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.

Higher interest rates and lack of available financing can have a significant impactimpacts 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. Lack of available credit to finance real estate purchases can also negatively impact demand. 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.

We are subject to various land use regulations and 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. In addition, the zoning that ultimately is approved could include density provisions that would limit the number of homes and other structures that could be built within the boundaries of a particular area, which wouldcould adversely impact the financial returns from a given project. Several years ago, the Los Angeles County Planning Department released a set of draft amendments to the Los Angeles County General Plan that 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 Los Angeles County Board of Supervisors or what its impact on Centennial would be, but if adopted it would likely involve additional processing time, studies, and findings by county officials, which could have an adverse impact similar to the density provisions described above, and affect the character and intensity of uses permitted in the Centennial project area. 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 the jurisdictions governing the Company’s land use, our future real estate development activities could be significantly adversely affected.

Third-party litigation could increase the time and cost of our 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. 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.

We are subject to environmental regulations and 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 our 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 species of concern, presumed removal of oak trees, the potential for our lands to function as wildlife movement corridors, potential impacts of our projects on traffic and air quality in Los Angeles County, and criticism of proposed development in rural areas as being “sprawl”. Recent concerns over the impact of development on global warming increases the breadth of potential obstacles that our developments face.

Until governmental entitlements are received, we will have a limited inventory of real estate. Each of our four current and planned real estate projects, TIC–West and East, Centennial and TMV, involve obtaining governmental permits or entitlements. A delay in obtaining governmental entitlementsapprovals could lead to additional costs related to these developments and potentially lost opportunities for the sale of lots to developers and land users.

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. TMV will compete generally for discretionary dollars that consumers will allocate to recreation and second homes, so its competition will include a greater area and range of projects.

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.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our 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 exists for our Common Stock which could lead to 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 ownership of our Common Stock creates a risk of sudden change in our share price.As of February 28, 2006,2008, directors and members of our executive management team beneficially owned or controlled approximately 35%34% 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 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.

If the downturn in the housing market or the sub-prime lending crisis continues, it could have an adverse effect on our real estate business.Our residential housing projects, Centennial

and TMV, are currently in the entitlement phase, and therefore they have not been impacted by the current downturn in the housing market or the sub-prime lending crisis. However, if the downturn in the housing market or the instability of the mortgage industry continues at the time these projects move into their development and marketing phases, our resort/residential business could be adversely affected.

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

None.

Our 270,000 acres include portions of the San Joaquin Valley, portions of the Tehachapi Mountains and portions of the western end of the Antelope Valley. A number of key transportation and utility facilities cross our land, including Interstate 5, California Highways 58, 138 and 223, the California Aqueduct (which brings water from Northern California), and various transmission lines for electricity, oil, natural gas and communication systems.

Approximately 247,000 acres of our land are located in Kern County, California. The Kern County General Plan, or the General Plan, for this land contemplates continued commercial, resource utilization, farming, grazing and other agricultural uses, as well as certain new developments and uses, including residential and recreational facilities. While the General Plan is intended to provide general guidelines for land use and development, it is subject to amendment to accommodate changing circumstances and needs. In addition to conforming to any amendment of the General Plan, much of our land will require specific zoning and site plan approvals prior to actual development.

The remainder of our land, approximately 23,000 acres, is in Los Angeles County. This area is accessible from Interstate 5 via Highway 138. Los Angeles County has adopted general plan policies that contemplate future residential development of portions of this land, subject to further assessments of environmental and infrastructure constraints. We are currently pursuing entitlements for athe Centennial master-planned community on 11,700 acres of this land. See Item 1, “Business—Real Estate Operations.”

Portions of our land consist of mountainous terrain and much of the land is not presently served by paved roads or by utility or water lines. Any significant development of the land would involve the construction of roads, utilities and other expensive infrastructure and would have to be done in a manner that accommodates a number of environmental concerns, including endangered species and

wetlands issues, which may limit development of portions of the land or result in substantial delays in getting governmental approval. Rural/agricultural development of much of our mountain land could be accomplished without many or any such approvals, constraints, and/or investments, but we have not to date pursued this avenue of development.

Water Rights

Existing long-term water contracts with the Wheeler Ridge-Maricopa Water Storage District, or Wheeler Ridge Water District, provide for water entitlements and deliveries from the California

State Water Project to our agricultural operations in the San Joaquin Valley. The terms of these contracts extend to 2035. Under the contracts, we are entitled to annual water for 5,496 acres of land, which is adequate for our present farming operations.

In addition to our agricultural contract water entitlements, we have an additional entitlement to obtain from the California State Water Project sufficient water to service a substantial amount of future residential and/or commercial development in Kern County. The Tejon-Castac Water District, or Tejon-Castac, a local water district serving only our land and land we have sold in the Tejon Industrial Complex, has 5,278 acre feet of State Water Project entitlement, or enough to supply over 10,000 average families assuming 100% delivery.entitlement. In addition, Tejon-Castac has approximately 30,00034,000 acre feet of water stored in Kern County water banks. Both the entitlement and the banked water are the subject of a long-term water supply contract extending to 2035 between Tejon-Castac and our Company. Tejon-Castac is the principal water supplier to the Tejon Industrial Complex, and would be the principal water supplier for any significant residential and recreational development in TMV.

We have constructed a 150 acre water bank consisting of nine ponds on our land in southern Kern County. Water is pumped into these ponds and then percolates into underground aquifers. We subsequently purchased 6,600 acre feet of water from the Antelope Valley-East Kern Water Agency, which has been pumped from the California aqueduct and is currently retained in this water bank. We anticipate adding additional water to this storage facility in 2008. This water is available for our current and future use.

During 2006,2007, project allocations were 100%60%, and the Wheeler Ridge Water District was able to supply us with 100% of our farming demands. In some years, there is also sufficient runoff from local mountain streams to allow us to capture some of this water in reservoirs and utilize it to offset some of the higher-priced State Water Project water. Both the Wheeler Ridge Water District and Tejon-Castac are able to bank (percolate into underground aquifers) some of their excess supplies for future use. The Wheeler Ridge Water District expects to be able to deliver our entire contract water entitlement in any year that the State Water Project deliveries exceed 30% by drawing on its ground water wells and water banking assets. Based on historical records of water availability, we do not believe we have material problems with our water supply. However, if State Water Project deliveries are less than 30% of our entitlement in any year, or if less severe shortages continue for a sustained period of several years, then the Wheeler Ridge Water District may not be able to deliver 100% of our entitlement and we will have to rely on our own ground water sources, mountain stream runoff, water transfers from Tejon-Castac and water banking assets to supply the shortfalls to our farming operations. Water from these sources may be more expensive because of pumping costs and/or transfer costs. Also, as we develop our real estate for residential, commercial and industrial uses, there will be less water available for agriculture from Tejon-Castac. A 60%35% allocation has been made by the State Water Project for 2007.2008. With this allocation, along with the

Wheeler Ridge Water District’s additional supplies, we believe that we will have adequate water supplies for farming in 2007.2008.

The water contracts with the Wheeler Ridge Water District and with Tejon-Castac require annual payments related to the fixed costs of the California State Water Project and each district, whether or not water is used or available. The Wheeler Ridge Water District contracts also establish a lien on benefited land.

TheAlthough no assurance has been given, the water agency serving the Los Angeles County portion of our land, the Antelope Valley-East Kern Water Agency, has surplus entitlement and, although no assurance has been given, it has indicated, based on water availability, that it would be able tocould provide a portion of the water needed for Centennial.

Portions of our property also have available groundwater. That source would be sufficient to supply commercial development in the Interstate 5 corridor and provide a significant portion of the water needed for development at Centennial and TMV. Ground water in the Antelope Valley Basin has recently become the subject of litigation. Please refer to Item 3, “Legal Proceedings.”

During 2007, there were many environmental challenges regarding the moving of state project water through the Sacramento Delta. These challenges resulted in a court ordered shut down of the Delta pumps, which are of primary importance to the California water system because these pumps are part of the system that moves water from Northern California to Southern California. After a temporary contingency pumping plan was approved by the Court, which protects a certain species of fish, the Court allowed the pumps to be turned back on but continued to limit usage. The usage is limited to approximately 50% capacity until all studies are completed as to the environmental impact to the Delta. This curtailment of water from the Delta impacts the delivery of our state water entitlements and during 2008 could limit us to only 50% of our total supply. There are many groups, governmental and private, working together to come up with a solution over the next year to alleviate the curtailment of water from the Delta.

