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

FORM 10-K

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, California 91355
(Address of principal executive offices) (Zip Code)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YESý NOo

        The aggregate market value of depositary receipts held by non-affiliates as of June 30, 2002 (the last business day of the Registrant's most recently completed second fiscal quarter), based upon the closing price of such depositary receipts on the New York Stock Exchange was $660,331,520.

DOCUMENTS INCORPORATED BY REFERENCE: None

THE NEWHALL LAND AND FARMING COMPANY

2002
FORM 10-K

TABLE OF CONTENTS

PART I

FORWARD-LOOKING INFORMATION

        Except for historical matters, the matters discussed in this Annual 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 publicly to 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. For additional information, please refer to the "Forward Looking Information and Risk Factors" section under Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 1.    Business

INTRODUCTION

        The Newhall Land and Farming Company, a California Limited Partnership, (the "Company" or the "Partnership") is engaged in the development of residential, industrial and commercial real estate and in agriculture, on its approximately 48,000 acres in California. The interests in the Company (other than those held by the general partners) are represented by transferable Depositary Units listed on the New York and Pacific Stock Exchanges under the ticker symbol NHL (also referred to in this Annual Report as "partnership units"). The Company was reorganized from a corporation to a limited partnership on January 8, 1985. The predecessor corporation was established in 1883 by the family of Henry Mayo Newhall; the shares of the corporation were listed on the New York Stock Exchange in 1970.

        The Company's primary business is developing two master-planned communities, Valencia and Newhall Ranch. Since 1965, the Company has been developing the town of Valencia on a portion of the Company's landholdings in Los Angeles County, which now is home to approximately 48,000 residents and about 1,500 companies that provide over 45,000 jobs. With approximately 6,000 acres remaining to be developed, and residential buildout expected by 2007, Valencia is the regional center for north Los Angeles County and the northern gateway to the entire Los Angeles metropolitan area.

        In 1994, the Company started the entitlement process on Newhall Ranch, a new master-planned community to be located on 12,000 acres adjacent to Valencia and west of Interstate 5. In March 1999, the Company received initial approval for the project from the Los Angeles County Board of Supervisors. The Newhall Ranch Specific Plan permits 21,600 homes in five distinct lifestyle villages and 325 net acres of commercial and business park uses. In June 2000, a Kern County Superior Court judge identified six issues in the Newhall Ranch Environmental Impact Report as requiring further environmental review. In October 2001, the Regional Planning Commission approved the additional analyses performed by the Company concerning the court-ordered issues. Hearings before the Los Angeles County Board of Supervisors are expected to begin on March 25, 2003. Based on the current schedule, the Company expects to return to the Kern County Superior Court late in 2003 or in early 2004 for resolution of the six issues that were identified by the Court as requiring further environmental review. The target date for the commencement of initial development of Newhall Ranch

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is 2006. Planning and design work continues on the infrastructure for the project and detailed planning is proceeding on the first two villages planned for the community. For additional information on this matter, please refer to the "Community Development" section under Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations.

        Valencia and Newhall Ranch are located on the Company's prime landholding consisting of over 18,000 contiguous acres in north Los Angeles County, a rapidly growing region in California. The development potential of these properties is unmatched in the entire County and is directly in the path of growth along the Interstate 5 corridor, just 30 miles north of downtown Los Angeles. Four major freeways intersect Interstate 5 within ten minutes of Valencia providing businesses and residents easy access to the Los Angeles metropolitan area, major airports and the ports of Los Angeles and Long Beach.

        In the late 1980s, the Company adopted the strategy of selling farm properties with little or no potential for development and re-deploying the proceeds into real estate operations. As of December 31, 2002, more than 70,000 acres of non-strategic farmland have been sold. However, no farmland has been sold since 1999. The Company's remaining agricultural properties are the New Columbia Ranch in the San Joaquin Valley and the Newhall Orchard in Ventura County. The Company has leased out a majority of the New Columbia Ranch to farming tenants in 2003 in order to minimize the Company's fixed overhead costs and its exposure to crop commodity price fluctuations.

        In May 2001, the Board of Directors authorized a unit repurchase program to acquire up to 2,520,000 partnership units, or 10% of the then outstanding units. As of December 31, 2002, a total of 1,957,185 units had been repurchased under this program. Completion of the repurchase program is planned for 2003. The Company's Board of Directors may approve additional repurchases of partnership units after completion of the current program, taking into account the Company's earnings, financial condition and prospects. For additional information about the repurchase program, please refer to the "Liquidity and Capital Resources" section under Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations.

        In order to finance an aggressive partnership unit repurchase program initiated by the Company in late 1999, certain income properties were identified for sale. This asset sales program was substantially complete in 2001. The Company closed escrow on one minor income property in 2002. For additional information about income property sales and unit repurchases, please refer to the "Results of Operations," "Income Property Sales" and "Liquidity and Capital Resources" sections under Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations.

        Financial information concerning the Company's business segments appears in Note 10 of the Notes to Consolidated Financial Statements section in this Annual Report. Information regarding compliance with governmental and environmental regulations appears in the "Forward-Looking Information and Risk Factors" section under Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations. At February 28, 2003, the Company had 155 employees.

Competition

        Valencia is among the most successful master planned communities in the nation, having achieved a 41% market share of new home sales in the Santa Clarita Valley in 2002, with a record 991 home sales for the year. In 2002, Valencia's share of the new home sales market in the Santa Clarita Valley increased over 2001. In addition, the residential market in the Santa Clarita Valley, including Valencia, is capturing an increasing portion of Los Angeles County's new home sales. However, there is no assurance these current trends will continue. The Company competes with several developers within the Santa Clarita Valley and the greater north Los Angeles County. These developers have residential projects and amenities similar to Valencia and offer significant competition in terms of home pricing. The industrial market in Valencia is experiencing limited demand and vacancy rates remain high since

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the national and regional economies have slowed. In addition, local competition has intensified as other business parks in the area have opened or are in the planning stages.

Appraisal of Real Property Assets

        The independent appraisal firm of Buss-Shelger Associates appraised the market value of the Company's real property assets to be $894 million at December 31, 2002. The appraised properties did not include oil and gas assets, water supply systems, cash and cash equivalents and certain other assets. The appraised value of the Company's net assets at December 31, 2002 was $889 million, after adjusting for debt and certain other assets and liabilities not independently appraised as shown in the table below.

        For the purpose of the appraisals, market value was defined as the most probable price in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimuli. A significant portion of the appraised real property assets is located on the Company's 18,000 acres, 30 miles north of downtown Los Angeles and currently is undeveloped.

        The receipt of entitlements on the Company's undeveloped properties and the continuing development of Valencia enhance the appraised value of the Company's remaining land assets. Although raw land increases in value as development opportunities arise, the most significant increases occur when necessary land use entitlements, including zoning and mapping approvals, are obtained from city and county governments.

        The appraised values of the Company's remaining land and income-producing properties in the Valencia master-planned community have increased from $222 million in 1984, the first year independent property appraisals were obtained, to $613 million in 2002 despite significant reductions in acreage due to land sales during the period. On a per unit basis, the Company's net appraised value has increased from $11.74 to $37.78 over the same 19-year period. In 1999, Newhall Land initiated an aggressive unit repurchase program to capitalize on the investment opportunity to create unitholder value based upon the difference in the record-high underlying asset values in relation to Newhall Land's unit price. With this announcement in 1999, the Company has completed a program for the sale of certain of the Company's income-producing properties. The $301.5 million in proceeds received from these sales, which were substantially completed by the end of 2001, were used to reduce outstanding debt and to fund unit repurchases. In the past four years ended 2002, the Company has repurchased more than 9.7 million of its units, representing nearly a 30% reduction in the Company's units then outstanding, for a total investment of $257.5 million. Repurchases of units represent the removal of asset value and a corresponding decrease in the remaining number of partnership units outstanding in the appraisal of the Company's net assets. Results for 2002 include the sale of 1,330 residential lots and 69 acres of commercial and industrial land as well as $12.8 million in distributions and $28.9 million in unit repurchases. The appraised value of Newhall Land's net assets per unit increased by 3% in 2002 as a 1% reduction in asset value was more than offset by a 4% reduction in units outstanding. Absent the above sales in 2002, remaining Valencia land increased by 17% over 2001 values.

