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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2002

or

For the transition period from                              to                             

Commission file number 1-8885

THE NEWHALL LAND AND FARMING COMPANY
(a California Limited Partnership)
(Exact name of Registrant as specified in its charter)

23823 Valencia Boulevard, Valencia, CA 91355
(Address of principal executive offices) (Zip Code)

(661) 255-4000
(Registrant's telephone number, including area code)

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.

Yes  ý        No  o

23,992,293 partnership units outstanding at October 31, 2002

Part I. Financial Information
Item 1. Financial Statements

Consolidated Statements of Income
(Unaudited)

See notes to consolidated financial statements

2

Consolidated Balance Sheets

See notes to consolidated financial statements

3

Consolidated Statements of Cash Flow
(Unaudited)

See notes to consolidated financial statements

4

Notes to Consolidated Financial Statements (unaudited)

Note 1. Accounting Policies

        The consolidated financial statements include the accounts of The Newhall Land and Farming Company and its subsidiaries, all of which are wholly-owned (collectively, "the Company"). All significant intercompany balances and transactions are eliminated.

        The Company's unaudited interim financial statements have been prepared in conformity with generally accepted accounting principles used in the preparation of the Company's annual financial statements. In the opinion of the Company, all adjustments, consisting of normal and recurring items, necessary for a fair presentation of the results of operations for the three and nine months ended September 30, 2002 and 2001 have been made. The interim statements are condensed and do not include some of the information necessary for a more complete understanding of the financial data. Accordingly, your attention is directed to the footnote disclosures found on pages 28 through 40 of the Company's 2001 Annual Report on Form 10-K. In addition, a summary of the accounting policies that management considers significant in the preparation of the Company's consolidated financial statements is included in Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain reclassifications have been made to prior period's amounts to conform to the current period presentation.

        Interim financial information for the Company has substantial limitations as an indicator for the calendar year because:

•

Land sales occur irregularly and are recognized, provided profit recognition criteria are met, at the close of escrow or, if the Company has an obligation to complete certain future improvements, on the percentage of completion basis.



•

Sales of income properties and non-developable farmland occur irregularly and are recognized upon close of escrow provided profit recognition criteria are met.



•

Agricultural crops are on an annual cycle and income is recognized upon harvest. Most major crops are harvested during the fall and winter.

Note 2. Details of Land Under Development

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Note 3. Details for Earnings per Unit Calculation

6

Note 4. Details of Income-Producing Properties, Income Producing Properties Held for Sale and Property and Equipment

Note 5. Disclosure about Certain Financial Statement Captions

        Cash and cash equivalents—Cash and cash equivalents increased $8.3 million at September 30, 2002 compared to December 31, 2001. Cash generated from operations totaled $72.9 million for the nine months ended September 30, 2002. This included collection of a total of $11.7 million in notes receivable. At September 30, 2002, the Company had no outstanding balances on its available lines of credit. Due to prepayment penalties, the Company invested its excess cash in short-term investments rather than pay down its fixed rate debt. The Company had $11.3 million in cash and short-term investments at September 30, 2002. (See the Consolidated Statements of Cash Flows and further discussion in Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.)

        Deferred revenues—The $20.5 million net increase in deferred revenues for the nine months ended September 30, 2002 was primarily attributable to $32.1 million in deferred revenues for certain commercial land and residential lot sales recorded under percentage of completion accounting in 2002, including $8.7 million recorded in the 2002 third quarter. (See definition of percentage of completion in the "Significant Accounting Policies and Estimates" section of Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.) This increase was partially offset by recognizing $11.8 million of deferred revenues earned in 2002 to date, including $5.1 million of deferred revenues recognized in the 2002 third quarter.

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        Mortgage and Other Debt—The $26.6 million decrease in mortgage and other debt for the nine months ended September 30, 2002 was primarily due to no outstanding borrowings on the Company's available line of credit at September 30, 2002 versus $23.7 million outstanding at December 31, 2001. The Company's lines of credit are available to fund recurring operations, distributions and repurchases of partnership units. The reduced borrowings on the credit line were primarily due to reduced repurchases of partnership units during the nine months ended September 30, 2002 as detailed in Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. In addition, in May 2002 a $2.6 million promissory note for the acquisition of water rights for the development of Newhall Ranch matured and was paid by the Company.

Note 6. Business Segment Reporting

        The following table provides financial information regarding revenues from external customers, income and total assets for the Company's business segments and also provides a reconciliation to the Company's consolidated totals:

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Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

        The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Inherent in the preparation of these financial statements are certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on a regular basis taking into account historical experience and other relevant current factors. Therefore, actual results may differ from reported amounts under different assumptions or conditions.

        The interim statements are condensed and do not include some of the information necessary for a more complete understanding of the financial data. Accordingly, your attention is directed to the footnote disclosures found on pages 28 through 40 of the Company's 2001 Annual Report on Form 10-K. A summary of the accounting policies that management considers significant in the preparation of the Company's consolidated financial statements follows.

        Revenue recognition—The majority of revenues for the Company result from land sales. The Company follows the provisions in Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate ("FAS 66"), to record these sales. FAS 66 provides specific sales recognition criteria to determine when land sales revenues can be recorded. For example, FAS 66 requires a 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.

