities, interest rates related to our outstanding indebtedness and trade receivables.

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields and prudently managing risk. To achieve this objective and limit interest rate exposure, we limit our investments to securities with a maturity of less than fivesix years and an investment grade of A“A” or better from Moody’s or Standard and Poors. See Note 3, Marketable Securities, of Notes to Consolidated Financial Statements.

The Company is exposed to interest rate risk on its long-term line of credit, which currently has no outstanding balance, and the long-term debt currently outstanding. The line-of-credit interest rate can be tied to the lending bank’s prime rate and would change when that rate changes, or the debt can be tied to a LIBOR rate on a fixed basis and change only at maturity of the fixed ratefixed-rate feature. Currently $10,000,000 is outstanding on the line of credit. A portion of theThe long-term debt ($5,131,000)492,000) has a fixed interest rate and the fair value of this long-term debt will change based on interest rate movements in the market. The remaining long-term debt ($1,260,000) can either be fixed for periods of time to a LIBOR rate or float with the lending bank’s prime rate. The floating rate obligationsfeature in our line of credit can expose us to variability in interest payments due to changes in interest rates. We believe it is prudent at times to limit the variability of a portion of ourfloating rate interest payments. To meet this objective,payments and in the past have entered into interest rate swaps to manage those fluctuations.

At December 31, 2004, we had no outstanding interest rate swap agreements. However, Petro Travel Plaza LLC, an unconsolidated joint venture, entered into an interest rate swap agreement with respect to $8.0 million of its long-term debt to manage the potential fluctuations in cash flows resulting from interest rate risk. See Note 8, Interest Rate Risk Management,risk by converting floating interest rate debt to fixed-rate debt. This swap agreement matures in November 2009 and is a contract to exchange variable-rate for fixed-rate interest payments periodically over the life of Notes to Consolidated Financial Statements.the agreement. The interest rate swap fixed rate is 4.33%. The joint venture accounts for the swap agreement as a cash flow hedge in accordance with FASB Statement No. 133, “Accounting for Derivative Investments and Hedging Activities.”

We record our pro rata change in the fair market value of the interest rate swap in accumulated other comprehensive income. As of December 31, 2004, the Company’s portion of the fair value of the interest rate swap was a loss of $88,000. Estimated fair value of the swap was determined by market price quotes as of December 31, 2004, received from the joint venture’s bank.

Market risk related to our inventories ultimately depends on the value of the almonds, grapes, pistachios, and walnuts at the time of payment or sale. Credit risk related to our receivables depends upon the financial condition of our customers. Based on historical experience with current customers and periodic credit evaluations of our customers’ financial conditions, we believe our credit risk is minimal. Market risk is discussed below in commodity price exposure.

The following tables provide information about our financial instruments that are sensitive to changes in interest rates. The tables present the related weighted-average interest rates by expected maturity dates of our marketable securities and debt obligations.

Interest Rate Sensitivity Financial Market Risks

Principal Amount by Expected Maturity

At December 31, 20032004

(Dollars in Thousands)

Interest Rate Sensitivity Financial Market Risks

Principal Amount by Expected Maturity

At December 31, 20022003

(Dollars in Thousands)

In comparison to the prior year,years, our risk with regard to fluctuations in interest rates has increaseddecreased related to the use of debt due to the expirationreduction in the use of an interest rate swap in April 2003. Since $10,000,000long-term lines of our debt floats at LIBOR orcredit that fluctuate with the bank’s prime lending rate, but has increased with regards to our risk with regardmarketable securities due to rising interest rates has increased.the increase in outstanding balances.

Commodity Price Exposure

We have exposure to adverse price fluctuations associated with certain inventories and accounts receivable. Inventories consist of farming and processing costs related to 20032004 almond production and 2005 crop production. The farming costs inventoried that are related to the 2004 crop are recorded at actual costs incurred. Historically, these costs have been recovered each year when that year’s crop harvest has been sold.

With respect to accounts receivable, the amount at risk relates primarily to farm crops. These receivables are often recorded as estimates of the prices that ultimately will be received for the crops. The final price is generally not known for several months following the close of our fiscal year. Of the accounts receivable outstanding at December 31, 2003, $2,888,0002004, $6,360,000 is at risk to changing prices. Of the

amount at risk to changing prices, $2,305,000$4,220,000 is attributable to almonds, $408,000

$1,909,000 to pistachios, $175,000and $231,000 to walnuts. The comparable amounts of accounts receivable at December 31, 20022003 were $1,599,000$2,305,000 related to almonds, $1,950,000$408,000 related to pistachios, and $111,000$175,000 to walnuts. The price estimated for recording accounts receivable at December 31, 20032004 was $1.68$2.53 per pound for almonds. For every $.01 change in the price of almonds, our receivable for almonds increases or decreases by $13,700.$16,700. Although the final price of almonds (and therefore the extent of the risk) is not presently known, over the last three years the final prices have ranged from $1.00 to $1.80.$3.00. With respect to pistachios, the price estimated for recording the receivable was $1.25$1.36 per pound, each $.01 change in the price increases or decreases the receivable by $3,300$13,986, and the range of final prices over the last three years for pistachios has been $1.05 to $1.28.$1.40. The price estimated for recording accounts receivable for walnuts was $.42$.50 per pound. For every $.01 change in the price of walnuts, our receivable increases or decreases by $4,100.$4,600. The final price for walnuts has averaged from $.45 to $.60 over the last three years.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this Item is submitted in a separate section of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

WithinITEM 9A. CONTROLS AND PROCEDURES

Controls and Procedures

As of the 90 days prior toend of the dateperiod covered by of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Controller, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 of the Securities and Exchange Commission under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our Company (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

There have been no significant changes in our internal controls or in other factors which could significantly affect our internal controls subsequent to the date of our evaluation of the internal controls.

Management’s Report on Internal Controls

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is a process designed by, or supervised by, the Company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with the preparation of the Company’s annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of the Company’s internal control over financial reporting.

Based on this assessment, management did not identify any material weakness in the Company’s internal control, and management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2004.

Ernst & Young LLP, the registered public accounting firm that audited the Company’s financial statements included in this report, have issued an attestation report on management’s assessment of internal control over financial reporting, a copy of which is included in this annual report on Form 10-K.

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

Tejon Ranch Co.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls, that Tejon Ranch Co. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Tejon Ranch Co.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Tejon Ranch Co. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Tejon Ranch Co. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Tejon Ranch Co. and subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004 and our report dated March 8, 2005 expressed an unqualified opinion thereon.

Ernst & Young LLP

Los Angeles, California

March 8, 2005

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding our directors is incorporated by reference from the definitive proxy statement to be filed by us with the Securities and Exchange Commission with respect to our 20042005 Annual Meeting of Stockholders. Information as to our Executive Officers is set forth in Part I, Item 1 under “Executive Officers of Registrant.”

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item is incorporated by reference from the definitive proxy statement to be filed by us with the Securities and Exchange Commission with respect to our 20042005 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by this Item with respect to security ownership by principal stockholders and management is incorporated by reference from the definitive proxy statement to be filed by us with the Securities and Exchange Commission with respect to our 20042005 Annual Meeting of Stockholders.

The following table shows aggregated information as of December 31, 20032004 with respect to all of our compensation plans under which our equity securities were authorized for issuance. At December 31, 2003,2004, we had, and we presently have, no other compensation contracts or arrangements for the issuance of any such equity securities and there were then, and continue to be, no compensation plans, contracts or arrangements which were not approved by our stockholders. More detailed information with respect to our compensation plans is included in Note 7 and Note 8 of Notes to Consolidated Financial Statements.

Equity Compensation Plan Information