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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

For the transition period from __________ to __________

Commission File Number:  1-7183

Registrant’s telephone number, including area code:                    (661) 248-3000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12 (g) of the Act:

None

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

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          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o.

          Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

          The aggregate market value of Registrant’s Common Stock, $.50 par value per share, held by persons other than those who may be deemed to be affiliates of Registrant on March 19, 2003 was $399,665,901 based on the closing price on that date on the New York Stock Exchange.

          The number of the Company’s outstanding shares of Common Stock on March 19, 2003 was 14,438,797 shares.

DOCUMENTS INCORPORATED BY REFERENCE:

          Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 13, 2003 relating to the directors and executive officers of the Company are incorporated by reference into Part III.

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PART I

Throughout Item 1 - “Business,” Item 2 - “Properties,” Item 3 - “Legal Proceedings,” Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 7A - “Quantitative and Qualitative Disclosures About Market Risk,” we have made forward-looking statements, including statements regarding strategic alliances, the almond and grape industry, the future plantings of permanent crops, future yields, prices and water availability for our crops and real estate operations, future prices, production and demand for oil and other minerals, future development of our property, future revenue and income of our jointly-owned travel plaza, almond plant and industrial building, potential losses to the Company as a result of pending environmental proceedings, the adequacy of future cash flows to fund our operations, market value risks associated with investment and risk management activities and with respect to inventory, accounts receivable and our own outstanding indebtedness and other future events and conditions.  These forward-looking statements are subject to factors beyond our control (such as weather, market and economic forces) and, with respect to the future development of our land, the availability of financing and the ability to obtain various governmental entitlements.  No assurance can be given that the actual future results will not differ materially from the forward-looking statements.

Tejon Ranch Co. is a diversified, growth oriented land development and agribusiness company whose purpose is to increase the value of our real estate and resource holdings in order to maximize stockholders’ value.  Operations consist primarily of land planning and entitlement, land development, commercial sales and leasing, income portfolio management, and farming.  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.

Over the last several years, we have been implementing a strategy that has led to our transformation from an agricultural operations based company to a real estate development company.  In order to implement our strategy we began to pursue joint venture agreements for the development of portions of our land, began conceptual planning and land entitlement projects, and undertook a program of divesting non-strategic assets.  In the implementation of our strategic plan, we have:

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The following table shows the revenues from continuing operations, segment profits and identifiable assets of each of our continuing industry segments for the last three years:

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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
(Amounts in thousands of dollars)

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Real Estate Operations

Our real estate operations consist of four principal activities:  land planning and entitlement, real estate development, commercial sales and leasing, and income portfolio management.  Our 270,000-acre land holding offers significant real estate development opportunities.  Our land is characterized by diverse topography and scenic vistas and is conveniently served by three inter-regional highways.  Interstate 5, one of the nation’s most heavily traveled freeways, brings approximately 65,000 vehicles a day through our land, which includes 16 miles of Interstate 5 frontage on both sides of the freeway and the commercial land surrounding four interchanges.  The strategic plan for real estate focuses on development opportunities along the Interstate 5 corridor as well as laying the necessary groundwork (constraints and feasibility analysis) for moving forward with a potential residential and resort project.

Our commercial/industrial activities on our land include:  entitlement, planning, and permitting of land for development; construction of infrastructure; the construction of pre-leased buildings and unleased buildings to be included in our income portfolio; and the sale of land to third parties for their own development.

During 2002 and 2001, commercial/industrial activity was principally focused on the 351-acre Tejon Industrial Complex-West at the Interstate 5/Laval Road Interchange. The activity was primarily related to infrastructure construction and marketing of commercial sites.  During March 2001, we entered into a joint venture agreement with DP Properties for the development of a 650,000 square foot building within Tejon Industrial Complex-West.  The building was completed during January 2002 and in March 2002 the joint venture entered into a 15-year lease with Daisytek International for 325,000 square feet.  During 2002, lessees opened three new retail operations within Tejon Industrial Complex-West:  McDonalds, Starbucks, and a Best Western motel.  In January 2003, IKEA, an international home furnishings retailer, who purchased 80 acres of land within Tejon Industrial Complex-West in 2000, began expansion of their current facilities.  Once completed, IKEA will have 1.8 million square feet of building within our industrial development.

We were also very involved during 2002 in securing development rights for Tejon Industrial Complex-East, an 1,100-acre commercial/industrial development adjacent to Interstate 5 and across the freeway from Tejon Industrial Complex-West.  During January 2003, we received approval for the project from the Kern County Board of Supervisors.  Development will not begin immediately within this project due to a lawsuit that has been filed by groups opposing the approval of our project.  See Item 3, “Legal Proceedings” for a further discussion of this subject.

Interest in developing industrial, warehouse, and distribution facilities within our commercial/industrial developments continues to be expressed by developers and end users.  We are currently marketing building sites within our developments to these groups.  See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for an overview of operations and trends within the industry.

Outside of our industrial developments, we also lease to various tenants land that is used for a full-service truck stop facility, a truck wash, four auto service stations with convenience stores, four full-service restaurants, five fast-food operations, a motel, two antique shops, and a United States Postal Service facility.  We are also involved in a joint venture that owns and operates a 51-acre travel and truck stop facility, named Petro Travel Plaza, which is in Tejon Industrial Complex-West.  In addition,

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several microwave repeater locations, radio and cellular transmitter sites, and fiber optic cable routes are also leased.

During July 2001, a subsidiary of Calpine Corp. executed an agreement with us for the development of a power plant on 35 acres of land, construction of which is currently underway.  During the construction of the plant, we receive $100,000 per month for a 24-month period that began in July 2001.  Commencing when the plant becomes operational, or earlier under certain circumstances, the annual amount increases to $2,600,000 per year, and is subject to escalation based upon changes in a designated consumer price index.  We are also entitled to receive additional payments after commercial operation of the plant begins, based upon production capacity at the plant and energy prices.  The term of the agreement is 25 years from the date the plant becomes operational (or earlier under certain circumstances), and Calpine has three five-year options to extend the term.  At this time, we do not expect the power plant to be operational until late 2004 or early 2005.