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        A summary of year-end appraised values follows (the appraisals were performed by the independent appraiser except as noted):

Appraised Values

        Appraised values are judgments. Land and property appraisals are an estimated value based on the sale of comparably located and zoned real estate or on the present value of income anticipated from commercial properties. There is no assurance that the appraised value of property would be received if any of the assets were sold. No assumptions have been made with respect to the bulk sale of the Company's total real estate assets. Certain reclassifications within categories have been made to conform to the current year presentation; however, prior period amounts have not been restated to reflect land sale activity, unit repurchases or distributions to unitholders. For the five-year period ended 2002, the Company has invested $302.2 million in unit repurchases and paid out $84.3 million in distributions.

*

The Company's 50.1% interest in City Ranch was divested in 2000 and an option on 1,800 acres in Broomfield, Colorado was sold in 2001.

REAL ESTATE

        The Company's primary business is developing new towns and master-planned communities in north Los Angeles County. This includes the town of Valencia, 30 miles north of downtown Los Angeles and Newhall Ranch, a new community planned for over 21,000 homes on 12,000 acres adjacent to Valencia and west of Interstate 5. The Company sells residential lots to merchant builders, operates a portfolio of commercial properties, provides building-ready sites for sale to industrial and commercial developers/users and owns a public water utility.

        For additional information regarding the Company's business refer to Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations. Valencia, the first master-planned community developed by the Company, has experienced tremendous success and set the standard for the Company's future planned communities. Today, Valencia is a balanced community, providing residential, commercial and retail properties, along with industrial and recreational facilities and is the regional center for north Los Angeles County. The Company believes Valencia residents are attracted to the quality of life offered in the community's relatively safe, clean environment, combined with award-winning schools. Major business, such as Princess Cruises and

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Explorer Insurance, have relocated to Valencia for similar reasons plus the added benefit of a strong local labor pool and proximity to the Los Angeles metropolitan area. Plans for the build-out of Valencia include approximately 4,300 homes and over 1,000 acres of commercial and industrial land. The Company's goal is to complete the sellout of Valencia area residential land by 2007.

        Newhall Ranch, the next master-planned community for the Company on 12,000 acres adjacent to Valencia and west of Interstate 5, is based on a master plan that incorporates the Santa Clara River in its natural state and provides access within the community to over 6,000 acres, which will be preserved as permanent open space. Approval of this 21,600 home project was received in 1999 from the Los Angeles County Board of Supervisors. In June 2000, a Kern County Superior Court judge identified six issues in the Newhall Ranch Environmental Impact Report as requiring further environmental review. In October 2001, the Regional Planning Commission approved the additional analyses performed by the Company concerning the court-ordered issues. Hearings before the Los Angeles County Board of Supervisors are expected to begin on March 25, 2003. Based on the current schedule, the Company expects to return to the Kern County Superior Court late in 2003 or in early 2004 for resolution of the six issues that were identified by the Court as requiring further environmental review. The target date for the commencement of initial development of Newhall Ranch is 2006. Riverwood and The Mesas will be the first two villages in the Newhall Ranch community. Initial mapping, engineering, and soils and geology work is underway for the first neighborhoods in these villages, along with design work on the major infrastructure to open the project.

Residential Development and Land Sales

        Valencia new home sales continued to be strong in 2002. Historically low interest rates, combined with low unemployment for the region, a rebounding southern California economy and a tight supply of new homes have pushed Valencia's home sale performance to record levels. In 2002, Valencia merchant builders sold 991 new homes built on land previously sold by the Company, an all-time record for Valencia and 13.5% higher than the previous record of 873 new homes sold by merchant builders in 2001. The success of Valencia has earned the community the honor of being one of the top selling master-planned communities in the nation. At December 31, 2002, merchant builders had 319 new homes in escrow, exceeding the 245 homes in escrow at the end of 2001. Including lots purchased from the Company late in the 2002 fourth quarter, merchant builders had an inventory at the end of 2002 of 1,577 lots remaining on which to build new homes, compared to a remaining inventory of 818 lots at the end of 2001. While the Company does not participate directly in profits generated from escrow closings by merchant builders, indirectly the Company generally shares with merchant builders in the overall revenues and profits of home building projects above agreed upon thresholds. The sale of previously sold lots to homebuyers is also key to the Company's future success in selling additional lots.

        In 2002, the Company closed escrows on a record 1,330 residential lots. Included in the total lot sales were 726 lots in the Westridge golf course community, all the 329 lots in the Alta Vista community, and all the 275 lots in the Hidden Creek community. The Company is continuing to capitalize on the strength of the residential market in 2003, as all 759 lots to be marketed for sale to merchant builders in 2003 were in escrow at December 31, 2002, with closings scheduled for the 2003 first quarter. The Company's current goal is to complete the sellout of its remaining Valencia area residential land by 2007. The Company continues to invest heavily in land use entitlements, land planning and responding to legal challenges in order to move forward with the remaining Valencia area communities and to position Newhall Ranch to commence development.

Industrial/Commercial Development and Land Sales

        In creating a balanced master-planned community in Valencia, the Company has ensured there are business opportunities to complement the residential development. The Company develops the infrastructure and provides sites for sale to industrial and commercial land developers and users.

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Valencia's location just 30 miles north of downtown Los Angeles on Interstate 5, California's major north-south freeway, provides an attractive environment for industrial, commercial, service, distribution and entertainment businesses. Valencia is the regional center for 4 north Los Angeles County and, as of the end of 2002, had a 3:1 jobs-to-housing ratio with approximately 46,000 jobs and 16,000 homes. The Company believes businesses will continue to be attracted to Valencia's relatively safe and clean environment, highly skilled workforce, variety of housing options and award-winning public schools.

        The Company markets industrial and commercial land as Valencia Gateway. Spanning 4,500 acres, Valencia Gateway is planned at buildout to accommodate 34 million square feet of building space, an estimated 63,000 employees and 2,700 companies in business sectors including technology, aerospace, biomedical, entertainment and education, making it the largest master-planned center for business, technology and industry in Los Angeles County. Although commercial land sales were strong in 2002, particularly the demand for apartment and retail land, industrial and office land sales have slowed recently as the market absorbs the significant new space being brought to market from strong land sales in previous years. However, the outlook is encouraging. With the City of Santa Clarita, of which most of Valencia is a part, being the second fastest growing city in Los Angeles County, the Company anticipates that companies will look to Valencia to relocate to larger, more modern facilities to accommodate growth. In 2002, the Company sold 3 acres of industrial land and 66 acres of commercial land. In 2003, the Company expects to market for sale approximately 23 acres of industrial land and 65 acres of commercial land.

Community Development

        The Company continues to actively invest in land use entitlements to support accelerated growth and to maximize the value of its landholdings. The Company's community development activities are focused on securing the necessary governmental land use approvals, as well as preliminary planning and community marketing activities, to complete the projected sellout of Valencia area residential land by 2007 and to position Newhall Ranch to commence development. Initial mapping, engineering, and soils and geology work is underway for the first neighborhoods in the 21,600-home Newhall Ranch project, along with design work on the major infrastructure to open the project.

Income-Producing Properties

        In 2001 and 2000, the Company sold several income-producing properties to finance the repurchase of partnership units. This asset sales program was substantially complete in 2001. The Company closed escrow on one minor income property in 2002. For additional information about the properties sold and the unit repurchase plan, see the "Income Property and Other Sales", "Income-Producing Properties" and "Liquidity and Capital Resources" sections under Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations.

        For information about the Company's remaining income-producing properties at December 31, 2002, see Part I. Item 2.—Properties, the "Income-Producing Properties" section under Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations and Schedule III—Real Estate and Accumulated Depreciation of this Annual Report. In 2002, the Company's development of income-producing properties primarily consisted of the construction of the Tournament Players Club® at Valencia championship golf course, in the Company's Westridge community, and the remodel of the former Edwards Theatres' space in Valencia Town Center regional mall for the relocation of the existing food court and creation of new retail space. Under the Company's business plan, no other development of income properties is anticipated in 2003. For additional information on capital expenditures, see the "Liquidity and Capital Resources" section under Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations.

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Valencia Water Company

        Valencia Water Company, a wholly-owned subsidiary that supplies water to Valencia and other adjacent developments, is a regulated public utility serving over 24,000 metered customers. The water supply for the service area is obtained from wells owned by Valencia Water Company and by purchases from the California State Water Project. In 2002, 46% of Valencia Water Company's water was supplied through ground sources.