Historic State Water Project restrictions on the right to use agricultural water entitlement for municipal purposes were removed in 1995, and the parties to a lawsuit challenging such removal have agreed to a settlement which would allow such removal to continue while the environmental impacts are studied. For this purpose, “municipal” use includes residential and industrial use. Therefore, although only 2,000 of Tejon-Castac’s 5,278 acre feet of entitlement are labeled for municipal use, there is no practical restriction on Tejon-Castac’s ability to deliver the remaining water to residential or commercial/industrial developments. In the near term, for political and regulatory reasons, it is unlikely that we would be able to direct any of our Wheeler Ridge Water District agricultural entitlement to municipal or industrial uses.

The Tejon Ranch Public Facilities Financing Authority Community Facilities District, or CFD, a joint powers authority formed by Kern County and the Tejon-Castac Water District, has placed liens on 1,728 acres of the Company’s land. These liens are to secure payment of special taxes related to $23,900,000$30,000,000 of bond debt sold by the CFD. The Company is obligated, as a landowner in the district, to pay its share of the special taxes assessed each year. The 1,728 acres of land includes the Tejon Industrial Complex development.TIC-West. Proceeds from the sale of CFD bonds went to reimburse the Company for public infrastructure related to the Tejon Industrial Complex development.TIC-West. In 2006, $3,524,0002007, $2,981,000 was reimbursed to the Company through these bond funds. In 2007, 2006, 2005 and 2004,2005, the Company paid approximately $940,000, $482,000, $385,000, and $101,000,$385,000, respectively, in special taxes related to the CFD. As development continues to occur at Tejon Industrial Complex, new owners of land and new lease tenants, through

triple net leases, will bear an increasing portion of the assessed special tax. As this happens, the Company’s obligation is reduced. It is expected that the Company will have special tax payments in 20072008 of approximately $386,000,$440,000, but this could change in the future based on the amount of bonds outstanding within the CFD and the amount of taxes paid by others. As development and values increase around the Tejon Industrial Complex, the Company may be able to have approximately 1,400 acres released from the CFD lien.

We leaseThe Company leases land to National Cement Company of California Inc., or National, for the purpose of manufacturing portlandPortland cement from limestone deposits on the leased acreage. National’s former subtenant, Systech Environmental Corporation, is awaiting action by the California Department of Toxic Substances Control in order to achieve regulatory closure for its former facility that burned hazardous waste as a supplemental fuel in the cement plant located on land leased from the Company.

The California Regional Water Quality Control Board, or RWQCB, for the Lahontan Region has issued several orders with respect to four environmental conditions on the property:property currently leased to National:

(2)

Cement kiln dust.National and Lafarge have consolidated, closed and capped cement kiln dust piles located on land leased from the Company. An order of the RWQCB directs National, Lafarge and the Company to maintain and monitor the effectiveness of the cap. Maintenance of the cap and groundwater monitoring remain as on-going activities. Groundwater contamination levels down gradient of the cap exceeded limits set by the RWQCB following record-breaking rains in late winter 2005. The Company is advised that National and Lafarge are conducting ongoing studies and developing a plan to minimize the chances of this occurring again.

To date, the Company is not aware of any other failure by Lafarge or National to comply with the orders or informal requests of the RWQCB. The Company has not been directed by the RWQCB to perform any remedial activities. Under the lease betweencurrent and prior leases, National and the Company, National isLafarge are obligated to indemnify the Company for costs and liabilities arising directly or indirectly out of itstheir use of the leased premises. Lafarge has liability for all obligations under the indemnity provisions arising before the November 1987 assignment of the lease from Lafarge to National. The Company believes that all of the matters described above are included within the scope of the National or Lafarge indemnity obligations.

The Company believesobligations and that Lafarge and National have sufficient resources to perform any possible or reasonably likely obligations relating to these matters. If they do not and the Company is required to perform the likely remedial work at its own cost, it is unlikely that the amount of any such expenditure by the Company would be material.

On November 29, 2004, a complaint was filed asking for the Antelope Valley ground water basin to be adjudicated. This means that the rights of all parties overlying the basin, including the Company’s land, should be fixed based on various principles of water law and on negotiations among the principal parties or groups of water users. ItBecause the case is still in the early stages and not yet at issue, it is too early to ascertain what effect, if any, this case may have on the Centennial project or the Company’s remaining lands in the Antelope Valley. Because the water supply plan for the Centennial project includes several sources of water in addition to ground water underlying the Company’s lands, and because the creation of an efficient market for local water rights is frequently an outcome of adjudication proceedings, we anticipate that sufficient water to supply the Centennial project’s needs will continue to be available for its use.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

The following table shows the high and low sale prices for our Common Stock on the New York Stock Exchange for each calendar quarter during the last two years:

As of February 26, 2007,2008, there were 444442 owners of record of our Common Stock.

No dividends were paid in 20062007 or 20052006 and at this time there is no intention of paying dividends in the future.

For information regarding the equity compensation plans pursuant to Item 201(d) of Regulation S-K, please see Item 11, “Executive Compensation” and Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Form 10-K, below.

In 2006,2007, the Certification signed by the CEO that he was not aware of any violation by the Company of the existing corporate governance standards of the New York Stock Exchange, or the Exchange, was filed by the Company with the Exchange, as required by Section 303A.12(a) of the Exchange’s Listed Company Manual.

ITEM 6.

SELECTED FINANCIAL DATA

Years Ended December 31

(in thousands of dollars, except per share amounts)

ITEM 7.

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

Overview

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

We are a diversified real estate development and agribusiness company committed to responsibly using our land and 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 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 and services generates revenues from lease activities, land sales, build-to-suit building sales and leases, oil and mineral royalties and grazing leases. The primary commercial/industrial development is Tejon Industrial Complex.Complex, or TIC. Resort/residential land development does not currently produce revenues but is actively involved in the land entitlement process. Within our resort/residential segment, the two active developments are: Tejon Mountain Village and the Centennial master planned community. Farming produces revenues from the sale of grapes, almonds, pistachios, and walnuts.

For 2007 we have net income of $7,333,000 compared to a net loss of $2,729,000 in 2006. The significant improvement in net income is attributable to increased revenues of $2,992,000 from our farming operations, increased commercial revenues of $930,000, decreased corporate expenses of $4,626,000 and significantly improved equity in earnings of unconsolidated joint ventures of $9,333,000. In 2007 revenues from operations grew $3,922,000 to $32,344,000 when compared to 2006. Expenses from operations declined $2,218,000 in 2007 to $34,918,000 compared to the prior year. The growth in commercial revenues of $930,000 resulted from improvements in both base and percentage rents from our power plant lease with Calpine and from increased revenues from ancillary land use. The increase in our farming revenues is primarily due to improved yields on our pistachio crop and walnut crop as compared to 2006. The large improvement in equity in earnings of unconsolidated joint ventures is the result of the sale of the industrial building owned by our Tejon Dermody joint venture. The building was sold in July 2007, resulting in a gain of $17,114,000 before tax, of which we recognized 50%, and which is included as equity in earnings of unconsolidated joint ventures. This was Tejon Dermody’s primary asset, and the entity is now in the process of being dissolved. Corporate expenses decreased in 2007 primarily due to the absence of

compensation costs that were incurred in 2006 relating to the successful formation of the TMV LLC joint venture with DMB Associates.

For 2006, we havehad a net loss of $2,729,000, compared to net income of $1,546,000 for 2005. Revenues from continuing operations for 2006 grew $2,062,000 to $28,422,000. Expenses from continuing operations for 2006 were $37,136,000, an increase of $9,974,000 when compared to 2005. The growth in revenue iswas due to an improvement in revenue from land sales, increased royalties from oil and minerals, and higher leasing revenue. Our royalty income from oil and minerals grew due to higher prices for oil and cement. Leasing revenue increased due to higher revenues from our power plant lease. The largest components of the increase in expense for the year arewere staffing costs, including higher stock compensation expense, a significant portion of which was a non-recurring payment incurred upon execution of the TMV LLC joint venture agreement, cost of sales related to our land sales transactions, higher farming crop costs including fixed water, and increased operational costs related to water, repairs and fuel.

During 2005, we had net income of $1,546,000, compared to net income of $389,000 for 2004. Revenues from continuing operations for 2005 increased $5,448,000 to $26,360,000. Expenses from continuing operations for 2005 were $27,162,000, an increase of $3,439,000 when compared to 2004. The growth in revenue was due to an improvement in revenue from our farm crops, increased royalties from oil and minerals, and higher leasing revenue.The improvement in farm

crop revenue was primarily due to higher prices for our almonds, pistachios, and grapes. Our royalty income from oil and minerals grew due to higher prices for oil and cement. Leasing revenue increased due to higher revenues from our power plant lease. The largest components of the increase in expense for the year were staffing costs, including higher stock compensation expense, marketing and public relations costs related to our development projects, and increased operational costs related to water, repairs and fuel.

Income from continuing operations for 2005 was $1,546,000, compared to a loss of $962,000 during 2004.