        Percentage of completion—When the Company has an obligation to complete development on sold property it utilizes the percentage of completion method of accounting to record revenues and income. Under percentage of completion accounting, the Company recognizes revenues and income based upon the ratio of development cost completed to the estimated total cost of the property sold, provided required sales recognition criteria have been met. Unearned revenues resulting from applying percentage of completion accounting are reported as deferred revenues in the liabilities section of the balance sheet. The Company estimates total project costs associated with the parcel sold. Revisions in profit estimates and changes in percentages complete are recorded in the consolidated statement of income in subsequent periods, as they become known and the development progresses toward completion.

        Project costs—Costs incurred after the earlier of specific plan or tentative map approval are capitalized as a cost of that project and included as an asset in land under development on the balance sheet. Preliminary planning and entitlement costs, including litigation costs, are charged to expense when incurred. Indirect costs that do not clearly relate to projects under development, including general and administrative expenses, are charged to expense when incurred.

        Cost allocations—The Company generally allocates onsite costs to individual parcels within a project on a square foot basis if the parcels in the project are of similar value. In mixed-use projects, where there may be both a residential and a commercial component with varying fair values, onsite costs are allocated to the respective parcels using the relative sales value method. Under the relative sales value method, each parcel in the project under development is allocated onsite costs in proportion to the estimated overall sales prices of the project such that each parcel to be sold reflects the same gross profit margin. Since this method requires the Company to estimate the expected sales prices for

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the entire project, the profit margin on subsequent parcels sold will be impacted by both changes in the estimated total revenues as well as any changes in the estimated total costs of the project.

        Offsite improvements with regional benefit, such as freeway on-ramps and off-ramps and water storage tanks, are referred to as infrastructure costs. The Company estimates the total cost to develop the infrastructure within a defined major development area and allocates this cost to the land within the area. Changes in the estimated remaining infrastructure costs or changes in the remaining developable acreage will impact the infrastructure cost allocation and corresponding profit margin for unsold land within a major development area.

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RESULTS OF OPERATIONS

Comparison of Third Quarter and Nine Months of 2002 to Third Quarter and Nine Months of 2001
Unaudited

        The amounts of increase or decrease in revenues and income from the prior year third quarter and nine months are as follows (in 000s, except per unit):

        The increases and decreases in revenues and income for the three and nine months are attributable to the following:

        For the three months ended September 30, 2002, revenues totaled $58.2 million and net income totaled $6.7 million. This compares with revenues of $37.2 million and net income of $486,000 for the three months ended September 30, 2001. Revenues for the nine months ended September 30, 2002

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totaled $162.2 million and net income totaled $27.2 million compared to revenues of $164.9 million and net income of $76.9 million for the same period in 2001.

        Residential land sales were the major contributor to 2002 third quarter results with 217 residential lots closing escrow, contributing $34.8 million to revenues and $13.0 million to income. Major contributors to 2002 nine-month results were the sales of 949 residential lots and 57.1 acres of commercial land, contributing $110.5 million to revenues and $45.7 million to income.

        The primary contributors to the 2001 third quarter were the sales of four commercial parcels totaling 11.5 net acres, including a 208-unit apartment complex site on 9.6 net acres in the Alta Vista community, and two asset sales which combined contributed $18.4 million to revenues and $5.5 million to income. In addition, major contributors to 2001 nine-month results were the sales of the Company's Chiquita Canyon Landfill and its option to purchase approximately 1,800 acres in Broomfield, Colorado and the sale of a 7.9 acre commercial parcel, which combined contributed a total of $88.1 million to revenues and $84.6 million to income. No residential land sales closed escrow in the first nine months of 2001.

        As previously reported, the Company's earnings estimate for the full year ending December 31, 2002 ranges from approximately $1.50 to $1.60 per unit. This estimate includes the sale of 1,330 residential lots in the communities of Westridge (726 lots), Alta Vista (329 lots) and Hidden Creek (275 lots); approximately 69 acres of commercial and industrial land; and income from the Company's portfolio of income-producing properties of approximately $12 million after administration, depreciation and interest expenses. The estimate for 2002 includes the sale of a small office building in the Valencia Commerce Center. During the 2002 fourth quarter, the Company expects to close escrows on an additional 381 residential lots and about 12 acres of commercial and industrial land. The ability to complete sales in 2002 will be dependent upon a variety of factors including, but not limited to, identification of suitable buyers, reaching agreement with the buyers on definitive terms, the successful completion of the due diligence work by buyers, the availability of financing to suitable buyers, satisfactory resolution of regulatory and legal issues, and market and other conditions, many of which are beyond the control of the Company.

Residential Land Sales

        A total of 217 residential lots in Valencia Westridge closed escrow in the 2002 third quarter, contributing $34.8 million to revenues and $13.0 million to income under percentage of completion accounting. For the nine months ended September 30, 2002, a total of 949 residential lots closed escrow, contributing $77.9 million to revenues and $27.4 million to income. Included in the 949 lots sold were the entire inventory of 329 entitled, unimproved residential lots in the community of Alta Vista and 620 entitled, improved lots in the Westridge golf course community.