AGRICULTURE

        The Company's agricultural division consists of farming and energy operations. The Company's remaining agricultural properties include the New Columbia Ranch in the San Joaquin Valley and the Newhall Orchard in Ventura County on which the Company and its tenants raised over 25 different crops during the 2002 calendar year. Of the Company's land devoted to farming, over 62% was leased to third parties in 2002. In 2003, the Company has leased out a majority of the New Columbia Ranch to farming tenants to minimize the Company's fixed overhead costs and its exposure to crop commodity price fluctuations. Including the New Columbia Ranch, it is anticipated in 2003 about 81% of the Company's land devoted to farming will be leased to third parties. Approximately 21,000 acres of land at the Newhall Orchard and on Newhall Ranch not suitable for cultivation or ready for development are leased to third parties for cattle grazing.

        The Company's agricultural operations obtain most of their water from underground sources and are not dependent on state or federal water projects. The Company continues to improve conservation practices to minimize the cost of irrigation and the amount of water used.

        Energy operations consist of royalty interests in oil and gas assets on the Newhall Ranch property. In total, the Company has royalty interests in approximately 150 oil wells and 16 gas wells. Energy operations do not represent a material source of revenues or income for the Company.

Central Administration

        Central Administration includes the Company's corporate functions including executive offices, treasury, tax, employee relations, accounting, finance, information systems, headquarters facilities, secretary/legal, investor relations, market research, internal audit and, in prior years, land acquisition. Except for certain costs relating to headquarters facilities and specific services billed to Valencia Water Company, expenses for these functions are expensed as general and administrative expenses and are not allocated to the Company's operating business segments.

Available Information

        The Company's electronic filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to each, are available free of charge through a link on the Company's website as soon as reasonably practicable after such material is electronically filed with the Commission. The Company's website address is www.newhall.com.

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Item 2.    Properties

Land

        Listed below are the location and acreage of properties owned by the Company at December 31, 2002:

        At December 31, 2002, the New Columbia Ranch secured a $9.6 million non-recourse mortgage. For additional information concerning encumbrances against Company properties, refer to Note 7 of the Notes to Consolidated Financial Statements section in this Annual Report.

Plants and buildings

        Agriculture—Various buildings located at two farming operations in California.

        Income-producing properties—Listed below are square footage, occupancy, net operating income by group and anchor tenants of major commercial properties owned by the Company at December 31, 2002. The Company also has numerous land leases. The commercial properties are leased to 210 tenants.

(1)

Gross Leasable Area

(2)

Before administration, depreciation and interest expenses

(3)

Including leases signed and not open

(4)

Santa Clarita Conference Center totals 26,000 square feet

(5)

Includes 393,000 square feet for anchor stores

(6)

Includes 51,000 square feet operated under a 12¹/2 year lease-back agreement expiring on June 30, 2013.

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        All of the Company's commercial real estate properties and the properties and equipment of Valencia Water Company are located in and around Valencia, California. The Company considers all of its properties to be in good condition, well maintained, and suitable and adequate to carry on the Company's present and foreseeable future business.

        At December 31, 2002, principal of $23.7 million was outstanding on two financings each secured by a retail shopping center. No amounts were outstanding against a $50 million revolving mortgage facility secured by Valencia Town Center regional shopping mall. Valencia Water Company has an $11 million financing secured by the utility's property and equipment. For additional information concerning encumbrances against Company properties, refer to Note 7 of the Notes to Consolidated Financial Statements section in this Annual Report.

        For additional information on the Company's properties, refer to the summary of appraised values on page 4 and Schedule III—Real Estate and Accumulated Depreciation on pages 85 and 86.

Item 3.    Legal Proceedings

        The Company, including its subsidiary, are named defendants in many lawsuits arising from the ordinary course of its business. While the outcome of these lawsuits cannot be predicted, management does not expect these matters in the aggregate to have a material adverse effect on the Company's business, financial condition or results of operations.

        In early 2001, the Company filed a lawsuit in Los Angeles Superior Court against Kerr-McGee Corporation, Kerr-McGee Oil & Gas Onshore LLC, Kerr-McGee Oil & Gas Onshore LP (collectively, "Kerr-McGee") and Medallion California Properties Company ("Medallion") for damages associated with oil field contamination on property owned by the Company and leased to Kerr-McGee or its predecessors, which successively transferred the lease interest to other lessees, including Medallion. During the period beginning in 1935 to the present, the lessees conducted crude oil and gas extraction operations on the property. The Company is seeking damages resulting from the defendants' failure to clean the property in accordance with the lease terms.

        During the 2001 fourth quarter, Kerr-McGee filed a cross-complaint against the Company seeking declaratory relief that it has satisfied its clean-up obligations under the lease. Also during the 2001 fourth quarter, Medallion filed a cross-complaint against the Company claiming the Company is responsible for clean-up costs for the portions of the leased property, which Medallion claims to have the continued right to occupy and on which Mediallion claims the Company failed to clean up the contamination caused by Kerr-McGee.

        Kerr-McGee and Medallion commenced discovery proceedings and filed eight pre-trial motions for summary adjudication in 2002. In 2003, the Company prevailed on seven of the motions, with the ruling on one motion still pending. The trial date was moved to May 12, 2003. Kerr-McGee has brought two writ petitions seeking review of the denial of three of its motions for summary adjudication. Decisions thereon are pending. Environmental site assessment of the leased property was completed in 2002. The Company is vigorously pursuing its claims and believes that the defendants' cross-claims will be unsuccessful. No governmental agency is participating in the litigation, and no proceedings are known to be contemplated by any governmental authority.

        In November 2000, Valencia Water Company, along with Castaic Lake Water Agency (the water wholesaler for the Santa Clarita Valley), Newhall County Water District and Santa Clarita Water Company (collectively, the "water purveyors") filed a lawsuit in U.S. District Court—Central District of California against Whittaker Corporation, Santa Clarita LLC and Remediation Financial, Inc. arising from the existence of the chemical perchlorate found in four local groundwater wells that are owned by the water purveyors.

        Whittaker Corporation and a predecessor owner manufactured munitions on a site now located in the City of Santa Clarita from 1934 to 1987 (called the "Whittaker-Bermite site"). During that period,

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the chemical perchlorate and various other chemicals were used in the munitions manufacturing process. In 1994, Whittaker Corporation and the California Department of Toxic Substances Control ("DTSC") entered into a consent order, under which Whittaker was required to commence preparation of a remediation work plan for the Whittaker-Bermite site. Subsequently, remediation plans have been the subject of ongoing negotiations among Whittaker, DTSC and the subsequent landowner and its parent, Santa Clarita LLC and Remediation Financial, Inc.

        The water purveyors independently filed the lawsuit to enforce the defendants' obligations to remediate the perchlorate contamination. In 2001, Santa Clarita LLC and Remediation Financial, Inc. filed counterclaims against the water purveyors alleging that the water purveyors caused or contributed to the perchlorate contamination in an unspecified manner. Valencia Water Company believes the counterclaim against it will not be successful. The case is in the early phase of discovery. Discovery is on-going. Mediation sessions among the parties have occurred, but no resolution ensued. The water purveyors are vigorously pursuing their claims.

        For information on lawsuits pertaining to Newhall Ranch and the West Creek community, please refer to the "Community Development" section under Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations. For information on the California Public Utilities Commission matter regarding Valencia Water Company, please refer to the "Residential Land Sales" section under Part II. Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 4.    Submission of Matters to a Vote of Security Holders

        None.

Part II

Item 5.    Market for the Registrant's Depositary Units and Related Security Holder Matters

Market Price and Distribution Data
Years ended December 31

        The Company's Depositary Units are traded on the New York and Pacific Stock Exchanges under the ticker symbol NHL and, at February 28, 2003, the Company had 961 unitholders of record. The Company has paid uninterrupted quarterly cash distributions since 1936 and on occasion the Company has declared and paid special cash distributions. The declaration of distributions, and the amount declared, are determined by the Board of Directors on a quarterly basis taking into account the Company's earnings, financial condition and prospects.

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Item 6.    Selected Financial Data

        The following selected financial data is derived from audited consolidated financial statements. The data for the eight-year period ended December 31, 1999 was derived from our audited financial statements and are not included in this Annual Report. You should read the selected financial information set forth below in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes appearing elsewhere in this Annual Report.