During 2007,2008, we will continue to invest funds toward the achievement of entitlements for our land and for infrastructure development within our active industrial developments. The process of securing entitlements for our land is a long, arduous process andwhich could take several years. Over this time,During the entitlement process, our net income will fluctuate from year-to-year based upon commodity prices, production within our farming segment, and the timing of sales of land and the leasing of land within our industrial developments.

The 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 each business segment of the business and is followed by a discussion of our financial position. It is useful to read the business segment information in conjunction with Note 1413 of the Notes to Consolidated Financial Statements.

Critical Accounting Policies

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, 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 a 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, stock compensation, our future ability to utilize deferred tax assets, 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:

Revenue Recognition – The Company’s revenue is primarily derived from rentallease 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 unless there is a considerable risk as to collectibility. The financial terms of leases are contractually defined. Royalty revenues are contractually defined and are generally based upon production. RentalLease revenue is not accrued when a tenant vacates the premises and ceases to make rent payments or files for bankruptcy.

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 to 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, or be required to develop the property in the future or construct facilities or off-site improvements.

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. It is not unusual for portions of our almond crop to be sold in the year following the harvest. 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 20062007 orchard crops, we estimated almond revenuesrevenue to be $2,724,000,$6,718,000, or $2.11$1.67 per pound on average, pistachio revenue to be $2,615,000,$4,802,000, or $2.11$1.33 per pound on average, and walnut revenue to be $175,000,$1,168,000, or $0.54$1.03 per pound on average. These estimates not only impact the recorded revenues within our farming segment but also our recorded accounts receivable at December 31, 2006.2007. Over the last three years, prices received on almonds have ranged from $1.85$1.00 to $3.80 per pound. Pistachio prices over the last three years have ranged from $1.05 to $2.30 per pound, and walnut prices have ranged from $.32$0.32 to $.60$1.03 per pound. If we were to assume that our above estimates for 20062007 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 $145,000,$386,000, or 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 20062007 was $2.06$1.62 to $2.16 $1.72

per pound. If we were to change our estimate of 20062007 orchard crop revenues to the low end of the estimateestimated 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

increased farming revenue by $34,000, $395,000 and $398,000 in 2007, 2006 and 2005 respectively, and decreased farming revenue by $34,000 in 2004.respectively. The large adjustments in 2006 and 2005these years are related to continuing increases in almond, pistachio and walnut prices prior to the receipt of our final scheduled payments.

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 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 20062007 and 2005,2006, $0.96 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 become even more significant as we continue to move forward as a real estate development company. 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 when events or changes in circumstances indicate that the carrying value of assets contained in our financial statements may not be recoverable. The impairment calculation

compares the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges)(undiscounted). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying 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)(discounted). We recognize an impairment loss ifequal to the amount ofby which 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 three 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 segment 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 1312 of the Notes to Consolidated Financial Statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Pension benefit obligations and the related effects on operations are calculated using actuarial models. The estimation of our pension obligations, costs and liabilities requires that we make use of estimationsestimates of present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.

The assumptions used in developing the required estimates include the following key 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. To determine the expected long-term rate of return on pension plan assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. At December 31, 2006,2007, 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 3%. The effects of actual results differing from our assumptions and the effects of changing assumptions are recognized as a component of other comprehensive income, net of tax. Amounts recognized in accumulated other comprehensive income are adjusted as they are subsequently recognized as components of net periodic benefit cost. If we were to assume a 50 basis point change in the discount rate used, our periodic pension cost would increase or decrease approximately $20,000 and our projected benefit obligation would increase or decrease approximately $730,000.

Stock-Based Compensation— – We apply the recognition and measurement principles of SFAS No. 123 (R), “Share-Based Payments” in accounting for long-term stock-based incentive plans. During 2006, $742,0002007, $333,000 of compensation expense related to grants of stock options was reflected in net income. No stock options were granted during 20062007 or 2005.2006. We have not issued any stock options to employees or directors since January 2003. The compensation expense recognized during 20062007 is related to options with final vesting dates in 20062007. All of our stock options are fully vested and 2007.all related expenses have been recognized in our financial statements. See Note 76 of the Notes to Consolidated Financial Statements, “Common Stock and Stock Option Information,” for additional information regarding stock options.

We also make stock awards to employees based upon time-based criteria and through the achievement of performance-related objectives. Performance-related objectives are stratified into threshold, target, and maximum goals. These stock awards are currently being expensed over the expected vesting period based on each performance criterion. We make estimates as to the number of shares that will actually be granted based upon estimated ranges of success in meeting the defined performance measures. If our estimates of performance shares vesting were to change by 25%, stock compensation expense would increase or decrease by $636,000$461,000 depending on whether the change in estimate increased or decreased shares vesting.

See Note 87 of the Notes to Consolidated Financial Statements, “Stock Compensation Plan,” for total 20062007 stock compensation expense related to stock grants.

New Accounting Pronouncements

The accounting policies adopted during 20062007 related to new accounting pronouncements. The impact of the adoption of these policies has been disclosed where material to the consolidated financial statements of the Company.

FASB Interpretation No. 48, or FIN 48, “AccountingStatement No.159 “The Fair Value Option for Uncertainty in Income Taxes,” isFinancial Assets and Financial Liabilities – Including an interpretationamendment of FASB Statement No. 109, “Accounting for Income Taxes,” and115” was issued in July 2006. FIN 48 creates a single modelFebruary 2007. This statement permits entities to address uncertaintychoose to measure many financial instruments and certain other items at fair value. Any unrealized gains or losses would be reported in income tax provisionsearnings at each reporting date. The objective is to improve financial reporting by prescribing a minimum threshold that a tax position must meet before being recognizedmitigating volatility in the financial statements. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48earnings caused by measuring related assets and in subsequent periods. FIN 48 will beliabilities differently without applying complex hedge accounting rules. FASB Statement No. 159 is effective for fiscal years beginning after DecemberNovember 15, 2006,2007 and the provisions of FIN 48 willshould be applied to all tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. We are currently evaluating the impact of FIN 48 on our financial statements and have not yet determined the impact.

FASB Statement No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140,” was issued in February 2006. This statement amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and addresses the financial treatment and evaluation of certain derivatives. FASB Statement No. 155 is effective for fiscal periods beginning after September 15, 2006.prospectively. We have reviewed FASB Statement No. 155159 and we have concluded that this pronouncement will not have a material impact on results of operations or our financial condition.

FASB Statement No. 141 (revised 2007) “Business Combinations,” or Statement No.141(R), was issued in December 2007. This statement is intended to improve the relevance, representational faithfulness and comparability of information reported in respect of a business combination and its effects. The statement establishes principles and requirements for how an acquirer recognizes and measures identifiable assets acquired, goodwill acquired and liabilities assumed in a business combination. It also establishes disclosure requirements that allow financial statement users to evaluate the nature and financial effects of the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We have reviewed Statement No. 141(R) and concluded that this pronouncement will not have a material impact on results of operations or our financial condition.

FASB Statement No. 156, “Accounting for Servicing of160 “Noncontrolling Interests in Consolidated Financial AssetsStatements – an amendment of ARB No. 51” was issued in December 2007. This statement is designed to improve the relevance, comparability and transparency of consolidated financial statements that include a noncontrolling interest, more commonly known as a minority interest. The statement establishes accounting and reporting standards that address the proper presentation in the financial statements of ownership interest, share of income, changes in ownership and required disclosure upon deconsolidation. FASB Statement No. 140,” was issued160 applies to all entities that prepare consolidated financial statements, but will only affect those entities that have an outstanding noncontrolling interest in March 2006.one or more subsidiaries. Although we prepare consolidated financial statements, we currently have no outstanding noncontrolling interests, therefore adoption of this statement will have no effect on our results of operation or our financial condition. This statement amends FASB Statement No. 140, “Accounting for Transactions and Servicing of Financial Assets,” and addresses recognition, measurement and presentation requirements when entering into contractual obligations to service financial assets. FASB Statement No. 156 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after SeptemberDecember 15, 2006. We have reviewed FASB Statement No. 156 and concluded that this pronouncement will not have a material impact on results of operations or our financial condition.2008.

FASB Statement No. 157, “Fair Value Measurements,” was issued in September 2006. It defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB Statement No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions of this statement should be applied prospectively as of the beginning of the year of initial application. We have reviewed FASB Statement No. 157 and concluded that this pronouncement will not have a material impact on results of operations or our financial condition.

FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement No. 87, 88, 106, and 132(R),” was issued in September 2006. It requires employers to recognize the overfunded or underfunded status of a defined-benefit post-retirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive income. The funded status of the plan must be measured as of the date of its year-end statement of financial position. Certain changes in prior service costs that are not recognized as components of net periodic benefit costs under FASB Statement No.87, “Employers’ Accounting for Pensions,” must also be recognized through other comprehensive income. This statement is effective for issuers of publicly traded securities for fiscal years ending after December 15, 2006. Our 2006 financial statements reflect the application of FASB Statements No. 158 and the overall impact was not material to results of operations or our financial condition.