        No residential lots closed escrow during the 2001 third quarter or the nine-month period ended September 30, 2001 resulting in net losses of $1.5 million and $3.3 million, respectively. For the three-and nine-month periods ended September 30, 2001 revenues of $25,000 and $204,000, respectively, were primarily due to amounts received from merchant builders under price and profit participation agreements.

        At September 30, 2002, the entire 275 residential lots in the community of Hidden Creek and 106 residential lots in Valencia Westridge were in escrow for a combined sales price of approximately $36.0 million with closings scheduled in the 2002 fourth quarter. In addition, a total of 750 residential lots was in escrow for approximately $53 million in the community of Creekside with closings expected in 2003. The ability to close escrows is dependent upon a variety of factors including, but not limited to, availability of financing to suitable buyers, market and other conditions which may be beyond the control of the Company. There were no residential lots in escrow at the end of the 2001 third quarter.

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        Lot sales in 2001 were impacted by the California Public Utilities Commission's (CPUC) decision to combine its review of Valencia Water Company's request to expand its service area together with the review of Valencia Water Company's water management plan. Late in 2001, the CPUC approved the Valencia Water Company's water management plan and granted the service expansion request, which permits Valencia Water Company to expand its service area to the Hidden Creek, Creekside, Alta Vista and West Creek communities (see the "Community Development" section below). These communities include approximately 4,000 potential residential lots and apartments. Valencia Water Company is Newhall Land's wholly-owned public water utility company serving Valencia and nearby areas. In April 2002, the CPUC denied opponents' request for a re-hearing regarding the CPUC's approval of Valencia Water Company's water management plan and service area expansion. Opponents' appeal of the CPUC's decision to the California Supreme Court was denied on June 19, 2002.

        Home sales continued strong as merchant builders sold 153 new homes in the 2002 third quarter on lots previously purchased from the Company compared to 234 new homes sold during the same period in 2001. For the nine months ended September 30, 2002, merchant builders sold a total of 849 new homes compared to a total of 682 new homes sold during the same period in 2001. In October 2002, new home sales in 2002 by merchant builders exceeded the record 873 new home sales achieved in the year ended December 31, 2001. The Company expects that 2002 new home sales by merchant builders will reach approximately 975 by year end.

        At September 30, 2002, merchant builders had 406 homes in escrow, compared to 349 homes in escrow at September 30, 2001. While the Company does not participate directly in profits generated from escrow closings by merchant builders, the sale of these previously sold lots to homebuyers is key to the Company's future success in selling additional lots.

Industrial and Commercial Sales

Industrial Land Sales

        Demand for industrial land in Valencia's business parks remains at low levels and prices remain flat partly as a result of high vacancy rates in Valencia industrial properties constructed by third-party developers and lower sales and leasing of new industrial space by third-party developers and the Company. At September 30, 2002, the combined vacancy rate in both Valencia Industrial Center and Valencia Commerce Center was approximately 12% compared to 14% at the end of the 2002 second quarter and 9.6% at September 30, 2001.

        No industrial land was sold or in escrow during the three or nine months ended September 30, 2002. A 3-acre parcel of industrial land is expected to be sold in the 2002 fourth quarter. The ability to complete sales in 2002 will be dependent upon a variety of factors including, but not limited to, identification of suitable buyers, agreement with the buyers on definitive terms, successful completion of the due diligence work by buyers, availability of financing to suitable buyers, satisfactory resolution of regulatory and legal issues, and market and other conditions which may be beyond the control of the Company. The Company has approximately 370 net acres of industrial land remaining in Valencia.

        No industrial land was sold in the quarter ended September 30, 2001. Results for the nine months ended September 30, 2001 included the sale of a 9.5-acre industrial parcel, which contributed $4.7 million to revenues and $1.3 million to income. One 1.9 acres industrial parcel was in escrow at September 30, 2001.

Commercial Land Sales

        During the 2002 third quarter, two commercial parcels totaling 1.6 acres closed escrow, contributing $1.1 million to revenues and $.5 million to income. In addition, $1.0 million in revenues and $.6 million in income were recognized under the percentage of completion method of accounting

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on sales closed earlier in 2002, and $1.2 million in revenues and $.6 million in income were recognized from prior year sales. For the nine months ended September 30, 2002, nine commercial parcels totaling 57.1 acres closed escrow, contributing $32.7 million to revenues and $18.3 million to income under percentage of completion accounting.

        Four commercial parcels totaling 11.5 acres closed escrow during the 2001 third quarter, contributing $11.2 million to revenues and $5.0 million to income. The parcels that closed escrow in the 2001 third quarter included a 208-unit apartment complex site on 9.6 net acres in the Alta Vista residential planning area contributing $9.4 million to revenues and $3.8 million to income. For the nine months ended September 30, 2001, eight commercial parcels totaling 23.5 acres closed escrow, contributing $24.4 million to revenues and $14.9 million to income. The 2001 nine-month period included close of escrow on a 7.9-acre parcel for a 341-unit apartment complex with 10,000 square feet of ground floor retail space contributing $10.1 million to revenues and $7.7 million to income.