We lease certain portions of our land to oil companies for the exploration and production of oil and gas, but do not ourselves engage in any such exploratory or extractive activities.

As of December 31, 2002, approximately 12,000 acres were committed to producing oil and gas leases from which the operators produced and sold approximately 311,500 barrels of oil and 77,250 MCF of dry gas during 2002.  Our share of production based upon prevailing average royalty rates during the last three years has been 107, 84, and 57 barrels of oil per day for 2002, 2001, and 2000, respectively.  Approximately 400 producing oil wells were located on the leased land as of December 31, 2002. 

Estimates of oil and gas reserves on our properties are unknown to us.  We do not make such estimates, and our lessees do not make information concerning reserves available to us.

We have approximately 2,440 acres under lease to National Cement Company of California, Inc., which we call ‘‘National,’’ for the purpose of manufacturing portland cement from limestone deposits found on the leased acreage.  National owns and operates on the property a cement manufacturing plant having capacity of approximately 1,000,000 tons of cement per year.  The amount of payment that we receive under the lease is based upon shipments from the cement plant.  The term of this lease expires in 2026, but National has options to extend the term for successive periods of 20 and 19 years.  Proceedings under environmental laws relating to the cement plant are in process; see Item 3, “Legal Proceedings.”

Our resort/residential development activities include conceptual design planning and entitlement activities related to our lands.  During the third quarter of 2002, we announced that our agreement with Pardee Homes, Lewis Investment Company, and Standard Pacific Corp. was amended to reflect a larger master-planned community development (Centennial).  The original agreement, previously announced in March 2000, called for a 4,000-acre housing development.  The agreement has been amended to accommodate a master-planned community that encompasses 11,700 acres.  The initial plans for this development were filed in Los Angeles County on August 28, 2002.  We are estimating that it could take several years in order to receive approvals from Los Angeles County to begin development within this project.  Upon completion of the development it is estimated that the community will include approximately 23,000 homes.  The community will also incorporate business districts, schools, retail and entertainment centers, medical facilities and other commercial office and light industrial businesses that, when completed, would create a substantial number of jobs.

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In addition to the Centennial community project, we are engaged in the constraints and feasibility analysis and Phase I planning of a master-planned mountain community.  We envision that the major components of any project would include mountain homes, a high quality golf and spa resort, a recreational emphasis, a small commercial component and substantial open space.  We call this concept “Tejon Mountain Village.”  Although the size of this development concept has not been finalized, it could involve several thousand acres.  While we have not defined the kind of real estate interests to be offered, they could include sites for homes in a rural, mountain environment.

The sale and leasing of commercial/industrial and residential real estate is very competitive, with competition coming from numerous and varied sources around California.  The degree of competition is impacted by such factors as the supply of real estate available for sale or lease that is comparable to our property and the level of demand.  Currently, our greatest competition for commercial/industrial land comes from the inland empire region of Southern California and areas north of us in the San Joaquin Valley of California.  The greatest competition for the Centennial project will come from Southern California.

Farming Operations

In the San Joaquin Valley, we farm permanent crops including the following acreage: wine grapes—1,252, almonds—1,687, pistachios—985 and walnuts—295.  Included in these acreage figures are 300 acres of almonds to be developed during 2003.  We also grow wheat on approximately 600 acres and alfalfa on 800 acres.

We sell our farm commodities to several commercial buyers.  As a producer of these commodities, we are in direct competition with other producers within the United States and throughout the world.  Prices received by us for our commodities are determined by total industry production and demand levels.  We attempt to improve price margins by producing high quality crops through cultural practices and by obtaining better prices through marketing arrangements with handlers.  In 2000, we purchased an almond processing plant for $2,700,000 in order to control the marketing of our almond production and lower hulling/shelling and processing costs.  This facility was originally built in the 1970’s.

In 2002, our almonds were primarily sold to various commercial buyers, with one of the buyers receiving approximately 38% of the crop.  Since we now process our own almonds, we have considerably more flexibility over the timing and nature of our sales.  We do not believe that we would be adversely affected by the loss of our largest buyers because of the size of the almond market, the large number of other buyers that would be available to us and the fact that the prices for these commodities do not vary based on the identity of the buyer.

In 2002, the majority of our pistachios were sold to one customer, and our walnuts were sold to two customers, each purchasing approximately 50% of the crop.  We believe that the loss of any of these customers would not adversely impact us because, like almonds, there are a number of potential purchasers of pistachios and walnuts, and prices do not change based on the identity of the buyer.  During 2002, the majority of harvested wine grapes were sold to two wineries.  We continue to believe that there is an imbalance between the supply and demand of wine grapes as a result of so many new plantings coming into production within California. During early March 2003, we contracted all of our

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2003 wine grape production.  At that time, we also contracted our French colombard grape production for 2004 and 2005.

Nut and grape crop markets are particularly sensitive to the size of each year’s world crop and the demand for those crops.  Large crops in California and abroad can rapidly depress prices.

Our water entitlement for 2002 available from the State Water Project was adequate for our farming needs.  The State Department of Water Resources has announced its 2003 water supply at 45% of full entitlement.  Other water supplies that the local water district will be able to make available to its farmers, combined with this level of state entitlement, are expected to provide a level of water supply that will cover all of our farming needs.  If in any year the local water district cannot meet all of our agricultural demands, we will rely on ground water sources, water transfers from the Tejon-Castac Water District and water banking arrangements that we have entered into.  Water from these sources may be more expensive because of pumping costs and transfer costs, but can be expected to make up for shortfalls of the kind we have experienced in the past.

See discussion of water contract entitlement and long-term outlook for water supply under Part I, Item 2, “Properties”.

Customers

In 2002, Pistachio Growers Incorporated, a purchaser of pistachios, accounted for approximately 11% of revenues from continuing operations.  During 2001, no single customer accounted for more than 10% of revenues from continuing operations.  During 2000, Golden State Vintners, a purchaser of grapes, accounted for 10% of revenues from continuing operations; and IKEA, an international home furnishing retailer,  accounted for 11% of revenues from continuing operations by purchasing land at Tejon Industrial Complex-West.