(1)

Includes income-producing properties held for sale, net

(2)

Includes lots sold at McDowell Mountain Ranch in Arizona prior to the sale of the project in 1996.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        Years ended December 31, 2002, 2001 and 2000

CRITICAL 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 accounting policies used by the Company in the preparation of its consolidated financial statements as they relate to its business segments are presented in Note 2 to the consolidated financial statements. A summary of the accounting policies management considers significant in the preparation of the Company's consolidated financial statements follows. In 2002, the Company's audit committee reviewed the selection, application and disclosure of the Company's critical accounting policies.

        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 ("SFAS 66"), to record these sales. SFAS 66 provides specific sales recognition criteria to determine when land sales revenues can be recorded. For example, SFAS 66 requires a land sale must be consummated with a sufficient down payment 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. 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 by the Company to record maps and develop specific real estate projects are capitalized as a cost of that project and included as an asset in land under development on the balance sheet. Project 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.

        Stock-based employee compensation—The Company accounts for stock-based employee compensation using the intrinsic value method allowed under APB Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based employee compensation expense is reflected in net income, as options granted under the Company's plans have an exercise price equal to the market value of the Company's partnership units on the date of grant. Refer to Note 8 to the consolidated financial statements for additional disclosures, including the pro forma effect for the fair value method of accounting (expensing) for stock-based employee compensation.

RESULTS OF OPERATIONS

        Results for 2002 reflect a strong residential market. New home sales in Valencia for 2002 reached a record level as merchant builders sold 991 new homes on lots previously purchased from the Company compared to the prior record of 873 new homes sold in 2001. Historically low interest rates, combined with low unemployment for the region and a tight supply of new homes, contributed to the increased home sales levels and pushed new home prices for the region to record highs in 2002. While the Company does not participate directly in profits generated from escrow closings by merchant builders, indirectly the Company generally shares with the merchant builders in the overall revenues and profits of home building projects above agreed upon thresholds. The sale of previously sold lots to homebuyers is also key to the Company's future success in selling additional lots. The Company is continuing to capitalize on the strength of the residential market in 2003, as all of the Company's 759 entitled residential lots available to be sold to merchant builders were in escrow at December 31, 2002, with closings scheduled for the 2003 first quarter.

        Commercial land sales were strong in 2002, particularly the demand for apartment and retail land. Industrial and office land sales were not major contributors to the Company's 2002 results. However, demand in these sectors is improving. As the economy continues to become more expansive, businesses are expected to look to Valencia to relocate to larger facilities to accommodate their growth.

        In 2002, the Company reported revenues of $239.8 million compared to $241.6 million in 2001. Net income of $40.6 million, or $1.66 per unit, was reported in 2002 compared to net income of $91.1 million, or $3.56 per unit, in 2001. Despite revenues decreasing only slightly from the prior year, net income for 2002 was approximately 55% lower than 2001. This was primarily due to high profit margins achieved on sales in 2001 of the Company's option to purchase 1,800 acres in Broomfield, Colorado and the Chiquita Canyon Landfill. Combined, these sales contributed $78.0 million to revenues and $76.9 million to income. No similar property sales occurred in 2002.

        Major contributors to 2002 results were the sales of 1,330 residential lots and approximately 69 acres of commercial and industrial land. These sales added a combined total of $164.4 million to revenues and $65.9 million to income in 2002 under percentage of completion accounting.

        The major contributors to the Company's 2001 results were the sales of 232 residential lots, approximately 92 acres of commercial and industrial land, the sale of the Company's option to purchase 1,800 acres in Broomfield, Colorado and four income-producing properties. The sale of income properties included one mixed-use building, two office buildings and the Chiquita Canyon

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Landfill. Combined, these sales added $174.9 million to revenues and $115.8 million to income in 2001. The sale of the landfill for $65.0 million in the second quarter of 2001 was the single largest contributor to the year's revenues and income.

        In 2000, the Company recorded revenues of $401.0 million and income of $85.4 million, or $3.05 per unit, primarily as a result of the sale of income properties in accordance with its business strategy to finance the repurchase of partnership units. The properties sold included two shopping centers, four apartment complexes and four office buildings. In addition to the income properties, 208 residential lots and over 108 acres of commercial and industrial land were sold during the year. These sales, combined with the sales of income properties, added $298.0 million to revenues and $105.9 million to income.

        The Company's 2003 business plan anticipates the majority of its revenues will be generated from residential, commercial and industrial land sales and its portfolio of income-producing properties. The entire community of Creekside, consisting of 759 entitled, improved residential lots, was in escrow to merchant builders at December 31, 2002. As of February 28, 2003, escrows closed on 239 of the 759 lots. The remaining escrows are expected to close in the first quarter of 2003. The Company also anticipates selling 26 custom, residential lots in the Westridge community in 2003. At December 31, 2002, seven of these custom lots were in escrow. As of February 28, 2003, one of these had closed. In addition to the 18 acres of commercial land and 10 acres of industrial land in escrow at the end of 2002 that are scheduled to close in 2003, the business plan targets another approximately 60 acres of commercial and industrial land for sale in 2003. As of February 28, 2003, one industrial land sale and three commercial land sales had closed escrow. The Company's portfolio of income-producing properties is expected to generate net operating income of approximately $22 million in 2003, after deducting projected start-up costs of approximately $700,000 related to the initial operations of the Tournament Players Club® at Valencia championship golf course, which is planned for opening in the summer of 2003 in the Company's Westridge community. The ability to complete sales in 2003 will be dependent upon a variety of factors including, but not limited to, identification of suitable buyers for its land, 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.

        Plans for 2003 also include completion of the current unit repurchase program of approximately 563,000 partnership units. Factors that could affect the Company's ability to complete its unit repurchase program include, but are not limited to, the factors listed in the paragraph above, changing interest rates, obtaining entitlements and subsequent challenges to these governmental approvals, many of which are beyond the control of the Company.

Residential Land Sales

        The Company primarily sells lots to merchant builders who, in turn, build homes for sale. Revenues and income are recorded when title is transferred to the merchant builder. Generally, residential lot sale agreements contain a provision whereby the Company will receive from the merchant builder a portion of the home sales prices above an agreed upon base price ("price participation") and/or in the overall profitability of the home building project after the merchant builder has received an agreed upon return ("profit participation"). If home prices and/or project profitability fall short of the participation thresholds, the Company receives no additional revenues or income and has no financial obligation to the builder.

        For the year ended December 31, 2002, a record 1,330 residential lots in Valencia closed escrow, contributing a total of $118.1 million to revenues and $41.6 million to income under percentage of completion accounting. Included in the total lot sales were 726 lots in the Westridge golf course

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community, contributing $85.5 million to revenues and $29.3 million to income. Escrow also closed on the entire 329 residential lots in the Alta Vista community, contributing $16.3 million to revenues and $6.5 million to income. In addition, the entire 275 lots in the Hidden Creek community closed escrow in 2002, contributing $16.3 million to revenues and $5.8 million to income. Results for 2002 also included the recognition under percentage of completion accounting of $7.0 million in revenues and $2.2 million in income from prior year lot sales and $1.4 million received from merchant builders under price and profit participation agreements related to Valencia area lot sales in prior years.

        At December 31, 2002, the entire 759 lots in the Creekside community were in escrow for approximately $53 million. Generally, revenues and income from land sales are recorded under the percentage of completion method of accounting. Accordingly, certain revenues and income from land sales may be deferred to future periods when the Company has an obligation to complete development on property sold. As of February 28, 2003, escrows closed on 239 lots for approximately $15 million, which will be reflected in the results for 2003 under the percentage of completion method of accounting. Escrows for the remaining 520 lots are expected to close in the first quarter 2003. Also, in escrow at December 31, 2002 were seven of the 26 custom, residential lots in the Westridge community planned for sale in 2003 for approximately $4 million. As of February 28, 2003, one of the custom lots had closed escrow for $895,000, which will be reflected in the results for 2003.

        A total of 232 residential lots was sold in 2001, contributing $15.5 million to revenues and $4.7 million to income under percentage of completion accounting. Despite a 12% increase in the number of residential lots sold in 2001 compared to 2000, a loss of $201,000 was reported after divisional expenses in 2001 compared to income of $3.8 million in 2000. This decrease was primarily due to $14.1 million in revenues and $5.9 million in income recognized in 2000 under percentage of completion accounting from lot sales in the prior year. No revenue or income from prior year lot sales was recorded in 2001. Results for 2001 also included $211,000 received from price and profit participation agreements relating to Valencia lot sales in prior years. At December 31, 2001, no residential lots were in escrow.