        At September 30, 2002, a total of 8.6 acres of commercial land was in escrow for approximately $7 million, with closings scheduled for the fourth quarter. Included in the 8.6 acres in escrow for 2002 is a 7.5-acre parcel for a 226-home senior community in Creekside. In addition, the Company has 10 acres in escrow for approximately $7 million that are expected to close in 2003. The ability to close escrows is dependent upon a variety of factors including, but not limited to, availability of financing to suitable buyers, market and other conditions which may be beyond the control of the Company. At September 30, 2001, a total of 11.4 acres of commercial land was in escrow.

Income Property and Other Sales

        There were no income property or other asset sales during the 2002 third quarter or the nine months ended September 30, 2002. The Company expects to sell a small office building in Valencia Commerce Center in the 2002 fourth quarter for approximately the carrying value of the asset plus closing costs.

        During the 2001 third quarter, the Bank of America building and a smaller office building closed escrow, contributing $7.2 million to revenues and $.5 million to income. Also during the 2001 third quarter, an easement was sold contributing $.6 million to revenues and income. Results for the 2001 nine-month period also included the sales of the Company's Chiquita Canyon Landfill and its option in Broomfield, Colorado, which combined contributed $78.0 million to revenues and $76.9 million to income.

Community Development

        Community development expenses increased by more than 100% for the three-month period and by 71% for the nine-month period ended September 30, 2002 compared to the same 2001 periods primarily due to an increase in legal expense incurred responding to third-party challenges. Community development expenses for the year are expected to increase about 60% from the 2001 level due to the Company's response to third-party legal challenges and its continued focus on entitlements, planning and community marketing to complete the projected sellout of Valencia residential land and to position Newhall Ranch to commence development.

        On October 9, 2002, attorneys for the Company appeared in California Superior Court to answer a misdemeanor charge of illegally altering a stream bed, which was filed on behalf of the California Department of Fish and Game (Fish and Game). The Company pled not guilty and is pursuing all appropriate courses of action. A trial on the matter has been set for November 20, 2002.

        In late May 2002, Fish and Game conducted a search on certain areas of Newhall Ranch. The investigation was to determine if an endangered plant, the San Fernando Valley Spineflower (Spineflower), had been taken, even though the routine farming operations being conducted on the

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Ranch are exempt from certain endangered species regulations. During the search, Fish and Game found the plant in several locations in the eastern area of Newhall Ranch. Existence of the plant, which, until 2000, was thought to be extinct, may affect development plans for the part of Newhall Ranch where the plant was discovered. The Company has completed surveying other portions of Newhall Ranch and found Spineflower on one other location. Fish and Game is continuing its investigation.

        As part of the Company's ongoing surveys to locate protected species, the Company discovered what appears to be the Los Angeles Sunflower, a native plant thought to be extinct for 65 years. The Company immediately began preparing a petition to recommend that the Department of Fish and Game add the Los Angeles Sunflower to the State list of endangered and threatened plants. The discovery of this plant is expected to have no impact on the Company's development plans.

        The Company previously announced that hearings before the Los Angeles County Board of Supervisors concerning the Newhall Ranch Environmental Impact Report six issues identified by a Kern County Superior Court as requiring additional analyses had been delayed. This delay resulted from the de-certification of an environmental impact report prepared in connection with the acquisition and importation of 41,000 acre feet per year of State Project Water by Castaic Lake Water Agency (CLWA), the water wholesaler that serves the Santa Clarita Valley. On September 24, 2002, CLWA obtained a court ruling that allowed use of the 41,000 acre feet of water, provided that CLWA must prepare and certify a new environmental impact report.

        The Company will not be relying on any of the 41,000 acre feet of State Project Water from CLWA. The Company has entered into an agreement to acquire a separate water supply source for its potable water needs that it believes will satisfy the requirements of the Los Angeles County Board of Supervisors. Hearings before the Board of Supervisors are scheduled to start on January 28, 2003.

        Based on the current schedule, the Company expects to return to the Kern County Superior Court late next year for resolution of the six issues that were identified by the court as requiring further environmental review. The target date for commencement of initial development of Newhall Ranch remains 2005; however, the length of time necessary to obtain completion of governmental review and approvals necessary for the project, and the timing of any judicial processes that may result, are difficult to predict. In addition, it is not known whether or not the Fish and Game investigation noted above will affect the schedule for hearings at the Los Angeles County Board of Supervisors. Delays in these processes would likely adversely affect the timing of the Company's development plans.

        West Creek is a 2,214-home community in the Valencia North River planning area. The project received tentative approval from the Los Angeles County Board of Supervisors in September 2000 and final approval in January 2001. Opponents to the community then filed a California Environmental Quality Act (CEQA) lawsuit challenging the Board of Supervisors' approval. In November 2001, the Superior Court dismissed opponents' claims, and that decision was appealed by the opponents to the California Court of Appeal. A November 13, 2002 Appellate Court date has been set for oral argument. The outcome of the appeal is difficult to predict and an adverse decision would likely affect the timing and costs of the project.

Income-Producing Properties

        For the three- and nine-month periods ended September 30, 2002, revenues were down 4% and 9%, respectively, from the same periods in 2001. The decreases were primarily due to the loss of revenues generated from sold income-producing properties that closed escrow in the second and third quarters of 2001, and the closing of the Edwards movies theaters in the Valencia Town Center regional shopping mall late in the 2001 third quarter. Income for the most recent three-month period was 8% higher than the same period in 2001 primarily due to improved operating efficiencies at the Company's

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two hotels. Income for the nine-month period ended September 30, 2002 was down 10% over the same period in 2001 primarily due to the sale of income-producing properties.