Organization

Tejon Ranch Co. is a Delaware corporation incorporated in 1987 to succeed the business operated as a California corporation since 1936.

Employees

At December 31, 2002, we had 96 full-time employees.  None of our employees is covered by a collective bargaining agreement.

Reports

We make available free of charge through an Internet website, www.tejonranch.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or to be furnished pursuant to section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with or furnish to, the Securities Exchange Commission.

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Executive Officers of Registrant

The following table shows each of our executive officers and the offices held as of March 25, 2003, the period the offices have been held, and the age of the executive officer.  All of such officers serve at the pleasure of the board of directors.

A description of present and prior positions with us, and business experience for the past five years, is given below.

Mr. Stine has been employed by us since May 1996, serving as President and Chief Executive Officer and as a Director. 

Mr. Warren has been employed by us since December 2000, serving as Vice President, Property Management and Ranch Operations.  From March 1999 to November 2000, he was a Director and Chief Financial Officer of BB Energy, an independent oil and gas exploration and production company headquartered in Bakersfield, California.  From December 1997 to February 1999, before joining BB Energy, Mr. Warren served as General Manager and Chief Financial Officer of West Coast Quartz Corporation of Fremont, California, a manufacturer of parts for semiconductor production equipment.

Mr. Lyda has been employed by us since 1990, serving as Vice President, Finance and Treasurer.  He was elected Assistant Secretary in 1995 and Chief Financial Officer in 1999.

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Mr. Mullins has been employed by us since 1993, serving as Vice President, General Counsel and Secretary.

Mr. Atkinson has been employed by us since July 1998, serving as Vice President, Agriculture.  From 1995 to 1998, he was a farm manager with Wilson Ag, an agricultural company in Kern County

Mr. Drew has been employed by us since March 2001, serving as Vice President, Commercial and Industrial Development.  From 1997 to 2001, he served as President of the International Trade and Transportation Center, a commercial and industrial development of The Allen Group located north of Bakersfield involving more than 700 acres.

Mr. Severy has been employed by us since September 2001, serving as Senior Vice President, Residential and Resort Properties.  From 1995 to 2001, he served as the Vice President of Resort Development for Intrawest Corporation, a leading resort developer in North America.

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 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 County 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 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 which contemplate future residential development of portions of this land, subject to further assessments of environmental and infrastructure constraints.  We are currently pursuing entitlements for a 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 developed 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 which accommodates a number of environmental concerns, including endangered species and wetlands issues, that may limit development of portions of the land or result in substantial delays in getting governmental approval.

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Water Rights

Existing long-term water contracts with the Wheeler Ridge-Maricopa Water Storage District, which we call the ‘‘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 term 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, 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.  In addition, Tejon-Castac has over 21,000 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 Tejon Mountain Village.

The years 1995 through 2000 were excellent water years with 100% of our water entitlement being available from the State Water Project in each of 1995 – 1999, and 90% in 2000.  While in the years 2001 and 2002 Project allocations were only 39% and 70%, respectively, the Wheeler Ridge Water District was able to supply us with 100% of our farming demands.  In some of these years, there was 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 the Tejon-Castac Water District 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 the Tejon-Castac Water District.  A 45% allocation has been made by the State Water Project for 2003.  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 2003.

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 contracts also establish a lien on benefited land.

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

Portions of our property also have available groundwater.  That source would be sufficient to supply significant commercial development in the Interstate 5 corridor and provide a significant portion of the water needed for development at Centennial and Tejon Mountain Village.

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 industrial developments. However, 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.

We lease land to National Cement Company of California, Inc. (“National”) for the purpose of manufacturing Portland cement from limestone deposits found on the leased acreage.  See Item 1, “Business – Real Estate Operations.”  In February 2002, National’s former subtenant, Systech Environmental Corporation (“Systech”), submitted to the California Department of Toxic Substances Control (“DTSC”) its final closure report for its former facility that burned hazardous waste as a supplemental fuel in the cement plant located on land leased from us.  Systech’s removal of certain contaminated soils is described in the final closure report.  We are advised that Systech expects DTSC approval of its final closure report substantially in the form submitted. 

In September 1994, the California Regional Water Quality Control Board (“RWQCB”) for the Lahontan Region issued a cleanup and abatement order with respect to an underground plume of chlorinated hydrocarbon compounds on certain property we lease to National for cement plant and related purposes.  This order, as amended on September 22, 2000, directs Lafarge Corporation (“Lafarge”), the successor to the previous tenant, National and us to, among other things, investigate the source and extent of the contamination and initiate cleanup.  We were ordered to complete the required investigation and cleanup only if Lafarge and National fail to do so.  We are advised that Lafarge and National have completed their investigation, and have installed a groundwater pump-and-treat system to clean up the groundwater.  In 1991 and 2000, Lafarge and National removed certain soils, which were the principal source of the contamination, from the property.

In May 2000, the RWQCB issued waste discharge requirements requiring National, Lafarge and us to consolidate, close and cap cement kiln dust piles located on land leased from us, and maintain and monitor the effectiveness of the cap.  We were ordered to undertake these activities only if National and Lafarge fail to do so.  We are advised that National and Lafarge have consolidated, closed and capped the cement kiln dust piles.  Maintenance of the cap and groundwater monitoring remain as on-going activities.

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In October 1990, the RWQCB issued a cleanup and abatement order with respect to an industrial waste landfill on the property.  This order, as amended on September 22, 2000, requires Lafarge and us to complete the cleanup of groundwater associated with the landfill.  We were ordered to undertake these activities only if Lafarge fails to do so.  We are advised that the RWQCB has approved Lafarge’s remedial plan recommending that the low-level groundwater contamination at the landfill be addressed by natural attenuation.  Groundwater monitoring remains as an ongoing activity.  Lafarge previously removed waste historically disposed of in the landfill and transported that waste off-site for disposal.

On September 22, 2000, the RWQCB ordered Lafarge, National and us to investigate the extent of contamination resulting from a diesel fuel tank and pipeline and initiate cleanup activities.  We were ordered to undertake these activities only if Lafarge and National fail to do so.  We are advised that Lafarge and National have completed their investigation and installed an air sparging system to clean up the soil and ground water.  Operation of the air sparging system remains as an on-going activity.