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 – Commercial/Industrial

Our commercial/industrial segment profits during 2006 increased $987,000,2007 decreased $266,000, or 26%6%, when compared to 20052006 segment profits. The improvementdecline in segment profits was driven by an increase in revenuesexpenses of $2,947,000. This$1,196,000 that more than offset the $930,000 increase resulted from land sales of $1,007,000, a $1,577,000 improvement in oil and minerals royalty revenue, and generally higher lease revenues, including those from our power plant lease with Calpine. Revenue from the land salesrevenues. The most significant increases in expenses were only partially recognized in 2006compensation costs due to incomplete commitments to construct offsite improvements. The remaining revenues of $712,000 will be recognized in the first quarter of 2007 as the construction commitments are completed. Oiladditional staff. We also experienced increased contract and minerals royalties continued to improve in 2006 dueprofessional service costs related to the higher oil pricesissuance of Community Facilities District bonds, or CFD bonds, for TIC-West, legal costs related to a pending land sale, and higher prices for cementcosts related to a lease and rock aggregate product. Revenues fromupdated operating agreements with the power plant leasecurrent Travel Centers of America. Property taxes increased due to improved variable rent payments based on the plant’s production. Expenses during 2006 increased $1,960,000, primarilyhigher special tax assessments related to outstanding CFD bonds. Increases in many routine operating costs such as a result of increased compensation costs, the cost of salesfuel, utilities and commissions associated with the land sales, increased commercial water charges and increased corporate allocations. The increase in compensation costs of $1,347,000 was principallyrepairs were driven by the compensationunderlying higher petroleum prices since many of these items are produced using petroleum derived products. Water costs associated with the execution of the joint venture agreement for TMV, the expensing of stock options and the cost associated with the stock grant program. Cost of sales and commissionsalso increased as a direct result of the land sales to In-N-Out Burger and Petro. Commercial water costs increased $143,000in this segment due to higher operating costs and water costs within the local water district. Corporate allocationsThese increased $276,000expenses were partially offset by improved revenues. In 2007, we completed the construction commitments required by our 2006 land sales agreements with In-N-Out and Petro. Completion of these improvements resulted in recognition of the remaining $712,000 of revenues relating to these sales. In 2006 we recognized $1,007,000 of this sales revenue. Improvements from both base and percentage rents from our power plant lease with Calpine accounted for an increase in revenues of $240,000. Revenues received from ancillary land use increased $650,000. Partially offsetting these increases was a net decline of $108,000 in mineral revenues due to decreased production of sand/rock mined by our lessee and from our tenant’s planned facility maintenance. A decrease in new construction in the near term could continue to cause a decline in the amount of rock aggregate product, and cement that our lessee’s produce and for which we receive a royalty percentage, however, higher oil prices are helping to offset these declines.

In 2008 we will be focused on continuing the marketing and development of TIC-West and beginning the marketing and development of commercial/industrial product within TIC-East. In July 2007 construction on TIC-East was cleared for commencement as this business segment’s revenuesthe Fifth Circuit Court of Appeals in Fresno, California upheld the lower court ruling allowing the Company to begin development. We also anticipate receiving final approval in 2008 on our Foreign Trade Zone (or FTZ), application from the U.S. Foreign Trade Zone Board. Approval of our 2006 application for 177 acres of land at TIC was delayed due to U.S. Customs and assets increased in relationBorder Protection issues related to other operating segments.resource management and jurisdictional oversight.

During December 2005, the tenant of the power plant lease, Calpine, filed for Chapter 11 bankruptcy protection. On June 21, 2006, we received notification that the bankruptcy court had affirmed the power plant lease as part of the bankruptcy reorganization. Therefore,On January 31, 2008, Calpine emerged from its bankruptcy reorganization. Based on past operating history and

Calpine’s emergence from bankruptcy, we do not currently anticipateexpect any loss or reduction of lease payments fromchanges in our business relationship with Calpine that would negatively impact our commercial operating revenues.

Future activities within the commercial/industrial segment will be focused on the marketing and development of commercial/industrial product and the beginning of infrastructure development for the TIC-East development. During 2006, we sold land to In-N-Out Burger for a fast food restaurant and to Petro for a new convenience store and gas station. In October 2006, the Port of Los Angeles submitted to the Foreign Trade Zone Board of the U.S. Department of Commerce an expansion application for 177 acres of land at Tejon Industrial Complex. We expect a decision on this application in the first half of 2007.

Our marketing efforts for TIC-East and West continue to focus on educating potential users about the logistical benefits of our site and the success that current tenants and owners within our development have experienced. We believe that as California’s population continues to grow, and the economy continues its expansion, we will begincontinue to see an increaseincreases in industrial activity at Tejon Industrial Complex.TIC. Our development strategy fits very well within the logistics model that companies are using, which 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 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.

A potential disadvantage to our development strategy is our distance from the Port of Los Angeles in comparison to the traditional warehouse/distribution centers east of Los Angeles.

On March 24, 2006, Temporary or long-term downturns in the Company receivedeconomy can also have an adverse impact on our ability to sell or lease our industrial/commercial product. While we have not experienced declining interest in our developments by potential tenants, declining profitability of these potential tenants as a favorable rulingresult of a slowing economy is possible in Kern County Superior Court that cleared the waynear term future and could decrease the demand for expansion of the TIC-East by dismissing the legal challenges to the project. On June 28, 2006, our opponents filed an appeal of the ruling, though the grounds for such an appeal are limited and construction could commence pending a favorable outcome. Opening briefs related to the appeal were filed by our opponents during October 2006. The Court of Appeals is expected to hear the appeal during the first half of 2007.buildings.

The commercial/industrial segment 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 development is difficult to predict due to the uncertainties of the market. Infrastructure development and marketing 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.

Our commercial/industrial segment profits during 20052006 increased $1,765,000,$987,000, or 87%26%, when compared to 20042005 commercial/industrial segment profits. The improvement in commercial/industrial segment profits was driven by an increase in revenues of $2,871,000. The growth$2,947,000. This increase resulted from land sales of $1,007,000, a $1,577,000 improvement in revenues was primarily driven by higher leasing revenues and higher oil and mineralminerals royalty revenues. Leaserevenue, and generally higher lease revenues, increased approximately $2,000,000 during the year. This increase was largely due to higher revenuesincluding those from our power plant lease with Calpine. Power plant lease revenue improvedRevenue from the land sales were only partially recognized in 2006 due to incomplete commitments to construct offsite improvements. The remaining revenues of $712,000 were recognized during the endingfirst half of a grace period during 2004 that was related to2007 as the timing of construction of the plant and to the receipt of variable rent payments associated with the plant’s production.commitments were completed. Oil and mineral royalties improved during 2005in 2006 due to the higher oil prices for oil and increased production andhigher prices for cement and rock aggregate product. Revenues from the power plant lease increased due to improved variable rent payments based on the plant’s production. Expenses during 2006 increased $1,960,000 compared to expenses during 2005, primarily as a result of increased $1,106,000, primarily duecompensation costs, the cost of sales and commissions associated with the land sales, increased commercial water charges and increased corporate allocations. The increase in compensation costs of $1,347,000

was principally driven by the compensation costs associated with the execution of the joint venture agreement for TMV, the expensing of stock options and the cost associated with the stock grant program. Cost of sales and commissions increased as a direct result of the land sales to staffing costs, marketing costs, water costs,In-N-Out Burger and repairs and fuel costs. Staffing costs increased $384,000 due to higher benefit costs, annual salary increases, the conversion of part-time employees to full time, and to an increase of $72,000 in stock compensation expense. An increase of $307,000 in marketing costs was related to the beginning of new marketing campaigns designed to generate additional activity within our commercial/industrial developments. FixedPetro. Commercial water costs increased $286,000 during the year$143,000 due to higher operating costs and water costs within athe local water district. RepairsCorporate allocations increased $276,000 as the commercial/industrial segment’s revenues and fuel costsassets increased $179,000 duein relation to higher gasoline and diesel costs, repairs on the ranch related to winter storm damage, and to the demolition of an old, previously leased commercial building.other operating segments.

