Liquidity and Capital Resources

For the nine month periods ended September 30, 2009 and 2008, net cash was used for operating activities, principally for real estate expenditures at the San Elijo Hills and Otay Ranch projects, general and administrative expenses and farming operations at the Rampage property. The Company's principal sources of funds are proceeds from the sale of real estate, fee income from the San Elijo Hills project, dividends and tax sharing payments from its subsidiaries, borrowings from or repayment of advances by its subsidiaries and cash and cash equivalents and investments. As of September 30, 2009, the Company had aggregate cash, cash equivalents and investments of $62,150,000 to meet its current liquidity needs and for future investment opportunities.

As of September 30, 2009, the aggregate balance of deferred revenue for all real estate sales was $1,700,000, which the Company estimates will be substantially recognized as revenue during 2009. The Company estimates that it will spend approximately $500,000 to complete the required improvements, including costs related to common areas. The Company will recognize revenues previously deferred and the related cost of sales in its statements of operations as the improvements are completed under the percentage of completion method of accounting.

As of September 30, 2009, the remaining land at the San Elijo Hills project to be developed and sold or leased consisted of the following:

Single family lots to be developed and sold        441
Multi-family units                                 171
Square footage of commercial space              53,500

As more fully discussed in the 2008 10-K, residential property sales volume, prices and new building starts have declined significantly in many U.S. markets, including California and the greater San Diego region, which have negatively affected sales and profits at the San Elijo Hills project. The slowdown in residential sales has been exacerbated by the turmoil in the mortgage lending and credit markets, which has resulted in stricter lending standards and reduced liquidity for prospective home buyers. Sales of new homes and re-sales of existing homes have declined substantially from the early years of the project's development; there have been no residential lot sales at the San Elijo Hills project since June 2006.

The Company has substantially completed development of its remaining residential single family lots at the San Elijo Hills project, many of which are "premium" lots which are expected to command premium prices if, and when, the market recovers. The Company has not been actively soliciting bids for its remaining inventory of single family lots; however, the Company has recently received expressions of interest from homebuilders for certain of its remaining single family lots. The Company has not increased its marketing efforts, and is unable to predict if the recent activity indicates that the local residential real estate market is entering into a period of sustainable improvement. The Company believes that by exercising patience and waiting for market conditions to improve it can best maximize shareholder value with its remaining residential lot inventory. On an ongoing basis the Company evaluates the local real estate market and economic conditions in general, and updates its expectations of future market conditions as it continues to assess the best time to market its remaining residential lot inventory for sale.

The construction of 12 residential condominium units and approximately 11,000 square feet of retail space at the San Elijo Hills Towncenter is substantially complete. San Elijo Hills has applied for and received conditional approval from two federal government agencies that will enable lenders to provide buyers with competitive financing for the residential units. The residential condominium units are currently being marketed for sale; four units have been reserved for sale pending completion of sales agreements and financing. Tenant improvement work covering 5,300 square feet for five retail tenants has been completed and all of those tenants were open for business in October 2009.

In July 2009, the Company sold the visitor center building at the San Elijo Hills project to a third party for cash proceeds of approximately $1,950,000, which resulted in the recognition of a pre-tax gain of $1,850,000.

Results of Operations

Real Estate Sales Activity

San Elijo Hills Project:

There were no sales that closed during the three month period ended September
30, 2008. During the three and nine month periods ended September 30, 2009 and
the nine month period ended September 30, 2008, the Company closed on sales of
real estate and recognized revenues as follows:

                                                        For the
                                                       Three and
                                                       Nine Month         For the Nine
                                                        Periods            Month Period
                                                         Ended                Ended
                                                       September            September
                                                        30, 2009            30, 2008

Single family units                                              -                    -
Commercial lot sales - planned square feet                   6,000                    -
Non-residential acres sold                                       -                  5.3
Sales price, net of closing costs                      $ 1,950,000          $ 1,300,000
Revenues recognized on closing date                    $ 1,950,000          $ 1,300,000

As discussed in the 2008 10-K, a portion of the revenue from sales of real estate is deferred, and is recognized as revenue upon the completion of the required improvements to the property, including costs related to common areas, under the percentage of completion method of accounting. Revenues include amounts that were previously deferred of $550,000 and $800,000 for the three month periods ended September 30, 2009 and 2008, respectively, and $4,050,000 and $5,100,000 for the nine months ended September 30, 2009 and 2008, respectively. Such amounts were recognized upon the completion of certain required improvements.

In September 2008, the San Elijo Hills project repurchased a 131 unit multifamily site for $6,000,000 that had previously been sold to a homebuilder in October 2005 for $36,000,000. The Company's obligation to the homebuilder to complete certain improvements under the original contract was terminated upon acquisition of the property; accordingly, the Company recognized all the remainder of the previously deferred revenue of $1,300,000 in September 2008.

During 2009, the Company reduced its estimated cost to complete certain improvements at the San Elijo Hills project, which resulted in an acceleration of the recognition of previously deferred revenue of $300,000 and $2,250,000 for the three and nine month periods ended September 30, 2009, respectively. For the three and nine month periods ended September 30, 2009, these changes in estimates increased net income by $200,000 and $1,300,000, respectively. For the nine month period ended September 30, 2009, this change in estimate increased net income attributable to common shareholders by $1,450,000 and was not material for the three month period ended September 30, 2009.

During the three month periods ended September 30, 2009 and 2008, cost of sales of real estate aggregated $150,000 and $50,000, respectively. During the nine month periods ended September 30, 2009 and 2008, cost of sales of real estate aggregated $550,000 and $800,000, respectively. Cost of sales is recognized in the same proportion to the amount of revenue recognized under the percentage of completion method of accounting, subject to changes in estimate as discussed above.