To date, we are not aware of any failure by Lafarge or National to comply with the orders of the RWQCB or to pursue the cleanup and investigation actions as informally instructed by RWQCB staff.  We have not been directed by the RWQCB to perform any of the investigative, characterization, remediation or removal activities. 

Under the lease between National and us, the tenant is obligated to indemnify us for costs and liabilities arising directly or indirectly out of the use of the leased premises by the tenant.  All obligations under this indemnity provision arising after the assignment of the lease to National (which occurred in November 1987) were assumed by National, and Lafarge has liability for all obligations under the indemnity provisions arising before the assignment.  National’s obligation is guaranteed by its parent, National Cement Company, Inc.  We believe that all of the matters described above in this Item 3 are included within the scope of the National or Lafarge indemnity obligations. 

The Company believes that Lafarge and National have sufficient resources to perform any reasonably possible or reasonably likely obligations relating to these matters.  Therefore, we believe that it is unlikely that any cleanup orders issued by the RWQCB will have a material effect on us.  If, however, National and Lafarge do not fulfill their cleanup responsibilities and we are required at our own cost to perform the remedial work likely to be mandated by the regulatory agencies on the sites described above, the amount of any such expenditure by us could be material.

On February 20, 2003, the Center for Biological Diversity and other anti-growth environmental groups filed a lawsuit in Kern County Superior Court against Kern County in which a subsidiary of the Company is the real party in interest.  This suit challenges the County’s certification of the environmental impact report for Tejon Industrial Complex-East (“TIC-East”), the Company’s 1100-acre expansion of the industrial park at the south end of the San Joaquin Valley.  Principal environmental issues raised in the suit involve the project’s likely effects on air quality and endangered species, the impact of converting farmland to development and the related potential for growth inducement, and the cumulative impact of the project when combined with other development on the Ranch and elsewhere.  The suit also challenges the land use entitlements granted by the County as being inconsistent with the County’s general plan and zoning policies. 

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The Company has an obligation to indemnify and defend the County and has undertaken defense of this suit in close coordination with County counsel.  The Company believes that the lawsuit is without merit, and intends to defend it vigorously.

The suit does not ask for damages, but if plaintiffs prevail, the Company would be called upon to pay their attorneys fees.  The biggest impact of the suit is to raise questions as to the practicality of developing TIC-East while the suit is pending.  While a delay in the Company’s ability to develop TIC-East could restrict its opportunities to serve industrial customers, the Company has inventory of land remaining at the approved industrial development across the freeway.  This opportunity cost would be partially offset by postponing incurring capital expenditures for TIC-East infrastructure.  The suit is expected to be heard by the trial court judge this summer, with a decision rendered shortly thereafter.  Appeals to California’s intermediate appeals court and the California Supreme Court could extend the effects of the suit after a decision is rendered by the trial court.  If plaintiffs prevail, which the Company considers unlikely, further delays would be incurred while the environmental impact report is revised to correct any deficiencies determined to exist, re-approved by the County and possibly re-litigated by the plaintiffs.

Not applicable.

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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 March 19, 2003, there were 554 owners of record of our Common Stock.

No dividends were paid in 2002 or 2001. In May 2000, the Board of Directors decided to discontinue payment of dividends in order to conserve cash for the operations of the Company.  Any future determination to pay dividends will be made at the discretion of the Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects and other factors as the Board of Directors may deem relevant.

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Years Ended December 31
(in thousands of dollars, except
per share amounts)

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Overview

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

We are currently working to take advantage of existing resources and market conditions as well as to anticipate and create future market trends and demand.  Part of this effort includes evaluating our land and water resources and planning our real estate development activities based upon the evaluation.  In the future, we will continue to assess the feasibility of entering into complementary, new, related lines of business and refining or reconfiguring current core businesses to take advantage of opportunities presented and changing market conditions.

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to revenue recognition, impairment of long-lived assets, capitalization of costs, profit recognition related to land sales, and the operations of joint ventures.  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.

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 rental revenue from our rental portfolio, royalty revenue from mineral leases, sales of farm crops, and land sales.
Rental and royalty revenue is recognized when due from tenants.  Revenue from leases with rent concessions or fixed escalations is recognized on a straight-line basis over the initial term of the related lease.  The financial terms of leases are contractually defined.  Rental revenue is not accrued when a tenant vacates the premises and ceases to make rent payments or files for bankruptcy.  Revenues related to our agreements with Calpine are recognized when earned due to the long time frame for construction and the uncertainty related to the timing of completion and beginning of plant operations.

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

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For the 2002 orchard crops we estimated almond revenues to be $2,184,000, or $1.03 per pound on average, pistachio revenue to be $2,739,000, or $1.14 per pound, and walnut revenue to be $468,000, or $.50 per pound.  These estimates not only impact the recorded revenues within our farming segment but also our recorded accounts receivable at December 31, 2002.  Over the last three years prices received on almonds have ranged from $.89 to $1.25 per pound.  Pistachio prices over the last three years have ranged from $1.05 to $1.28 per pound, and walnut prices have ranged from $.45 to $.60 per pound.  If we were to assume that our above estimates for 2002 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 $270,000, or 5% 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.

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 $25,000 in 2002, and decreased farming revenue $100,000 in 2001, and $231,000 in 2000.

If we were to change our estimate of 2002 orchard crop revenues to the low end of the estimate range, there would be no material impact on our liquidity or capital resources.

Our estimate of orchard crop revenues is a critical accounting estimate for our farming segment.  Management of the Company has discussed the development and selection of this critical accounting estimate with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the Company’s disclosure relating to it in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

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

Capitalization of Cost  - The Company capitalizes direct construction and development costs, including predevelopment costs, interest, property taxes, insurance, and indirect project costs that are 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 Salesand Leases – When we sell land within one of our real estate developments and we have not completed all infrastructure development related to the total project, we

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follow SFAS 66 and FASB Statement No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects”, to determine the appropriate costs of sales for the sold land and the timing of recognition of the sale.  In the calculation of cost of sales or allocations to leased land we use estimates and forecasts to determine total costs at completion of the development project.  These estimates of final development costs can change as conditions in the market change and costs of construction change.