See 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 conceptual designland planning and entitlement activities related to our potential residential developments, which include the Centennial master-

plannedmaster-planned community and TMV. Each of our resort/residential projects is being developed through a joint venture in which the Company is a 50% partner. Such joint venture agreements provide a source of capital and allow the significant costs and business risks inherent in these projects to be shared with our venture partners. The resort/residential segment had an operating loss of $3,408,000$3,512,000 during 2006,2007, an increase of $912,000$104,000, or 3% when compared to the prior year. The increase in expenses when compared to 20052006 was attributable mainly to increased staffing costs of $418,000 including salary and stock compensation costs (net of $565,000. Compensation relatedamounts capitalized) for additional professional staff to administer and oversee our residential projects. These employees monitor regulatory and environmental issues and provide necessary oversight functions for our joint ventures. The increase in cost for this additional staff more than offset the executionabsence of the TMV LLC joint venture, stock option and stock grant expenses and the addition ofTMV-related compensation costs that were incurred in 2006. Temporary office accommodation for these additional staff all contributedresulted in an increase in lease costs in 2007 as compared to this increase. Contract and2006. Offsetting these increases was a decline in professional service fees relatingdue to the completionabsence of the TMV LLC joint venture agreementTMV-related formation costs and to other environmental programs and research increased $375,000. Additionally, costs associated withreduced lake maintenance increased $232,000. These increases were partially offset by decreased marketing and insurance costs.costs due to the lack of rainfall.

Near-term activities within this segment will be focused on obtaining entitlements for the Centennial project, located in Los Angeles County, and TMV, located in Kern County. The resort/residential segment will continue to experience increases 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 actual timing and completion of entitlement-related activities is difficult to predict due to the uncertainties of the approval process and the likelihood of litigation upon approval of our entitlements in the future. It could take several years to ultimately receive the required regulatory approvals. In the course of pursuing these development activities we routinely engage in conversations with environmental groups and government agencies that could have an interest in or influence over the planned future activities that we undertake on our land. Land development impacts diverse groups with varying concerns and we regularly meet with many of these groups to insure that we address these concerns proactively in order to allow our development plans to proceed with the most amount of support and concurrence. From time to time, we have granted conservation easements, sold land and taken other similar steps to facilitate development activities. We will also continue to evaluate land resources to determine the highest and best use for our land holdings. Our long-term goal through this process is to increase the value of our land and create future revenue opportunities through resort and residential development. We

The recent downturn in the housing industry has not impacted our business plans to date. Since we are currently working with our joint venture partner DMB, a leading resort/residential planned community developer, forin the entitlement phase of development, we currently do not have an approved project and developmenttherefore we do not have inventory for sale in the market. The housing industry downturn has impacted the perception of current land values due to the numerous write downs home builders have recently taken regarding land inventory. This perception of land value has impacted our stock price but has not impacted the values within our active industrial development.

In 2006 the resort/residential segment had an operating loss of $3,408,000, an increase of $912,000 when compared to 2005. The increase in expenses in 2006 compared to 2005 was mainly attributable to increased compensation costs of $565,000. Compensation related to the execution of the TMV project. On May 22, 2006, we executed aLLC joint venture, stock option and stock grant expenses and the addition of staff to the resort/residential segment all contributed to this increase. Contract and professional service fees relating to the completion of the TMV LLC joint venture agreement and to other environmental programs and research increased $375,000. Additionally, costs associated with DMB to jointly secure entitlement and all necessary regulatory approvals to master plan, and subsequently develop and build TMV. TMV is designed to be a premier mountain resort community offering a variety of homesite opportunities, a number of small resort hotels, and various outdoor recreational activities. The joint venture was formed through the contribution by the Company of rights to all studies, research, and other work which we had performed related to TMV, as well as a commitment to contribute 28,000 acres comprising the TMV site at such time as entitlements are successfully obtained and litigated, while DMB will contribute up to a total of $113,500,000 to fund entitlement efforts and development. Based on this joint venture, our future cost obligation related to TMV has been greatly reduced by the amount of contributions DMB will be providing to the joint venture for entitlement and development activities. For additional information regarding the joint venture, please refer to our Current Report on Form 8-K filed by the Company on May 24, 2006. Centennial is being developed by Centennial Founders, LLC, an unconsolidated joint venturelake maintenance increased $232,000 in which we have a 50% ownership interest. Our partners in this joint venture are Pardee Homes, Lewis Investment Company and Standard Pacific Corp. Our partners in this joint venture will contribute up to $33,000,000 to fund entitlement efforts. After their commitment has been met we will share equally with our partners in any additional capital needs for the joint venture.

The resort/residential segment had operating losses of $2,496,000 during 2005, an increase of $509,000 when2006 compared to the prior year. The increase in expense over the prior year was driven2005. These increases were partially offset by several smaller variances, the largest of which was an increase of $250,000 indecreased marketing and public relations activity related to our development and environmental activities and a $71,000 increase in staffinginsurance costs. Staffing costs increased due to the addition of new employees and stock compensation expense.

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

Farming

Farming segment profits were $4,972,000 in 2007, an increase of $1,884,000, or 61%, when compared to the prior year. The improvement in 2007 farming segment profits is due to improved revenues of $2,992,000 more than offsetting increased expenses of $1,108,000. The increase in revenues is driven by significantly higher yields for both pistachios and walnuts as compared to 2006 yields. These improvements were partially offset by lower land lease revenues. Expenses in our farming segment increased $1,108,000 primarily due to higher costs associated with the production of our crops due to increased wages, chemicals and fertilizers that are derived from petroleum based products. In 2007, crop production costs increased $1,946,000 compared to 2006, but this increase was offset by a decline in water costs of $453,000 in 2007 due to a 65% allocation of water from the local water district. The increased crop production costs were also offset by a decline in administrative salary costs of $314,000 due to the absence of the TMV-related formation compensation costs in 2007.

Grape revenues for the 2007 crop declined $111,000 as compared to 2006 due to slightly lower prices. Grape production in 2007 increased by approximately 200 tons as compared to 2006, but the lower grape prices more than offset this increase. Grape prices are remaining relatively stable in spite of this slight decline in prices in 2007. The expected future demand for our product led to additional plantings in 2006 from which we expect the first crop in 2008. We have long term contracts for our grape crops ranging from three to ten years.

Almond revenues of $6,718,000 in 2007 were in line with 2006 revenues of $6,750,000. Our 2007 almond revenues include $3,595,000 of revenue from the sale of 2006 crop almonds in 2007 as compared to $3,754,000 of 2006 farming revenues attributable to the sale of 2005 crop

almonds. These sales reflect amounts held in inventory at the end of the prior year and sold in the following calendar year. Almond prices have fallen from the record levels experienced in late 2005, but are still relatively high compared to historical prices. Total production of almonds was approximately 2,976,000 pounds in 2007 as compared to 3,390,000 pounds in 2006. We are carrying approximately 1,000,000 pounds of our 2007 almond crop into 2008 as they were unsold at December 31, 2007. In 2006 we carried over approximately 2,000,000 pounds of almonds into 2007. These amounts are held at the lower of cost or market on our balance sheet and are classified as inventory.

Thus far in 2008, the price for almonds has remained relatively stable, but the demand has improved as compared to demand in late 2007 when there was a notable temporary absence of buyers in the market. We do not expect the current range of almond prices of $1.65 to $2.00 to continue to climb over an extended period of time, but we do expect prices to stay above historical averages due to current demand levels. Our long-term expectations are that our almond crop prices will decrease based on industry projections that almond production will continue to increase in the future.

Pistachio revenues increased $2,187,000 in 2007 to $4,802,000. Yields increased 2,350,000 pounds due to 2007 being an “on” production year in the alternate-bearing production cycle for pistachios and this improved yield more than offset the decline in prices from an average of $2.11 per pound in 2006 to $1.33 per pound in 2007. The price decline for pistachios that we experienced is attributable to the large production increase in 2007. We expect our 2008 revenues from pistachios to decline when compared to 2007 due primarily to lower production yields for this “off” production year. If prices continue to decline, our revenues will be adversely impacted.

Walnut revenues from the 2007 crop were $1,168,000, an increase of $993,000 when compared to the 2006 crop. The 2007 walnut yields improved 820,000 pounds due to better weather conditions for walnut crops in 2007 as compared to 2006. We also recognized $319,000 of insurance proceeds during 2007 related to the 2006 walnut crop. Due to the significant decline in the 2006 walnut crop yield of less than 75% of its average expected production, the crop qualified for an insurance payment. The inconsistent performance of the walnuts in the last several years has led us to remove these trees from production in order to prepare for a new Rubired grape vineyard. We began removal of the trees in late 2007.

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 worldwide grape production more in line with worldwide demand, the pressure on prices has been alleviated at the present time and grape prices should stabilize at current 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, improved global production or a significant increase in the value of the dollar could negatively impact exports and hurt the current pricing for almonds.