        Income for the current and prior year third quarters includes the favorable effects of the cessation of depreciation on Properties Held for Sale and Sold Properties of $19,000 and $81,000, respectively, and for the current and prior nine-month periods of $58,000 and $300,000, respectively.

        Retained income-producing properties produced slightly higher net operating income (before administration, depreciation and interest expenses) in the three and nine months ended September 30, 2002 versus the same period in 2001 primarily due to higher room rates in the hotels, and increased rents in other retained properties. Net operating income for 2002 from the Company's portfolio of income-producing properties is expected to be approximately $22 million, and income (after administration, depreciation and interest expenses) is expected to be approximately $12 million.

Income-Producing Properties

(1)

Includes NorthPark Village Square and River Oaks shopping centers, Valencia Town Center regional mall and entertainment center, retail along Town Center Drive, Hyatt Valencia and Valencia Hilton hotels, restaurants, leases, etc.

(2)

Includes a 35,310 square foot building in Valencia Commerce Center.

(3)

Includes in 2001, the Chiquita Canyon landfill (sold in second quarter), the Bank of America building and a small office building (sold in third quarter) and the Town Center Plaza mixed-use building (sold in fourth quarter).

(4)

Before administration, depreciation and interest expenses. Maintenance expensed as incurred.

        Occupancy rates at the Company's various income properties were as follows at September 30, 2002 and 2001:

(a)

Includes signed lease space and leases to short-term tenants.

(b)

Includes 334,470 square feet of leasable retail space and 8,400 sq. ft. of office space.

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(c)

Includes 129,103 square feet of leasable space.

(d)

Includes 50,000 square feet of retail space from a 12¹/2 year leaseback agreement that was part of the sale of four office buildings along Town Center Drive that closed in early December 2000.

        Valencia Town Center regional shopping mall was 80% leased at the end of the 2002 third quarter. Remodeling of the west end of the shopping mall where the Edwards movie theaters were located is expected to be completed in early 2003. Plans call for relocating an expanded food court into the remodeled space. Based on current plans, the existing food court space also will be remodeled to provide for enhanced retail space that is scheduled to be available for rent by the 2003 holiday season.

        The occupancy rates at the Company's Hyatt Valencia and Hilton Garden Inn hotels were 71% and 83%, respectively, for the nine month period ended September 30, 2002. This compares to occupancy rates of 73% for the Hyatt Valencia and 83% for the Hilton Garden Inn for the nine months ended September 30, 2001. While higher daily room rates were a factor in the slightly lower occupancy rates at the Hyatt Valencia, they did result in increased revenues compared to the same period last year.

Valencia Water Company

        Valencia Water Company is a regulated utility and a wholly-owned subsidiary of the Company serving approximately 24,000 metered connections. Third quarter 2002 revenues decreased 1% and income decreased 32% from the same period in the prior year. For the first nine months of 2002, Valencia Water Company recorded an increase of 7% in revenues and a 12% decrease in income over the nine-month period ended September 30, 2001. The decrease in revenues for the 2002 third quarter was primarily due to a February 2002 California Public Utilities Commission (CPUC) mandated water rate reduction of 4.85%, which was nearly offset by increased revenue from new metered connections. The increase in revenues for the nine months ended September 30, 2002 was primarily the result of a 5% increase in the water company's metered connections and increased water usage due to drier weather conditions, partially offset by the CPUC rate reduction. The decrease in income for the three- and nine-month periods ended September 30, 2002 was primarily due to higher administrative expenses and expenses relating to legal proceedings in which Valencia Water Company is involved.

Agricultural Operations and Ranch Sales

        For the three-month period ended September 30, 2002, revenues from agriculture operations, including the Company's energy operations, increased 3% over the year earlier period primarily due to higher yields on tomatoes, while revenues for the 2002 nine-month period decreased 6% primarily as a result of lower prices for oil and gas. Net income for the three- and nine-month periods ended September 30, 2002 decreased 50% and 107%, respectively, primarily due to costs associated with the Spineflower warrant (See "Community Development" section above) and decreased oil and gas prices compared to 2001.

General and Administrative Expense

        General and adminstrative expenses for the 2002 third quarter and for the nine months ended September 30, 2002 increased 23% and 6%, repectively. The 2002 third quarter increase was primarily due to higher levels of accrued incentive-based compensation resulting from higher earnings for the 2002 third quarter, and increased legal and consulting expenses. For the nine months ended September 30, 2002, the increase is primarily due to an increase in expense for unit ownership plans, and increased legal and consulting expenses, partially offset by a reduction in accrued incentive-based compensation due to lower earnings for the nine-months ended September 30, 2002 compared to the same period in 2001. General and administrative expenses for all of 2002 are expected to increase approximately 4% over 2001 levels.