In preparing these estimates we use internal budgets, forecasts, and engineering reports to help us estimate future costs related to infrastructure that has not been completed.  These estimates become more accurate as the development proceeds forward due to historical cost numbers and to the continued refinement of the development plan.  These estimates are updated periodically throughout the year so that, at the ultimate completion of development, all costs have been allocated.  During 2002, $.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 be more significant as we grow as a real estate development company because:  the estimates are very susceptible to change from period to period because they require management to make assumptions about costs of construction, absorption of product, and timing of completion of project; and changes to these estimates could have a material impact on the recognition of profits from the sale of land within our developments.  Management has discussed the development and selection of this critical accounting estimate with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure relating to it in this MD&A.

Impairment of Long-Lived Assets – We evaluate our property and equipment and development projects for impairment whenever indicators of impairment exist.  Accounting standards require that if the sum of the future cash flow expected to result from a company’s asset, undiscounted and without interest charges, is less than the reportedvalue of the asset, an asset impairment must be recognized.  The amount of the impairment is determined by subtracting the fair value of the asset from the reported value of the asset.

We currently operate in two segments:  real estate and farming.  At this time there are no assets within our real estate or farming segments 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.  Management has discussed the development and selection of this critical accounting estimate with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosure relating to it in this MD&A.

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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, and discussions with commercial real estate brokers and potential purchasers of our farming products.

Investment in Joint Ventures -– Investments in unconsolidated joint ventures are accounted for under the equity method.  Under the equity method, the original investment is recorded at cost and is adjusted periodically to recognize our share of earnings or losses.  Investments are evaluated as to the future recoverability of value.  Any permanent loss in value of an investment will be recognized in the period the impairment was identified.

New Accounting Pronouncements

The accounting policies adopted during 2002 were related to new accounting pronouncements and the adoption of these policies did not have a material impact on the consolidated financial statements of the Company.

In September 2001, FASB issued Statement No. 143 “Accounting for Asset Retirement Obligations”.  This statement covers obligations that a company incurs for the retirement of tangible long-lived assets such as drilling rigs or manufacturing plants.  We do not anticipate this pronouncement having a significant impact on our consolidated financial position or results of operations when it becomes effective for the 2003 financial year.

FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, was issued in June 2002.  This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and not at the date of the commitment to an exit plan.  We do not expect this statement to have a significant impact on our consolidated financial position or results of operations when it becomes effective for the 2003 financial year.

On December 31, 2002, FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), “Accounting for Stock-based Compensation – Transition and Disclosure.”  SFAS 148 amends SFAS 123, “Accounting for Stock-based Compensation,” to provide alternative methods of transition to SFAS 123’s fair value method of accounting for stock-based employee compensation.  SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure, in the summary of significant accounting policies, of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.  While the statement does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 123 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB Opinion No. 25

SFAS 148’s amendment of the transition and annual disclosure requirements of SFAS 123 and APB Opinion No. 28 are effective for fiscal years ending after December 15, 2002.  The Company has implemented these new disclosure provisions.  See the disclosure in Note 7 of Notes to Consolidated Financial Statements.

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FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” was issued in November 2002.  The initial recognition and measurement requirements of the interpretation are effective on a prospective basis to guarantees issued or modified after December 31, 2002.  We are currently evaluating the impact of the required accounting treatment under the interpretation for guarantees issued or modified after December 31, 2002, which could require the recording of a guarantee liability equal to its estimated fair value based on the expected present value of the estimated probability-weighted range of contingent payments under the guarantee arrangement.  We have not yet determined the anticipated impact of the application of the interpretation, however it could have a significant impact on our consolidated financial position when it becomes effective for the 2003 financial year.

FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, was issued in January 2003.  This interpretation addresses consolidation by business enterprises of joint ventures and special purpose entities (described as variable interest entities in this interpretation) that have certain characteristics.  The implementation of this interpretation could have a material impact on our consolidated financial statements because we may have to begin to consolidate one or more of the joint ventures we have entered into.  We are currently reviewing all of our joint venture agreements to determine what the potential impact may be related to the implementation of this interpretation.

Results of Operations

As reflected in the accompanying consolidated financial statements, we had net income of $243,000 in 2002, net income of $294,000 in 2001, and a net loss of $545,000 in 2000.

Net income for 2002 declined when compared to 2001 due to lower real estate operating profits, reduced interest income, higher corporate expenses, and losses from discontinued operations.  These unfavorable variances were partially offset by improved profits from farming and equity in earnings of unconsolidated joint ventures. 

Net income for 2001 improved when compared to 2000 due primarily to higher operating profits within the real estate division, increased interest income, and lower interest expenses.  These favorable variances were partially offset by losses from farming and higher corporate expenses.

Net income for 2002 consists of income from continuing operations of $492,000 and a loss from discontinued operations of $249,000.  Net income for 2001 consisted of income from continuing operations of $52,000 and income from discontinued operations of $242,000.  A significant portion of the income from discontinued operations resulted from the sale of assets of our cattle and feedlot operations.

Real Estate.  Segment operating profits within real estate during 2002 were $2,672,000, a decrease of $899,000 when compared to 2001 segment profits.  The decline in segment profits during 2002 was due primarily to an increase in segment expenses and reduced revenues associated with the power plant lease.  Revenues from the power plant agreement declined approximately $2,400,000 during 2002 due to the earning of milestone payments in 2001 related to easements and use of our land.  Expenses increased due to the continued expansion of our real estate activities.  Marketing and transaction costs related to our development projects increased $437,000 during 2002.  Property management costs, which included costs related to leased property and expenses associated with the management of the

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ranch, had a net increase of $452,000 during 2002.  Staff costs increased $287,000 during 2002 due to the timing of hiring staff during 2001, and insurance costs allocated to real estate increased $242,000 due to a hardening of general liability and property insurance markets over the last two years.  These unfavorable variances were partially offset by increases in lease revenues, oil and mineral royalties, easement sales, and land sales.  Lease revenues increased $232,000 due to three new leases coming on-line during 2002 and to a full year of grazing lease revenue.  Oil and mineral royalties grew $452,000 when compared to 2001 due to higher oil prices and increased production related to the cement plant lease.  During 2002, we also received a $1,375,000 easement payment related to a natural gas pipeline that crosses our land and we sold approximately 5.8 acres of land recognizing a gain of approximately $891,000.