Farming segment profits were $3,088,000 in 2006, a decrease of $2,695,000 when compared to the prior year.2005. The decline in 2006 farming segment profits iswas due to both a decrease in farm revenues of $885,000 and increased expenses of $1,810,000. The drop in revenue iswas primarily due to a decline in crop revenues of $480,000, combined with the absence of the prior year’s water settlement amount of $479,000. Higher compensation costs, fixed water costs, corporate allocations, insurance and the direct costs incurred to produce the farm crops all contributed to the increase in farming expenses. Staffing costs increased $465,000 due to compensation related to the successful completion of the TMV LLC joint venture agreement, the commencement of expensing of stock options, higher stock grant expense and costs for additional staff. Water costs increased $372,000 due to higher variable water cost charges that are related to the movement of water out of the California Aqueduct to our orchards and vineyards.

Grape revenues for the 2006 crop of $2,253,000 representrepresented a marginal decline compared to the 2005 grape crop revenue of $2,337,000. A drop in grape production in 2006 of 300 tons contributed to the decreased revenue and resulted from the late completion of the 2006 harvest. Grape prices remain stable and the demand for our product led to additional grape plantings in 2006 to meet anticipated future demand.

Almond revenues increased $2,061,000 during 2006 to $6,750,000. The increase in almond revenue iswas primarily the result of the large carryover of approximately 1,600,000 pounds of 2005 crop almonds that were sold during 2006. These almonds were inventoried at the end of 2005 and contributed $3,754,000 to 2006 revenue. The revenues from the 2005 crop carryover in 2006 exceeded the comparable carryover of 2004 crop sales revenue of $1,944,000 in 2005 by $1,810,000. Almond revenues generated from the 2006 crop year are $2,724,000, which is anwere $167,000, a decline when compared to the revenues from the 2005 crop year of $2,891,000. Almond prices were at record high levels during 2005 and, although prices slipped from those levels early in 2006, they increased throughout the year and are continuing to climb. Total production of almonds was approximately 3,390,000 pounds in 2006, an increase of 900,000 over 2005. Of the total almond production, of almonds approximately 2,000,000 pounds are beingwere carried in 2006 year-end inventory.

Thus far in 2007, the price for almonds has improved from 2006 due to an increase in world demand. We do not expect the current range of almond prices to continue over an extended period of time, but do expect prices to stay above historical averages for most of 2007 due to current demand levels. Our long-term expectations are for lower prices for our almond crop, based on industry projections that production will continue to increase in the future for almonds.

Pistachio revenue totaled $2,615,000 in 2006, a decrease of $2,451,000 when compared to 2005. The decrease in revenue was primarily driven by a decline in production of 780,000 pounds combined with a price decline from $2.28 per pound in 2005 to $2.11 per pound in 2006. This change in production accounted for approximately $1,778,000 of the decrease in revenue when compared to 2005, while the change in price accounted for the remainder of the difference. The decrease in price iswas attributable to the relatively smaller size of the 2006 pistachio nut compared to 2005. The producer cannot demand the same level of pricing for a smaller product, which resultsresulted in the lower prices. We expect our 2007 revenues from pistachios to improve when compared to 2006 due primarily to 2007 being an “on” production year in the alternate-bearing production cycle of pistachios. The increase in production could potentially be offset by a decrease in prices due to excess supply.

Walnut revenue from the 2006 crop was $175,000, compared to $331,000 in 2005. Additional 2005 crop revenues of $182,000 were recognized in 2006, due to grower price adjustments. Our 2006 walnut crop production only reached 30% of our 2005 crop level.level and consequently qualified for an insurance payment under catastrophic insurance. The age of our walnut orchard contributed to the decline in production and we are re-evaluating the long term possibilities for this crop.production.

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 current 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, improved global production or a significant increase in the value of the dollar could negatively impact exports and hurt the current pricing for almonds.

Farming segment profits were $5,783,000 in 2005, an increase of $2,011,000 when compared to 2004. The growth in 2005 farming segment profits was due primarily to higher pistachio and grape revenue, as well as the receipt of $479,000 in proceeds from our local water districts, comprising our percentage of proceeds from the settlement of a case brought by our local water districts concerning water illegally taken by the federal government in the early 1990s. These improvements in revenue were partially offset by higher staffing costs, water costs, and repair and fuel costs. Staffing costs increased $186,000 due to additional staff and a $72,000 increase in stock compensation expense during the year. Water costs increased $210,000 due to higher variable cost charges that are related to the movement of water out of the California Aqueduct to our orchards and vineyards. Repair and fuel costs increased $179,000 primarily due to an increase in equipment owned and to higher input costs such as diesel and repair parts.

Grape revenues increased $340,000 in 2005 when compared to 2004, due to increased production and a $13.50 per ton improvement in the average price that we received for our grapes. This price improvement began in 2004 and was driven by statewide production better matching the needs of wine producers.

Almond revenue declined $340,000 during 2005 to $4,689,000 when compared to 2004, despite record almond prices. Almond prices averaged $3.18 per pound for 2005 compared to $2.53 per pound for 2004. The decline in revenue was due primarily to approximately 1,134,000 fewer pounds of 2005 year crop being sold when compared to the number of pounds of the 2004 crop sold in 2004. This decline in 2005 year crop pounds sold was partially offset by the sale of approximately $2,000,000 of 2004 crop almonds that were in inventory at the end of 2004. Total 2005 production was approximately 2,500,000 pounds, compared to approximately 2,700,000 pounds of production in 2004. Of the 2005 production, approximately 1,600,000 pounds of almonds was carried in 2005-ending inventory.

Pistachio revenue totaled $5,066,000 in 2005, an increase of $2,258,000 when compared to 2004 pistachio revenue. The increase in revenue was primarily driven by the average price per pound increasing to $2.28 during 2005, compared to $1.36 during 2004. This change in price accounted for approximately $1,900,000 of the increase in revenue when compared to 2004.

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

Interest

InterestInvestment income for 20062007 of $2,975,000$3,509,000 represented a $410,000$534,000 increase compared to 2006. This increase in the interestinvestment income compared to 2005. This increase was due to an increase in average funds invested during 20062007 compared to 2005,2006, and improving yields on new invested funds, andfunds. Similarly, investment income for

2006 of $2,975,000 represented a $410,000 increase over the 2005 amounts for the same reasons that contributed to the increase in 2006, in addition to the receipt of interest fromon loans to joint ventures.

Interest expense was $70,000 in 2006,2007, the same as in both 2006 and 2005. Interest expense of $76,000 incurred during 2004 is included in discontinued operations. Interest incurred and paid during 20062007 was $182,000,$129,000 compared to $182,000 in 2006 and $133,000 in 2005, and $646,000 in 2004, of which $59,000, $112,000 and $63,000 and $570,000respectively were capitalized, respectively.capitalized.

Corporate Expenses

Corporate expenses decreased $4,626,000 to $8,547,000 during 2007. The decrease during 2007 is due primarily to the absence of $4,171,000 of compensation costs incurred in 2006 upon successful completion of the TMV LLC joint venture agreement. Charitable donations decreased in 2007 by $347,000 because the prior year included contributions of stock that were not repeated in 2007. Directors’ stock compensation costs decreased $102,000 in 2007 due to a decline in the stock price used to compute the expense.

Corporate expenses increased $5,292,000 to $13,173,000 during 2006. The increase during 2006 iswas due to increased charitable donations of $372,000, higher staffing costs, expensing of stock options, and a non-recurring cash and stock compensation cost of $4,171,000 that was incurred upon execution of the TMV LLC joint venture agreement. These increases were partially offset in 2006 by the allocation of more costs to operating segments and a decrease in our Delaware holding company expenses.

Corporate expenses increased $1,258,000 to $7,881,000 during 2005. The increase during 2005 was due to higher staffing costs and stock compensation costs that were partially offset by reduced professional service fees. Staffing costs during 2005 increased $599,000 due to the addition of new staff, annual salary increases, and to increased retirement benefit costs. Stock compensation expense during 2005 increased $703,000 when compared to 2004, due primarily to a full year of cost during 2005, compared to only nine months of cost in 2004. Professional service fees declined in 2005 due to a reduction in fees associated with Sarbanes-Oxley and lower legal fees.

Equity in Earnings of Unconsolidated Joint Ventures

During 2007, we recognized net earnings of $10,580,000 from unconsolidated joint ventures. The largest single component of these earnings consisted of our portion of the gain that was realized on the sale of the industrial building owned by the Tejon Dermody joint venture. The building was sold for a pretax gain of $17,114,000, of which we recognized 50%. As a result of the divestiture of Tejon Dermody’s primary asset, this joint venture is in the process of being dissolved. We do not anticipate any material costs will be incurred during this process which should be completed during 2008. The balance of the net earnings from joint ventures consisted of earnings from Petro of $2,070,000 and losses from Five West Parcel of $56,000, losses from TMV LLC of $15,000 and losses from Centennial Founders of $178,000. Earnings from our Petro joint venture continued to improve in 2007 due to improved gross margins and cost reductions. Our original partner in the Petro joint venture, Petro Stopping Centers, was purchased by Travel Centers of America in 2007. However, this change of ownership has had no impact on the operations of our jointly owned Petro Travel Plaza LLC, and we do not anticipate any impact in the future. Losses from the Centennial and TMV joint ventures did not vary significantly from those incurred in 2006.

