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SECURITIES AND EXCHANGE COMMISSION

For the quarterly period ended September 30, 2002

Commission file number 0-18756

WESTERN WATER COMPANY

102 Washington Avenue, Point Richmond, CA 98401
(Address of principal executive offices)        (Zip code)

(510) 234-7400
(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.

As of October 31, 2002, there were 8,069,012 shares of registrant’s common stock outstanding.

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WESTERN WATER COMPANY AND SUBSIDIARIES

INDEX

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WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets

September 30 and March 31, 2002
(Unaudited)

See accompanying notes to consolidated financial statements.

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WESTERN WATER COMPANY AND SUBSIDIARIES

Consolidated Statements of Operations

Three months ended September 30, 2002 and 2001
(Unaudited)

See accompanying notes to consolidated financial statements.

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WESTERN WATER COMPANY AND SUBSIDIARIES

Consolidated Statements of Operations

Six months ended September 30, 2002 and 2001
(Unaudited)

See accompanying notes to consolidated financial statements.

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WESTERN WATER COMPANY AND SUBSIDIARIES

Statements of Cash Flows

Six months ended September 30, 2002 and 2001
(Unaudited)

See accompanying notes to consolidated financial statements.

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WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002
(Unaudited)

Note 1. Summary of Significant Accounting Policies and Practices:

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) relating to interim financial statements. These statements reflect all adjustments, consisting only of normal, recurring adjustments necessary to present fairly the consolidated balance sheets of Western Water Company and Subsidiaries (the “Company) as of September 30, 2002 and March 31, 2002, the consolidated statements of operations for the three and six months ended September 30, 2002 and 2001 and the statements of cash flows for the six months ended September 30, 2002 and 2001. The results of the three and six-months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements of Western Water Company include Western Water Service Company, Cherry Creek Water Company and YG Procyon Corporation, the Company’s wholly owned subsidiaries, and YG Rice Farms, L.P., a limited partnership directly and indirectly wholly-owned and controlled by the Company, and Western Agua, L.P. a limited partnership in which the Company is the general partner and owns a 70% interest.

The information included in this Form 10-Q should be read in conjunction with management’s discussion and analysis and financial statements and notes thereto in the Company’s annual report on Form 10-K for the fiscal year ended March 31, 2002.

New Accounting Policies Effective April 1, 2002

Effective April 1, 2002, the Company adopted the full provisions of SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and also specifies the criteria that intangible assets acquired in a business combination must meet in order to be recognized and reported apart from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company evaluated the impact of adopting SFAS 142 and concluded that its water rights represent intangible assets which meet the scope of SFAS 142 . Pursuant to SFAS 142, the majority of the Company’s water rights will be amortized in conjunction with the actual periodic use of water derived from such water rights. Since this is consistent with the Company’s policy prior to the adoption of SFAS 142, the new pronouncement did not have any impact upon adoption. In addition, the adoption of SFAS 141 did not have any impact on the Company’s results of operations or financial position.

Effective April 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS 144 applies to all long-lived assets (including discontinued operations), and consequently amends APB Opinion No. 30, “Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 develops an accounting model for long-lived assets that are to be disposed of by sale. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value, less cost of sale. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of an entity, and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS 144 did not have a material impact on the Company’s results of operations or financial position.

Net Income (Loss) Per Share

The weighted average shares used for basic and diluted net income per share were 8,069,012 shares for the three and six months ended September 30, 2002 and 2001, respectively.

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Stock options to purchase 1,603,166 and 1,476,166 shares of common stock at exercise prices ranging from $0.23 — $18.69 and $0.39 — $18.69 for the three and six months ended September 30, 2002 and 2001, respectively, were not included in the computation of diluted net income per share as their effect would have been anti-dilutive.

Convertible debentures, Series C redeemable preferred stock and Series F redeemable preferred stock convertible into 555,976, 463,779 and 390,260 shares of common stock, respectively at conversion prices of $15.86, $16.62 and $5.60 per share, respectively, were not included in the computation of diluted loss per share for the three and six months ended September 30, 2002 as their effect would have been anti-dilutive.