Equity in earnings of unconsolidated real estate joint ventures increased $340,000 during 2002 due primarily to continued improvements in operations at Petro Travel Plaza.  Results of operations at the Petro Travel Plaza joint venture increased $512,000 compared to the prior year due to an increase in volume of activity and improved margins on gasoline and diesel sales. Cash flows continued to improve during 2002 and expectations are for continued growth in the future as the Tejon Industrial Complex continues to grow and as more travelers and trucking professionals place Petro on their refueling schedules.  These joint venture profits were partially offset by a loss of $172,000 within the Dermody/Tejon joint venture.  This loss was the result of depreciation and interest expense  for the entire development, and costs early in 2002 associated with leasing one-half of the building within the venture being greater than the revenue generated from leasing one-half of the building.

Near term activities within the real estate segment will be focused on the development of commercial/industrial products, the receipt of entitlements for the Centennial project in Los Angeles County, and completion of constraints and feasibility analysis and planning related to the Tejon Mountain Village concept.  In the marketing of Tejon Industrial Complex, we have seen signs that leasing activity has begun to slow down and that lease prices have been gradually declining within industrial developments in the Los Angeles area.  We have, however, seen a continuing interest in our industrial product due to the size of buildings that can be built within our development.  Our development fits very well within the new logistics model that companies are beginning to use that favors larger single site buildings rather than a number of decentralized smaller distribution centers.  Buildings of 1.0 million square feet or larger are difficult to build in Los Angeles due to the number of acres necessary for a building of that size.  We feel that in the future our ability to provide land parcels to support buildings of that size will provide us with a potential marketing advantage.

The Real Estate segment will continue to see 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.  During 2003 we are also anticipating a decline in revenues from the power plant agreement due to the timing of the plant becoming operational.  The power plant agreement allows for a twelve-month grace period beginning July 2003 ($100,000 per month) in the event construction is not completed and the plant is not operational.  Whether or not the plant is operational, contractual payments are scheduled to resume in July 2004. 

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

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

Real Estate segment operating profits of $3,571,000 in 2001 were $563,000, or 19% higher than 2000 segment profits.  The improvement in 2001 segment profits is due to a slight increase in revenues and to lower expenses.  The slight improvement in revenues was due to an increase in oil and mineral income of $194,000, increased lease income from our portfolio of properties of $1,190,000, and additional milestone payments for use of land, easements, and services provided related to the Calpine power plant project of $1,500,000.  These gains in real estate revenue were partially offset by the sale of land for $2,000,000 and the settlement of an easement payment for $801,000 during 2000.  Expenses declined $1,353,000 in 2001 due to no cost of sales and commissions associated with the sale of land when compared to the prior year and to lower indirect real estate project expenses.  These improvements were partially offset by higher staffing costs and marketing costs during 2001.

The increased equity in earnings from our investment in Petro Travel Plaza of $183,000 for 2001 was due to a continued increase in customers, improved margins on diesel and gasoline sales as our cost of sales declined throughout the year, and improved cost controls.

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

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

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

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

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Industry expectations are that statewide almond and pistachio crop yields on average should continue to improve, which may negatively impact prices if demand for those products fails to keep pace with production.  We continue to expect pricing pressure on our almonds and pistachios over the next few years due to new statewide plantings beginning to produce higher volumes of these crops. This increase in production may be somewhat negated by old almond orchards being removed as they become uneconomical to farm. The potential increase in almond production will positively impact our almond processing operation because of more almonds being available to process.  All of our crops are particularly sensitive to the size of each year’s world crop.  Large crops in California and abroad can rapidly depress prices.

During 2002, on a statewide basis, both almonds and pistachios experienced record production levels.  Even at high production levels, prices remained stable due to increasing demand for these crops.

Wine grape revenues during 2002 were flat when compared to 2001.  Grape prices however continued to be depressed during 2002, and we expect that these depressed prices will continue throughout 2003.  The growth in grape production within California is the primary reason for the decline in wine grape prices.  Improved prices will be realized only if demand continues to improve for wine and grape products or there is a significant reduction in the number of acres used for grape production within California. During early March 2003, we contracted our 2003 grape production.  At that time, we also contracted our French colombard grape production for 2004 and 2005.

During 2001, the Farming Division sustained a loss of $1,343,000, a decrease of $1,414,000 when compared to 2000 segment profits.  The decline during 2001 was due to a decrease in grape revenues of $815,000, lower almond revenues of $900,000, reduced rental revenues of $381,000 and increased fixed water costs of $390,000.  These unfavorable variances were partially offset by increased pistachio revenues of $873,000 and walnut revenues increasing $165,000. 

Grape revenues continued to decline during 2001 due to lower prices and to reduced production.  Grape prices declined approximately 27% when compared to 2000 prices.  Grape production declined due primarily to the removal of 247 acres of unprofitable cabernet sauvignon grapes.  The overall decline in grape prices was directly related to the growth in production throughout California.

Almond revenues during 2001 declined due to a large drop in production.  The decline in production was due to storms that impacted the pollination period and to storm damage to trees.  The damaged trees were ultimately removed due to the damage sustained in the storms and to the age of the damaged trees.  Pistachio revenues increased in 2001 due to production doubling when compared to 2000 production.  A large part of the increase in production was due to 300 acres of young pistachio trees producing their first full crop.  The improvement in walnut revenues is due primarily to increased production.

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

Interest.  Interest and investment income during 2002 fell approximately $1,000,000 due to fewer funds being invested and to lower interest rates on funds invested.  The decline in funds invested was

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due to the liquidation of debt in 2001 and to expenditures on property and equipment that reduced cash available for investment in 2002.