Within our Centennial joint venture two of our partners, Pardee Homes and Standard Pacific, are home builders. As with other home builders their businesses have declined over the last eighteen months and their internal financing has become more difficult. At the present time, despite the current market in housing, both of these partners continue to be committed to the

Centennial development. If it becomes necessary for one or more of our current partners to leave the joint venture, the Centennial joint venture operating agreement requires the exiting partner to leave its capital contributions in the venture. Its capital investment would be paid back in the future from operating profits.

Construction of a 606,000 square foot speculative industrial building began in 2007 and the building was completed during February 2008. This building is being constructed by our Five West Parcel joint venture and is financed by a construction loan that matures in 2010. Potential tenants have shown interest in the building and we anticipate leasing the building in 2008. Currently, approximately 450,000 square feet within the building is being leased on a temporary basis by Ikea.

During 2006, we recognized net earnings of $1,247,000 from unconsolidated joint ventures. Our portion of earnings consisted of profits from the Petro joint venture of $1,752,000, losses from the Tejon/Tejon Dermody joint venture of $93,000, losses from the Centennial joint venture of $185,000, losses from the Five West Parcel joint venture of $67,000, and a loss from the TMV LLC joint venture of $160,000. During 2006, the Petro joint venture produced a significant increase in total profits when compared to 2005. The increase in 2006 was largely due to lower operating costs and improved fuel margins. Operating losses improved within the Tejon/Tejon Dermody joint venture due to the leasing of a building within that joint venture during the third quarter of 2005. The Centennial joint venture loss increased $130,000 when compared to the prior year due to a decrease in revenues from hay and alfalfa sales.

During 2005, we recognized net earnings of $423,000 from unconsolidated joint ventures. Our portion of earnings consisted of profits from the Petro joint venture of $971,000, losses from the Tejon/Dermody joint venture of $492,000, losses from the Centennial joint venture of $55,000 and losses from the Five West Parcel joint venture of $1,000. During 2005, the Petro joint venture

produced a slight decrease in total profits when compared to 2004. The decrease was largely due to higher operating costs being offset by improved fuel margins. Operating losses improved within the Tejon/Dermody joint venture due to the leasing of a building within that joint venture during the third quarter of 2005. The Centennial joint venture loss declined $244,000 when compared to the prior year due to an improvement in revenue from operations within the joint venture.

Discontinued Operations

There were no discontinued operations in 2006 or 2005. Discontinued operations in 2004 consisted of the operations of Pacific Almond, an almond processing plant, and three commercial buildings in Phoenix, Arizona that were being held for sale. 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 the buyer assumed all responsibility for the assets and liabilities of the joint venture. The gain on the sale of our interest in Pacific Almond was approximately $800,000 before taxes.

In May 2004, the Company determined that it was an appropriate time to liquidate our investment in the three commercial buildings in Phoenix, Arizona due to favorable market conditions and to redirect those funds into our core real estate development business. These buildings were sold during November 2004, resulting in a net gain of $1,258,000 after transaction costs. Overall, discontinued operations during 2004 provided net income of $1,351,000, or $0.09 per diluted share.

Income Taxes

For financial statement purposes, our effective tax rate for 20062007 was 39%36% after taking into consideration permanent and temporary timing differences. The tax benefitexpense for 20062007 was $1,714,000.$4,167,000. During 2006,2007, our largest permanent tax difference was related to depletion allowances. Due to the impactOut tax liability at December 31, 2007 of $1,359,000 reflects full utilization of our 2006 net operating loss and other available carry forwards. Additionally, temporary timing differences and the tax benefit from the exercise of stock options reduced our tax receivable as of December 31, 2006 was $973,000 which is included in accounts receivable in the consolidated balance sheet.liability.

For 2006,2007, we had net deferred tax assets of $4,283,000.$5,063,000. Our largest deferred tax assets were made up of temporary differences related to the capitalization of costs, pension adjustments, stock grant expense and deferred accounting gains on land sales. Deferred tax liabilities consist of deferred gains, cost of sale allocations, and straight-line rent. Due to the nature of our deferred tax assets, we believe they will be used in future years and an allowance is not necessary.

The effective tax rate for 2005 was 38% after taking into consideration permanent and temporary timing differences. Tax expense for 2005 was $954,000. During 2005, our largest permanent tax difference was related to depletion allowances. Due to the impact of temporary timing differences and the tax benefit of the exercise of stock options, our tax liability for the year was $1,076,000.

For 2005, we had net deferred tax assets of $2,307,000. Our largest deferred tax assets were made up of temporary differences related to the capitalization of costs, pension adjustments, and stock grant expense. Deferred tax liabilities consist of deferred gains, cost of sale allocations, and straight line rent. Due to the nature of our deferred tax assets, we believe they will be used in future years and an allowance is not necessary.

Liquidity and Capital Resources

Cash Flow and Liquidity. Our strong financial position allows us to pursue our strategies of land entitlement, development, and conservation. 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, build infrastructure for our developments, ensure adequate future water supplies, and provide funds for general 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 $78,066,000$77,013,000 at December 31, 2006, an increase2007, a decrease of $16,028,000$1,053,000 from the corresponding amount at the end of 2005.2006. Cash and marketable securities increased primarilydecreased in 2007 due to the distributiona variety of $14,735,000factors. Significant cash inflows including net maturities of equityinvestment securities of $6,753,000, distributions of $9,198,000 from joint ventures, and $1,200,000 of earnings from our joint ventures. Proceeds of $3,524,000cash from the saleexercise of CFD bonds also contributed to the significant increase. Offsetting these increasesstock options of $2,144,000, were capital expenditures withinmore than offset by investments in our real estate developmentsprojects and net investments in marketable securities.joint ventures of $16,342,000, purchases of water inventory of $1,871,000 and tax payments of $2,813,000.

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

Net cash provided by operations during 2007 increased to $8,163,000 from $2,190,000 in 2006, primarily as a result of the increase in 2007 net revenue. The non-cash nature of some of our operating expenses such as stock compensation and depreciation also helped to improve net cash, while increases in deferred taxes, prepaid expenses, inventories, accounts receivable and earnings of unconsolidated joint ventures utilized operating funds. Net cash provided by operations during 2006 decreased to $2,190,000 from $6,336,000 in 2005. When comparedThe decrease in 2006 was due to our 2005 operating profit of $1,546,000, our 2006the operating loss of $2,668,000 contributed to a decrease of $4,146,000incurred in operating cash flow. However, the non-cash nature of some of our operating expenses, such as stock compensation and depreciation helped to offset this loss. Increases2006 coupled with increases in deferred tax assets, prepaid expenses and income tax payments of income taxes alsowhich all utilized operating funds. Net cashNon-cash expenses such as depreciation and stock compensation expense helped to offset the use of funds in 2006.

During 2007 we invested $5,831,000 into our operations. These investments were primarily related to investments in property and equipment including our real estate projects. We also contributed $6,455,000 to our unconsolidated joint ventures with $4,586,000 of this amount invested in the Five West Parcel joint venture for construction of an industrial building. Maturing marketable securities, reimbursement proceeds from CFD bonds and a distribution from the Five West Parcel joint venture of $1,182,000 of equity upon securing a construction loan provided by operations during 2005 increased to $6,336,000 from $236,000 in 2004. The increase was due to the improvement in net income, the add-backoffsetting inflows of non-cash expenses, and the collection of accounts receivable.

funds. During 2006 we invested $3,080,000 into our operations. These investments were primarily related to investments in marketable securities of $26,378,000 and in capital investment projects of $11,789,000. The capital investment projects are primarily related to our real estate development activities. Maturing marketable securities, proceeds from the sale of CFD bonds, and distributions of equity from joint ventures partially

offset these uses. The distribution of equity from joint ventures is related to the establishment of TMV LLC and to the repayment of loans made to Tejon/Tejon Dermody. During 2005, we invested $15,393,000 into our continuing operations. These investments were primarily related to capital investment spending of $11,138,000 and investments in marketable securities. These uses of funds were partially offset by maturities of investment securities, distributions from joint ventures, and proceeds from the sale of real estate.