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Interest and Other

        Interest and other, net decreased 39% and 47% for the 2002 third quarter and the nine months ended September 30, 2002, respectively. Lower interest rates on the Company's bank line borrowings together with increased interest income from promissory notes accepted by the Company in conjunction with certain commercial land and residential lots sales in the 2001 fourth quarter and 2002 first quarter were the primary contributors to the decrease over the same 2001 periods. Interest expense in 2002 is expected to be approximately 42% lower than 2001 due to lower interest rates and lower outstanding balances on the Company's bank line borrowings, an increase in interest income from notes receivable and an increase in capitalized interest on active real estate projects.

FINANCIAL CONDITION

Liquidity and Capital Resources

        At September 30, 2002, the Company had $11.3 million of cash and cash equivalents and $160.1 million available under bank lines, net of $23.9 million in letters of credit. There were no borrowings outstanding on unsecured lines of credit or a revolving mortgage facility. The Company had fixed rate debt totaling $58.9 million. The Company believes it has adequate sources of cash from operations and debt capacity, combined with anticipated land sales, to finance future operations on both a short- and long-term basis and to fund unit repurchases. (See additional information on the unit repurchase program below.) The Company utilizes its available debt capacity to fund ongoing operations, as well as administration and legal costs to bring future projects online over the longer term to enable the Company to complete the development of Valencia and begin development of Newhall Ranch. As a guideline, the Company targets total debt not to exceed 60% of the appraised value of the income portfolio. The Company ended the 2002 third quarter with a conservative debt to income portfolio value ratio of 22%, which provides adequate debt capacity to fund operations. At September 30, 2002, there was no debt secured by the Company's raw land or land under development inventories.

        In May 2001, the Board of Directors authorized a unit repurchase program of up to 2,520,000 units, or 10% of the then outstanding units. In accordance with the program, the Company repurchases units from time to time at prevailing market prices and, depending on market conditions, either through open market, or unsolicited negotiated transactions. Repurchases are generally funded from cash flow generated from normal business operations. As of September 30, 2002, a total of 1,471,985 units, or approximately 58%, of the total number of units authorized for repurchase had been repurchased for $42.6 million, or an average price of $28.94 per unit. A total of 1,048,015 units remained to be repurchased under this program at September 30, 2002. Factors that could affect the Company's ability to complete its unit repurchase program include, but are not limited to, governmental approvals, changing market and economic conditions, changing interest rates, challenges to governmental approvals and finding suitable buyers for certain properties. In the second quarter 2002, the Company announced that due to uncertainties of the economy and various legal challenges concerning Newhall Ranch and West Creek (see the "Community Development" section above), the Company would reduce significantly the pace of unit repurchases and likely will not complete the current program during 2002.

        For the nine months ended September 30, 2002, the Company invested approximately $16.9 million in major roads and freeway improvements to benefit the projects, which amounts are included in land under development on the accompanying balance sheet. In addition, the Company invested approximately $3.7 million (net of a settlement received in May 2002 from Edwards Theatres, Inc. bankruptcy proceedings) on the remodel of the former Edwards Theatres space in Valencia Town Center regional shopping mall for relocation of the existing food court and creation of new retail space, and approximately $6.3 million on the construction of Tournament Players Club® at Valencia

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championship golf course, in the Company's Westridge community, which are included in income-producing properties on the accompanying balance sheet. In the 2002 fourth quarter, the Company expects to invest approximately $5.9 million in major roads and freeway improvements to enable the Company to continue its land sales program in Valencia. Another approximately $1.9 million is expected to be invested in 2002 in Valencia Town Center regional shopping mall for the remodel of the former Edwards Theatres space for relocation of the existing food court and creation of new retail space with an additional $14.7 million in 2003 and 2004, for a total of approximately $20 million for the project. Additionally, the Company expects to invest another approximately $5.3 million in 2002 and $6.9 million in 2003 on the completion of the golf course and clubhouse. As of September 30, 2002, there were no other material commitments for capital expenditures.

        The following discussion relates to principal items on the Consolidated Statement of Cash Flows:

Operating Activities

        Net cash provided by operating activities totaled $72.9 million for the first nine months of 2002 versus $59.2 million for the nine months ended September 30, 2001. For the nine months ended September 30, 2002, revenues generated from operating activities included revenues from the sale of 949 residential lots, the sale of approximately 57.1 commercial acres and revenue from the Company's portfolio of income-producing properties, combined for a total of $139.7 million. In addition, $11.7 million of notes receivables outstanding at December 31, 2001 were collected in the nine months ended September 30, 2002. This was offset by the Company's acceptance in the 2002 first quarter of $8.3 million promissory note in conjunction with the terms of a commercial land sale. The term of the note is less than one year and it is expected to be collected prior to December 31, 2002. Cash used in operating activities also included the use of approximately $68.4 million for land under development expenditures mostly related to land preparation and infrastructure improvements to ready the land for development or sale. Additional uses of cash included the Company's general and administrative expenses and interest expense.

        For the nine months ended September 30, 2001, net cash provided by operating activities included revenues from the sale of 33.0 commercial and industrial acres, the sale of the Company's Chiquita Canyon Landfill and two office buildings, the sale of an option on 1,800 acres in Broomfield, Colorado, the sale of an easement and revenues from the portfolio of income-producing properties, which, combined, generated a total of $147.9 million. In addition, $10.5 million in promissory notes accepted in 2000 in conjunction with the terms of certain commercial land sales were collected during the nine-month period. Cash used by operating activities included $48.7 million of expenditures for land under development inventories mostly related to land preparation and infrastructure improvements to ready land for sale. Additional uses of cash included the Company's general and administrative, community development and interest expenses.