Otay Ranch Project:

There was no real estate sales activity at the Otay Ranch project during the three and nine month periods ended September 30, 2009 and 2008. As discussed in the 2008 10-K, the Company continues to evaluate how to maximize the value of this investment while pursuing land sales and processing further entitlements on portions of its property. The Otay Ranch Project is in the early stages of development; as a result, the Company does not expect any sales activity in the near future.

Rampage Property Project:

As more fully described in the 2008 10-K, in connection with the settlement of a lawsuit the Company sold a 17 acre parcel at the Rampage property for $300,000 and recognized a $250,000 gain on the sale of real estate for the periods ended September 30, 2008.

Other Results of Operations Activity

Co-op marketing and advertising fees did not significantly change in the 2009 periods as compared to the same periods in 2008. The Company records these fees when the San Elijo Hills project builders sell homes, and are generally based upon a fixed percentage of the homes' selling price. These fees provide the Company with funds to conduct its marketing activities.

Interest expense is capitalized for the notes payable to trust deed holders on the San Elijo Hills project, which totaled $4,000 and $10,000 for the three month periods ended September 30, 2009 and 2008, respectively, and $10,000 and $30,000 for the nine month periods ended September 30, 2009 and 2008, respectively.

General and administrative expenses decreased during the three month period ended September 30, 2009 as compared to the same period in 2008 primarily due to lower expenses related to marketing, compensation and legal and professional fees. Marketing expenses decreased by $300,000 as a result of a reduction in advertisements due to the limited number of new homes for sale at the San Elijo Hills project; compensation expense decreased by $50,000 principally due to workforce reductions; and legal and professional fees declined by $150,000. In addition, during the three month period ended September 30, 2008, the Company spent $350,000 investigating a potential real estate project which was not acquired.

General and administrative expenses decreased during the nine month period ended September 30, 2009 as compared to the same period in 2008 primarily due to the settlement of a lawsuit in 2008 related to the Rampage property for $1,150,000. The decline in general and administrative expenses in 2009 also reflects $850,000 of lower marketing expenses as a result of a reduction in advertisements due to the limited number of new homes for sale at the San Elijo Hills project; $800,000 of lower compensation expense principally due to workforce reductions and lower estimated general bonus expense; $300,000 of lower professional fees; and $250,000 of lower legal expenses. In addition, during the nine month period ended September 30, 2008, the Company spent $350,000 investigating a potential real estate project. General and administrative expenses for the nine month 2009 and 2008 periods also reflects payments of $100,000 and $200,000, respectively, to acquire an option to purchase water storage capacity, which is a component of the Company's plan to acquire sufficient water to develop the Rampage property as a master-planned community. The Company will have to make additional annual option payments of between $200,000 and $400,000 over the next six years in order to retain the option to acquire water storage capacity.

The change in interest and other income, net for the three and nine month periods ended September 30, 2009 as compared to the same periods in 2008 reflects a decline in interest income of $350,000 and $1,500,000, respectively, due to lower interest rates and a lower amount of invested assets reflecting cash used for operating and financing activities. Other income, net includes farming income at the Rampage property of $2,800,000 for the three and nine month periods ended September 30, 2009 (of which $1,050,000 relates to insurance proceeds received as a result of weather damage to the grapes) as compared to $1,100,000 of farming income for the three and nine month periods ended September 30, 2008. Other income, net includes farming expenses at the Rampage property of $750,000 and $2,800,000, respectively for the three and nine month periods ended September 30, 2009, as compared to $300,000 and $800,000, respectively, for the three and nine month periods ended September 30, 2008, resulting from an increase in acres being farmed from 500 acres to 1,400 acres. The additional acres being farmed were previously leased to a third-party. During the third quarter of 2009, the Company recognized in interest and other income $400,000 of previously deferred fees that had been prepaid by a homebuilder. The fees were recognized in income because the homebuilder's lender foreclosed on the property, which removed any contingent obligation related to the fees.

Due to the expiration of the statute of limitations, the Company recognized $250,000 and $1,000,000 for the three and nine month periods ended September 30, 2009 and 2008, respectively, of previously unrecognized tax benefits which was reflected as a reduction to income tax expense. As a result, the Company's effective income tax rate is lower than the federal statutory rate.

Cautionary Statement for Forward-Looking Information

Statements included in this Report may contain forward-looking statements. Such statements may relate, but are not limited, to projections of revenues, income or loss, development expenditures, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words "estimates," "expects," "anticipates," "believes," "plans," "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.

Factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or may materially and adversely affect the Company's actual results include but are not limited to the following: the performance of the real estate industry in general; changes in mortgage interest rate levels or changes in consumer lending practices that reduce demand for housing; recent turmoil in the mortgage lending markets; the economic strength of the Southern California region where our business is currently concentrated; changes in domestic laws and government regulations or in the implementation and/or enforcement of government rules and regulations; demographic changes in the United States generally and California in particular that reduce the demand for housing; increases in real estate taxes and other local government fees; significant competition from other real estate developers and homebuilders; delays in construction schedules and cost overruns; increased costs for land, materials and labor; imposition of limitations on our ability to develop our properties resulting from condemnations, environmental laws and regulations and developments in or new applications thereof; earthquakes, fires and other natural disasters where our properties are located; construction defect liability on structures we build or that are built on land that we develop; our ability to insure certain risks economically; shortages of adequate water resources and reliable energy sources in the areas where we own real estate projects; changes in the composition of our assets and liabilities through acquisitions or divestitures; the actual cost of environmental liabilities concerning our land could exceed liabilities recorded; opposition from local community or political groups at our development projects; and our ability to generate sufficient taxable income to fully realize our deferred tax asset. For additional information see Part I, Item 1A. Risk Factors in the 2008 10-K.

Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Report or to reflect the occurrence of unanticipated events.