Capital investments were $9,887,000 in 2007 compared to $11,789,000 in 2006 compared toand $11,138,000 in 2005 and $6,664,000 in 2004.2005. Capital investments for these years were primarily dominated by investments in our real estate projects and our farming operations. Capital investments in our real estate projects are primarily related to infrastructure development and to the capitalization of costs related to our entitlement activities in our real estate projects. We anticipate that our capital investment requirements for 20072008 could be as high as $26,000,000$45,000,000 to $28,000,000.$50,000,000. These estimated investments include approximately $24,500,000$19,600,000 of infrastructure and entitlement investment for real estate development projects and approximately $1,000,000$2,213,000 of investment within our farm operations for the extensiondevelopment of a new grape vineyard and for the replacement of equipment. A portionIn 2008 we expect to contribute $9,000,000 to our various joint ventures and make other capital investments of the infrastructure costs related to TIC-West and East$17,215,000. Of this other capital investment amount, we expect approximately $12,500,000 will not be invested if planned absorptionin the purchase of land does not take place.water inventory and water-related contracts. We are adding to our current water assets to help secure our ability to supply water to our future real estate developments and as a future investment, since we believe that the cost of water in California will continue to increase. Investments in water are expected to continue at varied levels in future years.

Our funds provided by financing activities of $5,438,000$2,460,000 during 20062007 resulted from cash received from the exercise of stock options and tax benefits from stock-based compensation. Cash fromOur funds provided by financing activities totaled $2,479,000of $5,438,000 during 2005. This2006 also resulted from cash was provided byreceived from the exercise of stock options.options and tax benefits from stock-based compensation.

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 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, the timing aspect 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 capital structure and financial condition to be solid. At December 31, 2006,2007, total capitalization was $149,474,000,$165,471,000, consisting of $444,000$417,000 of debt and $149,030,000$165,054,000 of equity and resulting in a debt-to-total-capitalization ratio of less than one percent, which is comparable to the prior year’s debt-to-total-capitalization ratio.

We have a long-term revolving line of credit of $30,000,000 that, as of December 31, 2006,2007, had no outstanding 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 0.75% 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. Any outstanding principal balance is due and payable in full in September 2009.2010. This note is unsecured. The outstanding long-term debt, less current portion of $27,000,$28,000, is $417,000$389,000 at December 31, 2006.2007. This debt is being used to

provide long-term financing for a building being leased to Starbucks and the debt is secured by the leased building and land.

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 (described below under “Off-Balance Sheet Arrangements”), and the issuance of common stock. As noted above, we have $78,066,000$77,013,000 in cash and securities and $30,000,000 available on credit lines to meet any short-term liquidity needs. We continue to expect that substantial future investments will be required in order to develop our land assets. In order to meet these long-term capital requirements, we may 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.

Contractual Cash Obligations. The following table summarizes our contractual cash obligations and commercial commitments as of December 31, 2006,2007, to be paid 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 purchases, 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 and entitlement costs related to our industrial and residential development projects. At the present time, we do not have any capital lease obligations or purchase obligations outstanding. Our operating lease obligations are for office equipment, a small land lease, several vehicles, and a temporary trailer providing office space and average approximately $21,000$23,000 per month.

As discussed in Note 1312 to the Consolidated Financial Statements, we have long-term liabilities for deferred employee compensation, including pension and supplemental retirement plans. Any payments related to the supplemental executive 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. During 2006,2007, we made approximately $615,000$465,000 in pension plan contributions, compared to $488,000$615,000 in pension plan contributions in 2005.2006. We estimate that we will contribute approximately $600,000$350,000 to the pension plan in 2007.2008.

Off-Balance Sheet Arrangements

The following table shows contingent obligations we have with respect to unconsolidated entities in which we have an interest and with respect to the CFD.

The standby letter of credit is related to the issuance of CFD 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 $70,000 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. The standby letter of credit, if drawn upon, would not have a material impact upon the Company’s liquidity, capital resources, or market or credit risk support. This letter of credit is for a two-year period and will be renewed if necessary in 2007.

At December 31, 2006, the Company was guaranteeing $6,000,000 of debt to Tejon Dermody Industrial LLC, an unconsolidated joint venture formed to construct and market a 651,000 square foot building at the TIC-West. Total debt in the venture is approximately $14,534,000, which is secured by a mortgage on the building. In the joint venture agreement, each partner agreed to guarantee a portion of the outstanding debt through the term of the loan. The maturity date of this loan is May 19, 2011. Principal and interest on this loan is payable monthly, with the principal portion of the monthly payment being $18,930. Based on the achievements of certain operational objectives, such as the renewal of tenant leases, the guarantees can begin to be reduced. The Company believes it is unlikely that it will ever be required to make payments under this guarantee due to sufficient cash flows to service the debt and the value of joint venture property. Therefore, no liabilities have been recorded related to this guarantee at December 31, 2006 or December 31, 2005.2009.

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 five years and an investment grade of “A” or better from Moody’s or Standard and Poor’s. See Note 3 of the 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-rate feature. The long-term debt ($444,000)417,000) 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 floating rate feature 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 floating-rate interest payments and in the past have entered into interest rate swaps to manage those fluctuations.

At December 31, 2006,2007, we had no outstanding interest rate swap agreements. However, Petro, an unconsolidated joint venture, has an interest rate swap agreement with respect to $6,400,000$6,000,000 of its long-term debt to manage interest rate 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 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, 2006,2007, the Company’s portion of the fair value of the interest rate swap was a gainloss of $64,000.$39,000. Estimated fair value of the swap was determined by market price quotes as of December 31, 2006,2007, 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, 20062007

($ in Thousands)

Interest Rate Sensitivity Financial Market Risks

Principal Amount by Expected Maturity

At December 31, 20052006

($ in Thousands)

In comparison to the prior years, our risk with regard to fluctuations in interest rates has decreased related to the use of debt because there is no outstanding balance on our line of credit, butcredit. Our risk with regard to fluctuations in interest rates has increased with regardsalso decreased slightly related to our marketable securities duesince these balances have also decreased compared to the increase in outstanding balances.prior year.

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 20062007 almond production and 20072008 crop production. The farming costs inventoried are recorded as 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, 2006, $4,196,0002007, $7,091,000 is at risk to changing prices. Of that amount, $2,290,000$2,727,000 is attributable to almonds, $1,791,000$3,407,000 to pistachios, and $115,000$957,000 to walnuts. The comparable amounts of accounts receivable at December 31, 20052006 were $2,360,000$2,290,000 related to almonds, $3,244,000$1,791,000 related to pistachios, and $63,000$115,000 to walnuts. The price estimated for recording accounts receivable at December 31, 20062007 was $2.11$1.67 per pound for almonds. For every $0.01 change in the price of almonds, our receivable for almonds increases or decreases by $10,900.$16,000. Although the final price of almonds (and therefore the extent of the risk) is not presently known, over the last three years prices have ranged from $1.85$1.00 to $3.80. With respect to pistachios, the price estimated for recording the receivable was $2.11$1.33 per pound, so for each $0.01 change in the price of pistachios, our receivable increases or decreases by $8,500,$26,000, and the range of final prices over the last three years for pistachios has been $1.05 to $2.28.$2.30. The price estimated for recording accounts receivable for walnuts was $0.54$1.03 per pound. For every $0.01 change in the price of walnuts, our receivable increases or decreases by $2,100.$9,000. The final price for walnuts has averaged from $0.32 to $0.60$1.03 over the last three years.

The response to this Item is submitted in a separate section of this Form 10-K.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by 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 Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that all information required in the reports we file or submit under the Exchange Act was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding

required disclosure and was recorded, processed, summarized and reported within the time period required by the rules and regulations of the Securities and Exchange Commission.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(c) Management’s Annual Report on Internal Control Over Financial Reporting

The 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 in Rule 13a-15(f) of the Exchange Act, internal control over

financial reporting is a process designed by, or supervised by, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, 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.

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, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 20062007 based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. 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, 2006.2007.

Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s financial statements included in this report, has issued an attestation report on management’s assessmentthe effectiveness of internal control over financial reporting, a copy of which is included below.

Report of Independent Registered Public Accounting Firm

Stockholders andThe Board of Directors and Stockholders

Tejon Ranch Co.

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, that Tejon Ranch Co. maintained effective’s internal control over financial reporting as of December 31, 2006,2007, 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,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, 2006, 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, 2006,2007, 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, 20062007 and 20052006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 20062007 and our report dated February 20, 200727, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

February 27, 2008

PART III

Information as to our Executive Officers is set forth in Part I, Item 1 of this Form 10-K under ‘Executive“Executive Officers of Registrant.” Other 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 20072008 Annual Meeting of Stockholders.

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 20072008 Annual Meeting of Stockholders.

(a) Security Ownership of Certain Beneficial Owners and Management.

Information required by this Item with respect to security ownership of certain beneficial owners 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 20072008 Annual Meeting of Stockholders.

(b) Securities Authorized for Issuance under Equity Compensation Plans.

The following table shows aggregated information as of December 31, 20062007 with respect to all of our compensation plans under which our equity securities were authorized for issuance. At December 31, 2006,2007, 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 76 and Note 87 of Notes to Consolidated Financial Statements.

Equity Compensation Plan Information