        A total of 208 residential lots was sold in 2000 for $12.7 million contributing $5.7 million to income. These were the remaining lots in the Bridgeport lake community. Results for 2000 also included the recognition of revenues and income from lot sales in the prior year as discussed above and $309,000 received from price and profit participation agreements relating to Valencia lot sales in prior years. Also in 2000, the Company recorded a $5.2 million loss associated with the dissolution of the Company's 50.1% interest in City Ranch, a joint venture project with Kaufman and Broad of Southern California, Inc. At December 31, 2000, no residential lots were in escrow.

        Lot sales in 2001 and 2000 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). 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.

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Industrial and Commercial Sales

Industrial Land Sales

        For the year ended December 31, 2002, escrow closed on one industrial parcel totaling 3.1 acres. This escrow contributed $1.6 million to revenues and $258,000 to income. The decrease in acres sold in 2002 compared to prior years is due to the continuation of absorption of significant new space being brought to market from strong land sales in previous years. As of December 31, 2002, the Company had approximately 371 net acres of entitled industrial land remaining in Valencia. There are indications the local market for industrial property beginning to strengthen. Valencia's industrial vacancy rate at the end of 2002 had improved to 12%, compared to over 13% at the end of 2001. The net amount of all new or existing available space that was leased in 2002 in the both Valencia Industrial Center and Valencia Commerce Center was approximately 944,000 square feet compared to a negative 482,000 square feet absorbed in 2001. With the City of Santa Clarita, of which most of Valencia is a part, being the second fastest growing city in Los Angeles County, the Company anticipates that companies will look to Valencia to relocate to larger, more modern facilities to accommodate growth. The Company expects to market for sale approximately 23 acres of industrial land in 2003. At December 31, 2002, two industrial parcels totaling about 10 acres were in escrow for approximately $7.2 million, with closings expected in 2003. Subsequent to December 31, 2002, one of these escrows closed on a 5.7-acre parcel, contributing $2.8 million to revenues, which will be reflected in the results for 2003. All escrow closings are subject to market and other conditions beyond the control of the Company.

        Five industrial parcels totaling 16.8 acres closed escrow in 2001. These sales contributed $8.4 million to revenues and $2.4 million to income. The decrease in acres sold in 2001 as compared to the prior year was due to the marketing for sale or lease of approximately 2 million square feet of new space coming on line as a result of aggressive land sales in previous years, as well as the slowing of the southern California economy. No industrial land was in escrow at December 31, 2001.

        In 2000, escrows closed on 58.8 industrial acres contributing $28.4 million to revenues and $8.5 million to income. No industrial land sales were in escrow at December 31, 2000. In September 2000, the Company agreed to accept a reduced note pay-off in return for accelerating the due date on a 1998 industrial land sale note with scheduled maturities through September 2002. This resulted in the Company recording a $2.1 million charge to income to reduce the note receivable and accrued interest to the negotiated $14.4 million pay-off amount. The note was collected in December 2000.

Commercial Land Sales

        Approximately 66 acres of commercial land closed escrow in 2002, contributing $44.8 million to revenues and $24.0 million to income under percentage of completion accounting. Included in the 66 acres were 22.3 acres in the Westridge golf course community for two commercial sites and an apartment site, which, combined, contributed $20.1 million to revenues and $10.9 million to income. A 16.7-acre parcel in the Town Center area and a 7.5-acre apartment site in the Creekside community contributed an additional combined total of $16.6 million to revenues and $9.5 million to income. In addition, 2002 results include $3.0 million in revenues and $1.7 million in income recognized under percentage of completion accounting from prior year sales. At December 31, 2002, six commercial parcels totaling approximately 18 acres were in escrow for approximately $10.2 million, with closings expected in 2003. Subsequent to December 31, 2002, three of these escrows closed on a total of 8 acres for $3.2 million, which will be reflected in the results for 2003. All escrow closings are subject to market and other conditions beyond the control of the Company.

        Commercial land escrow closings for 2001 totaled 75.5 acres, contributing $59.0 million to revenues and $30.8 million to income. Included in these sales were a 13.8-acre parcel in the Valencia Corporate Center, the entire 23-acre Rockwell Canyon Business Park and three apartment sites, which, combined,

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contributed $51.5 million to revenues and $26.8 million to income. In addition, 2001 results included $2.8 million in revenues and $400,000 in income recognized under percentage of completion accounting from sales in prior years. At December 31, 2001, five commercial parcels totaling about 29 acres were in escrow for approximately $13.5 million. Four of the escrows closed in 2002. The remaining escrow was still open at December 31, 2002 and is expected to close in 2003.

        In 2000, a total of 49.7 commercial acres closed escrow contributing $36.9 million to revenues and $18.9 million to income. The sales included a 16.5-acre parcel for a retail center for $12.9 million adding $6.3 million to income. Results for 2000 also included revenues of $3.2 million and income of $1.9 million recognized under percentage of completion accounting from the prior year sale of an apartment site. At December 31, 2000, seven commercial parcels totaling 37.9 acres were in escrow for $24.9 million.

Income Property and Other Sales

        The Company closed escrow on one minor income property in 2002. The sale of a 35,000 square foot building in Valencia Commerce Center contributed $2.5 million to revenues and $17,000 to income. The Company does not anticipate any income property sales in 2003.

        Income property sales in 2001 included one mixed-use building, two office buildings and the Chiquita Canyon Landfill. The Company also sold its option to purchase approximately 1,800 acres in Broomfield, Colorado. Combined, these sales in 2001 contributed $92.0 million to revenues and $77.8 million to income. The sale of the Chiquita Canyon Landfill was the largest contributor, generating $65.0 million in revenues and $64.0 million in income.

        Income-producing properties sold in 2000 included Castaic Village Shopping Center, Plaza del Rancho mixed-use retail, four office buildings and four apartment complexes. These income property sales were part of the Company's business strategy, announced late in 1999, to sell approximately half of its income portfolio to finance the repurchase of the Company's partnership units. These sales combined added $220 million to revenues and $72.9 million to income. The primary contributor to the results was the sale of the apartment complexes for $129.0 million, contributing $74.0 million to income.

        The 2000 sale of the four office buildings for $72.3 million exceeded the construction costs by approximately $7.8 million. A condition of the sale included a monthly rental payment by the Company to the buyer for 161,000 square feet of building space (principally occupied by Princess Cruises) until Princess Cruises' rent commencement date in the first quarter of 2001. In addition, under the terms of the agreement, the Company leased back approximately 51,000 square feet of retail space for a term of 12¹/2 years. With regard to the retail leaseback, accounting guidelines do not allow the consideration of any future new or renewal leasing activity to reduce the calculation of the net lease obligation. As a result, the Company recorded an accounting loss on the sale of the buildings of $4.9 million in 2000. Management believes that subleasing of the retail space will more than offset this accounting loss over the life of the leaseback and ultimately will result in additional revenues and income. As of December 31, 2002, approximately 79% of the retail space was leased compared to 77% at December 31, 2001.

        In 2001, an easement was sold contributing $600,000 to revenues and income. In 2000, a right-of-way parcel was sold to the California Department of Transportation, which contributed $5.1 million to revenues and $4.0 million to income. No similar property was sold in 2002.

Community Development

        Community development expenses in 2002 increased 61% from the prior year primarily due to expenses related to litigation initiated by the Company against a gas and oil-field operator to enforce

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contractual provisions requiring adequate clean-up of leased properties. Absent these costs, community development expenses would have shown a decline in 2002 over 2001. For 2003, community development expenses are expected to decrease about 40% over 2002 levels due to the Company's anticipated reduction in costs related to certain legal challenges partially offset by the continued focus on entitlements and planning to complete the projected sellout of Valencia residential land and to position Newhall Ranch to commence development.

        In 2001, community development expenses increased 9% from the prior year primarily due to higher administrative and preliminary entitlement expenses. Community development expenses in 2000 decreased 6% from 1999 primarily due to expenses in 1999 related to preliminary planning work for Newhall Ranch, certain initial costs relating to commercial properties under development and a strategic marketing program.

        In June 2000, a Kern County Superior Court judge identified six issues in the Newhall Ranch Environmental Impact Report (EIR) as requiring further environmental review. The six issues include the impact of the 21,600-home Newhall Ranch development on the Salt Creek wildlife corridor and on traffic congestion in Ventura County; biological impacts on the Santa Clara River corridor; consistency with the General Plan and impacts in Significant Ecological Areas; adequacy and reliability of the water supply; and a further alternative site analysis for the water reclamation plant location. On October 24, 2001, the Regional Planning Commission approved the additional analyses performed by the Company concerning the court-ordered issues. Hearings before the Los Angeles County Board of Supervisors are expected to begin on March 25, 2003.