Interest and investment income for 2001 increased $1,265,000 to $1,897,000 when compared to 2000 interest income.  The receipt of funds associated with the rights offering, which was completed during January 2001, primarily drove the increase.  The increase in income from additional funds invested was partially offset by lower interest rates during the year.

Interest expense for 2002 was $134,000, of which $18,000 is included in discontinued operations, compared to interest expense of $1,136,000 in 2001, of which $441,000 is included in discontinued operations.  Interest expense declined due to lower average outstanding amounts on credit lines and to the capitalization of interest expense due to the growth of our real estate development activities.  Interest incurred and paid in 2002 was $1,381,000 compared to $2,602,000 in 2001, of which $1,246,000 and $1,466,000 were capitalized, respectively.

Interest expense during 2001 was $1,136,000, of which $441,000 is included in discontinued operations, compared to interest expense of $2,701,000 in 2000, of which $1,275,000 is included in discontinued operations.  The decrease in interest expense was due to liquidation of debt throughout the year.  Debt declined due to the disposal of our livestock operations throughout the year and to using cash from the rights offering to reduce debt.  Interest incurred and paid in 2001 was $2,602,000 compared to $3,590,000 in 2000, of which $1,466,000 and $1,174,000 were capitalized, respectively.  Interest capitalized increased during 2001 due to the growth in our real estate development activities. 

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

Corporate expenses in 2001 were $3,347,000, an increase of $318,000 when compared to 2000 corporate expenses.  The increase during 2001 is due to higher professional service fees related to accounting and legal costs ($76,000), higher staffing costs related to deferred stock compensation costs and employee benefits ($180,000), and to higher depreciation expense ($66,000). 

Discontinued Operations.  During April 2001, we finalized a plan for the sale of our cattle and feedlot division.  Since then, we have disposed of our cattle and feedlot operations to provide capital for real estate development activities and to reduce outstanding debt.  While the sale of livestock assets has provided working capital, it has also resulted in the loss of significant revenues even after taking into account the revenue stream from the grazing leases we entered into in connection with the sale of the breeding herd.  While the operations of the livestock division created significant revenues they also used large amounts of debt and working capital.  We believed that our working capital and debt facilities would be better allocated to potentially higher returning and value enhancing real estate development activities, which led to our decision to dispose of the livestock division assets.  During April 2002, we completed the process of liquidating the remaining stocker cattle herd and livestock assets that were still owned at December 31, 2001.

Discontinued operations during 2002 generated a loss of $249,000, or $.02 per share diluted, compared to income from discontinued operations of $242,000, or $.02 per share diluted, for 2001.  The decrease

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from the prior year is due to a decline in revenues as a result of fewer cattle sales in 2002 and losses on many of the cattle sold because of lower prices in early 2002.  In addition, during 2002 we recognized no revenues from the feedlot that was sold in July 2001 or gains from the sale of the breeding herd that occurred in 2001.

Income from discontinued operations, net of applicable taxes, of $242,000 during 2001 was $183,000 less than the $425,000 of income from discontinued operations, net of taxes, in 2000.  The decline in income is largely due to revenues from discontinued operations of $48,426,000 decreasing $1,593,000 when compared to the $50,019,000 of revenues for 2000.  This reduction in revenues is primarily due to fewer cattle being sold when compared to 2000 and to lower prices on cattle during the fourth quarter of 2001.  During 2001, approximately 8,200 fewer head of cattle were sold.  This reduction in cattle sold is due to replacement cattle not being purchased throughout the year that possibly could have been sold because of the decision to dispose of our livestock and feedlot assets.  Partially offsetting this decline in revenues was a corresponding decline in expense due to fewer cattle being sold and to cattle inventory numbers declining throughout the year.

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

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Financial Condition.  Our cash, cash equivalents and short-term marketable securities totaled approximately $25,240,000 at December 31, 2002, an increase of $1,777,000 from the corresponding amount at the end of 2001.  Working capital at the end of 2002 was $30,515,000, which is $1,071,000 less than working capital at the end of 2001.  Cash, cash equivalents and short-term marketable securities increased during 2002 due to the liquidation of the remaining discontinued assets, the receipt of bond reimbursement proceeds, and funds from the exercise of stock options.  These increases were partially offset by property and equipment expenditures, land development project costs, and the financing of receivables and inventories.  Working capital decreased due to a decline in current assets.  The decrease in current assets is primarily related to the liquidation of the remaining assets of discontinued operations.  The funds from these assets were used throughout the year to fund operations and property and equipment expenditures.

During 2001 the principal uses of cash and cash equivalents consisted of capital expenditures related to real estate development activities, financing of receivables and inventories, and the reduction in both short-term and long-term debt.

We have a secured revolving line of credit of $15,000,000 that, as of December 31, 2002, had no outstanding balance.  This line of credit bears interest at a rate which floats with changes in the lending bank’s prime interest rate.  At our option the interest rate on this line of credit can be fixed for a period of time at 1.50% over a selected LIBOR rate or float at .50% less than the bank’s prime lending rate.  During 2001 short-term debt declined significantly due to the disposition of livestock assets and to the use of proceeds from the rights offering that was completed earlier in 2001.

Our outstanding long-term debt, less current portion of $1,731,000, declined $227,000 to $14,336,000 at the end of 2002 when compared to 2001.  Long-term debt is being used to fund real estate development infrastructure and farming assets on our land, commercial buildings in Phoenix, Arizona that were purchased in 1999, and the almond processing plant purchased in January 2000.  Long-term debt currently consists of three separate debt obligations.  One long-term note for real estate and farming purposes provides for loan amounts up to $10,500,000, has a current balance of $10,000,000, and is secured by farmland.  This note comes due in 2004.  The second note obligation was used to purchase the buildings in Phoenix, is secured by mortgages on the buildings, and has a balance of $4,627,000. The last note is for a loan used to purchase the almond processing plant in 2000 and has a balance of $1,440,000.