Convertible debentures, Series C redeemable preferred stock and Series F redeemable preferred stock convertible into 555,976, 463,779 and 367,857 shares of common stock, respectively, at conversion prices of $15.86, $16.62 and $5.60 per share, respectively, were not included in the computation of diluted net loss per share for the three and six months ended September 30, 2001 as their effect would have been anti-dilutive.

Segment reporting

For the three and six months ended September 30, 2002 and 2001, the Company recognized revenue of $321,000, and $653,000, and $321,000 and $641,000, respectively, from sales of water to the City of Inglewood. No other recurring customer accounted for more than 10% of the Company’s revenue.

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The results are determined based on the Company’s management accounting process, which assigns balance sheet and income statement items to each operating segment. This process is dynamic and somewhat subjective. Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting equivalent to generally accepted accounting principles. The management accounting process measures the performance of the operating segments based upon the Company’s management structure and is not necessarily comparable with similar information for other companies. Management uses the same reporting criteria for measurements of the reportable segments’ profits or losses and assets as used for the Company’s consolidated financial statements.

The non-segment amount under operating income (loss) includes general and administrative expenses. The non-segment amount under depreciation and amortization includes depreciation of the non-segment equipment, and amortization of debt issuance costs. The non-segment amount under assets includes cash and cash equivalents, and equipment not otherwise allocated to a segment, and other assets.

New Accounting Pronouncements

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS 145 rescinds FASB Statements No. 4 and 64 that deal with issues relating to the extinguishment of debt. The standard also rescinds FASB Statement No. 44 that deals with intangible assets of motor carriers. The standard modifies SFAS No. 13, “Accounting for Leases”, so that certain capital lease modifications must be accounted for by lessees as sale-leaseback transactions. Additionally, SFAS 145 identifies amendments that should have been made to previously existing pronouncements and formally amends the appropriate pronouncements. SFAS 145 is effective for fiscal years beginning after May 15, 2002, but early adoption is permitted. The adoption of SFAS 145 will not have a significant effect on the Company’s results of operations or financial position.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this statement is required for the Company’s fiscal year beginning April 1, 2003. The adoption of SFAS 146 will not have a significant impact on the Company’s results of operations or financial position.

Note 2. Liquidity:

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company believes that scheduled revenues from operations will be insufficient to fund its estimated expenses during the twelve months ended September 30, 2003. The Company currently plans to fund its obligations and expenses during the twelve months ending September 30, 2003 from its existing capital resources, from planned sales of non-strategic assets, and from any new water revenues that it may generate. In October 2002, the Company sold its remaining Mojave water rights in San Bernardino County, California, the sale of which is scheduled to generate approximately $2,630,000 of net cash proceeds during the current fiscal year. The currently planned sales are expected to provide additional cash sufficient to fund anticipated operating expenses through September 30, 2003. In the event that the Company is unable to complete the sale of non-strategic assets or enter into new water revenue agreements, or if the proceeds from such sales or water agreements are significantly less than anticipated, the Company may not have sufficient cash available to fund its estimated expenses for the next twelve months. Such circumstances, should they occur, would require the Company to curtail certain of its operating expenses, or refrain from declaring the Series C Preferred Stock dividend, or both.

Note 3. Bank loan:

In 1998, the Company entered into a loan agreement that matures on August 1, 2003 with a bank (the “Bank Loan”) to finance its participation, through a subsidiary, in a long-term water supply arrangement with the City of Inglewood. As guarantor of its subsidiary’s obligation, the Company agreed to maintain not less that $15 million of net worth (as defined in the Bank Loan). During the quarter ended September 30, 2001, the Company’s net worth (as defined) fell below that amount. Although the breach of the net worth covenant technically constitutes a breach under the Bank Loan, the bank has not declared a default under the loan. The Bank Loan is being paid on a current basis, and there are ample reserves and collateral to avoid any default in the payment of the regularly scheduled debt payments.

