Liquidity and Capital Resources

For the six month periods ended June 30, 2012 and 2011, net cash was used for operating activities, principally for real estate project expenditures, general and administrative expenses, farming expenses at the Rampage property and estimated federal and state tax payments. 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, farming income related to grape sales at the Rampage property, borrowings from or repayment of advances by its subsidiaries and cash and cash equivalents and investments. As of June 30, 2012, the Company had aggregate cash, cash equivalents and investments of $59,750,000 to meet its current liquidity needs and for future investment opportunities.

As of June 30, 2012, the remaining land at the San Elijo Hills project to be developed and sold or leased consisted of the following (including real estate under contract for sale):

Single family lots                        266
Multi-family units                         11
Square footage of commercial space     37,800

In March 2012, the Company sold 18 single family lots at San Elijo Hills to a homebuilder for aggregate cash proceeds of $3,350,000, pursuant to which it had previously received a non-refundable option payment of $350,000 in 2011, and recognized a gain of $2,700,000. These lots were originally zoned for residential development, and the buyer was able to obtain approval from the City to convert 18 units from the project's multi-family designation to single family lots.

As more fully discussed in the 2011 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.

Recent homebuilder interest and sales activity at the San Elijo Hills project are encouraging; however, it is too soon to determine if the long slump in the housing market is coming to an end, or when the Company will be able to sell its remaining inventory. 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. Although development has been completed on all of the remaining residential single family lots at the San Elijo Hills project to the same degree as lots previously sold, the Company has recently determined to further develop some of the remaining lots at the project to enhance sales value. Additional development work will include the extension of sewer, water, storm drain, road and curb improvements from the neighborhood boundary to individual lots. The Company has not determined whether all of the remaining lots will be further developed.

In February 2012, the Company acquired approximately 450 acres of land in Virginia Beach, Virginia for cash consideration of $17,350,000 including closing costs. The project is entitled for 455 single family lots, of which 91 are finished lots that are available for sale. In July 2012, the Company sold 17 finished lots at the Virginia Beach project for net cash consideration of $2,300,000.

Results of Operations

Real Estate Sales Activity

San Elijo Hills Project:

There were no sales of real estate during the three month period ended June 30,
2012. During the three month period ended June 30, 2011 and the six months ended
June 30, 2012 and 2011, the Company closed on sales of real estate and
recognized revenues as follows:



                                                      For the three month               For the six month
                                                          period ended                    periods ended
                                                         June 30, 2011          June 30, 2012       June 30, 2011

Single family units                                                      -                  18                  32
Multi-family units                                                       -                   -                   -
Residential condominium units                                            1                   -                   1

During the three month period ended June 30, 2011, cost of sales of real estate aggregated $400,000, and during the six month periods ended June 30, 2012 and 2011, cost of sales of real estate aggregated $650,000 and $4,000,000, respectively.

Otay Ranch Project:

There was no real estate sales activity at the Otay Ranch project during the three and six months ended June 30, 2012 and 2011. As discussed in the 2011 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.

Other Results of Operations Activity

Rental income increased by $20,000 and $40,000, respectively, during the three and six month periods ended June 30, 2012 as compared to the same periods in 2011 due to the addition of one retail tenant and reduced charges for uncollectible rent.

The Company recorded co-op marketing and advertising fees of $100,000 and $50,000 for the three month periods ended June 30, 2012 and 2011, respectively, and $220,000 and $80,000 for the six month periods ended June 30, 2012 and 2011, respectively. 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.

General and administrative expenses increased slightly during the three month period ended June 30, 2012 as compared to the same period in 2011 primarily due to higher professional and travel expenses. The increase primarily relates to activity at the Virginia Beach project.

General and administrative expenses decreased during the six month period ended June 30, 2012 as compared to the same period in 2011 primarily due to lower legal expenses. Legal expenses for the six month periods ended June 30, 2012 decreased by $550,000, principally due to lower legal fees associated with litigation brought by a minority shareholder against one of the Company's subsidiaries related to the San Elijo Hills project. The Company also incurred higher professional and travel expenses related to activity at the Virginia Beach project during 2012.

The change in interest and other income for the three and six month periods ended June 30, 2012 as compared to the same periods in 2011 reflect a moderate decline in interest income due to lower interest rates. The six month 2011 period also includes $150,000 of income relating to proceeds received from the settlement of a contract dispute.

The Company's effective income tax rate is higher than the federal statutory rate due to state income taxes.

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 2011 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.