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The following table shows our long-term obligations and commitments over the next five years:

The standby letter of credit is related to the issuance of Community Facility District bonds by the Tejon Ranch Public Facilities Financing Authority, a joint-powers authority created by Kern County and the Tejon-Castac Water District.  The standby letter of credit is in place to provide additional credit enhancement and covers approximately two years worth of interest on the outstanding bonds.  This letter of credit will not be drawn upon unless we, as the largest landowner in the district, fail to make our property tax payments.  This letter of credit will terminate in the future as land in the district becomes developed.

The guarantees consist of a $1,375,000 guarantee related to the debt of Petro Travel Plaza LLC, an unconsolidated limited liability company in which we are equity owners with Petro Stopping Centers, L.P.  Total debt in the venture is approximately $12,000,000 and is related to the long-term financing of the facility.  This guarantee will be reduced over the next two years as the principal balance on the loan is reduced through scheduled debt payments.  The remaining $5,878,000 of guarantees relate to debt within the Tejon Dermody Industrial LLC, an unconsolidated joint venture to construct and market a 650,000 square foot building at the Tejon Industrial Complex.  Total debt in the venture is approximately $11,756,000 and was used in the construction of the building.  In the joint venture agreement each partner agreed to guarantee one half of the outstanding construction loan debt through the two-year term of the loan.  It is anticipated that this loan will be refinanced during July 2003.  During March 2002, a lease was signed for one half of the building and the cash payments from this lease will cover principal and interest debt service requirements under the current loan agreement.  At this time we believe that neither of the guarantees nor the standby letter of credit will ever be called upon.

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

During 2003, $16,047,000 has been budgeted for capital expenditures and development investment, which includes nearly $8,700,000 for infrastructure at the Tejon Industrial Complex West and East, and $5,360,000 for planning and analysis work related to potential real estate projects in the mountain/lake area of our lands and Los Angeles County.  Other items included in the capital expenditure budget are a 300 acre almond development for $832,000, equipment, and improvements to existing facilities.

Our current and future capital resource requirements will be provided primarily from the following sources:  current cash and marketable securities, cash flow from ongoing operations, proceeds from the sale of developed parcels, additional use of debt, and proceeds from the reimbursement of public infrastructure costs through Community Facilities District bond debt.  As noted above, we have $25,240,000 in cash and securities and $15,000,000 available on credit lines to meet any short-term liquidity needs.  We continue to expect that substantial investments will need to be made in future years in our land assets to secure entitlements and develop the land.  In order to meet these long-term capital requirements, we will 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.

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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 Poors.  See Note 3, Marketable Securities, of Notes to Consolidated Financial Statements.

The Company is exposed to interest rate risk on its short-term working capital line of credit and the long-term debt currently outstanding.  The short-term 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.  A portion of the long-term debt ($4,627,000) has a fixed interest rate, and the fair value of this long-term debt will change based on interest rate movements in the market.  The remaining long-term debt ($11,440,000) can either be fixed for periods of time to a LIBOR rate or float with the lending bank’s prime rate.  The floating rate obligations expose us to variability in interest payments due to changes in interest rates.  If interest rates increase, interest expense increases.  Conversely, if interest rates decrease, interest expense also decreases.

We believe it is prudent to limit the variability of a portion of our interest payments.  To meet this objective we entered into an interest rate swap to manage the potential fluctuations in cash flows resulting from interest rate risk.  See Note 9, Interest Rate Risk Management, of Notes to Consolidated Financial Statements.

Credit and market risks related to our inventories ultimately depend 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, debt obligations and interest rate swaps.

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Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 2002
(Dollars in Thousands)

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Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 2001
(Dollars in Thousands)  

Debt figures above include debt related to discontinued operations.

Our risk in regards to fluctuations in interest rates has remained constant over the last two years due to the reduction in the use of both short-term and long-term lines of credit that fluctuate with the bank’s prime lending rate.

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 2003 crop production.  The farming costs inventoried that are related to the 2003 crop are recorded at actual costs incurred.  Historically, these costs have been recovered each year when that year’s crop harvest has been sold.

With respect to accounts receivable, the amount at risk relates primarily to farm crops.  These receivables are 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, 2002, $3,660,000 is at risk to changing prices.  Of the amount at risk to changing prices, $1,599,000 is attributable to almonds, $1,950,000 to pistachios, $111,000 to walnuts,.  The comparable amounts of accounts receivable at December 31, 2001 were

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$609,000 related to almonds, $1,335,000 related to pistachios, and $138,000 to walnuts.  The price estimated for recording accounts receivable at December 31, 2002 was $1.03 per pound for almonds.  For every $.01 change in the price of almonds our receivable for almonds increases or decreases by $15,500.  Although the final price of almonds (and therefore the extent of the risk) is not presently known, over the last three years the final prices have ranged from $.89 to $1.25.  With respect to pistachios, the price estimated for recording the receivable was $1.14 per pound, each $.01 change in the price increases or decreases the receivable by $17,000 and the range of final prices over the last three years for pistachios has been $1.05 to $1.28.

The price estimated for recording accounts receivable for walnuts was $.50 per pound.  For every $.01 change in the price of walnuts, our receivable increases or decreases by $2,200.  The final price for walnuts has averaged from $.45 to $.60 over the last three years. 

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

Not applicable.

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PART III

Information regarding our directors is incorporated by reference from the definitive proxy statement to be filed by us with the Securities and Exchange Commission with respect to our 2003 Annual Meeting of Stockholders.  Information as to our Executive Officers is set forth in Part I, Item 1 under “Executive Officers of Registrant.”

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 2003 Annual Meeting of Stockholders.

Information required by this Item with respect to security ownership by principal stockholders and management is incorporated by reference from the definitive proxy statement to be filed by us with the Securities and Exchange Commission with respect to our 2003 Annual Meeting of Stockholders.

The following table shows aggregated information as of December 31, 2002 with respect to all of our compensation plans under which our equity securities were authorized for issuance.  At December 31, 2002 we had, and we presently have, no other compensation contracts or arrangements for the issuance of any such equity securities, and there were then, and continue to be, no compensation plans, contracts or arrangements which were not approved by our stockholders.  More detailed information with respect to our compensation plans is included in Note 7 of Notes to Consolidated Financial Statements.

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Equity Compensation Plan Information

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 2003 Annual Meeting of Stockholders.

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

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

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PART IV

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