Note 4. Income taxes:

Management does not expect there will be taxable income for the fiscal year ending March 31, 2003. Accordingly, the Company has not recorded a federal income tax liability and has recorded the minimum state income tax provision for the three and six months ended September 30, 2002.

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Note 5. Supplemental Cash Flow Information:

Note 6. Subsequent Event

In October 2002, the Company sold its remaining Mojave water rights in San Bernardino County, California to two municipalities for $2,637,000. The Company received $770,000 in cash upon closing of the two transactions, and is scheduled to receive the remaining proceeds in installments of $942,000 and $925,000 in January and March, 2003, respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

In addition to historical information contained herein, this Quarterly Report contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof and based on information currently available to management. Western Water Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended March 31, 2002, any Current Reports on Form 8-K filed by the Company and any Registration Statements on Form S-8 or Form S-3 filed by the Company.

Critical Accounting Policy

In response to the SEC’s release No. 33-8040, “Cautionary Advise Regarding Disclosure About Critical Accounting Policies,” the Company has identified its most critical accounting policy as that related to the carrying value of its water rights, which are carried at cost. Any event or circumstance that indicates to the Company that there is an impairment of the fair value of any of its water rights is recorded in the period in which such event or circumstance becomes known to the Company. During each of the periods in the three and six months ended September 30, 2002 and 2001, no such event or circumstance occurred that would, in the opinion of management, signify the need for a material reduction in the carrying value of any of the Company’s water rights.

The critical estimates made by the Company in assessing the existence of an impairment is associated with the fair value of its water rights. When considered necessary, management obtains third-party valuations to assist and support their estimate of fair value. In the case of the Cherry Creek Project, the Company’s estimate of fair value is based upon comparison with water rights sales in the area, upon various third-party valuations performed for the Company within the preceding six months, upon actual sales to an unaffiliated third party of water derived from the Project, and upon current negotiations for the sale of Water Contract Delivery Units.

General

Until the fiscal year ended March 31, 2000, the Company’s principal activity had been to acquire and develop water assets in California and in the Cherry Creek basin in Colorado. The Company did so because it believed that there was a growing demand for water resources in both of these areas, which demand is expected to exceed the water resources currently available to these areas. During the fiscal years ended March 31, 2001 and 2000, the Company executed a variety of wholesale water supply contracts with a number of retail municipal water agencies. However, the Company encountered significant regulatory obstacles to its attempts to develop and transfer water for delivery to such customers. Accordingly, the Company has reduced its overhead expenditures, has deferred development activities, and has concentrated its efforts in California on overcoming the regulatory obstacles to water transfers and on arranging water transfers that do not face such obstacles. However, based on continuing regulatory difficulties and administrative delays in completing water transfers and generating revenue from water sales, the Company has suspended additional water acquisitions. The Company also faced significant financial problems brought on by the expenditure of funds for overhead and asset acquisitions in the face of constrained operating revenue. Therefore, during the fiscal year ended March 31, 2001, the Company explored various alternatives, including the sale of the Company, the sale of some or all of its assets, the liquidation of the Company, and various restructuring alternatives. The Board of Directors concluded that liquidation of the Company was not in the best interest of the Company’s shareholders and other constituents. The Company is, however, continuing to pursue a strategy of selling non-strategic assets to bolster its cash position while concentrating its efforts on the development and monetization of its existing strategic water-related assets and assisting other water rights owners to consummate voluntary water sales and transfers. As part of this strategy, the Company in October 2002 sold the remainder of its Mojave water rights in San Bernardino County, California, and has commenced implementing a plan to market and sell Water Contract Delivery Units, contractual rights to receive a specified portion of the undivided water production capacity of the Cherry Creek Project, to Colorado water agencies. The Company is also pursuing other alternatives including the sale or joint venture development of strategic assets or even the sale of all or part of the Company to a strategic buyer.