Investing Activities

        Expenditures for the development of income-producing properties for the nine months ended September 30, 2002 totaled $12.0 million and were primarily for the Valencia Town Center food court remodel and expansion, and construction of Tournament Players Club® at Valencia championship golf course, which is located in the Company's Westridge community. Expenditures for the development of income-producing properties for the nine-month period ended September 30, 2001 totaled $7.7 million and were primarily for the completion of two office buildings sold in December 2000. Purchase of property and equipment totaled $6.8 million for the nine-month period ended September 30, 2002 compared to $8.6 million for the same 2001 period and was primarily for water utility construction.

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Financing Activities

        Distributions of $10.4 million for the nine months ended September 30, 2002 consisted of three regular quarterly distributions of $.10 per unit and a $.13 per unit special distribution made in March 2002. For the nine-month period ended September 30, 2001, three quarterly distributions of $.10 per unit each and a $.10 per unit special distribution made in March 2001 were paid for a total of $10.3 million. The Company has also declared a fourth quarter 2002 regular distribution of $.10 per unit, payable December 9, 2002 to unitholders of record on November 1, 2002. The Company's usual practice is to provide sufficient distributions, including special distributions, to pay the taxes associated with Company earnings. The declaration of distributions, and the amount declared, is determined by the Board of Directors on a quarterly basis taking into account the Company's earnings, financial condition and prospects.

        At September 30, 2002, the Company had balances in mortgage and other debt of $58.9 million versus $95.8 million at September 30, 2001. The $36.9 million decrease was primarily due to the absence of any outstanding borrowings on the Company's available lines of credit at September 30, 2002 versus $32.8 million outstanding at September 30, 2001. The Company's lines of credit are available to fund recurring operations, distributions and repurchases of partnership units. The reduced borrowings on the credit line were primarily due to reduced repurchases of partnership units during the nine months ended September 30, 2002. (See further discussion in the "Liquidity and Capital Resources" section above and in the paragraph that follows.)

        During the nine months ended September 30, 2002, 501,835 partnership units were repurchased for a total of $15.0 million, or an average price of $29.81. For the nine-month period ended September 30, 2001, a total of 2,221,462 units were repurchased for the aggregate amount of $59.6 million, or an average price of $26.84 per unit.

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FORWARD-LOOKING INFORMATION

        Except for historical matters, the matters discussed in this report are forward-looking statements that involve inherent risks and uncertainties. We have tried, wherever practical, to identify these forward-looking statements by using words like "anticipate," "believe," "estimate," "target", "project," "expect," "plan," and similar expressions. Forward-looking statements include, but are not limited to, statements about plans; opportunities; anticipated regulatory approvals; negotiations; market and economic conditions; development, construction, and sales activities; and availability of financing.

        We caution you not to place undue reliance on these forward-looking statements, which reflect our current beliefs and are based on information currently available to us. We expressly undertake no obligation to publicly revise or update these forward-looking statements to reflect future events or changes in circumstances.

        These forward-looking statements are subject to risks and uncertainties that could cause our actual results, performance, or achievements to differ from those expressed in or implied by these statements. See our risk factors below.

        Sales of Real Estate:    The majority of the Company's revenues is generated by its real estate operations. The ability of the Company to consummate sales of real estate is dependent on various factors including, but not limited to, the availability of financing to suitable buyers, reaching agreement with buyers on definitive terms, satisfactory resolution of regulatory and legal issues, and the successful completion of due diligence work by buyers. The fact that a real estate transaction has entered escrow does not necessarily mean that the transaction ultimately will close. Therefore, the timing of sales may differ from that anticipated by the Company. The inability to close sales as anticipated could adversely impact the recognition of revenue in any specific period.

        Economic Conditions:    Development of residential, industrial and commercial real estate can be significantly impacted by general and local economic conditions, which are beyond the control of the Company. The Company's real estate operations are concentrated in north Los Angeles County. The Southern California economy is profoundly affected by the entertainment, technology and defense industries and certain other business segments. Consequently, all sectors of the Company's real estate operations tend to be cyclical. The regional economy, like that of the state and nation, has slowed into a recession. There can be no assurance that the recession will not worsen or the economy will recover in the near future.

        Inflation:    The Company believes it is well positioned against the effects of inflation. Historically, during periods of inflation, the Company has been able to increase selling prices of properties to offset rising costs of land development and construction. A portion of the commercial income portfolio is protected from inflation since percentage rent clauses and Consumer Price Index increases in the Company's leases tend to adjust rental receipts for inflation, while the underlying value of commercial properties has tended to rise over the long term. However, there can be no assurance that the Company will continue to be able to offset the impacts of inflation through increases in the selling prices of its properties in future periods.

        Interest Rates and Financing:    Fluctuations in interest rates and the availability of financing have an important impact on the Company's performance. Sales of the Company's properties could be adversely impacted by the inability of buyers to obtain adequate financing. Further, the Company's real estate development activities are dependent on the availability of adequate sources of capital. Certain of the Company's credit facilities bear interest at variable rates and would be negatively impacted by increasing interest rates.