        Hearings before the Board of Supervisors were delayed as a result of the January 2002 decertification of an EIR prepared in connection with the acquisition and importation of 41,000 acre-feet per year of California State Water Project water by Castaic Lake Water Agency (CLWA), the water wholesaler serving the Santa Clarita Valley. However in October 2002, the Company 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. Accordingly, the Company will not be relying on any of the 41,000 acre-feet of State Project Water from CLWA to meet Newhall Ranch's primary water needs.

        In May 2002, the California Department of Fish and Game (Fish and Game) conducted a search on certain areas of Newhall Ranch. The search was to determine if an endangered plant, the San Fernando Valley spineflower, had been taken through routine farming operations being conducted on the Ranch that are exempt from certain endangered species regulations. During the search, Fish and Game found the plant, which, until 1999, was thought to be extinct, in several locations in the eastern area of Newhall Ranch. The Company completed surveying other portions of Newhall Ranch and found spineflower populations in a total of three locations on the Newhall Ranch site. On February 11, 2003, the Company reached an agreement with Fish and Game and the Los Angels County District Attorney regarding this matter. The agreement requires recordation of a conservation easement for the perpetual benefit of the State of California on approximately 64 acres in the Airport Mesa and Grapevine Mesa areas of Newhall Ranch. The Company also will provide a funded management plan and allow Fish and Game personnel expanded access to the Company's property and biological reports. This agreement resolves all the outstanding issues related to spineflower and the alleged streambed violation (see the "Agricultural Operations" section below). This civil compromise is not expected to have a significant impact on Newhall Ranch as the project's Specific Plan provides the Company with some flexibility in mapping the planned 21,600 homes on the property.

        Based on the current schedule, the Company expects to return to the Kern County Superior Court late in 2003 or in early 2004 for resolution of the six issues that were identified by the Court as requiring further environmental review. The target date for the commencement of initial development of Newhall Ranch is currently 2006. The length of time necessary to obtain completion of governmental

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review and approvals necessary for the project, and the timing of any judicial processes that may result, are difficult to predict and actual commencement of development may be delayed beyond the target date.

        West Creek is a planned 2,214-home community in Valencia's North River planning area. The project received final approval from the Los Angeles County Board of Supervisors in January 2001. Opponents to the community filed a lawsuit under California environmental and planning laws in 2001 challenging the Board of Supervisors' approval. In November 2001, the Superior Court determined that the opponents' claims had no merit. Opponents filed an appeal and the California Court of Appeal Second Appellate District heard the challenge to the Board of Supervisor's approval of West Creek on November 13, 2002. In a ruling filed February 27, 2003, the Court of Appeal confirmed the correctness of the Superior Court's ruling regarding the adequacy of the project's water supply mitigation measures, environmental flood analysis, and the County's adherence to the requirements of its Development Monitoring System. The Court of Appeal referred the issue of water availability for the West Creek project back to the County of Los Angeles for further review. This will require the Company to participate in further public proceedings before the County of Los Angeles. The Company anticipates this process and further court proceedings could take approximately 18 months. However, the actual time required will depend on a number of factors that make it difficult to estimate the time to complete applicable legal processes. Therefore, lot sales in West Creek may not commence until late 2005, which would impact the Company's current 2004 business plan.

Income-Producing Properties

        Revenues and income from the Company's income-producing properties decreased 6% and 27%, respectively, compared to 2001. The reduction is primarily the result of income property sales in the prior year and lower occupancy at Valencia Town Center regional shopping mall due primarily to the vacancy in the third quarter 2001 of Edwards Theatres due to bankruptcy.

        For 2001, revenues and income decreased 27% and 33%, respectively, from the prior year. The decrease is primarily due to the sale of income properties in 2001 and 2000. In 2001, income property sales included one mixed-use building, two office buildings and the Chiquita Canyon Landfill. In addition, 2001 income decreased due to interest expense recorded on the net lease obligation recorded in 2000 in conjunction with the sale of four office buildings.

        Revenues in 2000 increased 15% over 1999 while income increased 32% primarily due to suspension of depreciation on income properties during the period the properties were held for sale. This accounted for approximately 56% of the increase in income compared to 1999. In 2000, four apartment complexes, four office buildings, a neighborhood shopping center and a mixed-use retail property were sold in accordance with the Company's business strategy to finance the repurchase of partnership units. In addition, improved results from hotel operations, continued high retail occupancy and favorable rents also contributed to increases in revenues and income for 2000.

        In August 2000, a potential buyer terminated its due diligence work on Valencia Town Center regional shopping mall and entertainment center due to the Chapter 11 bankruptcy filing by Edwards Theatres Circuit, Inc., a major tenant in the mall. In December 2000, the Company announced it was no longer marketing the properties for sale and recorded a charge of $4 million for depreciation that had been suspended during the period the assets were held for sale. In 2001, Edwards Theatres reaffirmed its current lease for the 12-screen theater in the Valencia Entertainment Center but rejected its lease for the original 10-screen theater located in Valencia Town Center regional shopping mall and vacated in September 2001. In May 2002, the Company received a settlement from Edwards Theatres' bankruptcy proceeding for lost rent on the canceled lease space and other expenses.

        In 2001, the Company began the process of remodeling the west end of Valencia Town Center regional mall where Edwards Theatres was located for the relocation an expanded mall food court to

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the space. The initial phase of the renovation was completed in February 2003 with the opening of the new food court. The new food court includes additional quick stop restaurants and double the seating capacity. A second phase of the renovation involves the remodel of the prior food court location into new retail space. The second phase of the remodel is expected to be completed and open by the 2003 holiday shopping season.

        At December 31, 2002, the occupancy at Valencia Town Center regional shopping mall was 84%, including short-term tenants, which is unchanged from December 31, 2001. The primary contributor to the vacancy was Edwards Theatres vacating the mall in September 2001, which represented approximately 12% of the non-anchor gross leasable area in the mall. The Company's other retail centers continue to have high occupancy rates, with NorthPark Village Square and River Oaks Shopping Center both 100% leased. Hotel operating performance continues to be strong. At December 31, 2002, the year-to-date occupancy levels for the Valencia Hilton Garden Inn and Hyatt Valencia Hotel were 79% and 69%, respectively. Although, these rates are 7% and 3% lower, respectively, than prior year levels, this is primarily the result of higher average daily room rates charged in 2002. The average daily rates at Valencia Hilton Garden Inn and Hyatt Valencia Hotel were 11% and 6% higher, respectively, than the prior year.

        For 2003, the Company expects the portfolio of income-producing properties to generate revenues approximately 8% higher and income approximately 12% lower than 2002's results. Increased revenues are primarily due to the commencement of operation at the Tournament Players Club® at Valencia championship golf course in the summer of 2003 together with an increase in Valencia Town Center regional shopping mall revenues due to the opening of the remodeled food court area and new retail space. The decrease in projected income is primarily the result of an anticipated loss from operation of the golf course due to initial start-up costs and pre-opening expenses.

Valencia Water Company

        Valencia Water Company is a regulated utility and a wholly-owned subsidiary of the Company, serving over 24,000 metered connections. For the year ended December 31, 2002, revenues increased approximately 6% and net income decreased 8% compared to 2001 levels. The increase in revenues was primarily the result of a 5% increase in the water company's metered connections and increased customer usage due to drier weather conditions, partially offset by a February 2002 water rate reduction of 4.85%. The decrease in income was primarily due to higher administrative expenses and expenses related to legal proceedings in which Valencia Water Company is involved.

        For 2001, revenues increased 4% and income decreased 2% compared to 2000. Increased revenues were primarily due to a 7.5% growth in metered customers. The decrease in income was primarily due to higher administrative and legal expenses. In 2000, revenues increased 8% and income increased 18% compared to 1999 due to the continuing expansion of the utility's customer base.

        In January 2002, Valencia Water Company was notified by the California Public Utilities Commission (CPUC) of the Commission's desire to perform a review of the utility's authorized rate of return based upon its approved rate structure. The review was completed in February 2002 and resulted in a 4.85% reduction in Valencia Water Company's authorized water billing rates. In March 2002, Valencia Water Company filed a general rate case with the CPUC. A proposed decision is expected in March 2003 with a final decision by the end of the second quarter 2003. It is anticipated that the final decision from the CPUC will result in a slight increase to the water company's authorized water billing rates over current rates.

Agricultural Operations

        For 2002, agriculture operations, including the Company's energy operations, reported revenues and income of $7.4 million and $495,000, respectively. The increase in revenues over 2001 was primarily

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due to high yields on almonds and higher citrus prices. The increase in income was due to the yields and prices previously mentioned and to operating expense reductions.

        In October 2002, the Company appeared in Los Angeles County Superior Court to answer a misdemeanor charge of illegally altering a streambed, which was filed on behalf of the California Department of Fish and Game (Fish and Game). The Company pled not guilty and on February 11, 2003 reached an agreement with Fish and Game and the Los Angeles County District Attorney regarding this issue. The agreement requires a permanent conservation easement on approximately 64 acres in two areas of Newhall Ranch to be granted in favor of the state, the Company providing a funded management plan for the area, and Fish and Game personnel having expanded access to the Company's property and biological reports. This agreement resolves all the outstanding issues related to the alleged streambed violation as well as issues regarding the San Fernando Valley Spineflower found on areas of Newhall Ranch (see the "Community Development" section above).

        For 2001, the Company reported revenues of $7.2 million and a loss of $437,000 from agriculture operations, including the Company's energy operations. This represented a decrease in revenues compared to the prior year and was primarily due to lower prices for citrus and other crops, which was partially offset by higher gas prices during most of 2001. The 2001 loss was consistent with the decrease in revenue combined with higher operating expenses. In 2000, revenues and income decreased as compared to 1999 primarily due to the sale of over 39,000 acres of farm land in 1999 and lower prices for oranges, which were partially offset by higher revenues and income from energy operations due to higher oil and gas prices.

        The Company's remaining agricultural properties include the 14,000-acre New Columbia Ranch in Madera County and the 1,250-acre Newhall Orchard in Ventura County. Most of the remaining 14,750 acres in Ventura County owned by the Company are leased for cattle grazing. The Company has leased out a majority of the New Columbia Ranch to farming tenants in 2003 to minimize the Company's fixed overhead costs and its exposure to crop commodity price fluctuations.

General and Administrative Expenses

        General and administrative expenses increased 3% in 2002 primarily due to higher expenses related to general legal matters and consulting. These increases were partially offset by lower base compensation and incentive-based compensation expenses. In 2001, general and administrative expenses decreased 15% from 2000 levels primarily due to lower compensation expense. A net increase of 1% for the year ended December 31, 2000 compared to 1999 was primarily due to an increase of $3.1 million in compensation expense partially offset by a reduction of $2.2 million in land acquisition costs. General and administrative expenses in 2003 are expected to remain comparable to 2002.

Interest and Other Expense, net

        Lower interest rates on the Company's bank line borrowings and lower outstanding balances on available lines of credit together with increased interest income from promissory notes accepted by the Company in conjunction with certain commercial land and residential lot sales in the 2001 fourth quarter and 2002 first quarter were the primary contributors to a 47% decrease in interest and other expense, net for the year ended December 31, 2002 compared to 2001.

        Reduced borrowings throughout 2001 and lower interest rates resulted in a 68% decrease in net interest expense compared to 2000. In 2000, net interest expense increased 73% over 1999 levels due to increased borrowings under credit facilities to temporarily fund partnership unit repurchases prior to completion of the sale of income properties, most of which occurred in December 2000.

        Interest and other expense, net is expected to increase approximately 30% in 2003 compared to 2002 primarily due to a decrease in interest income from promissory notes accepted in conjunction with

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land sales and planned increases in borrowings under existing lines of credit. No notes receivable were outstanding at December 31, 2002 and the Company does not anticipate any 2003 land sales involving note payments.

FINANCIAL CONDITION

Liquidity and Capital Resources

        At December 31, 2002, the Company had cash and cash equivalents of $25.4 million and $160.1 million in available lines of credit, net of $23.9 million in outstanding letters of credit. At that date there were no borrowings outstanding on unsecured lines of credit or a revolving mortgage facility. The Company had fixed rate debt outstanding totaling $60.0 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 to fund administration and legal costs to bring future projects online over the longer term in order to enable the Company to complete the development of Valencia and to 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 2002 with a conservative debt to income portfolio value ratio of 22%, which the Company believes will provide adequate debt capacity to fund operations and continue unit repurchases. At December 31, 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 the open market, or unsolicited negotiated transactions. Repurchases are generally funded from cash flow generated from normal business operations. As of December 31, 2002, a total of 1,957,185 units had been repurchased under this program for $56.6 million, or an average unit price of $28.93. Of this total, 987,035 partnership units were repurchased in 2002 for $29.0 million, or an average unit price of $29.37. A total of 562,815 units remained to be repurchased under this program at December 31, 2002. Completion of the repurchase program is planned for 2003 and is expected to require approximately $17 million. 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. The Company's Board of Directors may approve additional repurchases of partnership units after completion of the current program after taking into account the Company's earnings, financial condition and prospects.

        For the year ended December 31, 2002, the Company invested approximately $24 million in major roads and freeway infrastructure improvements primarily within Valencia, which amounts are included in land under development on the accompanying balance sheet. In addition, the Company invested approximately $8 million in the remodel of the former Edwards Theatres' space in Valencia Town Center regional mall to relocate of the existing food court and create retail space, and approximately $8 million on the construction of the Tournament Players Club® at Valencia championship golf course, in the Company's Westridge community, which amounts are included in income-producing properties on the accompanying balance sheet. In 2003, the Company expects to invest approximately $24 million in major roads and freeway improvements to enable the Company to continue its land sales program in Valencia. In addition, approximately $13 million is expected to be invested in 2003 in Valencia Town Center regional mall to complete the relocation of the existing food court and the creation of new retail space. Additionally in 2003, the Company expects to invest approximately $11 million on the completion of the golf course and clubhouse. At December 31, 2002, there were no other material commitments for capital expenditures.

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        The following discussion relates to principal items in the Consolidated Statements of Cash Flows:

Operating Activities

        Net cash provided by operating activities totaled $110.8 million in 2002. Cash generated from operating activities included the sales of 1,330 residential lots, the sale of approximately 69 acres commercial and industrial land and the sale of one income-producing property, which, combined, resulted in a total of $185.7 million. During 2002, $11.7 million of notes receivable outstanding at December 31, 2001 from certain prior year land sales were collected. All notes receivable recorded in 2002 were collected during the year. Cash used in operating activities included the use of approximately $85.5 million for land development expenditures primarily related to land preparation and infrastructure improvements to ready land for development or sale. Additional uses of cash included payment of the Company's general and administrative expenses and interest expense.

        Net cash provided by operating activities totaled $84.1 million in 2001. Cash generated from operating activities included the sale of 232 residential lots, 92.3 acres of industrial and commercial land, the sale of an option on 1,800 acres in Broomfield, Colorado and the sales of four income producing properties, including Chiquita Canyon Landfill. These combined sales generated $176.9 million in cash and $19.7 million in notes. During the year, an $8.3 million portion of one note was subsequently sold to a bank at par. Notes totaling $10.5 million were collected in 2001 from land sales in prior years. Expenditures for land under development inventories totaled $75.4 million in 2001 and were primarily related to land preparation and infrastructure improvements to ready land for development or sale.

        Net cash provided by operating activities in 2000 totaled $221.7 million and included sales of 208 residential lots, over 108 acres of industrial and commercial land and sales of income properties which included four apartment complexes, four office buildings, a neighborhood shopping center and a mixed-use center. These sales combined provided $239.8 million in cash and $10.5 million in notes. In addition, notes totaling $49.7 million from land sales in prior years were collected and $5.1 million was received from a right-of-way purchase by the California Department of Transportation. The notes collected included $14.4 million from a 1998 land sale note on which the Company recorded a $2.1 million charge to income in 2000 to reduce the note principal and accrued interest to a negotiated $14.4 million payoff amount in return for accelerating the due date to December 2000. Expenditures for land under development inventories in 2000 totaled $76.1 million and were primarily related to land preparation and infrastructure improvements to ready land for development or sale.

Investing Activities

        Expenditures for the development of income-producing properties for the year ended December 31, 2002 totaled $19.1 million and were primarily for the Valencia Town Center food court remodel and expansion, and the construction of the Tournament Players Club® at Valencia championship golf course.

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        In 2001, expenditures for development of income-producing properties totaled $13.7 million and were primarily for the construction of the Tournament Players Club® at Valencia golf course and the completion of construction of two office buildings sold in December 2000. The buildings were sold prior to completion of construction and the Company was obligated to finish construction of the buildings in 2001.

        Expenditures for development of income-producing properties in 2000 totaled $27.4 million and primarily were for the two office buildings that were completed in 2001 and the expansion of Valencia Entertainment Center.

        Purchase of property and equipment totaled $7.6 million, $8.9 million and $9.7 million in 2002, 2001 and 2000, respectively, and were primarily for water utility construction costs.

Financing Activities

        In 2002, distributions to unitholders totaling $12.8 million were made consisting of four quarterly distributions of $.10 per unit and a special distribution of $.13 per unit. Distributions in 2001 totaled $12.7 million and consisted of four quarterly distributions of $.10 per unit and a $.10 per unit special distribution. In 2000, distributions totaling $21.2 million were made which consisted of four quarterly distributions of $.10 per unit and a $.35 per unit special distribution. The Company declared a regular quarterly distribution of $.10 per unit, payable March 6, 2003 to unitholders of record on February 1, 2003. No special distribution was declared for the 2003 first quarter. 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, are determined by the Board of Directors on a quarterly basis taking into account the Company's earnings, financial condition and prospects.

        At December 31, 2002, the Company had balances in mortgage and other debt of $60.0 million. The $25.5 million decrease from prior year was primarily due to the absence of any outstanding borrowings on the Company's available lines of credit and revolving mortgage facility at December 31, 2002 versus $23.7 million in outstanding borrowings 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 lines of credit were due to strong operating cash flow, primarily from record residential lot sales, and a reduced pace of repurchases of partnership units compared to 2001.

        At the end of 2002, a $6.8 million bank loan secured by a deed of trust on the Valencia Hilton Garden Inn was outstanding. The loan is payable in quarterly principal installments of $41,250 plus monthly interest payments until maturity on March 31, 2004. As the equity method is used to account for the Company's investment in the joint venture with Hilton Inns, Inc., the bank loan is not included in mortgage and other debt on the accompanying balance sheet.

        For the year ended December 31, 2001, the Company had a balance in mortgage and other debt of $85.5 million. This represented an $11.0 million increase from 2000 and was primarily due to a net increase in the outstanding balance on the Company's lines of credit to fund the recurring operations, distributions to unitholders and repurchases of partnership units.

        At December 31, 2000, the Company had balances in mortgage and other debt of $74.6 million. This was a $148.3 million decrease from 1999 balances and included an $85 million reduction in amounts outstanding against available lines of credit. As planned, the Company utilized available debt capacity during the year to temporarily fund the unit repurchase program until major asset and land sales were completed. Mortgages secured by three apartment complexes totaling $49.0 million were assumed by the buyer of the apartment complexes in December 2000 and a $12.0 million note payable was canceled upon divestiture of the Company's interest in the City Ranch joint-venture with Kaufman and Broad of Southern California, Inc. in September 2000.

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Partnership Unit Repurchases

        In 2002, 2001 and 2000, the Company repurchased 987,035 partnership units for $29.0 million, 2,455,094 units for $66.2 million and 3,175,550 units for $86.5 million, respectively. For the three-year period ended December 31, 2002, the Company has repurchased approximately 22% of its total partnership units outstanding at the end of 1999.

New Accounting Pronouncements

        On January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. This statement makes significant changes to the accounting for business combinations, goodwill, and intangible assets. The adoption of this statement did not have a material effect on the Company's results of operations or financial condition for the year ended December 31, 2002.

        On January 1, 2002, the Company adopted the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement retains the requirements of SFAS No. 121 for recognizing an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and to measure an impairment loss as the difference between the carrying amount and the fair value. This statement also establishes criteria for when an asset should be classified as held for sale and depreciation ceased. The adoption of this statement did not have a material effect on the Company's results of operations or financial condition for the year ended December 31, 2002.

        The Financial Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, in April 2002. Under SFAS No. 145, any gain or loss on extinguishments of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified. Although, the provisions of SFAS No. 145 are not effective until fiscal years beginning after May 15, 2002, the Company adopted this statement in 2002. The adoption of this statement did not have a material effect on the Company's results of operations or financial condition for the year ended December 31, 2002.

        The FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, in December 2002. SFAS No. 148 amends SFAS No. 123, Accounting for Stock Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value recognition provision of recording stock option expense. SFAS No. 148 also requires disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock options on reported net income and net income per unit in annual and interim financial statements. The Company continues to account for stock-based employee compensation using the intrinsic value method allowed under APB Opinion No. 25, Accounting for Stock Issued to Employees, and, as such, no expense will be recorded for stock options. Therefore, the adoption of this statement by the Company on January 1, 2003 will not have a material effect on the Company's results of operations or financial condition for the year ended December 31, 2003.

        The FASB issued FASB Interpretation No. (FIN) 45, Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others, in November 2002. FIN 45 changes the current practice in accounting for, and disclosure of, guarantees. Guarantees and indemnification agreements meeting the characteristics described in FIN 45 are required to be initially recorded as a liability at fair value. The disclosure requirements within FIN 45 are effective for financial statements for annual or interim periods ending after December 15, 2002. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has completed the process of

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evaluating the impact that will result from adopting FIN 45 and determined that the adoption of this interpretation will not have a material effect on the Company's results of operations or financial position.

        The FASB issued FIN 46, Consolidation of Variable Interest Entities, in January 2003. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and provides guidance on the identification of entities for which control is achieved through means other than through voting rights, referred to as "variable interests", and how to determine when and which business enterprise should consolidate the variable interest entity (VIE). This new model for consolidation applies to an entity which either (1) the equity investors, if any, do not have a controlling financial interest or (2) the equity investment at risk is sufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. The provisions of this interpretation are immediately effective for VIEs formed after January 31, 2003. For VIEs formed prior to January 31, 2003, the provisions of this interpretation apply to the first fiscal year or interim period beginning after June 15, 2003. The Company is currently evaluating the impact this interpretation will have on its financial statements.

FORWARD-LOOKING INFORMATION AND RISK FACTORS

        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 publicly to 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, availability of financing to the buyer, agreement with buyers on definitive terms, regulatory and legal issues, and successful completion of the buyer's due diligence. 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 and some anticipated sales may not occur. 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, state and national economies have slowed into recession. There can be no assurances 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

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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 at rates acceptable to them. 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 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 economy has slowed. 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 18,100 acres that it owns in north Los Angeles County. The Company's entire commercial income portfolio is located in the Valencia area. Therefore, any economic or other 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 may be 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, delay or prevent development of 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 develop its projects have become increasingly complex and subject to uncertainty. The statutes, regulations and ordinances governing the approval processes provide third parties the opportunity to challenge the proposed plans

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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 due to 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 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.

Item 7A.    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 December 31, 2002, the Company had no variable rate debt outstanding and $60.0 million of outstanding fixed rate debt with interest rates ranging from 5.76% 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 December 31, 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 December 31, 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 1.25%, against which no borrowings were outstanding, respectively at December 31, 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 5.05% to 6.05%.

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        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 December 31, 2002, the Company's debt to income portfolio value ratio was 22%.

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Item 8.    Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS INCLUDED IN ITEM 8:

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Report of Independent Auditors

        The Board of Directors of Newhall Management Corporation and Partners of The Newhall Land and Farming Company:

        We have audited the accompanying consolidated balance sheets of The Newhall Land and Farming Company and subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of income, changes in partners' capital, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the index at Item 14. These financial statements and the financial statement schedule are the responsibility of the management of the Company. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. The financial statements of the Company for the year ended December 31, 2000 was audited by other auditors whose report, dated January 16, 2001, expressed an unqualified opinion on those statements.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Newhall and Farming Company and subsidiaries at December 31, 2002 and 2001, and the results of its operations and its cash flows the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

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Report of Independent Auditors

        The Board of Directors of Newhall Management Corporation and Partners of The Newhall Land and Farming Company:

        We have audited the accompanying consolidated statements of income, changes in partners' capital, and cash flows of The Newhall Land and Farming Company and subsidiaries for the year ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of The Newhall Land and Farming Company and subsidiaries for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.

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Consolidated Statements of Income

See notes to consolidated financial statements

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Consolidated Balance Sheets