Results of Operations

The following is a description of the Company’s results of operations for the three and six months ended September 30, 2002 and 2001.

CONSOLIDATED

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Management does not expect that the Company will generate taxable income for the fiscal year ending March 31, 2003. Accordingly, the Company has not recorded a federal income tax liability and has recorded the minimum state income tax provision for the six, months ended September 30, 2002 and 2001.

CALIFORNIA OPERATIONS

Revenues for each of the three and six-month periods consisted solely of revenues generated by the Company from its water related activities. Water revenue for the three and six-month periods included revenues from both the sale of water and from water lease agreements with various municipal and agricultural water districts in California. Cost of revenue for the three and six-month periods includes the cost of water purchased for resale and amortization of other resource acquisition costs.

Revenues during each of the three and six-month periods were primarily derived from the Company’s five-year water sale agreement with the City of Inglewood, California. For the three months ended September 30, 2002 and 2001, the Company recognized revenue of $321,000, and $321,000, respectively, from the City of Inglewood, or approximately 69% and 98%, respectively, of the revenues derived during those periods from the Company’s California operations. Although revenues from the City of Inglewood were unchanged, the revenues from other sources for the quarter ended September 30, 2002 included a one-time sale of water to a governmental agency on behalf of three of the Company’s Sacramento Valley, California clients in the amount of $139,000. As a result, revenues from the Company’s California operations increased by approximately 42% for the three-month period ended September 30, 2002 compared to the three-month period ended September 30, 2001. For the six months ended September 30, 2002 and 2001, the Company recognized revenue of $653,000, and $641,000, respectively, from the City of Inglewood, or approximately 74% and 82%, respectively, of the revenues derived during those periods from the Company’s California operations. Revenues from the City of Inglewood were relatively unchanged, and were augmented by the aforementioned sale of water, partially offset by short-term water rights leases, which decreased in the current period, compared with the same period in the prior year. As a result, revenues from the Company’s California operations increased by approximately 13% for the six-month period ended September 30, 2002 compared to the comparable period in 2001. Revenues from the agreement with the City of Inglewood are expected to remain substantially unchanged until the expiration of that agreement in September, 2003. However, the Company’s ability to generate other revenues in California will be dependent upon its ability to successfully complete water sales and transfers and, therefore, is not currently predictable.

The cost of revenues for water delivered under the agreement with the City of Inglewood remained substantially unchanged in the three and six-month periods ended September 30, 2002, compared with the same periods in 2001. However, the cost of revenues for the 2002 period increased due to costs associated with the aforementioned sale of water in the 2002 periods.

COLORADO OPERATIONS

All of the Company’s Colorado operations involve the Company’s Cherry Creek Project. Since the date that the Company first acquired water assets in the Cherry Creek basin in Colorado in 1992, the Company has been primarily engaged in acquiring and developing the assets that currently constitute the Company’s Cherry Creek Project. Other than the sale of non-strategic real estate

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owned by the Company in the Cherry Creek basin, the Company to date has not generated any material revenues from its Colorado operations. However, the Company has recently commenced implementing a plan to market and sell Water Contract Delivery Units (“WCDUs”), contractual rights to receive a specified portion of the undivided water production capacity of the Cherry Creek Project, to Colorado water agencies. The Company is currently engaged in negotiations for the sale of initial WCDUs which, in aggregate, would account for 600 acre-feet of annual production. The Company anticipates that such sales, if completed, will be made as isolated, individually negotiated transactions, the timing and terms of which are inherently unpredictable. Thus, there can be no assurance that WCDUs will, in fact, be sold on terms satisfactory to the Company.

During the three and six-month period ended September 30, 2002, the Company began delivery of a small amount of water produced from nontributary resources of the Cherry Creek Project. Neither the amount of water nor the revenue to be derived from such sale is material. However, the Company believes that this initial sale of water, entailing perfection of the underlying water right, completion of physical infrastructure and acquisition of various permits required for the delivery, represents an important milestone in the development of the Cherry Creek Project.