        Competition:    The sale and leasing of residential, industrial and commercial real estate is highly competitive, with competition coming from numerous and varied sources. The degree of competition is

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affected by such factors as the supply of real estate available comparable to that sold and leased by the Company and the level of demand for such real estate. Currently, the residential market in the Santa Clarita Valley, including Valencia, remains strong and has been capturing an increasing portion of Los Angeles County's new home sales. However, there is no assurance that this trend will continue. The industrial market in Valencia is experiencing limited demand and vacancy rates remain high since the national and regional economies have slowed and concerns linger over California's power crisis. In addition, local competition has intensified as local business parks have opened or are in the planning stages.

        Geographic Concentration:    The Company's real estate development activities are focused on the 18,600 acres that it owns in north Los Angeles County. The Company's entire commercial income portfolio is located in the Valencia area. Therefore, any factors affecting that concentrated area, such as changes in the housing market, economic conditions and environmental factors, which cannot be predicted with certainty, could affect future results.

        Exposure to Natural Occurrences and Acts of Terror:    The Company's assets and real estate operations may be adversely affected by natural occurrences such as earthquakes and weather conditions, and acts of terrorism or armed conflict that may cause damage to assets, delay progress and increase the costs of infrastructure construction and land development, and affect the pace of sales.

        Government Regulation and Entitlement Risks:    In developing its projects, the Company must obtain the approval of numerous governmental authorities regulating such matters as permitted land uses, density and traffic, and the provision of utility services such as electricity, water and waste disposal. In addition, the Company is subject to a variety of federal, state and local laws and regulations concerning protection of health and the environment. This government regulation affects the types of projects which can be pursued by the Company and increases the cost of development and ownership. The Company devotes substantial financial and managerial resources to comply with these requirements. To varying degrees, certain permits and approvals will be required to complete the developments currently being undertaken or planned by the Company. Furthermore, the timing, cost and scope of planned projects may be subject to legal challenges. (See following "Litigation" discussion.) In addition, the continued effectiveness of permits already granted is subject to factors such as changes in policies, rules and regulations and their interpretation and application. The ability to obtain necessary approvals and permits for its projects may be beyond the Company's control and could restrict or prevent development of otherwise desirable new projects. The Company's results of operations in any period will be affected by the amount of entitled properties the Company has in inventory.

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

        Environmental Remediation and Endangered Species:    The Company owns or formerly owned properties with respect to which the Company may be required to remediate environmental effects of prior releases of contamination. Future environmental costs are difficult to estimate because of factors such as, but not limited to, the unknown magnitude of possible contamination, the unknown timing and extent of remediative actions that may be required, the determination of the Company's potential liability, and the extent to which such costs are recoverable from third parties or from applicable

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insurance coverages. In addition, the length of time to perform any required remediation or the successful pursuit of responsible third parties is difficult to predict. The ability to, or length of time required to, remediate any property could increase the costs of, and restrict, prevent or delay the development of a new project. Additionally, the presence of endangered species on the Company's property could delay and increase the cost of development, and, in limited circumstances, could prevent the development of some properties.

Part 1. Financial Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk.

        The Company is exposed to market risk primarily due to fluctuations in interest rates. The Company utilizes both fixed rate and variable rate debt. At September 30, 2002, the Company had no variable rate debt outstanding and $58.9 million of fixed rate debt with interest rates ranging from 7.33% to 8.45%.

        The table below presents principal cash flows and related weighted average interest rates of the Company's long-term fixed rate and variable rate debt at September 30, 2002 by expected maturity dates:

(1)

The Company has a $50 million revolving mortgage facility which bears interest at LIBOR plus 1.40% against which no borrowings were outstanding at September 30, 2002. The Company also has unsecured lines of credit consisting of a $130 million line on which the interest rate is LIBOR plus 1.25% to 1.45% and a $2 million line on which the rate is LIBOR plus 1.35%, against which no borrowings were outstanding, respectively at September 30, 2002.

(2)

The fair values of the Company's fixed rate debt either approximate carrying value or are estimated using discounted cash flow analyses based on the Company's current incremental borrowing arrangments ranging from 5.00% to 5.90%.

        The table below presents principal cash flows and related weighted average interest rates of the Company's long-term fixed rate and variable rate debt at December 31, 2001 by expected maturity dates:

        There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's future financing requirements. The Company manages its interest rate risk by maintaining a conservative ratio of fixed rate, long-term debt to total debt in order to maintain variable rate exposure at an acceptable level and by taking advantage of favorable market conditions for long-term debt. In addition, the Company's guideline for total debt is not to exceed 60% of the appraised value of the income portfolio. As of September 30, 2002, the Company's debt to income portfolio value ratio was 22%.

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Part 1. Financial Information
Item 4. Controls and Procedures.

        Within 90 days prior to the date of this report, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.

Part 2. Other Information
Item 1. Legal Proceedings.

        Please refer to "Residential Land Sales" and "Community Development" under Part I, Item 2.—"Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K):

(b)

No reports on Form 8-K were filed in the third quarter ended September 30, 2002.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

THE NEWHALL LAND AND FARMING COMPANY
(a California Limited Partnership)
Registrant