During the three months ended June 30, 2002, the Company negotiated settlement of a condemnation proceeding by a local water agency relating to 36 acres of land in its Cherry Creek Project (Colorado). Under the settlement agreement, the local agency was required to pay the Company a deposit of $294,000 against its obligation to pay fair value for the land to which it was granted immediate possession on May 22, 2002 under the terms of a stipulated settlement. That $294,000 payment was received by the Company in July, 2002, and a gain on sale of $11,000 was recognized. The final amount of consideration to be paid to the Company is pending the conclusion of the valuation phase of the condemnation, which is expected during fiscal year 2004. Under the terms of the stipulated settlement, the Company was granted a series of integrated easements relating to the condemned land to enable the Company to exercise its water rights associated with such land.

GENERAL AND ADMINISTRATIVE EXPENSES

         General and administrative expenses for the three and six months ended September 30, 2002 decreased by $169,000 (21%) and $178,000 (12%) from the comparable periods in 2001, primarily due to a decrease in deferred compensation expense related to accounting treatment based on the value of the Company’s Common Stock, and a decrease in outside professional fees.

OTHER INFORMATION

Interest income is comprised of interest earned on the Company’s cash and cash equivalents and interest earned on the secured promissory notes received by the Company in connection with the properties that it has sold. The secured notes bear interest at rates between 8% and 9.5% per annum. Interest income increased for the three-month period ended September 30, 2002 from the comparable period ended September 30, 2001, due primarily to a final contingent payment on a note which was recognized as additional interest income.

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Interest expense for the three and six-month periods ended September 30, 2002 and 2001 primarily includes accrued interest related to the principal amount of outstanding Debentures. The increase in interest expense for the six-month period ended September 20, 2002 was primarily due to the expensing in the 2002 period of $24,000 interest related to the Norte-Sur water purchase agreement.

Liquidity and Capital Resources

As of September 30, 2002, the Company had working capital and a current ratio of $2,443,000 and 2.27 to l, as compared to working capital and a current ratio of $3,900,000 and 2.59 to 1, respectively, at March 31, 2002.

Bank Loan

In 1998, the Company entered into a loan agreement that matures on August 1, 2003 with a bank (the “Bank Loan”) to finance its participation, through a subsidiary, in a long-term water supply arrangement with the City of Inglewood. As guarantor of its subsidiary’s obligation, the Company agreed to maintain not less that $15 million of net worth (as defined in the Bank Loan). During the quarter ended September 30, 2001, the Company’s net worth (as defined) fell below that amount. Although the breach of the net worth covenant technically constitutes a breach under the Bank Loan, the bank has not declared a default under the loan. The Bank Loan is being paid on a current basis, and there are ample reserves and collateral to avoid any default in the payment of the regularly scheduled debt payments.

For the six months ended September 30, 2002, the Company had a net loss of $1,488,000 and a net decrease in cash of $1,995,000.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company believes that scheduled revenues from operations will be insufficient to fund its estimated expenses during the twelve months ended September 30, 2003. The Company currently plans to fund its obligations and expenses during the twelve months ending September 30, 2003 from its existing capital resources, from planned sales of non-strategic assets, and from any new water revenues that it may generate. In October 2002, the Company sold its remaining Mojave water rights in San Bernardino County, California, the sale of which is scheduled to generate approximately $2,630,000 of net cash proceeds during the current fiscal year. The currently planned sales are expected to provide additional cash sufficient to fund anticipated operating expenses through September 30, 2003. In the event that the Company is unable to complete the sale of non-strategic assets or enter into new water revenue agreements, or if the proceeds from such sales or water agreements are significantly less than anticipated, the Company may not have sufficient cash available to fund its estimated expenses for the next twelve months. Such circumstances, should they may occur, would require the Company to curtail certain of its operating expenses, or refrain from declaring the Series C Preferred Stock dividend, or both.

The Company is committed to certain material expenditures over the next several years, including the following: