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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended March 31, 2001.

Commission file number 0-18756

WESTERN WATER COMPANY

(Exact name of registrant as specified in its
charter)


(www.wwtr.com)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|                        
|                        
|                        
|                        
|Delaware                 |  | 33-0085833                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

102 Washington Avenue, Point Richmond, California 94801

(Address of principal executive offices) (Zip
Code)


Registrants telephone number, including area code:
(510) 234-7400

Securities registered pursuant to Section 12(b) of the
Act:

|                    |  |                      
|------------------- |  | ---------------------
|                    |  | Name of each exchange
|Title of each class |  | on which registered  
|                    |  |                      
|None                |  | None                 

Securities registered pursuant to Section 12(g) of the
Act:

Common Stock, $.001 par value

Right to Purchase Series E Junior Participating
Preferred Stock, $.001 par value

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 filing requirements for the past
90 days.  Yes 
(BOX WITH X)  No 
(BOX)

The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 26, 2001 was
approximately $6,536,000 (based on last reported sale price of
$0.81 per share of common stock on that date). All directors are
considered affiliates. There were 8,069,012 shares of
registrants common stock outstanding as of June 26,
2001.

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.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrants Proxy Statement for its 2001
Annual Meeting of Stockholders, to be filed with the Securities
and Exchange Commission within 120 days after the close of
the registrants fiscal year, are incorporated herein by
reference in Part III of this Report.









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TABLE OF CONTENTS



|             |                                                                                              |                                                                |  |  |  |  |  | 
|------------ | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I      
|             | Item 1.Business                                                                             
|             | Item 2. Properties                                                                          
|             | Item 3. Legal Proceedings                                                                   
|             | Item 4.Submission of Matters to a Vote of Security Holders                                  
|PART II     
|             | Item 5.Market For Registrants Common Equity and Related Stockholder Matters                
|             | Item 6.Selected Financial Data                                                              
|             | Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
|             | Item 7A.Quantitative and Qualitative Market Risk Disclosures                                
|             | Item 8.Consolidated Financial Statements and Supplementary Data                             
|             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|PART III    
|             | Item 10.Directors and Executive Officers of the Registrant                                  
|             | Item 11.Executive Compensation                                                              
|             | Item 12.Security Ownership of Certain Beneficial Owners and Management                      
|             | Item 13.Certain Relationships and Related Transactions                                      
|PART IV     
|             | Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports On Form 8-K       
|SIGNATURES  
|             | INDEPENDENT AUDITORS REPORT                                                                
|             |                                                                                              | CONSOLIDATED BALANCE SHEETS                                   
|             |                                                                                              | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|             |                                                                                              | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY               
|             |                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                         
|             |                                                                                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    
|EXHIBIT 23.1



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TABLE OF CONTENTS

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|PART I   |           |  | 1                                                                                      |     
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|         | Item  1.  |  | Business                                                                               |      |  | 1  | 
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|         | Item  2.  |  | Properties                                                                             |      |  | 12 | 
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|         | Item  3.  |  | Legal Proceedings                                                                      |      |  | 12 | 
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|         | Item  4.  |  | Submission of Matters to a Vote of Security
	Holders                                   |      |  | 14 | 
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|PART II  |           |  | 15                                                                                     |     
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|         | Item  5.  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |      |  | 15 | 
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|         | Item  6.  |  | Selected Financial Data                                                                |      |  | 16 | 
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|         | Item  7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |      |  | 18 | 
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|         | Item  7A. |  | Quantitative and Qualitative Market Risk
	Disclosures                                  |      |  | 27 | 
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|         | Item  8.  |  | Consolidated Financial Statements and
	Supplementary Data                              |      |  | 27 | 
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|         | Item  9.  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |      |  | 27 | 
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|PART III |           |  | 28                                                                                     |     
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|         | Item  10. |  | Directors and Executive Officers of the Registrant                                     |      |  | 28 | 
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|         | Item  11. |  | Executive Compensation                                                                 |      |  | 28 | 
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|         | Item  12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |      |  | 28 | 
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|         | Item  13. |  | Certain Relationships and Related Transactions                                         |      |  | 28 | 
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|PART IV  |           |  | 29                                                                                     |     
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|         | Item  14. |  | Exhibits, Consolidated Financial Statement
	Schedules and Reports On Form 8-K          |      |  | 29 | 

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Forward-Looking Statements

In addition to historical information, this Annual Report
contains forward-looking statements. The forward-looking
statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the sections entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Risk
Factors. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect
managements analysis only as of the date hereof based on
information currently available to management. Western Water
Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances
that arise after the date hereof. Readers should carefully
review the risk factors described herein and in other documents
the Company files from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on
Form 10-Q to be filed by the Company in 2001 and 2002 and
any Current Reports on Form 8-K filed by the Company.




PART I




Item 1. Business

Introduction

The principal business of Western Water Company (the
Company) has been to identify, manage, acquire,
develop, sell and lease water and water rights in the western
United States. Prior to 2000, the Company had been developing
this business through the acquisition of water rights and other
interests in water, the purchase of real estate for the water
rights associated with such real estate, and the sale or lease
of water. The Company, directly and indirectly, owns a diverse
portfolio of water rights, as well as real estate, in California
and Colorado. Prior to the fiscal year ended March 31,
1999, the Company derived most of its revenue from the sale of
real estate that it acquired for the associated water rights,
and from assisting unaffiliated owners of water rights to obtain
revenue from their water rights. In the two most recent fiscal
years, virtually all revenues were generated from the sale of
water owned by the Company, or the sale of water which the
Company purchased for the purpose of reselling it. However,
delays and uncertainty in the Companys attempts to
overcome regulatory obstacles to execute additional water
transfers forced the Company to reconsider its business plans
and to consider other alternatives, including the sale of the
Company or the sale of its principal assets. During the fiscal
year ended March 31, 2001, the Company sold certain of its
assets but concluded that neither liquidation nor sale of the
Company is in the best interests of its customers or
stockholders. As a result, during this past fiscal year the
Company modified its prior business plan and sought to
restructure its balance sheet and sell certain of its
non-strategic assets to support development of its primary water
wholesaling business in light of its revised business plan.

As noted, the Companys principal historic activity had
been to acquire and develop water assets in California and in
the Cherry Creek basin in Colorado. The Company did so because
it believes that there is a growing demand for water resources
in both of these areas which demand is expected to exceed the
water resources currently available. During the fiscal year
ended March 31, 2000, the Company executed a variety of
take if delivered wholesale water supply contracts
with a number of retail municipal water agencies. Since then,
however, the Company has encountered significant regulatory
obstacles to its attempts to develop and transfer water for
delivery to such customers. Based on its inability to generate
revenues from water sales, the Company suspended its asset
acquisition program, reduced its marketing activities, curtailed
other overhead expenditures, and deferred certain development
activities. The Company is concentrating its current efforts on
overcoming the regulatory obstacles to water transfers and in
arranging water transfers that do not face such obstacles. The
Company is also increasing its efforts to assist non-affiliated
water rights owners to develop and manage their water rights for
maximum long-term value.

The Company owns various water assets in Northern and Southern
California. The Companys principal Northern California
water assets consists of certain riparian and appropriative
water rights, together with certain groundwater rights,
associated with approximately 9,055 acres of real property (the
Yuba Property)

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The principal Colorado water interests owned by the Company
consist of the water rights associated with an aggregate of
4,559 acres of land and certain other water rights in the Cherry
Creek basin. This land is in the drainage area of Cherry Creek,
south of Denver, in Douglas County, Colorado. It was purchased
by the Company in 1992 and most of the land has been sold.
However, the Company has retained almost all water rights from
the land that was sold. The Cherry Creek assets were acquired
primarily for the purpose of developing, selling or leasing
water in the Cherry Creek basin. The Companys real estate
holdings in Colorado currently consist of approximately 408
acres of primarily undeveloped land located in the Cherry Creek
basin.

The Companys principal executive office is located at 102
Washington Avenue, Point Richmond, CA 94801. Its telephone
number is (510) 234-7400. Unless the context requires
otherwise, references to the Company in this report
include Western Water Company and to all of its subsidiaries. On
September 18, 1992, the Company changed its name from
YG Development Company to Western Water
Company, and on March 23, 1994, the Company changed
its state of incorporation from California to Delaware.

Overview of Water Markets

There is a developing public policy to expand water markets in
the western United States to help meet the need for increased
water supply and reliability because of population growth and
chronic imbalances between areas of water abundance and areas of
deficit. The objectives of this developing public policy include
improved clarity of water rights, access to existing conveyance
facilities at a fair price, and competitive price-sensitive
allocation of scarce water resources. These policies favoring
voluntary water transfers as a means for meeting long-term
imbalances between supply and demand were emphasized in the
August, 2000 Record of Decision for CALFED, an ambitious water
resource planning agenda for the federal and state agencies
which oversee water resource and environmental planning in
California.

Southern California has been experiencing a water shortage that
is projected to become worse. According to the State Water Plan
(Bulletin 160-98) of the California Department of Water
Resources (DWR), last updated in November 1998, the
amount of water used in Southern California is estimated at
10.5 million acre-feet in 1995, and is expected to grow to
11.4 million acre-feet in 2020. Even assuming the
development of a number of new water resources and significant
additional conservation efforts over the forecast period, the
shortage of water estimated at 200,000 acre-feet in 1995 is
estimated to grow to 1.3 million acre-feet by 2020, as the
available supply is expected to decrease from 10.3 million
acre-feet in 1995 to 10.1 million acre-feet in 2020.
Although such deficits have historically been made up through
overdraft of groundwater, this source is already under severe
strain and limitations on availability are expected to constrict
the overall supply in certain areas of California.

Douglas County, Colorado, south of Denver, is experiencing very
rapid population growth. The County also has very limited local
surface water supplies, and is reliant upon groundwater and some
surface water from local streams and the South Platte River.
Additional surface water for the area is not readily available,
as existing supplies are already controlled by others and
development of new water supply projects has been blocked. Local
agencies are pursuing new surface water imports as well as
further developing the sustainable use of local groundwater to
meeting new demands on their systems. Demand for water to supply
new growth is expected to exceed 50,000 acre-feet over the next
20 years. Currently, there are at least three regional
water retail agencies that are undertaking long-term supply
development projects including substantial infrastructure
projects involving new pipelines, diversion structures and
off-stream reservoirs aimed at meeting increasing water demands
anticipated in the area. The Company is attempting to induce
these and other agencies to evaluate use of the Companys
local water resources to meet a portion of such future demand.

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Regulatory Overview

Water rights in California are subject to complex laws,
regulations and jurisdictions that complicate the development of
water for transfer and sale. Under the doctrine of
appropriation, a water user can publicly claim water from a
river for beneficial use, so long as the water is physically
available from the flow of the river after accounting for the
rights of prior appropriators. Thus, older appropriations are
senior in right to later appropriations. However, senior
appropriative rights may be lost through non-use for long
periods. Beginning in 1914, surface water (generally, water in
rivers) has been subject to regulation by the State Water
Resources Control Board (SWRCB). The SWRCB oversees
a registry of surface right appropriations and a dispute
resolution process designed to mediate competing claims to the
use of the States surface water. In the past, the Company
has claimed various appropriative rights on the Yuba River, some
of which predate SWRCB jurisdiction (pre-1914 rights) and should
therefore be grandfathered from regulatory
jurisdiction, but recent developments, including the
SWRCBs decision in the Lower Yuba River water rights case,
indicate that development of these rights associated with the
Yuba Property for transfer and use outside the immediate area of
Yuba County will take longer and cost more than the Company had
formerly anticipated. Accordingly, the Company does not
currently anticipate that it will derive significant revenues
from its water rights associated with the Yuba property during
the next two fiscal years.

California law also recognizes the rights of landowners adjacent
to a river to divert an un-quantified amount of water from the
river for beneficial use on such lands (riparian rights) or for
in-stream beneficial use. Riparian rights cannot be forfeited
through non-use. Through its interest in the water rights
associated with the Yuba Property, the Company claims riparian
rights on the Yuba River; these riparian claims are supported,
as well, by a court decree dating from 1929.

Groundwater (generally, water in underground aquifers) is not
subject to statewide regulation. Overlying landowners have the
right to place wells on their property and pump water from the
underlying aquifer. In some cases, such water rights may be
severed from the land and traded separately. The Company has
retained the groundwater rights associated with the Yuba
Property, but information developed in the most recent fiscal
year indicates that development of such rights will take longer
and cost more than formerly anticipated. In addition, recovery
and export of groundwater originating in Yuba County is subject
to extensive area of origin protections that the Company must
observe in realizing value from such rights.

When there are disputes about groundwater rights, generally as
the result of overdrawing a water basin by multiple wells, such
disputes are either negotiated to resolution among the
surrounding pumpers or submitted to litigation. In Southern
California, there are several basins in which such litigation
has resulted in a legal apportionment of the annual safe yield
of the basin among the historic pumpers. Such so-called
adjudicated basins are regulated by a court-appointed
watermaster who manages an accounting system to
assure that extractions from the basins are limited in
accordance with the courts order. The Company has
purchased water rights in three such adjudicated basins located
in Southern California. During the Companys most recent
fiscal year, the Company sold its rights in the Central Basin as
well as a portion of its rights in the Mojave Basin. Also during
the fiscal year ended March 31, 2001, important aspects of
groundwater law were clarified by the California Supreme Court
in a case involving the adjudication of the Mojave Basin.

The proposed transfer of water from a place of origin to a
proposed area of use in another region of the State generally
requires a series of regulatory approvals designed to assure
that other water users and the environment are not harmed by the
transfer. For example, the Company had sought clarification of
the rules for such transfers in the context of a series of
petitions before the SWRCB. Under these petitions, several of
the Companys clients sought permission to transfer water
they have independent rights to appropriate from the Sacramento
River to the Company. Such water has been made available for
transfer through various conservation activities undertaken by
the petitioners. Following approval of such petitions, the
Company has successfully managed to convey and resell such water
to unaffiliated water retailers in the Bay Area and Southern
California, although conveyance and regulatory costs prevented
the Company from making a profit on such sales. Nonetheless, the
Company believes that the successful completion of such
transfers opens the way for more significant and more profitable
sales in the future. In addition, the difficult and
time-consuming

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In order to transport water from area of origin (where the water
may be surplus to local needs) to distant areas of use, federal,
state and local governments have developed a complex
interconnected infrastructure system to augment conveyance
through natural flow in rivers. Important portions of the
infrastructure include: (i) the Central Valley Project,
operated by the U.S. Bureau of Reclamation (USBR),
(ii) the State Water Project (sometimes referred to as the
California Aqueduct), operated by the California Department of
Water Resources (DWR), (iii) the Colorado River
Aqueduct, operated by the Metropolitan Water District of
Southern California (MWD), and (iv) the Los
Angeles Aqueduct, operated by the Los Angeles Department of
Water and Power. In addition, there are a variety of regional
and local conveyance facilities throughout the State.

Under legislation enacted in 1986 (the Wheeling
Statute), available capacity in such public water systems
is required to be made available to facilitate voluntary water
transfers, subject to fair compensation to the owner
of the infrastructure. In light of uncertainty regarding
application of the Wheeling Statute and the reluctance of system
operators to accommodate water transfers, the Company has sought
clarification through request, negotiation and further
legislation. The outcome of the Companys efforts to gain
such clarification is not yet certain. Therefore, even as to
water rights clearly owned by the Company and eligible for
transfer according to applicable water rights law, there can be
no assurance that the Company will gain access to available
conveyance capacity on a timely basis or at an economic cost.
Without such access, the Companys ability to sell water
has been and will continue to be severely constrained, and the
Company may be unable to monetize the value of many of its
California water assets. The results of the Companys
efforts in the most recent fiscal year to gain such
clarification have been unsatisfactory, and the Company now
anticipates that obtaining clarification of these issues may
take several more years. The Company believes that DWR and USBR
are inherently conflicted in their separate roles as operators
of conveyance systems, on one hand, and water rights
competitors, on the other hand. Like monopoly service providers
in other utilities, these agencies have resisted providing
access to otherwise idle capacity in their systems, except at
unit costs that are too high to allow economic water transfers.
No assurance can be given that these issues will be resolved in
a manner that will enable the Company to profitably develop and
manage its water assets.

Description of Business

The Companys business goal has been to create recurring
income through identifying undervalued and/or under used water
assets, and enhancing the value of those assets via development,
transmission and delivery to customers in the arid western
United States. However, the Companys inability to overcome
regulatory obstacles to economic water transfers, forced it to
reconsider its business plan. As a result, the Company offered
some of its non-strategic assets for sale during the most recent
fiscal year, in accordance with a plan to enhance the
Companys cash position and reduce its operating expenses.
In addition, the Company re-evaluated its acquisition of
additional water assets and deferred its efforts to market and
sell water derived from its existing water assets within the
service area of the MWD. The Company also re-evaluated its plans
to develop its existing water assets in light of current
regulatory obstacles and financial constraints. As a result, the
Company has sold or disposed of certain of its assets that it no
longer believed it would be able to profitably develop, manage
and/or monetize. The following non-strategic assets were sold or
disposed of during the most recent fiscal year:

|                                         |  |             |         |  
|---------------------------------------- |  | ----------- | ------- | -
|Asset                                    |  | Gain (Loss)
|                                         |  |            
|Central Basin (Los Angeles) Water Rights |  | $           | 428,000 |  
|                                        
|                                        
|                                        
|                                        
|Mojave Water Rights (Partial Sale)       |  |             | 465,000 |  
|                                        
|                                        
|                                        
|                                        
|Olancha Project                          |  |             | (5,000  | )
|                                        
|                                        
|                                        
|                                        
|Cucamonga Water Fee Agreement            |  |             | 879,000 |  

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California Water Transfer Program

Until recently, based on the Companys interpretation of
California law and the statements made by officials of major
California water agencies, the Company believed that the legal
and institutional barriers to water transfers by private
entities would be reduced, making it easier for such entities to
transport water through the distribution systems of the state
and local agencies during periods when those systems have excess
capacity. The Company believes that water transfers can be a
cost-effective means of providing water to under-served users
and, accordingly, had developed a plan to become an independent
water provider to municipalities and other agencies located
throughout California. However, events of the last two years
have made it clear that such transfers will continue to be
constrained because the legal and institutional barriers to
water transfers are going to be maintained for the indefinite
future by the public agencies which currently distribute water
in California.

The Companys prior business plan assumed that water
transfer transactions would require the Company to
(i) purchase water that can be delivered to urban areas in
California, (ii) finance the development of infrastructure,
such as wells, pipes, and pumps, needed to deliver water, and
(iii) enter into agreements with utilities, cities, or
water districts for the sale or lease of the Companys
water to such water retailers. The Company anticipated that each
water transfer transaction that it entered into would be unique
and that the terms under which such transactions were financed
and completed would vary. All such transfer transactions would
be expected to involve significant government regulation and
would be dependent upon the Companys ability to obtain all
required governmental approvals and to satisfy a series of
environmental and other protective conditions. In accordance
with its prior business plan, the Company entered into the
following water transactions in California:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a.) In September 1997, the Company entered into a water
	purchase agreement with San Bernardino Valley Municipal Water
	District (SBVMWD) pursuant to which SBVMWD agreed to sell
	to the Company 100,000 acre feet of surplus California State
	Water Project water during the ensuing ten years. The agreement
	provides for the delivery of 10,000 acre-feet of water annually,
	with an option for the Company to accelerate deliveries if
	surplus water is available. The Company will pay SBVMWD $150 per
	acre-foot of water in the first year, escalating at 3.5%
	annually. However, as indicated above, public agencies resisted
	the Companys attempt to compete with their water delivery
	operations, and on September 30, 1997, MWD filed a
	complaint in the Superior Court of California for the County of
	Los Angeles against SBVMWD, the Company and SMWD, in order to
	block the water sale A separate, but similar action was filed by
	DWR in the California Superior Court for the County of
	Sacramento against SBVMWD and the Company on December 22,
	1997. As a result of these legal challenges, the Company has not
	been able to deliver water under its agreements. However, SBVMWD
	and MWD announced, during the Companys most recent fiscal
	year an agreement that may eventually resolve the essential
	dispute which has so far prevented the sale of surplus SBVMWD
	water derived from its State Water Project contract into the MWD
	service area. The Company is monitoring these developments to
	determine whether they may provide an opportunity to become
	profitably involved in such water sales. See Item 3.
	Legal Proceedings.
|
| | (b.) On September 30, 1998, the Company entered into a
	pumping rights lease and a water sale agreement with the City of
	Inglewood, California. Beginning October 1, 1998, Inglewood
	leased the rights to pump 4,450 acre-feet of water per year to
	the Company for a five-year period. In consideration of the
	lease, the Company made a $3,603,200 lump-sum cash payment to
	Inglewood. Under the water sale agreement, the Company agreed to
	sell, and Inglewood agreed to buy, 5,950 acre-feet of water each
	year for the next five years. In the first year, Inglewood paid
	the Company $200 per acre-foot ($1,190,000). After the first
	year, the per acre-foot price escalates over the remaining
	four-year period at a rate equal to the sum of 3.75% per year
	plus 25% of any increase in MWDs rate for water, as
	defined.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | The Company financed the pumping rights lease lump-sum payment
	through a $3,560,000 five-year amortizing term loan. The loan is
	secured by the Companys rights under the pumping rights
	lease with Inglewood in addition to the water rights associated
	with the other 1,500 acre-feet of water to be sold to Inglewood
	by the Company annually during the term of the loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company will obtain 4,450 acre-feet of the 5,950 acre-feet
	of water it needs to deliver to Inglewood annually from the
	lease it entered into with Inglewood. The Company secured the
	balance of the water from its owned inventory of West Basin
	groundwater pumping rights and entered into two water rights
	leases. The first is a five-year water rights lease for 1,008
	acre-feet per year at a price of $150 per acre-foot in the first
	year ($151,200). This price will escalate over the remaining
	four-year period at $7.50 per acre-foot per year. The second is
	a fifteen-year water rights lease for 250 acre-feet per year for
	a price of $135 per acre-foot in the first year ($33,750). The
	costs for subsequent years will be determined by multiplying the
	cost for the first year by the ratio of the index price for each
	subsequent year divided by the index price for the first year.
	The index price is based on prices established annually by MWD.
	The remaining 242 acre-feet per year of water to be supplied to
	Inglewood is owned by the Company.                                                                                                                                                                                                                                                                                                        
|
| | (c.) In December 1998, the Company completed a pilot water sale
	in cooperation with MWD. For the first time in its 70-year
	history, MWD exchanged water with a private company for delivery
	within MWDs service territory. In this transaction, the
	Company sold 1,000 acre-feet of water to the SMWD. The
	transaction involved water previously purchased by the Company
	in Central California. The water was exchanged into the State
	Water Project, where it was then conveyed to MWD by DWR. MWD
	stored, treated and delivered the water to the Municipal Water
	District of Orange County, and ultimately to SMWD. The
	transaction was not financially material or profitable for the
	Company. However, pursuant to the precedent set by the pilot
	transfer, the Company arranged a similar transaction with SMWD
	and, on July 16, 1999, applied to MWD for facilitation of
	the transfer under the same conditions and pursuant to the same
	statutory authority as the 1998 transfer. During the most recent
	fiscal year, the Company completed negotiations with MWD and
	completed the transfer of water to SMWD. However, because of
	conveyance costs, energy costs, and system access limitations
	imposed by MWD, only a portion of the water delivered to MWD was
	actually made available to SMWD. As a result, the overall
	transaction was not profitable for the Company.
|
| | (d.) The Company purchased real estate and water rights and
	aggregated the right to extract 2,996 acre-feet of water per
	year from the Mojave Basin in San Bernardino County, California.
	Following the sale during the most recent fiscal year of 1,000
	acre-feet of its water rights in the Mojave Basin, the Company
	retains the rights to extract 1,996 acre-feet of water per year
	as part of its plan to expand its participation in the ownership
	and marketing of water in Southern California. The Company may
	use the water it is entitled to extract under the foregoing
	pumping allocation to supplement its water transfer activities
	in Southern California. In the fiscal year ended March 31,
	2000, the Company was restricted to selling only 80% of its
	then-current rights, or 2,397 acre feet, and leased such rights
	for a one-year period, earning $106,755 during the fiscal year.
	The Company leased its carry-over rights for the 1999-2000 water
	year and received additional revenue of $81,830 in the fiscal
	year ended March 31, 2001. Because of the sale of a portion
	of its water rights in the Mojave Basin, future water leasing
	activity will be more modest, although the value of future water
	use in the Basin is expected to increase as demand for water
	increases.                                                                          
|
| | (e.) In prior fiscal years, the Company had invested $1,274,678
	in the development of a water project in Inyo County,
	California, which included the purchase of 240 acres of land for
	a cost of $1,005,000. Because of uncertainty in the process for
	gaining environmental and other regulatory approvals for the
	project, the Company recorded an allowance against the core Inyo
	County water project costs of $1,274,678 incurred as of
	March 31, 2000 (see Item 7. Managements
	Discussion and Analysis of Financial Condition and Results of
	Operations.). After attempting to sell the project, the
	Company decided to abandon further development activity which
	resulted in an impairment of the remaining assets of this
	project of $762,770, and reached an agreement to return the land
	to its former owner in consideration of cancellation of the
	outstanding balance of the purchase money note secured by such
	property. Cancellation of the note resulted in an extraordinary
	gain on the early extinguishment of debt of $758,000.                                                                                                                                                                                                                                                                                                                                  
|
| | (f.) In February 1999, the Company entered into a water transfer
	agreement with Natomas Central Mutual Water Company
	(Natomas) pursuant to which Natomas agreed, subject
	to certain conditions which were never fully satisfied, to
	transfer to the Company up to 30,000 acre-feet of non-Central
	Valley Project water from the Sacramento River. In February
	1999, the Company paid a nonrefundable deposit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | of $275,000 to Natomas as an advance against its obligation to
	pay Natomas, upon delivery of the water to a third party
	purchaser, $20 per acre-foot for any of the water transferred
	for use within or north of the Delta and $50 per acre-foot for
	any of the water transferred for use south of the Delta. In
	addition, the Company also agreed pay Natomas 50% of the net
	proceeds, as defined, from the sale of water to a third party
	purchaser. In July 1999, the Company entered into a contract for
	the sale of a portion of this water to a customer within the
	service area of the MWD. The Company thereupon made a request to
	MWD to convey the water to the customer. In April 1999, Natomas
	and the Company jointly filed a petition with the State Water
	Resources Control Board (SWRCB) seeking authority to
	complete this transfer. On December 28, 1999, the SWRCB
	entered its Order WR 99-012, which significantly limited the
	amount of water available for transfer based on Natomass
	conservation efforts. Subsequently, the Company completed a
	transfer of water originating with Natomass conservation
	efforts to SMWD. However, because of conveyance costs, energy
	costs, and system access limitations imposed by MWD, only a
	portion of the water delivered to MWD was actually made
	available to SMWD. As a result, the overall transaction was not
	profitable for the Company.
|
| | (g.) In May 1999, the Company also entered into a water transfer
	agreement with the Sutter Mutual Water Company that is similar
	to the arrangement with Natomas, and made a deposit of $100,000
	for water to be delivered under that contract. As a result of
	the regulatory and other difficulties that the Company
	encountered with the Natomas transfer and other water projects,
	the Company also provided an allowance for water project costs
	equal to 100% for its deposit for this contract. During the
	fiscal year ended March 31, 2001, however, the Company
	successfully completed a transfer of a portion of Sutters
	conserved water to the Contra Costa Water District, a Bay Area
	wholesale agency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (h.) In March, 2000, the Company also entered into a conserved
	water purchase and sale agreement with Reclamation District 108,
	a northern California agricultural water agency. Pursuant to
	that agreement and under terms of a petition approved by the
	SWRCB, the Company successfully transferred conserved water to
	Contra Costa Water District. Neither the Sutter nor the RD
	108 transfer involved a significant amount of water, and
	the financial results for the Company were not material.
	However, the Company believes that the precedents set in these
	transfers provides opportunities for future transfers that are
	more significant in size and revenue potential.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (i.) The Company also entered into a one-year option agreement
	with Contra Costa Water District for the future delivery of
	water. The option to purchase 8,000 acre feet of water expired
	unexercised on March 5, 2001, and the Company recorded the
	option price of $32,000 as income in the quarter ended
	March 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Yuba Property Water Rights

The Company owns certain riparian and appropriative rights,
together with certain groundwater rights, associated with
approximately 9,055 acres of real property that constitutes the
Yuba Property. The Yuba County Superior Court, in a 1929
judgment, recognized the Companys
predecessor-in-interests riparian rights to the Yuba River
and pre-1914 appropriative rights. (Appropriations that began
before December 19, 1914 do not require a permit for
transfer or change in place or purpose of use from the State
Water Resources Control Board). Additionally, the Company holds
overlying rights to the groundwater aquifer beneath the Yuba
property.

The Company is currently considering developing its Yuba
Property water for sale or lease. The Companys Yuba
Property water resources, if and when distributed, could be
distributed with the other water resources originating in the
Sacramento River Valley. The Sacramento River Valley water
resources serve most of Northern California and serve Southern
California through statewide water distribution facilities which
begin at the southern end of the Sacramento-San Joaquin Bay
Delta. Accordingly, because of the configuration of
Californias water distribution system, the Company
believes that sales could be made by the Company to water
utilities serving over half of the states population. The
Company has not, however, developed a plan for marketing and
selling its Yuba Property water, and the Company cannot
currently estimate when any water disposition plan will be
implemented. In addition, there are various regulatory

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Cherry Creek Water Rights Project

In July 1992, the Company initiated a project (the Cherry
Creek Project) to assemble, develop, and eventually sell
water or packaged water rights to municipalities and other water
users located in the Cherry Creek basin in the State of
Colorado. Cherry Creek is a tributary of the South Platte River
that flows into the City of Denver, Colorado, and the Cherry
Creek basin is the drainage area of Cherry Creek, encompassing
approximately 60 square miles. Much of the Cherry Creek
basin is part of the greater metropolitan area of Denver, an
area that historically has had water shortages. Although the
water supplies currently available in the Cherry Creek basin are
sufficient, in most cases, to meet the current demand for water
in the area, increased need for water as a result of projected
residential, commercial, and industrial development and growth
in the Cherry Creek basin is expected to exceed the currently
available supply of water in the region within the next several
years. The goal of the Cherry Creek Project is to develop the
Companys water rights to provide reliable additional water
resources in the Cherry Creek basin that can be sold or leased
to municipalities and other water users to meet expected future
demand for water.

The State of Colorado has enacted various laws and regulations
that identify and establish rights to tributary water which
grant the holders thereof the right to use specified amounts of
tributary water on a fixed priority basis. Because junior water
rights do not constitute a reliable source of water and because
of the scarcity of tributary resources in the area,
municipalities and water districts in the Cherry Creek basin
have relied on supplemental groundwater resources and other
non-tributary supplies. However, under Colorado law, by
combining various water rights under a court-approved plan of
augmentation, junior water rights can effectively be out
of priority without injury to the senior appropriators.
Because court approved plans of augmentation allow water to be
diverted from junior water sources without regard to the
priority system, such plans are currently the most common method
by which new reliable water supplies are developed for municipal
uses in Colorado. As a result, the Company believes that water
derived from the Cherry Creek Project constitutes a reliable
future supply to meet the growing demand within the area.

At the beginning of its Cherry Creek Project in 1992, the
Company acquired a total of approximately 4,559 acres of
undeveloped land (primarily for the water rights associated with
the land) and the right to drill and service water wells on land
that was not acquired by the Company. To date, the Company has
sold or exchanged a total of 4,279 acres of the Cherry Creek
Project properties. In the year ended March 31, 2000,
however, the Company repurchased 128 acres, which it had
previously sold because the Company determined that the
repurchased property is important to the full development of the
Cherry Creek Project. During the Companys most recent
fiscal year, the Parker Water and Sanitation District, a special
purpose water agency in Douglas County, informally indicated to
the Company of its desire to acquire this 128 acre parcel
for use in connection with a new water supply program. To date,
the Company has not received a formal offer to purchase nor
notice of condemnation related to this parcel.

The Company has retained substantially all of the water rights
associated with the land it has resold (including the right to
drill and service a number of wells on such resold land), and
the Companys plan is to retain most water rights
associated with any Cherry Creek real properties it may sell in
the future. The real estate parcels that have been sold are not
needed to further the principal purposes of the Cherry Creek
Project. The Company has the right to operate 14 wells
drawing tributary water in the Cherry Creek alluvium, of which
12 are existing wells. Eight of the 14 well rights are
located on property that is not owned by the Company. With
respect to these eight wells, the Company owns the right to
drill and operate wells and to enter the real property on which
such wells may be located or drilled in order to operate or
establish wells.

In addition to the foregoing sales of Cherry Creek land, the
Company in April 1995 transferred approximately 257 acres
of the Companys Cherry Creek Project real estate to the
State of Colorado in

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The Company currently has the right to sell or lease each of the
various water rights it owns. However, in order to package its
water rights so that it can sell long-term, reliable water
resources to municipalities and other larger water users located
in the Cherry Creek basin, the Company combined its various
water resources in a plan of augmentation approved by the
Colorado District Court, Water Division (the Colorado
Water Court) in February 1998. During the fourth quarter
of the year ended March 31, 1999, the Company drilled its
first non-tributary well to begin implementation of the
augmentation plan. This well provides the Company with
additional information on the water resources in the aquifer. In
addition, water from this well is available for future water
sales.

With the plan of augmentation approved and implementation begun,
the Company is currently seeking to market its water in the
Cherry Creek basin. The Company is considering a number of
alternatives, from sale of water to a single buyer or user, to
the short-term and/or long-term sale of water to municipalities
or other water users. The sale of its water will, however,
require the Company or the purchaser to develop and build the
infrastructure necessary to utilize the water currently owned by
the Company in the Cherry Creek basin. This could result in
significant capital expenditure requirements. To date, the
Company has not entered into any agreements for the sale of its
Cherry Creek water assets, with the exception of one sale in
fiscal 1998.

In the fiscal year ended March 31, 2001, the Company
initiated or continued discussions with several local water
agencies aimed at determining whether and on what basis the
Cherry Creek Project could be integrated into long-term resource
planning efforts underway in the area. In the course of such
discussions, the Company identified several alternative plans
for the Cherry Creek Project development to make the
Companys water resources practically and economically
available for use by several such agencies. Although the Company
has yet to reach terms with any such end user for purchase of
water from the Cherry Creek Project, the Companys
involvement in the resource planning process as an observer has
improved the Companys understanding of local water needs
and issues. As a result, the Company is refining its marketing
approach and seeking formal inclusion of the Cherry Creek
Project among alternatives currently being considered for future
integrated resource planning to meet growth in demand for water
in the region.

Other Water Assets

The Company owned a right to receive 3.7398% of the gross
payments made by the Cucamonga County Water District (San
Bernardino County, California) in connection with certain water
sold or made available to the water district by the Fontana
Union Water Company, a mutual water company, under a 100-year
lease (the Cucamonga Water Fee Agreement) which
expired, by its terms, in 2089. The Company received
approximately $126,000 during the fiscal year ended
March 31, 2001 under the Cucamonga Water Fee Agreement.
During the fiscal year ended March 31, 2001, the remaining
lease to the Cucamonga County Water District was cancelled in
favor of an outright sale of the underlying shares of the
Fontana Union Water Company. As a result, the Company received a
payment of approximately $2,700,000 (net of certain transaction
and equity sharing costs) for its interest in the foregone
future lease payments. The Company booked a gain on the sale of
$879,000 in the quarter and year ended March 31, 2001.

The Company also owns shares of the Bear Valley Mutual Water
Company. A mutual water company is an entity that owns water and
water rights, which water is made available to the shareholders
of the mutual water company. Accordingly, the Company is
entitled to receive its proportionate share of water made
available by the Bear Valley Mutual Water Company in relation to
its shares. Originally, the Company acquired the Bear Valley
Mutual Water Company shares, as well as shares in other mutual
water companies, in order to acquire and re-sell water it would
be entitled to receive from each of the companies. However, the
Company was unable to arrange for the practical delivery of
water based on its shares. Therefore, the Company re-evaluated
its overall water strategy and may sell or otherwise deploy its
remaining mutual water company interests.

9



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##### Table of Contents



Real Estate Held for Sale

In March 1993, the Company commenced disposing of its Colorado
real estate assets that were not needed for its water rights
development program. As of March 31, 2001, the Company
still owned 408 acres of real estate located in the Cherry
Creek basin in Colorado. Through March 31, 2001, the
Company has sold or exchanged, net of certain properties which
were repurchased, a total of 4,151 acres of land in the Cherry
Creek basin that were not needed for the Cherry Creek Project.
In connection with the Cherry Creek land transfers, the Company
retained substantially all of the water rights related to the
land that was sold by the Company. The Company is currently
considering alternatives for generating value from the remainder
of its Cherry Creek real estate holdings.

During the fiscal year ended March 31, 2001, the Company
received notice from the Parker Water and Sanitation District
that the District intends to acquire, either through negotiated
purchase or through eminent domain, a portion of one parcel that
is part of the Cherry Creek Project for use in the
Districts proposed water supply project. In response, the
Company has offered a variety of arrangements that would meet
the needs of the District for use of the parcel on a basis that
is compatible with development of the Companys Cherry
Creek Project. No mutually satisfactory arrangement for
cooperative use of the parcel has been identified. There can be
no assurance that satisfactory arrangements for joint use and
occupancy can be negotiated, and it is currently impossible to
estimate the damage to the overall viability of the Cherry Creek
Project in the event of acquisition of the parcel by eminent
domain. In light of the risk to the Cherry Creek Project
associated with loss of use of the parcel, however, the Company
intends to vigorously contest the Districts acquisition
insofar as such acquisition would interfere with or limit the
Companys ability to use the parcel for its intended
purpose as an integral part of the Cherry Creek Project.
However, local counsel has advised the Company that Colorado law
provides broad eminent domain authority to public water agencies.

In Glenn County, California, the Company owns 112 acres of farm
land which it leases on an annual basis to an unrelated
agricultural operator. The Company is currently considering
alternatives for generating increased value from its Glenn
County real estate holdings, although the Company is not
currently considering the export of water associated with this
property for sale outside of Glenn County.

During the year ended March 31, 1999, the Company acquired
various land and farms located in San Bernardino County,
California, that collectively comprise 367 acres. The
Company is currently marketing water rights acquired with the
land and the Company is in the process of subdividing or
otherwise preparing to sell these properties.

During the year ended March 31, 2000, the Company purchased
240 acres of land in Inyo County, California, as a part of
the water project the Company had been attempting to complete in
that area. However, because of the financial commitment required
to complete the project as proposed and the difficulty of
gaining political and environmental approval for the project,
the Company decided to abandon the project in Fiscal 2001.
Accordingly, effective in February 2001, the Company entered
into an agreement with the former owner of the parcel to
extinguish the Companys interest in such real estate in
favor of cancellation of the remaining balance of the purchase
money note secured by such land.

No assurance can be given that the Company will be able to sell
any additional real estate parcels or that any such sales will
be on terms favorable to the Company.

Competition, Markets and Customers

The Company will compete in Southern California with MWD and
other governmental water wholesalers in trying to market any
water that the Company acquires pursuant to its California Water
Transfer Program.

In the event that the Company elects to market its Yuba Property
water interest, the Company may compete directly with the Yuba
County Water Agency in the sale of water from Yuba County.
Western Aggregates, an unaffiliated owner of certain water
rights in the Yuba Property, has informed the Company that it
may attempt to market its Yuba Property water rights and,
therefore, may also compete with the Company. In order to
maximize the value of its water rights associated with the Yuba
Property, the Company is exploring various alternatives for
cooperating with both the Yuba County Water Agency and Western

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The Companys goal in the Cherry Creek basin of Colorado is
to sell or lease water to public water agencies and other users
in the Cherry Creek basin. On a limited basis, public agencies
and private holders of water rights currently also sell water
and water rights in the Cherry Creek basin and, therefore, also
compete with the Company.

Environmental Regulation

The Companys operations are or may become subject to
federal, state and local laws and rules regulating the discharge
of materials into the environment, air quality standards,
pollution of stream and freshwater sources, odor, noise, dust
and other environmental protection controls. The Company
believes that it currently is in substantial compliance with all
material environmental laws governing its operations.
Furthermore, the Company does not believe that federal or state
environmental laws will hinder or adversely affect its proposed
operations. Compliance with existing environmental laws may have
the effect of delaying the completion of projects in those cases
where environmental impact statements or other similar documents
have to be prepared and filed. Furthermore, future legislation
designed to protect the environment, as well as future
interpretations of existing laws, could require further
expenditures by the Company, or have adverse effects on its
operations, the extent and nature of which cannot now be
predicted. Water leased or sold by the Company may be subject to
regulation as to quality by the United States Environmental
Protection Agency (the EPA) acting pursuant to the
Federal Safe Drinking Water Act (the US Act). In
California, the responsibility for enforcing the US Act is
delegated to the California Department of Health Services (the
Health Department) and to the SWRCB acting pursuant
to the California Safe Drinking Water Act (the Cal
Act). The US Act provides for the establishment of uniform
minimum national water quality standards, as well as
governmental authority to specify the type of treatment
processes to be used for public drinking water. Moreover, the
EPA has an ongoing directive to issue regulations under the US
Act and to require disinfection of drinking water, specification
of maximum contaminant levels (MCLS) and filtration
of surface water supplies. The Cal Act and the mandate of the
Health Department are similar to the US Act and the mandate of
the EPA, and in many instances MCLS and other requirements of
the Health Department are more restrictive than those
promulgated by the EPA.

Both the EPA and the Health Department have promulgated
regulations and other pronouncements, which require various
testing and sampling of water and inspections by distributors
and retailers and which set MCLS for numerous contaminants.
Since the Company does not intend to sell water directly to
consumers, it believes that these standards only affect the
water agencies that may buy or lease the Companys water.
While drinking water regulations do not directly affect the
Company, the regulations regarding the quality of water
distributed affects the Companys intended customers and
may, therefore, depending on the quality of the Companys
water, impact the price and terms upon which the Company may in
the future sell its water or water rights.

Under various federal, state and local laws, regulations and
ordinances (collectively, Environmental Laws), an
owner or operator of real estate interests may be liable for the
costs of cleaning up, as well as certain damages resulting from,
past or present spills, disposals or other releases of hazardous
or toxic substances or wastes on, in or from a property. Certain
Environmental Laws including the federal Comprehensive
Environmental Response Compensation and Liability Act and
Resource Conservation and Recovery Act, impose such liability
without regard to whether the owner knew of, or was responsible
for, the presence of hazardous or toxic substances or wastes at
or from the property. The presence of such substances or wastes,
or the failure to properly remediate any resulting
contamination, also may adversely affect the owners or
operators ability to sell, lease, or operate its property
or to borrow using its property as collateral. Although the
Company is not aware of any such environmental contamination on
any of its real estate holdings or on any locations adjacent to
its holdings, there can be no assurance that such environmental
contamination does not exist.

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##### Table of Contents



Employees

As of the date of this report, the Company has eleven employees,
two of which are temporary employees.




Item 2. Properties

The principal non-water properties currently owned by the
Company are the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Undeveloped land in the Cherry Creek basin, Colorado, consisting
        of a total of approximately 408 acres and associated water
        rights, the rights to operate six tributary wells on property
        owned by the Company, and water rights reserved or acquired in
        connection with the 4,151  acres of land in the Cherry
        Creek basin that the Company has sold or exchanged. See
        Item 1. Business  Description of
        Business  Cherry Creek Water Rights Project.
        The Companys Cherry Creek land is zoned for agricultural
        and residential uses.
|
| |  | Various rice farms and ranches, located in Yuba County,
        California, that collectively comprise 1,424 acres, and a
        116-acre parcel in Glenn County, California. The rice farms are
        graded for cultivation and watered by wells on the properties.
        The Company has leased the rice farms and ranches to
        unaffiliated operators.                                                                                                                                                                                                                                            
|
| |  | The Company owns 30 acres of real estate located along the
        Yuba River in Yuba County, California, and approximately ten
        miles northeast of Marysville, California. The 30 acres are
        zoned industrial-extractive and may be used for commercial but
        not residential purposes.                                                                                                                                                                                                                                                                                                     
|
| |  | Certain mineral interests and other property rights, including
        hydrocarbon, oil, gas and entry rights, related to
        440 acres of real estate in Chico, California, and to
        2,578 acres near Sacramento, California. These property
        rights affect the ability of the owners of the surface rights to
        the land to develop, finance or transfer the land.                                                                                                                                                                                                                      
|
| |  | Various cattle and crop farms with four associated residences,
        located in San Bernardino County, that collectively comprise 367
        acres.                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Some of the Companys foregoing real estate properties are
encumbered by mortgages. For a description of the Companys
mortgage indebtedness, see Note 11: Long-Term
Debt to the Companys consolidated financial
statements included as part of this Annual Report on
Form 10-K.

The Company leases its principal executive office in Point
Richmond, California, containing 2,400 net square feet,
pursuant to a lease that expires in February 2002. The
Companys current monthly rental obligation for the
facility is $3,600.




Item 3. Legal Proceedings

In June 1997 the Company entered into a water sale agreement
with Santa Margarita Water District (SMWD) pursuant
to which SMWD agreed, subject to certain conditions still to be
satisfied, to purchase from a subsidiary of the Company
10,000 acre-feet of water annually during each of the
ensuing ten years.In September 1997 the Company entered
into a water purchase agreement with San Bernardino Valley
Municipal Water District (SBVMWD) pursuant to which
SBVMWD agreed, subject to certain conditions still to be
satisfied, to sell to the Company 100,000 acre-feet of
surplus California State Water Project water during the same ten
year periods.SMWD is located and operates within the
service area of the Metropolitan Water District of Southern
California (MWD).

On September 30, 1997, MWD challenged the validity of the
Companys water sales and purchase agreements with SBVMWD
and SMWD by filing a lawsuit against SBVMWD, the Company and
SMWD in the Superior Court of the State of California for the
County of Los Angeles.That action was dismissed by MWD,
without prejudice, on December 18, 1997, but a
substantially identical complaint had previously been filed by
MWD on December 10, 1997, against SBVMWD and the Company
(but not SMWD) in the Superior Court of the State of California
for the County of Sacramento.On December 22, 1997,
the DWR filed its complaint against SBVMWD and the Company,
making substantially similar claims and allegations.

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##### Table of Contents



The MWD complaint alleges that the Company acted as an agent or
co-conspirator with SBVMWD in attempting to facilitate the sale
of State Water Project water by SBVMWD in MWDs service
area.The DWR complaint alleges only that the Company
acted as SBVMWDs agent for that purpose.Both
complaints seek declaratory relief stating that the water
purchase agreement between SBVMWD and the Company is invalid,
and request that injunctive relief be granted blocking the sale
and use of State Water Project water within MWDs service
area without the written consent of MWD and DWR.Both
complaints also challenge the validity of the water purchase
agreement on the ground that its execution and implementation
require compliance with the California Environmental Quality Act
(CEQA), including the preparation of an
environmental impact report.

On January 12, 1998, MWDs and DWRs actions were
consolidated for all purposes, including trial, before the
Sacramento Superior Court.MWD, DWR and the Company have
stipulated to an order of court made July 21, 1998,
consolidating another action with the two actions brought by MWD
and DWR. The third action involves a complaint filed by SBVMWD
against DWR and MWD on February 11, 1980, in the Sacramento
Superior Court. By that complaint SBVMWD sought a declaratory
judgment allowing it to sell, without MWDs consent, State
Water Project water to Orange County Water District, a district
located within MWDs service area. On May 17, 1982,
the parties to that 1980 action entered into a stipulation
indefinitely extending the time to respond to the amended
complaint, and waiving any right to dismiss the action for
failure to prosecute it in a timely manner. Nothing has occurred
in that action since the filing of that stipulation. This third
action involves the same basic legal issues as the other two
actions and its consolidation with those actions will not
prejudice the Companys position in either of them.

By stipulation between the Company and DWR and MWD, made and
approved by the Court on April 15, 1998, DWR and MWD
dismissed, without prejudice, as against the Company, their
petitions for writ of mandate and injunctive relief based on
alleged non-compliance with CEQA, and in consideration thereof
the Company agreed to give DWR and MWD thirty (30) days
written notice of its intent to take delivery of water pursuant
to the water purchase agreement with SBVMWD or to take any steps
in compliance with its obligation under that agreement.

By stipulation approved by order of court on July 12, 1998,
MWD, DWR and SBVMWD agreed that their prosecution of the two
CEQA causes of actions in the MWD and DWR complaints were stayed
subject to conditions similar to the dismissal of their CEQA
causes of action as against the Company.

The Company has by its answer to the two complaints denied all
material allegations, and has asserted several defenses based on
its position that both complaints fail to allege facts
sufficient to constitute a cause of action against the
defendants.

The Company has evaluated the complaints of MWD and DWR and has
engaged in considerable research on pertinent issues of fact and
law. Based on said evaluation and research, and while the
outcome of these proceedings cannot be predicted, the Company
believes (1) that the validity of the Companys water
purchase and sale agreements should be upheld, and (2) that
in all events the actions will not have a material adverse
impact on the Companys financial condition, liquidity or
the results of its operations. Until the lawsuits are resolved
by trial or by settlement, the Company does not expect to
purchase or receive any water under its water purchase agreement
with SBVMWD.

No trial date has been set for this matter, and the Company does
not know when this matter will be resolved. In the meantime, the
Companys ability to effect similar water transfer
transactions will be subject to challenge by the MWD and others.
Although the Company is still able to effect certain water
transfers that are not affected by the issues raised by the
pending lawsuit, the lawsuit will continue to limit the
Companys ability to engage in certain types of water
transfers in Southern California.

The Company is the general partner of Western Agua, L.P.
(Western Agua), a partnership that agreed to provide
consulting services to the Nevada Land and Resources Company,
LLC, an unaffiliated limited liability company (the Nevada
LLC), pursuant to a certain consulting agreement. The
Nevada LLC purported to terminate the Consulting Agreement on
March 13, 1998 based on Western Aguas purported
willful breach of the consulting agreement. On November 10,
1998, Western Agua filed an action in the San

13



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##### Table of Contents





Effective September 1, 1999 (the Effective
Date), the Company, Western Agua and Nevada LLC entered
into an agreement wherein they agreed that: (i) the action
would be dismissed without prejudice; (2) from the
Effective Date forward, the Company and Western Agua were
relieved of restrictions on certain water-related business
activities; (3) all claims, counterclaims and defenses by
Western Agua and the Company, on the one hand, against Nevada
LLC, on the other hand, and all claims, counterclaims and
defenses by Nevada LLC, on the one hand, against Western Agua
and/or the Company, on the other hand, would be preserved
without regard to the passage of time, from the Effective Date
through and including July 31, 2002; and (4) Nevada
LLC would deliver notice to Western Agua on or before
June 30, 2002 of the amount of the consulting fee, if any,
which would be owed by Nevada LLC to Western Agua if the
consulting agreement were in effect as of April 23, 2002.




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

None.

14



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##### Table of Contents






PART II




Item 5. Market For Registrants Common
Equity and Related Stockholder Matters

Until August 2000, the Companys common stock was traded on
the Nasdaq National Market under the symbol WWTR.
During the fiscal year ended March 31, 2001 the Company
received notice from The Nasdaq Stock Market that the
Companys common stock was out of compliance with two of
the maintenance standards necessary for the common stock to be
traded on the Nasdaq National Market. Accordingly, the
Companys common stock was de-listed from trading on the
Nasdaq National Market, effective August 30, 2000. The
Companys common stock is currently traded electronically
on the OTC Bulletin Board under the symbol WWTR-OB. The
following table sets forth for the prior two fiscal years the
high and low closing sales prices of the common stock.

|                          |                                  |     |   |      |  |  |   |      | 
|------------------------- | -------------------------------- | --- | - | ---- |  |  | - | ---- | 
|                          |                                  | Low |   | High
|                          |                                  |     |   |     
|Year-Ended March 31, 2000 |                                  |     |   |      |  |  |   |     
|                         
|                         
|                         
|                         
|                          | First Quarter (April-June)       |     | $ | 3.00 |  |  | $ | 4.38 | 
|                         
|                         
|                         
|                         
|                          | Second Quarter (July-September)  |     |   | 1.50 |  |  |   | 3.31 | 
|                         
|                         
|                         
|                         
|                          | Third Quarter (October-December) |     |   | .87  |  |  |   | 1.50 | 
|                         
|                         
|                         
|                         
|                          | Fourth Quarter (January-March)   |     |   | 1.03 |  |  |   | 1.50 | 
|                         
|                         
|                         
|                         
|Year-Ended March 31, 2001 |                                  |     |   |      |  |  |   |     
|                         
|                         
|                         
|                         
|                          | First Quarter (April-June)       |     | $ | .19  |  |  | $ | 1.19 | 
|                         
|                         
|                         
|                         
|                          | Second Quarter (July-September)  |     |   | .03  |  |  |   | .53  | 
|                         
|                         
|                         
|                         
|                          | Third Quarter (October-December) |     |   | .06  |  |  |   | .28  | 
|                         
|                         
|                         
|                         
|                          | Fourth Quarter (January-March)   |     |   | .16  |  |  |   | .31  | 

On March 31, 2001, the Company had 1,574 record holders of
its common stock. The Company believes there are numerous
additional beneficial owners of the common stock whose shares
are held in street name.

To date, the Company has not declared or paid any cash dividends
with respect to its common stock, and the current policy of the
Board of Directors is to retain earnings, if any, to provide for
the expenses of the Company. Consequently, no cash dividends are
expected to be paid on the common stock in the foreseeable
future. Further, there can be no assurance that the proposed
operations of the Company will generate the revenues and cash
flow needed to declare a cash dividend or that the Company will
have legally available funds to pay dividends. Any dividends on
the Common Stock would be subject to prior payment of dividends
on the Companys currently outstanding Series C
Preferred Stock and Series F Preferred Stock.

As of March 31, 2001, there were outstanding 2,000 shares
of the Companys Series F Convertible Redeemable
Preferred Stock. The Series F Preferred Stock provides for
annual dividends, when and if declared, in the amount of $60.00
per year (6%), payable semi-annually in arrears. Such dividends
may be payable in cash or in additional shares of Series F
Preferred Stock, at the sole discretion of the Companys
Board of Directors. To date, no dividends have become due under
the Series F Preferred Stock.

As of March 31, 2001, there were outstanding
7,708 shares of the Companys Series C
Convertible Redeemable Preferred Stock. The Series C
Preferred Stock provides for annual dividends, when and if
declared, in the amount of $72.50 per year (7.25%), payable
semi-annually. Subsequent to the end of the most recent fiscal
year, the Board of Directors declared the dividend due on the
Series C Preferred Stock, and the Company paid such
dividend in cash on June 21, 2001.

15



---



##### Table of Contents






Item 6. Selected Financial Data

The table below summarizes certain financial data for the
periods shown and is qualified in its entirety by, and should be
read in conjunction with, the Companys Consolidated
Financial Statements and the Notes thereto, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, included elsewhere in
this Annual Report.

|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |            |  
|------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------- | -------------------- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                                                                 |                                                                                                                            |                     
|                                                                                                 |                                                                                                                            | Year Ended March 31,
|                                                                                                 |                                                                                                                            |                     
|                                                                                                 |                                                                                                                            | 2001                 |            | 2000       |   | 1999 |            | 1998       |   | 1997
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |     
|Statement of Operations Data:                                                                    |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Revenue                                                                                                                    |                      | $          | 2,126,695  |   |      | $          | 2,796,037  |   |      | $          | 1,822,990  |   |   | $          | 3,922,377  |   |   | $          | 1,770,771  |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Cost of revenue                                                                                                            |                      |            | 1,517,610  |   |      |            | 1,767,714  |   |      |            | 1,184,998  |   |   |            | 2,296,409  |   |   |            | 1,034,750  |  
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|                                                                                                 | Gross profit                                                                                                               |                      |            | 609,085    |   |      |            | 1,028,323  |   |      |            | 637,992    |   |   |            | 1,625,968  |   |   |            | 736,021    |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | General and administrative expenses                                                                                        |                      |            | 3,933,995  |   |      |            | 7,448,615  |   |      |            | 5,805,192  |   |   |            | 5,645,559  |   |   |            | 2,946,252  |  
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|                                                                                                 | Operating income (loss)                                                                                                    |                      |            | (3,324,910 | ) |      |            | (6,420,292 | ) |      |            | (5,167,200 | ) |   |            | (4,019,591 | ) |   |            | (2,210,231 | )
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Interest income (expense), net                                                                                             |                      |            | (660,745   | ) |      |            | (624,966   | ) |      |            | (586,464   | ) |   |            | (209,694   | ) |   |            | (1,027,540 | )
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Other income (expense)                                                                                                     |                      |            | 1,757,324  |   |      |            | 373,352    |   |      |            | 222,300    |   |   |            | 2,330,255  |   |   |            | (795,027   | )
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|                                                                                                 | Income (loss) from continuing operations
	before income taxes                                                              |                      |            | (2,228,331 | ) |      |            | (6,671,906 | ) |      |            | (5,531,364 | ) |   |            | (1,899,030 | ) |   |            | (4,032,798 | )
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Income taxes                                                                                                               |                      |            | (3,200     | ) |      |            | (3,200     | ) |      |            | (3,200     | ) |   |            | (2,400     | ) |   |            | (1,102,400 | )
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|                                                                                                 | Income (loss) from continuing operations                                                                                   |                      |            | (2,231,531 | ) |      |            | (6,675,106 | ) |      |            | (5,534,564 | ) |   |            | (1,901,430 | ) |   |            | (5,135,198 | )
|                                                                                                 | Discontinued operations                                                                                                   |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |            |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Loss on disposal of silica plant                                                                                           |                      |            |           |   |      |            |           |   |      |            |           |   |   |            |           |   |   |            | (257,276   | )
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|Income (loss) before extraordinary item and
	cumulative effect of change in accounting principle |                                                                                                                            |                      | (2,231,531 | )          |   |      | (6,675,106 | )          |   |      | (5,534,564 | )          |   |   | (1,901,430 | )          |   |   | (5,392,474 | )         
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Extraordinary income on extinguishment of debt,
	net of income taxes                             |                                                                                                                            |                      | 1,154,094  |            |   |      | 3,489,803  |            |   |      | 99,656     |            |   |   |           |            |   |   |           |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Cumulative effect of change in accounting
	principle                                             |                                                                                                                            |                      | (237,065   | )          |   |      |           |            |   |      |           |            |   |   |           |            |   |   |           |           
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|Net income (loss)                                                                                |                                                                                                                            |                      | (1,314,502 | )          |   |      | (3,185,303 | )          |   |      | (5,434,908 | )          |   |   | (1,901,430 | )          |   |   | (5,392,474 | )         
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Accretion of preferred stock to redemption value                                                 |                                                                                                                            |                      | (38,255    | )          |   |      | (35,819    | )          |   |      | (33,099    | )          |   |   | (30,584    | )          |   |   |           |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Excess of carrying value over amount paid to
	retire convertible redeemable preferred stock      |                                                                                                                            |                      | 7,678,597  |            |   |      |           |            |   |      |           |            |   |   |           |            |   |   |           |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Preferred stock dividends                                                                        |                                                                                                                            |                      | (930,977   | )          |   |      | (1,486,954 | )          |   |      | (990,401   | )          |   |   | (526,000   | )          |   |   |           |           
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|Net income (loss) available to common stockholders                                               |                                                                                                                            | $                    | 5,394,863  |            |   | $    | (4,708,076 | )          |   | $    | (6,458,408 | )          |   | $ | (2,458,014 | )          |   | $ | (5,392,474 | )         
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|Basic net income (loss) per common share
	available to common stockholders:                      |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Income (loss) before discontinued
	operations, extraordinary item and cumulative effect of change
	in accounting principle |                      | $          | .56        |   |      | $          | (1.03      | ) |      | $          | (.80       | ) |   | $          | (.30       | ) |   | $          | (.64       | )
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Discontinued operations                                                                                                    |                      |            |           |   |      |            |           |   |      |            |           |   |   |            |           |   |   |            | (.03       | )
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Extraordinary income on early extinguishment of
	debt, net                                                                 |                      |            | .15        |   |      |            | .44        |   |      |            | .01        |   |   |            |           |   |   |            |           |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Cumulative effect of change in accounting
	principle                                                                       |                      |            | (.03       | ) |      |            |           |   |      |            |           |   |   |            |           |   |   |            |           |  
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|Net income (loss) per common share available to
	common stockholders                             |                                                                                                                            | $                    | .68        |            |   | $    | (0.59      | )          |   | $    | (.79       | )          |   | $ | (.30       | )          |   | $ | (.67       | )         
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|Diluted net income (loss) per common share
	available to common stockholders:                    |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Income (loss) before discontinued
	operations, extraordinary item and cumulative effect of change
	in accounting principle |                      | $          | .56        |   |      | $          | (1.03      | ) |      | $          | (.80       | ) |   | $          | (.30       | ) |   | $          | (.64       | )
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Discontinued operations                                                                                                    |                      |            |           |   |      |            |           |   |      |            |           |   |   |            |           |   |   |            | (.03       | )
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Extraordinary income on early extinguishment of
	debt, net                                                                 |                      |            | .13        |   |      |            | .44        |   |      |            | .01        |   |   |            |           |   |   |            |           |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Cumulative effect of change in accounting
	principle                                                                       |                      |            | (.03       | ) |      |            |           |   |      |            |           |   |   |            |           |   |   |            |           |  
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           
|                                                                                                 | Net income (loss) per common share available
	to common
	stockholders                                                      |                      | $          | .66        |   |      | $          | (.59       | ) |      | $          | (.79       | ) |   | $          | (.30       | ) |   | $          | (.67       | )
|                                                                                                 |                                                                                                                            |                      |            |            |   |      |            |            |   |      |            |            |   |   |            |            |   |   |            |           

16



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##### Table of Contents



|                    |                               |                 |   |            |  |      |   |            |  |      |   |            |  |  |   |            |  |  |   |            | 
|------------------- | ----------------------------- | --------------- | - | ---------- |  | ---- | - | ---------- |  | ---- | - | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                    |                               |                
|                    |                               | As of March 31,
|                    |                               |                
|                    |                               | 2001            |   | 2000       |  | 1999 |   | 1998       |  | 1997
|                    |                               |                 |   |            |  |      |   |            |  |     
|Balance Sheet Data: |                               |                 |   |            |  |      |   |            |  |      |   |            |  |  |   |            |  |  |   |           
|                   
|                   
|                   
|                   
|                    | Current assets                |                 | $ | 7,701,501  |  |      | $ | 3,117,578  |  |      | $ | 15,536,283 |  |  | $ | 17,388,488 |  |  | $ | 4,833,903  | 
|                   
|                   
|                   
|                   
|                    | Total assets                  |                 |   | 29,646,307 |  |      |   | 37,700,950 |  |      |   | 47,630,860 |  |  |   | 41,891,968 |  |  |   | 39,475,358 | 
|                   
|                   
|                   
|                   
|                    | Working capital               |                 |   | 5,932,450  |  |      |   | 703,780    |  |      |   | 13,616,371 |  |  |   | 16,517,459 |  |  |   | 3,787,083  | 
|                   
|                   
|                   
|                   
|                    | Long-term debt and debentures |                 |   | 10,325,976 |  |      |   | 12,015,366 |  |      |   | 17,712,349 |  |  |   | 16,028,470 |  |  |   | 17,840,860 | 
|                   
|                   
|                   
|                   
|                    | Redeemable preferred stock    |                 |   | 7,842,030  |  |      |   | 19,816,686 |  |      |   | 19,780,867 |  |  |   | 9,049,033  |  |  |   |           | 
|                   
|                   
|                   
|                   
|                    | Preferred stock               |                 |   |           |  |      |   |           |  |      |   |           |  |  |   |           |  |  |   | 3,807,517  | 
|                   
|                   
|                   
|                   
|                    | Common stockholders equity   |                 |   | 8,885,130  |  |      |   | 3,451,767  |  |      |   | 8,174,399  |  |  |   | 15,860,103 |  |  |   | 16,680,161 | 

17



---



##### Table of Contents






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

General

Until the fiscal year ended March 31, 2000, the
Companys principal activity had been to acquire and
develop water assets in California and in the Cherry Creek basin
in Colorado. The Company did so because it believes that there
is a growing demand for water resources in both of these areas,
which demand is expected to exceed the water resources currently
available to these areas. During the fiscal years ended
March 31, 2001 and 2000, the Company executed a variety of
wholesale water supply contracts with a number of retail
municipal water agencies. However, it has encountered
significant regulatory obstacles to its attempts to develop and
transfer water for delivery to such customers. Accordingly, the
Company has reduced its overhead expenditures and deferred
certain development activities. The Company is concentrating its
current efforts on overcoming the regulatory obstacles to water
transfers and in arranging water transfers that do not face such
obstacles. Based on regulatory difficulties and administrative
delays in completing water transfers and generating revenue from
water sales, the Company has suspended additional water
acquisitions. The Company also faced significant financial
problems brought on by the expenditure of funds for overhead and
asset acquisitions in the face of constrained operating revenue.
Therefore, during the fiscal year ended March 31, 2001, the
Company explored various alternatives, including the sale of the
Company, the sale of some or all of its assets, the liquidation
of the Company, and various restructuring alternatives. The
Company has no formal plan to liquidate its assets.

During the course of the fiscal year ended March 31, 2001,
the Company evolved a two-pronged strategy of (1) selling
non-strategic assets to generate liquidity and working capital,
and (2) pursuing a voluntary restructuring of the
Companys debt and preferred stock capitalization with the
purpose of reducing the Companys interest and preferred
dividend burdens. With regard to the asset sale strategy, during
the year the Company (a) sold its fee interest in the
Cucamonga Water Fee Agreement, realizing a gain of $879,000;
(b) sold its Central Basin (California) water rights for a
gain of $428,000; and (c) sold 1000 acre feet of its Mojave
Basin (California) water rights for a gain of $465,000. With
regard to the restructuring strategy, during the year the
Company (a) repurchased $2,456,000 of its Series C
redeemable preferred stock at an 82% discount from face value;
(b) retired its entire issue of Series D redeemable
preferred stock for $3,854,000 in cash plus $2,000,000 in face
value of Series F redeemable preferred stock (fair value of
$364,000) and 175,000 shares of the Companys common
stock (fair value of $38,500); and (c) retired $909,000 of
its 9% Convertible Debentures at a 45% discount from their face
value.

On October 27, 1998, the Company issued $10,000,000 of its
Series D Convertible Redeemable Preferred Stock
(Series D Preferred Stock) to Interagua,
Servicios Integrales del Agua, S.A. (Interagua), an
affiliate of Sociedad General de Aguas de Barcelona, S. A.
(Agbar). The shares of Series D Preferred Stock
were issued pursuant to that certain Strategic Relationship
Agreement (SRA) the Company entered into with Agbar.
Each share of Series D Preferred Stock had a stated value
of $1,000, had a dividend rate of 7.5% per annum of its stated
value, and was convertible at any time at the option of the
holder into the number of shares of common stock determined by
dividing the amount of the liquidation preference on the
conversion date by the conversion price of such shares in effect
on the conversion date. The conversion price was $8.99 per share
and was subject to adjustment in certain events to prevent
dilution. Dividends were payable, when and if declared by the
Board of Directors, quarterly on March 15, June 15,
September 15 and December 15 of each year and the
Series D Preferred Stock was subject to partial redemption
at its stated value plus accrued dividends, at the option of the
holder, from available cash of the Company beginning in 2007
with the full amount redeemable in 2008. The Companys
Board of Directors did not declare a dividend on the
Series D Preferred Stock on December 15, 2000.

Under the SRA, the Company agreed to use the $10,000,000 of
proceeds from the sale of Series D Preferred Stock only to
fund development costs of specific water projects and related
capital costs, including Series D Preferred Stock
dividends, which were identified and agreed upon by Agbar. As of
December 31, 2000, a total of $5,958,857 of Series D
proceeds had been expended on such project development and
capital costs and dividends, leaving an unused restricted
balance of $4,041,143.

18



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##### Table of Contents



On March 16, 2001, the Company entered into an Investment
Restructure Agreement (the Agreement) with Agbar and
Interagua for the early redemption and retirement of the entire
$10,000,000 of issued and outstanding Series D Preferred
Stock. In consideration of that redemption and retirement, the
Company (1) declared and paid to Interagua the
December 15, 2000 scheduled dividend of $187,500;
(2) returned to Interagua the remaining restricted cash
balance (after giving effect to the reduction of such balance
resulting from the aforementioned dividend) of $3,853,643;
(3) issued 175,000 shares of the Companys Common
Stock to Interagua; and (4) issued to Interagua
2,000 shares of its newly authorized Series F
Convertible Redeemable Preferred Stock, which shares of
preferred stock have an aggregate stated value of $2,000,000
with a fair value of $364,000, based upon an independent
third-party valuation. In addition, under the Agreement, the SRA
was cancelled, and the parties thereto agreed to consider
cooperating in the potential joint development of future water
infrastructure and water utility projects. Also, with the
cancellation of the SRA, Interagua no longer has the right to
appoint Directors to the Board of the Company.

As described in the Certificate of Designations for the
Series F Convertible Redeemable Preferred Stock (the
Series F Preferred Stock), each share of
Series F Preferred Stock has a stated value of $1,000, has
a dividend rate of 6.0% per annum of its stated value, and is
convertible at any time at the option of the holder into the
number of shares of common stock determined by dividing the
amount of the stated value of the shares of Series F
Preferred Stock by the conversion price of such shares in effect
on the conversion date. The conversion price is $5.60 per share
and is subject to adjustment in certain events to prevent
dilution. Dividends shall be fully cumulative, and shall be paid
semi-annually in arrears, out of funds legally available for the
payment of dividends, on January 15 and July 15 of
each year. Dividends may be paid in additional shares of
Series F Preferred Stock, or in cash, at the Companys
option. The Series F Preferred Stock is subject to full
redemption at its stated value plus accrued dividends, at the
option of the holder, from cash of the Company legally available
for such purpose, beginning in 2010, or earlier, at the option
of the Company, subject to certain conditions being met.

The transactions effected by the Agreement are part of the
Companys previously announced restructuring plan. As a
result of this transaction, the overall liquidation preferences
of the Companys Preferred Stock over its Common Stock has
been reduced by $8,000,000, and the Companys restricted
cash balance has been reduced by a total of $4,041,000. In
addition, the Companys annual future dividend obligations
have been reduced by $630,000, and the dividend payable on the
Series F Preferred Stock can now be paid, at the
Companys option, either in cash or through the issuance of
additional shares of Series F Preferred Stock.

In order to reduce its ongoing operating expenses, the Company
consolidated its corporate headquarters into its Point Richmond,
California office and closed its San Diego office during fiscal
2001. The consolidation resulted in the net reduction of three
administrative personnel and the early termination of (or other
provision for) its office and equipment leases in San Diego.
Total severance costs related to the terminated employees in the
San Diego office amounting to $56,000 and lease termination and
other costs of $96,000 were charged to general and
administrative expenses.

19



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##### Table of Contents



Results of Operations

The following is a description of the Companys results of
operations for its three most recent fiscal years.

The Company reports its continuing operations in two segments,
water rights and real estate. As a result, upon the purchase of
assets that contain both real estate and water rights, the basis
of such assets is allocated to real estate and water rights
based on the relative fair market values of the components at
the time of acquisition, and development costs are allocated to
the appropriate component whenever possible. As properties or
water rights are sold, the allocated portion of the basis is
included in cost of revenue.

Water

|                |  |                       |           |      |  |      |           |  |  |   |           | 
|--------------- |  | --------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                |  |                      
|                |  | Years Ended March 31,
|                |  |                      
|                |  | 2001                  |           | 2000 |  | 1999
|                |  |                       |           |      |  |     
|Revenue         |  | $                     | 2,127,000 |      |  | $    | 2,796,000 |  |  | $ | 1,477,000 | 
|               
|               
|               
|               
|Cost of Revenue |  |                       | 1,518,000 |      |  |      | 1,768,000 |  |  |   | 1,001,000 | 
|                |  |                       |           |      |  |      |           |  |  |   |           | 
|Gross Profit    |  | $                     | 609,000   |      |  | $    | 1,028,000 |  |  | $ | 476,000   | 
|                |  |                       |           |      |  |      |           |  |  |   |           | 

Water revenue for the fiscal year ended March 31, 2001
(Fiscal 2001) decreased $669,000 (24%) from the
prior year as a result of decreased water sales. Such sales
decreased both because of regulatory and administrative
impediments, and because the Company reduced its sales force and
its sales efforts in order to reduce expenses, and to
concentrate on selling non-strategic assets and restructuring
its balance sheet. Water rights revenue for Fiscal 2001 includes
both water sales and income from water lease agreements with
various municipal and agricultural water districts in
California. Cost of revenue for Fiscal 2001 includes the cost of
water purchased for resale and amortization of other resource
acquisition costs.

Water revenue for the fiscal year ended March 31, 2000
(Fiscal 2000) increased $1,319,000 (89%) from the
prior year as a result of increased water sales. Water rights
revenue for Fiscal 2000 includes both water sales and income
from water lease agreements with various municipal and
agricultural water districts in California. Cost of revenue for
Fiscal 2000 includes the cost of water purchased for resale and
amortization of other resource acquisition costs.

Real Estate

|                |  |                       |   |      |  |      |   |  |  |   |         | 
|--------------- |  | --------------------- | - | ---- |  | ---- | - |  |  | - | ------- | 
|                |  |                      
|                |  | Years Ended March 31,
|                |  |                      
|                |  | 2001                  |   | 2000 |  | 1999
|                |  |                       |   |      |  |     
|Revenue         |  | $                     | 0 |      |  | $    | 0 |  |  | $ | 346,000 | 
|               
|               
|               
|               
|Cost of Revenue |  |                       | 0 |      |  |      | 0 |  |  |   | 184,000 | 
|                |  |                       |   |      |  |      |   |  |  |   |         | 
|Gross Profit    |  | $                     | 0 |      |  | $    | 0 |  |  | $ | 162,000 | 
|                |  |                       |   |      |  |      |   |  |  |   |         | 

In Fiscal 2001 and 2000, the Company did not sell any real
estate, and therefore had no revenue or cost of sales from the
sale of real estate.

General and Administrative Expenses

|                                    |  |                       |           |      |  |      |           |  |  |   |           | 
|----------------------------------- |  | --------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                    |  |                      
|                                    |  | Years Ended March 31,
|                                    |  |                      
|                                    |  | 2001                  |           | 2000 |  | 1999
|                                    |  |                       |           |      |  |     
|General and Administrative Expenses |  | $                     | 3,934,000 |      |  | $    | 7,449,000 |  |  | $ | 5,805,000 | 

General and administrative expenses for Fiscal 2001 decreased by
$3,515,000 (47%) from Fiscal 2000. The decrease was primarily
due to a decrease in consulting and engineering fees of
$779,000, a decrease in the allowance for water projects of
$1,019,000, a decrease in asset impairment charges of $403,000,
and a decrease of $783,000 in payroll and office expenses as the
Company downsized its staff, and consolidated its administrative
operations into its Point Richmond, California headquarters.

During the year ended March 31, 2001, based upon a review
of the value of such assets, the Company recorded a non-cash
impairment of land of $318,000 and an impairment of water rights
of $445,000, all associated with the Olancha Project. These
impairments were to reduce the recorded asset values of these

20



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##### Table of Contents





During the year ended March 31, 2000, the Company reduced
the carrying value of its water rights in the Mojave Basin from
$3,327,000 to its estimated fair value of $2,500,000. This
reduction of $827,000 has been recorded as an asset impairment
loss and included in general and administrative expenses and
reflects the Companys belief that the market value of such
rights has declined since they were purchased. This decline is
due, in part, to uncertainty surrounding the appeal of the
Mojave Basin adjudication to the California Supreme Court. The
Company also took additional asset impairment losses against the
carrying value of certain mutual water company shares ($204,000)
and against the carrying value of certain water storage
activities ($124,000), reducing the carrying value of the water
storage assets to zero.

General and administrative expenses for Fiscal 2000 increased by
$1,644,000 (28%) from Fiscal 1999. The increase was primarily
due to higher payroll costs, and the termination expense of one
officer ($254,000), higher costs for consulting and engineering
($543,000), due in part to the cost of retaining a financial
advisory firm to assist the Company, a decrease in the allowance
for water project costs ($275,000), and an impairment of asset
adjustments ($1,166,000) in Fiscal 2000, compared to zero in
Fiscal 1999.

Other Non-Segment Information

|                                                         |  |                       |            |      |  |      |            |   |  |   |            |  
|-------------------------------------------------------- |  | --------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                         |  |                      
|                                                         |  | Years Ended March 31,
|                                                         |  |                      
|                                                         |  | 2001                  |            | 2000 |  | 1999
|                                                         |  |                       |            |      |  |     
|Interest Income                                          |  | $                     | 478,000    |      |  | $    | 622,000    |   |  | $ | 879,000    |  
|                                                        
|                                                        
|                                                        
|                                                        
|Interest Expense                                         |  |                       | (1,139,000 | )    |  |      | (1,247,000 | ) |  |   | (1,465,000 | )
|                                                        
|                                                        
|                                                        
|                                                        
|Gain on Sale of Investment in Limited Liability
	Company |  |                       | 3,000      |      |  |      | 40,000     |   |  |   | 40,000     |  
|                                                        
|                                                        
|                                                        
|                                                        
|Gain on Sale of Water Rights                             |  |                       | 893,000    |      |  |      |           |   |  |   |           |  
|                                                        
|                                                        
|                                                        
|                                                        
|Other                                                    |  |                       | 866,000    |      |  |      | 333,000    |   |  |   | 182,000    |  
|                                                        
|                                                        
|                                                        
|                                                        
|Extraordinary income, net                                |  |                       | 1,154,000  |      |  |      | 3,490,000  |   |  |   | 100,000    |  
|                                                        
|                                                        
|                                                        
|                                                        
|Cumulative effect of change in accounting
	principle     |  |                       | (237,000   | )    |  |      |           |   |  |   |           |  

Interest income is composed of interest earned on the
Companys cash and cash equivalents and investments and
interest earned on the secured promissory notes the Company
received in connection with the real estate that it has sold.
The secured notes bear interest at rates between 8% and 9.5% per
annum. Interest income decreased for Fiscal 2001 from Fiscal
2000 due primarily to lower investment balances.

Interest income decreased for Fiscal 2000 from Fiscal 1999 due
primarily to lower investment balances.

Interest expense for Fiscal 2001 and Fiscal 2000 included
interest of $849,000 and $1,036,000, respectively, related to
the Debentures. Fiscal 2001 and Fiscal 2000 also included
$182,000 and $194,000 respectively of interest related to the
five-year amortizing term loan for the Inglewood project.
Interest of $0 and $84,000, and $83,000 was capitalized during
Fiscal 2001, 2000, and 1999, respectively, in connection with
the development of land held for sale and water rights.

During the fiscal year ended March 31, 2001, the Company
sold 1,219 acre feet of annual groundwater rights in the Central
Basin in Los Angeles, California to a municipality in the Los
Angeles area. The Company realized a gain on that sale in the
amount of $428,000. During the fiscal year ended March 31,
2001, the Company also sold 1,000 acre feet of its water rights
in the Mojave Basin of California to a water management company,
and realized a gain on that sale in the amount of $465,000.
There were no comparable sales in Fiscal 2000 and 1999.

The Company accounted for its investment in the Nevada LLC under
the equity method of accounting and accordingly, income or
losses were allocated according to the Companys ownership
interest in the Nevada LLC. The Company sold its interest in the
Nevada LLC in April 1997. As a result of the sale, the Company
realized a gain of $2,419,000, net of legal and other closing
costs totaling $60,000 and deferred $120,000 of the gain
relating to estimated future consulting services that were to be
provided in accordance with the

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The Company has owned a right to receive 3.7398% of the gross
payments made by the Cucamonga County Water District
(CCWD), located in San Bernardino County,
California, in connection with certain water sold or made
available to CCWD by the Fontana Union Water Company, a mutual
water company principally owned by Kaiser Ventures, Inc.
(KVI), under a 100-year lease. In March, 2001 KVI
completed the sale of its interest in the Fontana Union Water
Company to CCWD. As a result of the sale, the Company became
entitled to 3.7398% of the net sales proceeds to KVI, after
certain offsets for KVIs transaction expenses. On
March 23, 2001, the Company received net proceeds from the
sale resulting in a gain of $879,000, after providing for
transaction costs and a residual interest due to an unrelated
third party. The gain is included as a component of other
income, above.

In March 2000, the company sold 714.5 shares of the Fontana
Mutual Water Company, which it owned for a net price of
$950,000, and realized a gain on the sale in the amount of
$395,000, which is included as a component of other income,
above.

Other income for Fiscal 1999 includes the reversal of $291,000
of severance costs recorded in Fiscal 1998 related to the
resignation of an officer. This reversal resulted from the
Company selling to two of its former officers its 40% interest
in an option to purchase certain shares of stock of Integrated
Water Technologies, Inc., an unaffiliated water consulting
company. Other income for Fiscal 1999 also includes a $187,000
loss realized from the sale of the Companys interest in
PICO Holdings, Inc. that the Company received in connection with
its sale of its Nevada LLC interest.

During the fiscal year ended March 31, 2001, the Company
abandoned its Olancha project in Inyo County, California, due to
insurmountable local regulatory impediments. In connection with
that abandonment, the Company returned the associated real
property to the seller of the property in exchange for full
satisfaction and retirement of the Companys note in favor
of the seller in the amount of $758,000 and accrued interest of
$11,000 (Note 11), and recognized an extraordinary gain on
extinguishment of debt, net of income taxes, of $769,000.

In Fiscal 2001, the Company repurchased $909,000 of its
outstanding 9% Debentures, plus accrued interest of $14,000 for
$514,000 in cash. After reducing related net deferred debt costs
of $24,000, the Company recognized a $385,000 extraordinary gain
on the early extinguishment of debt.

In Fiscal 2000, the Company repurchased $5,000,000 of its 9%
Convertible Subordinated Debentures, plus accrued interest of
$158,000, for $1,500,000. After reducing related net deferred
debt costs of $273,000, the Company recognized an extraordinary
income on extinguishment of debt, net of income taxes of
$3,490,000.

In the fourth quarter of Fiscal 2001, after giving consideration
to guidance provided by the SEC Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial
Statements, the Company performed a review of its revenue
recognition policy affecting water sales contracts. As a result
of this review, the Company revised its revenue recognition
policy for water sales contracts effective April 1, 2000,
and restated its Fiscal 2001 quarterly operating results to
reflect this new policy. The issuance of SAB 101 changes
the Companys revenue recognition practices for
non-refundable water contract payments. The Company previously
recognized water revenue upon execution of a water sales
contract, where delivery of water was not a condition for
realization of payment. Prior to April 1, 2000, this water
sales contract provided water revenue of $974,000 and cost of
water revenue of $737,000. In accordance with SAB 101, the
Company recorded the cumulative effect of the change in
accounting principle with a charge of $237,000 to the Fiscal
2001 consolidated statement of operations in the fourth quarter
of Fiscal 2001.

Liquidity and Capital Resources

A portion of the costs of retiring the Series D Preferred
Stock was required to be paid in cash in the amount of
$3,854,000, which, together with the December 2000 dividend on
the Series D preferred Stock, comprised the entire
remaining balance of the restricted cash which had been
previously restricted under the

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Operating Activities

For the year ended March 31, 2001 the Company recognized
revenues of $2,127,000 and a gross profit of $609,000, primarily
from water sales and the lease of water rights. However, the
gross profit was offset by $3,934,000 of general and
administrative expenses consisting of payroll and fringe
benefits ($1,461,000), consulting and engineering costs
($676,000), asset impairment loss ($763,000), and miscellaneous
costs of $1,034,000. The Company recognized $478,000 from
interest income earned primarily from its cash and cash
equivalents investments. This interest income was offset by
$849,000 interest expense incurred on its Debentures and
$290,000 of interest expense incurred on its term loan and other
obligations. The Companys Fiscal 2001 loss from continuing
operations of $2,232,000 was partially offset by a $1,154,000
extraordinary non-cash gain on the early extinguishment of debt,
and was increased by a non-cash cumulative effect of change in
accounting principle charge of $237,000.

Due to the factors mentioned above, the Company had negative
cash flow from operating activities of $1,353,000 for the year
ended March 31, 2001, compared with negative cash flow from
operating activities of $3,693,000 for the year ended
March 31, 2000.

For the year ended March 31, 2000 the Company recognized
revenues of $2,796,000 and a gross profit of $1,028,000,
primarily from water sales and the lease of water rights.
However, the gross profit was offset by $7,449,000 of general
and administrative expenses consisting of payroll and fringe
benefits ($2,243,000), consulting and engineering costs
($1,455,000), allowance for water rights project costs under
development ($1,019,000), asset impairment loss on certain water
assets ($1,166,000), and miscellaneous costs of $1,566,000. The
Company recognized $622,000 from interest income earned
primarily from its cash and cash equivalents and investments.
This interest income was offset by $1,036,000 interest expense
incurred on its Debentures and $211,000 of interest expense
incurred on its term loan and other obligations. The
Companys Fiscal 2000 operating loss of $6,675,000 was
partially offset by a $3,490,000 extraordinary non-cash gain on
the early extinguishment of debt.

On September 30, 1998, the Company entered into a pumping
rights lease and a water sale agreement with the City of
Inglewood, California. On October 1, 1998, Inglewood leased
the rights to pump 4,450 acre-feet of water per year to the
Company for a five-year period. In consideration of the lease,
the Company made a $3,603,200 lump-sum cash payment to
Inglewood. Under the water sale agreement, the Company agreed to
sell, and Inglewood agreed to buy, 5,950 acre-feet of water
per year for the next five years at a price of $200 per
acre-foot in the first year ($1,190,000), which price will
escalate over the remaining four-year period at a rate equal to
the sum of 3.75% per year plus 25% of any increase in the
MWDs rate for water. The Company financed the payment it
made to Inglewood through a $3,560,000 five-year loan that bears
interest at the banks Reference Rate or LIBOR (capped at
6%) plus 1.5%, at the Companys option. Scheduled payments
of principal on this loan for the fiscal years ending
March 31, 2002, 2003 and 2004 are $749,000, $832,000, and
$437,000, respectively.

Investing and Financing Activities

During Fiscal 2001, the Company repurchased $909,000 of the
Debentures plus accrued interest of $14,000 for $514,000. After
reducing related net deferred debt costs of $24,000, the Company
recognized a non-cash $385,000 extraordinary gain on the early
extinguishment of debt. During Fiscal 2000, the Company
repurchased $5,000,000 of the Debentures plus accrued interest
of $158,000 for $1,500,000 in cash. After reducing related
deferred debt costs of $273,000, net of accumulated amortization
of $105,000, the Company recognized a non-cash $3,185,000
extraordinary gain on the early extinguishment of debt.

During the fiscal year ended March 31,2001, the Company
abandoned its Olancha project on Inyo County, California, due to
insurmountable local regulatory impediments. In connection with
that abandonment, the Company returned an associated real
property and related water rights to the seller of the property

23



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##### Table of Contents





During the fiscal year ended March 31, 2001, the Company
voluntarily purchased 2,456.5124 shares of its Series C
Preferred Stock at a purchase price of $180 per share for a
total purchase consideration of $442,000. The net carrying value
of such shares was $2,377,000 net of related private placement
costs of $80,000. The excess of the Series C Preferred
Stock net carrying value over the consideration paid by the
Company was $1,935,000 and has been credited to accumulated
deficit in the accompanying consolidated financial statements.
Solely for earnings per share purposes, such excess has been
included in the computation of earnings applicable to common
stockholders.

On March 16, 2001, the Company entered into an Investment
Restructure Agreement (the Agreement) with Agbar and
Interagua for the early redemption and retirement of the entire
$10,000,000 of issued and outstanding Series D Preferred
Stock. In consideration of that redemption and retirement, the
Company (1) declared and paid to Interagua the
December 15, 2000 scheduled dividend of $188,000;
(2) returned to Interagua the remaining restricted cash
balance (after giving effect to the reduction of such balance
resulting from the aforementioned dividend) of $3,854,000;
(3) issued 175,000 unregistered shares of the
Companys Common Stock to Interagua; and (4) issued to
Interagua 2,000 shares of its newly authorized Series F
Convertible Redeemable Preferred Stock, which shares of
preferred stock have an aggregate stated value of $2,000,000
with a fair value of $364,000, based upon an independent
third-party valuation.

The excess of the Series D Preferred Stock carrying value
over the fair value of the consideration paid by the Company to
redeem and retire the Series D Preferred Stock was
$5,744,000 and has been credited to accumulated deficit in the
accompanying consolidated financial statements. Solely for
earnings per share purposes, such excess has been included in
the computation of earnings available to common stockholders.

As described in the Certificate of Designations for the
Series F Convertible Redeemable Preferred Stock
(Series F Preferred Stock), each share of
Series F Preferred Stock has a stated value of $1,000, has
a dividend rate of 6.0% per annum of its stated value, and is
convertible at any time at the option of the holder into the
number of shares of common stock determined by dividing the
amount of the stated value of the shares of Series F
Preferred Stock by the conversion price of such shares in effect
on the conversion date. The conversion price is initially $5.60
per share and is subject to adjustment in certain events to
prevent dilution. Dividends shall be fully cumulative, and shall
be paid semi-annually in arrears, out of funds legally available
for the payment of dividends, on January 15 and
July 15 of each year. Dividends may be paid in additional
shares of Series F Preferred Stock, or in cash, at the
Companys option.

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Scheduled payments of principal on existing outstanding
	indebtedness for fiscal years ending March 31, 2002, 2003,
	2004, 2005 and 2006 are $781,000, $903,000, $463,000, $28,000
	and $31,000, respectively .                                                                                                                                                                                                                                                  
|
| |  | The Company is required to make semi-annual interest payments of
	$397,000 on the $8,831,000 principal amount of Debentures
	through their maturity on September 30, 2005.                                                                                                                                                                                                                                                                                       
|
| |  | The holders of the 7,708 outstanding shares of Series C
	Preferred Stock are entitled to receive, when and if declared,
	annual dividends in the amount of $72.50 per share, payable
	semi-annually on January 15 and July 15 of each year
	(aggregating $558,857 per year). The Company has not declared or
	paid the semi-annual dividend expected on January 15, 2001. On
	June 18, 2001, the Company declared the semi-annual
	dividend due on July 15, 2001.
|
| |  | The holders of the 2,000 outstanding shares of Series F
	Preferred Stock are entitled to receive annual dividends in the
	amount of $60.00 per share, payable semi-annually on
	January 15, and July 15 of each year (aggregating
	$120,000 per year). These dividends may be paid in cash or in
	additional shares of Series F Preferred Stock, at the
	Companys sole discretion.                                                                              
|
| |  | Commencing October 1998, the Company entered into a five-year
	and a fifteen-year water rights lease. The five-year water
	rights lease is expected to provide 1,008 acre-feet per year for
	a payment of $150                                                                                                                                                                                                                                                   

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | per acre-foot in the first year ($151,200). This amount will
	escalate over the remaining four-year period at $7.50 per
	acre-foot per year. The fifteen-year water rights lease is
	expected to provide 250 acre-feet per year for a payment of
	$135 per acre-foot in the first year ($33,750). The costs for
	subsequent years is determined by multiplying the cost for the
	first year by the ratio of the index price for each subsequent
	year divided by the index price for the first year. The index
	price is the sum of the price established by the MWD for full
	service untreated water and the price components established by
	the West Basin Municipal Water District for the MWD
	readiness-to-serve charge and the West Basin surcharge for basic
	non-interruptible water.

The Companys ability to operate over the long term will be
dependent upon its ability to derive revenues from its water
resources, arrange the purchase and sale of water it
doesnt own at a profit, and/or arrange additional
financing. The Companys ability to derive revenue from its
own water assets depends, in part, on the outcome of regulatory,
administrative and environmental review processes. The
Companys ability to derive profits from the sale of water
it does not currently own depends on its ability to acquire such
water, make sales to customers, and arrange delivery, all on an
economic basis. Consummation of profitable water sales is
subject to a variety of restrictions designed to protect
third-party water users and the environment. The Company
believed that it could operate profitably within these
restrictions. However, public agencies which control critical
segments of the public infrastructure necessary to transport and
deliver water in California, the Companys principal area
of operation at the current time, have restricted access to such
facilities through pricing and administrative action. The
Company believes that many of these latter restrictions violate
the States Wheeling Act (Section 1810 of the
California Water Code). Therefore, and in order to permit it to
complete profitable water sales, the Company has undertaken a
variety of administrative, legal, regulatory and legislative
initiatives to identify and remove such artificial barriers to
voluntary water transfers. There can, of course, be no assurance
that the Companys initiatives will result in removal of
such artificial barriers to voluntary water transfers in
California or, if they are removed, when that might happen.

Based on its existing assets and on its projected operating
income and expenses, the Company anticipates that it will be
able to fund its foreseeable working capital needs for at least
one year from the date of this report from existing cash,
proceeds derived from on-going operations and proceeds from the
sale of certain existing assets. However, no assurance can be
given that the Company will be able to sell its assets as
planned or, if the Company elects to do so, that it will be able
to raise additional funds.

As noted above, the Company has suspended the acquisition of new
water assets. In addition, because of delays and uncertainty
regarding regulatory and other approvals of pending water sales
transactions, the Company believes its revenue will be
insufficient to support its overhead.

The Company does not believe that inflation will have a material
impact on its results of operations.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument
be recorded in the balance sheet as either an asset or liability
measured at its fair value. This statement also requires that
changes in the derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria
are met. SFAS 133, as amended by SFAS 137, is effective for
fiscal years beginning after June 15, 2000. Management
believes that the adoption of SFAS 133 will not have a material
effect on the Companys financial statements.

25



---



##### Table of Contents



Risk Factors

The ownership of the Companys common stock involves
numerous risks. The following discussion highlights some of the
risks the Company faces and some of the risks related to the
ownership of the Companys Common Stock.

History of Losses in Principal Business

To date, the Companys activities have primarily consisted
of managing and developing its various water rights and related
assets, attempting to market and sell its water assets, and
those of its clients. The Company has only generated $2,127,000,
$2,796,000, and $1,823,000 of total revenues during the fiscal
years ended March 31, 2001, 2000 and 1999, respectively,
while incurring net losses of $1,315,000, $3,185,000, and
$5,435,000 during such years, respectively. Until this past
fiscal year, the Company had believed that the regulatory
obstacles that have prevented the development of a water market
would be lowered and that the Company would be able to monetize
its principal water assets and to substantially increase its
revenues and generate profits. The Company now believes that the
regulatory hurdles may not be lowered in the near future and
that revenues that it had anticipated from water transfers will
not be received as expected. As a result, the Company cannot
predict when it will be able to generate significant revenues
from the development and sale of water in accordance with its
original business plan.

Uncertainty of Future Water Revenue

The Companys ability to generate material revenues in the
future is dependent on (i) the Companys ability to
sell significant quantities of water from its Northern
California Yuba Property water assets, (ii) the
Companys ability to develop and sell water as part of the
Colorado Cherry Creek Project, (iii) the Companys
activities as an independent water wholesaler in California, and
(iv) the Companys ability to resolve regulatory
issues restricting its ability to sell and transport water to
potential customers. The Company has encountered significant
regulatory obstacles to its attempts to develop and transfer its
California water for delivery to its potential customers, which
regulatory obstacles the Company does not expect to overcome in
the near future. Unless the regulatory impediments are removed,
the Company now believes that its ability to generate
significant revenues from its water assets will be severely
limited. No assurance can be given that the regulations
currently limiting the Companys ability to exploit its
water assets will be changed, or if changed, that the change
will occur in the near future. In addition to the foregoing
regulatory difficulties, before the Company can consummate
significant water deliveries in the Cherry Creek area, the
Company or the purchaser of such water will have to build the
infrastructure necessary to utilize the water. The requirement
to build the infrastructure will affect the ability of the
Company to sell its water, the price at which the water can be
sold, and the revenues that the Company can derive from its
Colorado water assets. Finally, in addition to its ability to
overcome numerous regulatory impediments, the Companys
ability to become an independent water wholesaler in California
is dependent upon the Companys ability to arrange for the
transportation and storage of water and on its ability to
finance the foregoing activities. As a result, no assurance can
be given if the Company will ever be able to generate
significant revenues from its water transfer activities.

Limited Financial Resources

As a result of the operating losses sustained by the Company
during the last few years, which have been offset in Fiscal 2001
by sales of certain non-strategic assets, the Company may not
have sufficient free cash to carry out its business plan over
the longer term. In addition, due to the regulatory difficulties
that the Company has encountered, the Companys ability to
exploit its water assets in accordance with its business plan
has become questionable, and the time period in which a return
could be realized has been extended for an unknown period. These
uncertainties will make it difficult for the Company to obtain
new financing that it may need to complete its business plan.

26



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##### Table of Contents



Delisting of Common Stock from Nasdaq National
Market

During the first quarter of Fiscal 2001, the Company received
notice from The Nasdaq Stock Market that the Companys
common stock had failed to maintain a minimum bid price of $1.00
per share over a 30-day period and that the market value of the
Companys public float was below $5,000,000. Accordingly,
the Companys common stock was de-listed from trading on
the Nasdaq National Market effective August 30, 2000. Since
then, the Companys common stock has been traded
electronically on the OTC Bulletin Board. The effects of such a
de-listing are unknown, but the Company believes that the
de-listing has reduced the Companys visibility with
investors and may adversely affect the Companys ability to
attract and obtain financing because of the decreased liquidity
of the Companys shares. See Item 5. Market for
Registrants Common Equity and Related Stockholder
Matters.




Item 7A. Quantitative and Qualitative Market
Risk Disclosures

The Company is exposed to market risk primarily due to
fluctuations in interest rates. The Company utilizes both fixed
and variable rate debt. The Companys interest rate risk
management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower the
Companys overall borrowing costs. To achieve this
objective, the Company borrows primarily at fixed rates and may
enter into derivative financial instruments such as interest
rate caps in order to mitigate interest rate risk on a related
financial instrument. The Company does not enter into any
financial transactions for speculative or trading purposes. The
following table presents principal cash flows and related
weighted average interest rates of the Companys long-term
fixed rate and variable rate debt for the fiscal periods
indicated is as follows:

|                               |  |      |         |      |  |      |         |      |  |      |         |            |  |       |        |   |  |   |           |   |  |   |        |   |  |   |           |  
|------------------------------ |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ---------- |  | ----- | ------ | - |  | - | --------- | - |  | - | ------ | - |  | - | --------- | -
|                               |  | 2002 |         | 2003 |  | 2004 |         | 2005 |  | 2006 |         | Thereafter |  | Total
|                               |  |      |         |      |  |      |         |      |  |      |         |            |  |      
|Fixed rate debt                |  | $    | 31,000  |      |  | $    | 71,000  |      |  | $    | 26,000  |            |  | $     | 28,000 |   |  | $ | 8,862,000 |   |  | $ | 70,000 |   |  | $ | 9,088,000 |  
|                              
|                              
|                              
|                              
|Weighted average interest rate |  |      | 8.0     | %    |  |      | 8.7     | %    |  |      | 8.3     | %          |  |       | 9.0    | % |  |   | 9.0       | % |  |   | 9.0    | % |  |   | 8.9       | %
|                              
|                              
|                              
|                              
|Variable rate debt             |  | $    | 749,000 |      |  | $    | 832,000 |      |  | $    | 437,000 |            |  |       |       |   |  |   |          |   |  |   |       |   |  | $ | 2,018,000 |  
|                              
|                              
|                              
|                              
|Weighted average interest rate |  |      | 7.5     | %    |  |      | 7.5     | %    |  |      | 7.5     | %          |  |       |       |   |  |   |          |   |  |   |       |   |  |   | 7.5       | %

The Companys variable rate on its variable rate debt is
capped at 7.5%.

The carrying amount of the long-term debt and Debentures is
based on the principal amount owed, and does not represent
managements opinion with respect to the interest rates and
terms of the debt are comparable to those commercially available
to the Company in the marketplace for similar instruments. The
Company repurchased $909,000 principal amount of its Debentures
for $500,000 plus accrued interest during Fiscal 2001 and
repurchased $5,000,000 principal amount of its Debentures for
$1,500,000 plus accrued interest during Fiscal 2000.




Item 8. Consolidated Financial Statements and
Supplementary Data

The consolidated financial statements and the report thereon and
notes thereto, which are attached hereto as pages F-1 through
F-29, and indexed at page 2, are incorporated herein by
reference.






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure

Not applicable

27



---



##### Table of Contents






PART III




Item 10. Directors and Executive Officers of the
Registrant

The information in the Companys Proxy Statement to be
filed by July 27, 2001 set forth under the caption
Election of Directors and Executive
Officers is incorporated herein by reference.




Item 11. Executive Compensation

The information in the Companys Proxy Statement to be
filed by July 27, 2001 set forth under the caption
Executive Compensation is incorporated herein by
reference.




Item 12. Security Ownership of Certain Beneficial
Owners and Management

The information set forth under the caption Security
Ownership of Certain Beneficial Owners and Management of
the Companys Proxy Statement to be filed by July 27,
2001 is incorporated herein by reference.




Item 13. Certain Relationships and Related
Transactions

The information in the Companys Proxy Statement to be
filed by July 27, 2001 set forth under the caption
Certain Relationships and Related Transactions is
incorporated herein by reference.

28



---



##### Table of Contents






PART IV






|         |                                                                               
|-------- | ------------------------------------------------------------------------------
|Item 14. | Exhibits, Consolidated Financial Statement Schedules and
	Reports On Form  8-K

Exhibits

The following exhibits are filed as a part of this report

|     |  |                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Certificate of Incorporation.(1)                                                                                                                                                   
|3.2  |  | By-laws of the Company.(2)                                                                                                                                                         
|4.1  |  | Form of Common Stock Certificate.(1)                                                                                                                                               
|4.2  |  | Form of Convertible Subordinated Debenture Due
	2005.(3)                                                                                                                           
|4.3  |  | Certificate of Designations for Series C
	Convertible Redeemable Preferred Stock.(6)                                                                                               
|4.4  |  | Certificate of Designations for Series D
	Convertible Redeemable Preferred Stock.(8)                                                                                               
|4.5  |  | Certificate of Designations of Series E
	Participating Preferred Stock.(10)                                                                                                        
|4.6  |  | Certificate of Designations of Series F
	Convertible Redeemable Preferred Stock.(11)                                                                                               
|10.1 |  | 1990 Stock Option Plan.(2)                                                                                                                                                         
|10.2 |  | Amendment to 1990 Stock Option Plan.(1)                                                                                                                                            
|10.3 |  | Form of Indemnity Agreement between the Company
	and its officers and directors.(2)                                                                                                
|10.4 |  | Resignation Agreement dated October 27,
	1999, between the Company and Peter Jensen.(10)                                                                                           
|10.5 |  | 1993 Stock Option Plan.(5)                                                                                                                                                         
|10.6 |  | Amendment to 1993 Stock Option Plan.(5)                                                                                                                                            
|10.7 |  | 1997 Stock Option Plan.(7)                                                                                                                                                         
|10.8 |  | Point Richmond Office Lease, dated
	December 18, 1998, by and between Western Water Company and
	Janis & Martin McNair.(10)                                                        
|21   |  | Subsidiaries of the Company.(10)                                                                                                                                                   
|23.1 |  | Consent of KPMG LLP.                                                                                                                                                               
|99.1 |  | Form of Stock Purchase Agreement for the purchase
	and sale of Series C Convertible Redeemable Preferred
	Stock.(4)                                                                
|99.2 |  | Rights Agreement, dated as of July 23, 1999,
	between the Company and ChaseMellon Shareholder Services,
	L.L.C., as Rights Agent, which includes the Form of Right
	Certificate.(9)
|99.3 |  | Investment Restructure Agreement, dated
	March 16, 2001.(11)                                                                                                                       




|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Previously filed as an exhibit to the Companys
	Form S-1, file no. 33-47606, and incorporated herein
	by reference.                                                     
|   
|(2) | Previously filed as an exhibit to the Companys
	Form 10, file no. 000-18756, and incorporated herein
	by reference.                                                     
|   
|(3) | Previously filed as an exhibit to the Companys
	Form 8-K dated September 22, 1995, and incorporated
	herein by reference.                                               
|   
|(4) | Previously filed as an exhibit to the Companys
	Registration Statement on Form  S-3 filed on June 6,
	1997 and incorporated herein by reference.                        
|   
|(5) | Previously filed as an exhibit to the Companys Proxy
	Statement on Schedule 14A filed on February 7, 1994,
	which exhibit is hereby incorporated herein by reference.   
|   
|(6) | Previously filed as an exhibit to the Companys Annual
	Report on Form 10-K for the year ended March 31, 1996,
	which exhibit is hereby incorporated herein by reference.

29



---



##### Table of Contents





|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7) | Previously filed as an exhibit to the Companys Proxy
	Statement on Schedule 14A filed on September 12, 1997,
	which exhibit is hereby incorporated herein by reference.
|   
|(8) | Previously filed as an exhibit to the Companys current
	report on Form 8-K filed on November 25, 1998, which
	exhibit is hereby incorporated herein by reference.      
|   
|(9) | Previously filed as an exhibit to the Companys
	Registration Statement on Form  8-A filed on August 8,
	1999, which exhibit is hereby incorporated herein by reference.



|     |                                                                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Previously filed as an exhibit to the Companys Annual
	Report on Form 10-K for the year ended March 31, 2000,
	which exhibit is hereby incorporated herein by reference.
|    
|(11) | Previously filed as an exhibit to the Companys current
	report on Form 8-K filed on March 19, 2001, which
	exhibit is hereby incorporated herein by reference.          

The following financial statements are filed as a part of this
report, appearing at the pages indicated:

|                                                                                                                   |  |  |     | 
|------------------------------------------------------------------------------------------------------------------ |  |  | --- | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Report of KPMG LLP, independent certified public
	accountants                                                      |  |  | F-1 | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Consolidated Balance Sheets as of March 31,
	2001 and 2000                                                         |  |  | F-2 | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Consolidated Statements of Operations and
	Comprehensive Income for the years ended March 31, 2001,
	2000 and 1999 |  |  | F-3 | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Consolidated Statements of Stockholders
	Equity for the years ended March 31, 2001, 2000 and 1999                 |  |  | F-4 | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Consolidated Statements of Cash Flows for the
	years ended March 31, 2001, 2000 and 1999                           |  |  | F-5 | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Notes to Consolidated Financial Statements                                                                         |  |  | F-6 | 

Reports on Form 8-K

Report on Form 8-K, dated March 16, 2001 (Item 5)

Report on Form 8-K, dated March 23, 2001 (Item 5)

30



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



| |                      
| | ---------------------
| | WESTERN WATER COMPANY

Date:  June 28, 2001

| |     |                           
| | --- | --------------------------
| | By: | /s/ MICHAEL PATRICK GEORGE

| |                        
| | -----------------------
| |                        
| | Michael Patrick George,
| | President              

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.

|                                                 |  |                                                                                              |  |              
|------------------------------------------------ |  | -------------------------------------------------------------------------------------------- |  | -------------
|Signature                                        |  | Title                                                                                        |  | Date         
|                                                 |  |                                                                                              |  |              
|/s/ MICHAEL PATRICK GEORGEMichael Patrick George |  | President, Chief Executive Officer Chairman of
	the Board                                    |  | June 28, 2001
|/s/ WILLIAM T. GOCHNAUERWilliam T. Gochnauer     |  | Senior Vice President, Chief Financial Officer
	(Principal Financial and Accounting Officer) |  | June 28, 2001
|/s/ RONALD I. SIMONRonald I. Simon               |  | Director                                                                                     |  | June 28, 2001
|/s/ DAVID A. ABELDavid A. Abel                   |  | Director                                                                                     |  | June 28, 2001
|/s/ ROBERT A. BAKERRobert A. Baker               |  | Director                                                                                     |  | June 28, 2001

31



---



##### Table of Contents






INDEPENDENT AUDITORS REPORT

The Board of Directors



We have audited the accompanying consolidated balance sheets of
Western Water Company and subsidiaries (the Company) as of
March 31, 2001 and 2000, and the related consolidated
statements of operations and comprehensive income,
stockholders equity and cash flows for each of the years
in the three-year period ended March 31, 2001. 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
audits.

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, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Western Water Company and subsidiaries as of
March 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the
three-year period ended March 31, 2001, in conformity with
accounting principles generally accepted in the United States of
America.

As explained in Note 1 to the consolidated financial
statements, effective April 1, 2000, the Company changed
its method of accounting for revenue recognition for
non-refundable water contract payments through the adoption of
Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements.



| |         
| | --------
| | KPMG LLP

San Francisco, California



F-1



---



##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


March 31, 2001 and 2000


ASSETS

|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |             |            |  |            |             |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------- | ---------- |  | ---------- | ----------- | ---------- | 
|                                                                                                                                                                                                                                                   |                                                                                                                                                                | 2001                                       |            | 2000       
|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |            
|Current Assets:                                                                                                                                                                                                                                    |                                                                                                                                                                |                                            |            |             |            |  |            |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                   | Cash and cash equivalents                                                                                                                                      |                                            | $          | 7,138,615   |            |  | $          | 1,971,614   |           
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                   | Current portion of notes receivable (Note 3)                                                                                                                   |                                            |            | 86,413      |            |  |            | 154,235     |           
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                   | Other current assets                                                                                                                                           |                                            |            | 476,473     |            |  |            | 991,729     |           
|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |             |            |  |            |            
|                                                                                                                                                                                                                                                   |                                                                                                                                                                | Total Current Assets                       |            |             | 7,701,501  |  |            |             | 3,117,578  | 
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Cash and cash equivalents  restricted
	(Note 2)                                                                                                                                                                                                   |                                                                                                                                                                |                                            |           |             |            |  | 4,416,431  |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Notes receivable, less current portion
	(Note 3)                                                                                                                                                                                                   |                                                                                                                                                                |                                            | 135,709    |             |            |  | 527,085    |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Land held for sale (Notes 5, 11 and 16)                                                                                                                                                                                                            |                                                                                                                                                                |                                            | 5,104,836  |             |            |  | 5,422,606  |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Water rights (Notes 6 and 17)                                                                                                                                                                                                                      |                                                                                                                                                                |                                            | 13,267,387 |             |            |  | 18,380,807 |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Prepaid leasing costs, net of accumulated
	amortization (Note 7)                                                                                                                                                                                   |                                                                                                                                                                |                                            | 1,951,546  |             |            |  | 2,689,829  |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Other water assets, net of accumulated
	amortization (Note  1)                                                                                                                                                                                     |                                                                                                                                                                |                                            | 1,003,052  |             |            |  | 2,510,591  |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Deferred debt costs, net of accumulated
	amortization (Note  11 and 12)                                                                                                                                                                            |                                                                                                                                                                |                                            | 257,750    |             |            |  | 351,324    |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Property and equipment, net of accumulated
	depreciation (Note 4)                                                                                                                                                                                  |                                                                                                                                                                |                                            | 86,274     |             |            |  | 172,703    |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Other assets                                                                                                                                                                                                                                       |                                                                                                                                                                |                                            | 138,252    |             |            |  | 111,996    |            
|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |             |            |  |            |            
|                                                                                                                                                                                                                                                   |                                                                                                                                                                | Total Assets                               |            | $           | 29,646,307 |  |            | $           | 37,700,950 | 
|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |             |            |  |            |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Current Liabilities:                                                                                                                                                                                                                               |                                                                                                                                                                |                                            |            |             |            |  |            |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                   | Accounts payable                                                                                                                                               |                                            | $          | 189,567     |            |  | $          | 100,552     |           
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                   | Accrued expenses and other liabilities (Notes 10)                                                                                                              |                                            |            | 798,982     |            |  |            | 858,263     |           
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                   | Current maturities of long-term debt (Note 11)                                                                                                                 |                                            |            | 780,502     |            |  |            | 1,454,983   |           
|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |             |            |  |            |            
|                                                                                                                                                                                                                                                   |                                                                                                                                                                | Total Current Liabilities                  |            |             | 1,769,051  |  |            |             | 2,413,798  | 
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Deferred gain on sale (Note 8)                                                                                                                                                                                                                     |                                                                                                                                                                |                                            |           |             |            |  | 3,333      |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Deferred revenue on water contract (Note 1)                                                                                                                                                                                                        |                                                                                                                                                                |                                            | 824,120    |             |            |  |           |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Long-term debt, less current maturities (Note 11)                                                                                                                                                                                                  |                                                                                                                                                                |                                            | 1,494,864  |             |            |  | 2,275,366  |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|9% Convertible subordinated debentures (Note 12)                                                                                                                                                                                                   |                                                                                                                                                                |                                            | 8,831,112  |             |            |  | 9,740,000  |            
|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |             |            |  |            |            
|                                                                                                                                                                                                                                                   |                                                                                                                                                                | Total Liabilities                          |            |             | 12,919,147 |  |            |             | 14,432,497 | 
|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |             |            |  |            |            
|Series C convertible redeemable preferred
	stock, 100,000 shares authorized; 7,708 and 10,165 shares issued
	and outstanding (aggregate liquidation preference of $7,708,000
	and $10,165,000 at March 31, 2001 and 2000, respectively.
	(Note 13) |                                                                                                                                                                |                                            | 7,475,121  |             |            |  | 9,816,686  |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Series D convertible redeemable preferred
	stock, $1,000 stated value, 25,000 shares authorized; 10,000
	shares issued and outstanding (aggregate liquidation preference
	of $10,000,000) at March 31, 2000. (Note 13)                             |                                                                                                                                                                |                                            |           |             |            |  | 10,000,000 |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Series F convertible redeemable preferred
	stock, $1,000 stated value, 6,000 shares authorized; 2,000
	shares issued and outstanding (aggregate liquidation preference
	of $2,000,000) at March 31, 2001. (Note 13)                                |                                                                                                                                                                |                                            | 366,909    |             |            |  |           |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Stockholders Equity (Notes 13, 17, and
	18):                                                                                                                                                                                                      |                                                                                                                                                                |                                            |            |             |            |  |            |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                   | Common stock, $.001 par value, 20,000,000 shares
	authorized in 2001 and 2000; 8,410,212 and 8,235,212 shares
	issued at March 31, 2001 and 2000, respectively |                                            |            | 8,410       |            |  |            | 8,235       |           
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                   | Additional paid-in capital                                                                                                                                     |                                            |            | 24,487,116  |            |  |            | 24,448,791  |           
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                   | Accumulated deficit (accumulated since
	October 1, 1994)                                                                                                       |                                            |            | (14,235,526 | )          |  |            | (19,630,389 | )         
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|Treasury stock, at cost, 341,200 shares at
	March 31, 2001 and 2000                                                                                                                                                                                |                                                                                                                                                                |                                            | (1,374,870 | )           |            |  | (1,374,870 | )          
|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |             |            |  |            |            
|                                                                                                                                                                                                                                                   |                                                                                                                                                                | Total Stockholders Equity                 |            |             | 8,885,130  |  |            |             | 3,451,767  | 
|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |             |            |  |            |            
|Commitments and contingencies (Note 24)                                                                                                                                                                                                            |                                                                                                                                                                |                                            |            |             |            |  |            |            
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                   |                                                                                                                                                                | Total Liabilities and Stockholders Equity |            | $           | 29,646,307 |  |            | $           | 37,700,950 | 
|                                                                                                                                                                                                                                                   |                                                                                                                                                                |                                            |            |             |            |  |            |            

See accompanying notes to consolidated financial statements.

F-2



---



##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME


Years Ended March 31, 2001, 2000 and 1999


|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |            |            |  
|----------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------ | --------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | - | --------- | ---------- | ---------- | -
|                                                                                                      |                                                                                                  | 2001                                                                                             |           | 2000       |            | 1999
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |     
|Revenue:                                                                                              |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Water                                                                                            |                                                                                                  | $         | 2,126,695  |            |      | $          | 2,796,037  |            |   | $         | 1,477,375  |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Real estate                                                                                      |                                                                                                  |           |           |            |      |            |           |            |   |           | 345,615    |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  |                                                                                                  | 2,126,695 |            |            |      | 2,796,037  |            |            |   | 1,822,990 |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|Cost of Revenue:                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Water                                                                                            |                                                                                                  |           | 1,517,610  |            |      |            | 1,767,714  |            |   |           | 1,000,998  |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Real estate                                                                                      |                                                                                                  |           |           |            |      |            |           |            |   |           | 184,000    |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  |                                                                                                  | 1,517,610 |            |            |      | 1,767,714  |            |            |   | 1,184,998 |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  | Gross Profit                                                                                     |           |            | 609,085    |      |            |            | 1,028,323  |   |           |            | 637,992    |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|General and Administrative Expenses (Note 21)                                                         |                                                                                                  |                                                                                                  | 3,933,995 |            |            |      | 7,448,615  |            |            |   | 5,805,192 |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  | Operating Income (Loss)                                                                          |           |            | (3,324,910 | )    |            |            | (6,420,292 | ) |           |            | (5,167,200 | )
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|Other Income (Expenses):                                                                              |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Interest income                                                                                  |                                                                                                  |           | 478,204    |            |      |            | 622,239    |            |   |           | 878,878    |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Interest expense                                                                                 |                                                                                                  |           | (1,138,949 | )          |      |            | (1,247,205 | )          |   |           | (1,465,342 | )         
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Gain on sale of water rights (Note 6)                                                            |                                                                                                  |           | 893,219    |            |      |            |           |            |   |           |           |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Gain on sale of investment in limited liability
	company, net (Note 8)                           |                                                                                                  |           | 3,333      |            |      |            | 40,000     |            |   |           | 40,000     |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Other (Note 20)                                                                                  |                                                                                                  |           | 860,772    |            |      |            | 333,352    |            |   |           | 182,300    |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  |                                                                                                  | 1,096,579 |            |            |      | (251,614   | )          |            |   | (364,164  | )         
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  | Income (Loss) Before Income Taxes                                                                |           |            | (2,228,331 | )    |            |            | (6,671,906 | ) |           |            | (5,531,364 | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Income Taxes (Note 15)                                                                                |                                                                                                  |                                                                                                  | 3,200     |            |            |      | 3,200      |            |            |   | 3,200     |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  | Income (Loss) before extraordinary item and
	cumulative effect of change in accounting principle |           |            | (2,231,531 | )    |            |            | (6,675,106 | ) |           |            | (5,534,564 | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Extraordinary income on extinguishment of debt,
	net of income taxes (Note 19)                        |                                                                                                  |                                                                                                  | 1,154,094 |            |            |      | 3,489,803  |            |            |   | 99,656    |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  | Net Income (Loss) before cumulative effect of
	change in accounting principle                    |           |            | (1,077,437 | )    |            |            | (3,185,303 | ) |           |            | (5,434,908 | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Cumulative effect of change in accounting
	principle                                                  |                                                                                                  |                                                                                                  | (237,065  | )          |            |      |           |            |            |   |          |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  | Net Income (Loss)                                                                                |           |            | (1,314,502 | )    |            |            | (3,185,303 | ) |           |            | (5,434,908 | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Accretion of preferred stock to redemption value                                                      |                                                                                                  |                                                                                                  | (38,255   | )          |            |      | (35,819    | )          |            |   | (33,099   | )         
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Excess of carrying value over amount paid to
	retire convertible redeemable preferred stock (Note 13) |                                                                                                  |                                                                                                  | 7,678,597 |            |            |      |           |            |            |   |          |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Preferred stock dividends                                                                             |                                                                                                  |                                                                                                  | (930,977  | )          |            |      | (1,486,954 | )          |            |   | (990,401  | )         
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  | Net Income (Loss) Available to Common Stockholders                                               |           |            | 5,394,863  |      |            |            | (4,708,076 | ) |           |            | (6,458,408 | )
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|Other Comprehensive Income (Loss), Net of Tax:                                                        |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      |                                                                                                  | Unrealized holding gains (losses) arising
	during period                                         |           |            |           |      |            |            |           |   |           |            | (303,853   | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      |                                                                                                  | Less: Reclassification adjustment  realized
	holding (losses)                                   |           |            |           |      |            |            |           |   |           |            | (186,620   | )
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  |                                                                                                  |          |            |            |      |           |            |            |   | (117,233  | )         
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  | Comprehensive Income (Loss)                                                                      |           | $          | 5,394,863  |      |            | $          | (4,708,076 | ) |           | $          | (6,575,641 | )
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|Basic net income (loss) per common share
	available to common stockholders:                           |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Income (loss) before extraordinary item and
	cumulative effect of change in accounting principle |                                                                                                  | $         | 0.56       |            |      | $          | (1.03      | )          |   | $         | (0.80      | )         
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Extraordinary income on extinguishment of debt                                                   |                                                                                                  |           | 0.15       |            |      |            | 0.44       |            |   |           | 0.01       |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Cumulative effect of change in accounting
	principle                                             |                                                                                                  |           | (0.03      | )          |      |            |           |            |   |           |           |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  | Basic net income (loss) per common share
	available to common stockholders                       |           | $          | 0.68       |      |            | $          | (0.59      | ) |           | $          | (0.79      | )
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|Diluted net income (loss) per common share
	available to common stockholders:                         |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Income (loss) before extraordinary item and
	cumulative effect of change in accounting principle |                                                                                                  | $         | 0.56       |            |      | $          | (1.03      | )          |   | $         | (0.80      | )         
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Extraordinary income on extinguishment of debt                                                   |                                                                                                  |           | 0.13       |            |      |            | 0.44       |            |   |           | 0.01       |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Cumulative effect of change in accounting
	principle                                             |                                                                                                  |           | (0.03      | )          |      |            |           |            |   |           |           |           
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           
|                                                                                                      |                                                                                                  | Diluted net income (loss) per common share
	available to common stockholders                     |           | $          | 0.66       |      |            | $          | (0.59      | ) |           | $          | (0.79      | )
|                                                                                                      |                                                                                                  |                                                                                                  |           |            |            |      |            |            |            |   |           |           

See accompanying notes to consolidated financial statements.

F-3



---



##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


Years Ended March 31, 2001, 2000 and 1999


|                             |                                                       |                 |           |            |   |               |       |              |   |          |            |               |   |        |         |          |   |  |             |            |           |  |            |            |   |  |            |            |           | 
|---------------------------- | ----------------------------------------------------- | --------------- | --------- | ---------- | - | ------------- | ----- | ------------ | - | -------- | ---------- | ------------- | - | ------ | ------- | -------- | - |  | ----------- | ---------- | --------- |  | ---------- | ---------- | - |  | ---------- | ---------- | --------- | 
|                             |                                                       |                 |           |            |   | Accumulated   |       |              |   |          |            |              
|                             |                                                       | Common Stock    |           | Additional |   | Other         |       |              |   |          |            | Total        
|                             |                                                       |                 |           | Paid-In    |   | Comprehensive |       | Accumulated  |   | Treasury |            | Stockholders
|                             |                                                       | Shares          |           | Amount     |   | Capital       |       | Income(Loss) |   | Deficit  |            | Stock         |   | Equity
|                             |                                                       |                 |           |            |   |               |       |              |   |          |            |               |   |       
|Balance at March 31, 1998    |                                                       |                 | 8,235,816 |            |   | $             | 8,236 |              |   |          | 24,198,539 |               |   |        | 117,233 |          |   |  | (8,463,905  | )          |           |  |           |            |   |  | 15,860,103 |           
|                            
|                            
|                            
|                            
|                             | Net loss                                              |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             | (5,434,908 | )         |  |            |           |   |  |            | (5,434,908 | )        
|                            
|                            
|                            
|                            
|                             | Exercise of options                                   |                 |           | 4,000      |   |               |       | 4            |   |          |            | 26,996        |   |        |         |         |   |  |             |           |           |  |            |           |   |  |            | 27,000     |          
|                            
|                            
|                            
|                            
|                             | Unrealized loss on investment securities              |                 |           |           |   |               |       |             |   |          |            |              |   |        |         | (117,233 | ) |  |             |           |           |  |            |           |   |  |            | (117,233   | )        
|                            
|                            
|                            
|                            
|                             | Vesting of compensatory stock options                 |                 |           |           |   |               |       |             |   |          |            | 121,967       |   |        |         |         |   |  |             |           |           |  |            |           |   |  |            | 121,967    |          
|                            
|                            
|                            
|                            
|                             | Preferred dividends                                   |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             | (990,401   | )         |  |            |           |   |  |            | (990,401   | )        
|                            
|                            
|                            
|                            
|                             | Accretion of preferred stock                          |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             | (33,099    | )         |  |            |           |   |  |            | (33,099    | )        
|                            
|                            
|                            
|                            
|                             | Payments to acquire 292,200 shares of treasury
	stock |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             |           |           |  |            | (1,259,030 | ) |  |            | (1,259,030 | )        
|                             |                                                       |                 |           |            |   |               |       |              |   |          |            |               |   |        |         |          |   |  |             |            |           |  |            |            |   |  |            |           
|Balance at March 31, 1999    |                                                       |                 | 8,239,816 |            |   |               | 8,240 |              |   |          | 24,347,502 |               |   |        |        |          |   |  | (14,922,313 | )          |           |  | (1,259,030 | )          |   |  | 8,174,399  |           
|                            
|                            
|                            
|                            
|                             | Net loss                                              |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             | (3,185,303 | )         |  |            |           |   |  |            | (3,185,303 | )        
|                            
|                            
|                            
|                            
|                             | Vesting of compensatory stock options                 |                 |           |           |   |               |       |             |   |          |            | 101,284       |   |        |         |         |   |  |             |           |           |  |            |           |   |  |            | 101,284    |          
|                            
|                            
|                            
|                            
|                             | Preferred dividends                                   |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             | (1,486,954 | )         |  |            |           |   |  |            | (1,486,954 | )        
|                            
|                            
|                            
|                            
|                             | Accretion of preferred stock                          |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             | (35,819    | )         |  |            |           |   |  |            | (35,819    | )        
|                            
|                            
|                            
|                            
|                             | Payments to acquire 49,000 shares of treasury
	stock  |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             |           |           |  |            | (115,480   | ) |  |            | (115,840   | )        
|                            
|                            
|                            
|                            
|Cancellation of Common Stock |                                                       |                 | (4,604    | )          |   |               | (5    | )            |   |          | 5          |               |   |        |        |          |   |  |            |            |           |  |           |            |   |  |           |           
|                             |                                                       |                 |           |            |   |               |       |              |   |          |            |               |   |        |         |          |   |  |             |            |           |  |            |            |   |  |            |           
|Balance at March 31, 2000    |                                                       |                 | 8,235,212 |            |   | $             | 8,235 |              |   |          | 24,448,791 |               |   |        |        |          |   |  | (19,630,389 | )          |           |  | (1,374,870 | )          |   |  | 3,451,767  |           
|                            
|                            
|                            
|                            
|                             | Net loss                                              |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             | (1,314,502 | )         |  |            |           |   |  |            | (1,314,502 | )        
|                            
|                            
|                            
|                            
|                             | Preferred dividends                                   |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             | (930,977   | )         |  |            |           |   |  |            | (930,977   | )        
|                            
|                            
|                            
|                            
|                             | Accretion of preferred stock                          |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             | (38,255    | )         |  |            |           |   |  |            | (38,255    | )        
|                            
|                            
|                            
|                            
|                             | Issuance of Common Stock                              |                 |           | 175,000    |   |               |       | 175          |   |          |            | 38,325        |   |        |         |         |   |  |             |           |           |  |            |           |   |  |            | 38,500     |          
|                            
|                            
|                            
|                            
|                             | Retirement of Series C Preferred Stock                |                 |           |           |   |               |       |             |   |          |            |              |   |        |         |         |   |  |             | 1,934,740  |           |  |            |           |   |  |            | 1,934,740  |          
|                             | Retirement of Series D                                |                 |           |            |   |               |       |              |   |          |            |               |   |        |         |          |   |  |             |            |           |  |            |            |   |  |            |            |          
|                            
|                            
|                            
|                            
|                             |                                                       | Preferred Stock |           |            |  |               |       |              |  |          |            |               |  |        |         |          |  |  |             |            | 5,743,857 |  |            |            |  |  |            |            | 5,743,857 | 
|                             |                                                       |                 |           |            |   |               |       |              |   |          |            |               |   |        |         |          |   |  |             |            |           |  |            |            |   |  |            |           
|Balance at March 31, 2001    |                                                       |                 | 8,410,212 |            |   | $             | 8,410 |              |   |          | 24,487,116 |               |   |        |        |          |   |  | (14,235,526 | )          |           |  | (1,374,870 | )          |   |  | 8,885,130  |           
|                             |                                                       |                 |           |            |   |               |       |              |   |          |            |               |   |        |         |          |   |  |             |            |           |  |            |            |   |  |            |           

See accompanying notes to consolidated financial statements.

F-4



---



##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH FLOWS


Years ended March 31, 2001, 2000 and 1999


|                                                                                      |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |             |   |          |            |  
|------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------- | -------------------------------------- | ---------------------------------------------------- | - | -------- | ---------- | ---------- | - | -------- | ---------- | ----------- | - | -------- | ---------- | -
|                                                                                      |                                                                            | 2001                    |                                        | 2000                                                 |   | 1999    
|                                                                                      |                                                                            |                         |                                        |                                                      |   |         
|Cash Flows from Operating Activities:                                                 |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net income (loss)                                                                     |                                                                            | $                       | (1,314,502                             | )                                                    |   | $        | (3,185,303 | )          |   | $        | (5,434,908 | )          
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Adjustments to reconcile net income
	(loss) to net cash used in operating activities: |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Depreciation and amortization                                              |                         |                                        | 1,236,127                                            |   |          |            | 1,097,346  |   |          |            | 625,947     |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Compensation expense on vesting of unexercised
	compensatory stock options |                         |                                        |                                                     |   |          |            | 101,284    |   |          |            | 121,967     |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Gain on sale of water rights                                               |                         |                                        | (892,779                                             | ) |          |            |           |   |          |            |            |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Gain on sale of investment in limited liability
	company                   |                         |                                        | (3,333                                               | ) |          |            | (40,000    | ) |          |            | (40,000     | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Gain on sale of other water assets                                         |                         |                                        | (879,208                                             | ) |          |            | (394,745   | ) |          |            |            |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | (Gain) loss on disposition of available-for-sale
	securities               |                         |                                        |                                                     |   |          |            |           |   |          |            | 186,620     |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Asset impairment charge                                                    |                         |                                        | 762,770                                              |   |          |            | 1,165,982  |   |          |            |            |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Extraordinary income on extinguishment of debt                             |                         |                                        | (1,154,094                                           | ) |          |            | (3,489,803 | ) |          |            | (99,656     | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Cumulative effect of change in accounting
	principle                       |                         |                                        | 237,065                                              |   |          |            |           |   |          |            |            |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Allowance for (recovery of) water project costs                            |                         |                                        | (85,425                                              | ) |          |            | 1,018,717  |   |          |            | 1,294,065   |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Discount on accrued income receivable                                      |                         |                                        |                                                     |   |          |            | 75,880     |   |          |            |            |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Loss on disposition of property and equipment                              |                         |                                        |                                                     |   |          |            | 2,544      |   |          |            | 1,982       |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Loss on discount of notes receivable                                       |                         |                                        | 11,108                                               |   |          |            |           |   |          |            |            |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Changes in assets and liabilities:                                         |                         |                                        |                                                      |   |          |            |            |   |          |            |             |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                                            | (Increase) decrease in: |                                        |                                                      |   |          |            |            |   |          |            |             |   |         
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                                            |                         | Other current assets                   |                                                      |   | 515,256  |            |            |   | (570,099 | )          |             |   | (103,774 | )         
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                                            |                         | Land held for sale                     |                                                      |   |         |            |            |   | (594,353 | )          |             |   | (544,950 | )         
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                                            |                         | Water rights                           |                                                      |   |         |            |            |   | 737,055  |            |             |   |         |           
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                                            |                         | Other assets                           |                                                      |   | (26,256  | )          |            |   | (59,912  | )          |             |   | (48,084  | )         
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                                            | Increase (decrease) in: |                                        |                                                      |   |          |            |            |   |          |            |             |   |         
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                                            |                         | Accounts payable                       |                                                      |   | 89,015   |            |            |   | 8,444    |            |             |   | 72,834   |           
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                                            |                         | Accrued expenses and other liabilities |                                                      |   | 301,336  |            |            |   | 433,988  |            |             |   | (218,534 | )         
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                                            |                         | Deferred water revenue                 |                                                      |   | (150,000 | )          |            |   |         |            |             |   |         |           
|                                                                                      |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|                                                                                      |                                                                            |                         |                                        | Net cash used in operating activities                |   |          | (1,352,920 | )          |   |          | (3,692,975 | )           |   |          | (4,186,491 | )
|                                                                                      |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|Cash Flows from Investing Activities:                                                 |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Principal payments received on notes receivable                            |                         |                                        | 448,090                                              |   |          |            | 361,382    |   |          |            | 215,292     |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Purchase of property and equipment                                         |                         |                                        | (16,410                                              | ) |          |            | (44,155    | ) |          |            | (134,885    | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Purchase of available-for-sale securities                                  |                         |                                        |                                                     |   |          |            | (3,008,387 | ) |          |            | (10,931,503 | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Sales of available-for-sale securities                                     |                         |                                        |                                                     |   |          |            | 17,069,797 |   |          |            | 13,019,387  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Sales of water rights                                                      |                         |                                        | 5,589,880                                            |   |          |            |           |   |          |            |            |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Sales of other water assets                                                |                         |                                        | 2,700,593                                            |   |          |            | 929,535    |   |          |            |            |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Additions to water rights                                                  |                         |                                        | (28,681                                              | ) |          |            | (419,991   | ) |          |            | (1,189,062  | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Purchase of water rights                                                   |                         |                                        |                                                     |   |          |            | (1,325,000 | ) |          |            | (3,278,630  | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Additions to other water assets                                            |                         |                                        |                                                     |   |          |            | (155,439   | ) |          |            | (271,151    | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Prepayment of leasing costs                                                |                         |                                        | (166,320                                             | ) |          |            | (517,333   | ) |          |            | (4,187,679  | )
|                                                                                      |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|                                                                                      |                                                                            |                         |                                        | Net cash provided by (used in) investing
	activities |   |          | 8,527,152  |            |   |          | 12,890,409 |             |   |          | (6,758,231 | )
|                                                                                      |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|Cash Flows from Financing Activities:                                                 |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Proceeds from long-term debt                                               |                         |                                        |                                                     |   |          |            | 800,000    |   |          |            | 3,560,000   |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Net proceeds from exercise of options                                      |                         |                                        |                                                     |   |          |            |           |   |          |            | 27,000      |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Payment of deferred debt costs                                             |                         |                                        |                                                     |   |          |            |           |   |          |            | (84,900     | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Proceeds from issuance of redeemable preferred
	stock                      |                         |                                        |                                                     |   |          |            |           |   |          |            | 10,000,000  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Purchase of convertible subordinated debentures                            |                         |                                        | (499,888                                             | ) |          |            | (1,500,000 | ) |          |            | (151,006    | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Preferred stock dividends                                                  |                         |                                        | (930,977                                             | ) |          |            | (1,486,954 | ) |          |            | (291,666    | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Purchase of common stock                                                   |                         |                                        |                                                     |   |          |            | (115,840   | ) |          |            | (1,259,030  | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Purchase of convertible redeemable preferred stock                         |                         |                                        | (442,171                                             | ) |          |            |            |   |          |            |             |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Principal payments on long-term debt                                       |                         |                                        | (696,983                                             | ) |          |            | (1,245,721 | ) |          |            | (421,538    | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Cash restricted to fund water development costs                            |                         |                                        |                                                     |   |          |            | (4,416,431 | ) |          |            |            |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Release of restricted cash                                                 |                         |                                        | 562,788                                              |   |          |            |           |   |          |            |            |  
|                                                                                      |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|                                                                                      |                                                                            |                         |                                        | Net cash provided by(used in) financing activities   |   |          | (2,007,231 | )          |   |          | (7,964,946 | )           |   |          | 11,378,860 |  
|                                                                                      |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|Net increase (decrease) in cash and cash
	equivalents                                 |                                                                            |                         | 5,167,001                              |                                                      |   |          | 1,232,488  |            |   |          | 434,138    |            
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Cash and Cash Equivalents, beginning of year                                          |                                                                            |                         | 1,971,614                              |                                                      |   |          | 739,126    |            |   |          | 304,988    |            
|                                                                                      |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            
|Cash and Cash Equivalents, end of year                                                |                                                                            | $                       | 7,138,615                              |                                                      |   | $        | 1,971,614  |            |   | $        | 739,126    |            
|                                                                                      |                                                                            |                         |                                        |                                                      |   |          |            |            |   |          |            |            

See accompanying notes to consolidated financial statements.

F-5



---



##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1. Organization and Summary of Significant
Accounting Policies and Practices:

Description of Business

Western Water Company and subsidiaries (the Company)
identify, manage, acquire, develop, sell and lease water and
water rights in the western United States. The Company, directly
and indirectly, owns a diverse portfolio of water rights, as
well as real estate, in California and Colorado. The
Companys current principal activity is the acquisition and
development of water rights and the sale or lease of its water,
and from assisting unaffiliated owners of water rights in
obtaining revenue from their water rights.

Principles of Consolidation

The consolidated financial statements of Western Water Company
include Western Water Service Company and YG Procyon
Corporation, the Companys wholly-owned subsidiaries, and
YG Rice Farms, L.P., a limited partnership directly and
indirectly wholly-owned and controlled by the Company. All
inter-company balances and transactions have been eliminated in
consolidation.

Cash Equivalents

The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.

Allowance for Doubtful Accounts

The Company provides for valuation allowances for notes
receivable when repayment becomes doubtful or amounts due are
delinquent and in excess of the value of the collateral. Notes
are deemed delinquent when they are more than 90 days past
due. As of March 31, 2001 and 2000, no allowance for
doubtful accounts has been provided since the Companys
management believes that the value of the collateral is in
excess of the total receivables, and there are no delinquent
notes.

Land Held for Sale

Land held for sale is carried at the lower of the carrying
amount or fair value less costs to sell. The basis of the
properties includes the allocation of original purchase price,
direct development costs and an adjustment as a result of the
quasi-reorganization (see Note 17). Costs are allocated to
properties by the specific identification method whenever
possible. Otherwise, development costs are allocated based on
the relative fair value of the properties. Real estate operating
revenues include proceeds from the sale of land.

Water Rights

Water rights consist of various water interests acquired
directly or through the acquisition of real estate properties.
Water rights are stated at cost and consist of an allocation of
the original purchase price between water rights and real estate
properties based on their relative fair values, plus other
direct development and acquisition costs and an adjustment as a
result of the quasi-reorganization (see Note 17).

Costs are allocated to water rights by the specific
identification method whenever possible. Otherwise, development
costs are allocated based on the relative fair value of the
water rights. In addition, interest costs are capitalized during
the development period. Capitalized interest for the years ended
March 31, 2001, 2000 and 1999 was $0, $83,749, and $82,565,
respectively.

The Company capitalizes costs directly related to water projects
under development that are considered probable. The Company
provides an allowance for these capitalized water project costs,
based primarily upon the Companys historical experience
with similar projects.

F-6



---



##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Prepaid leasing costs

Prepaid leasing costs are lease payments or other development
costs incurred directly in connection with water rights leased
by the Company that are considered probable of providing a
benefit to the Company in future periods. The Company provides
an allowance for certain prepaid leasing costs in which the
Company has not entered into a related water contract to sell
such leased water, based primarily upon the Companys
historical experience with similar projects. Upon the execution
of a contract to sell such leased water to a customer, the
Company amortizes the prepaid leasing costs over the life of the
water sales contract using the straight-line method.

Other Water Assets

Prior to the sale of the right in March 2001, other water assets
primarily represented the Companys right to receive
3.7398 percent of payments made over a 100-year period
commencing July 1, 1989, with respect to sales of water by
a non-affiliated third party to the Cucamonga County Water
District. These rights were being amortized using the
straight-line method over a 40-year period. The accumulated
amortization as of March 31, 2001 and 2000 was $407,444 and
$349,124, respectively. The net carrying value of this right at
the time of sale of $1,821,385, net of accumulated amortization
of $467,595 was written-off and included as a component of other
income (Note 20). Other water assets also include the
Companys investment in shares of a mutual water company.
These shares are carried at cost.

Deferred Debt Costs

Deferred debt costs are amortized using the straight-line
method, which approximates the interest method, over the life of
the related debt.

Property and Equipment

Property and equipment are stated at cost. Depreciation expense
is computed on the straight-line method over the estimated
useful lives ranging from five to ten years and totaled
$102,639, $58,567, and $29,195, for the years ended
March 31, 2001, 2000, and 1999, respectively.

Stock Option Plan

The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, in
accounting for its outstanding stock options. As such, deferred
compensation expense would generally be recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price. Such deferred compensation is
expensed pro-rata over the vesting period of the stock option.
Repriced stock options are accounted for using variable plan
accounting which requires periodic re-measurement of the
intrinsic value of the related stock option until its exercise,
forfeiture, or cancellation.

Revenue Recognition  Water

In the fourth quarter of Fiscal 2001, after giving consideration
to guidance provided by the SEC Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial
Statements, the Company performed a review of its revenue
recognition policy affecting water sales contracts. As a result
of this review, the Company revised its revenue recognition
policy for water sales contracts effective April 1, 2000,
and restated its Fiscal 2001 quarterly operating results to
reflect this new policy. The issuance of SAB 101 changes
the Companys revenue recognition practices for
non-refundable water contract payments. The Company previously
recognized water revenue upon execution of a water sales
contract, where delivery of water was not a condition for
realization of payment. Prior to April 1, 2000, this water
sales contract provided water revenue

F-7



---



##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


of $974, 120 and cost of water revenue of $737,055. In
accordance with SAB 101, the Company recorded the
cumulative effect of the change in accounting principle with a
charge of $237,065 to the Fiscal 2001 consolidated statement of
operations in the fourth quarter of Fiscal 2001. Included in the
results of operations for the year ended March 31, 2001 is
water revenue of $150,000 and cost of water revenue of $105,300
that was previously recognized in the results of operations for
the year ended March 31, 2000 under the prior method.

The pro forma effect of retroactive application to the results
of operations for the fiscal years ended March 31, 2001,
2000 and 1999 only affected fiscal 2000, as follows:

|                                                                                   |  |             |  |   |            |   |  | 
|---------------------------------------------------------------------------------- |  | ----------- |  | - | ---------- | - |  | 
|Fiscal year ended March 31, 2000                                                   |  |             |  |  
|                                                                                   |  |             |  |  
|Net income (loss) available to common
	stockholders:                               |  | As reported |  | $ | (4,708,076 | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   |  | Pro forma   |  |   | (4,945,141 | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Net income (loss) per share available to
	common stockholders  basic and diluted: |  | As reported |  |   | (.59       | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   |  | Pro forma   |  |   | (.62       | )

Under the new method, water revenue is recognized when
realizable and earned. Such revenue is realizable and earned
when: (i) persuasive evidence of an arrangement exists,
(ii) delivery of the water has occurred, (iii) the
sales price is fixed and determinable, and
(iv) collectibility is reasonably assured. When a water
transaction does not meet these requirements revenue is deferred
until these requirements are met. Revenue from long-term water
right lease contracts with non-cancelable, fixed rate increases
is recognized on a straight-line basis over the contractual
period of the water right lease.

Revenue Recognition  Land

Sales of land are generally accounted for under the full accrual
method. Under that method, gain is recognized when the
collectibility of the sales price is reasonably assured and the
earnings process is virtually complete. When a sale does not
meet the requirements for full accrual recognition, gain is
deferred until these requirements are met.

Income Taxes

Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.

Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of

Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest)
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the
assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value, less selling costs (Note 16).

F-8



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing
net income (loss) available to common stockholders by the
weighted average number of common shares outstanding during each
period. Diluted net income (loss) per share is computed by
dividing the amount of net income (loss) available to common
stockholders by the weighted average number of common shares
outstanding during each period plus all potentially dilutive
common shares outstanding during the reporting period.

The following table sets forth the support for the computation
of basic and diluted net income (loss) per common share
available to common stockholders for the year ended
March 31, 2001:

|                                                                                                                                                                                |                                                                                                                             |                                         |                                         |           |         |           |      |       |   |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | --------------------------------------- | --------- | ------- | --------- | ---- | ----- | - | ---- | 
|                                                                                                                                                                                |                                                                                                                             | Total                                   |                                         | Per Share
|                                                                                                                                                                                |                                                                                                                             |                                         |                                         |          
|Basic:                                                                                                                                                                          |                                                                                                                             |                                         |                                         |           |         |           |      |      
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                                | Income available to common stockholders before
	extraordinary item and cumulative effect of change in accounting
	principle |                                         | $                                       | 4,477,834 |         |           | $    | 0.56  |  
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                                | Extraordinary income on extinguishment of debt                                                                              |                                         |                                         | 1,154,094 |         |           |      | 0.15  |  
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                                | Cumulative effect of change in accounting
	principle                                                                        |                                         |                                         | (237,065  | )       |           |      | (0.03 | )
|                                                                                                                                                                                |                                                                                                                             |                                         |                                         |           |         |           |      |      
|                                                                                                                                                                                |                                                                                                                             |                                         | Income available to common stockholders |           | $       | 5,394,863 |      |       | $ | 0.68 | 
|                                                                                                                                                                                |                                                                                                                             |                                         |                                         |           |         |           |      |      
|                                                                                                                                                                                | Weighted average number of shares                                                                                           |                                         |                                         | 7,901,204 |         |           |      |       |  
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|Diluted:                                                                                                                                                                        |                                                                                                                             |                                         |                                         |           |         |           |      |      
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                                | Income available to common stockholders before
	extraordinary item and cumulative effect of change in accounting
	principle |                                         | $                                       | 4,477,834 |         |           |      |       |  
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                                |                                                                                                                             | Add: Series D preferred stock dividends |                                         |           | 562,500 |           |      |       |   |     
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|Accretion on Series F preferred stock                                                                                                                                           |                                                                                                                             |                                         | 2,909                                   |           |         |           |      |      
|                                                                                                                                                                                |                                                                                                                             |                                         |                                         |           |         |           |      |      
|                                                                                                                                                                                |                                                                                                                             |                                         | 5,043,243                               |           |         | $         | 0.56 |      
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                                | Extraordinary income on extinguishment of debt                                                                              |                                         |                                         | 1,154,094 |         |           |      | 0.13  |  
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                                | Cumulative effect of change in accounting
	principle                                                                        |                                         |                                         | (237,065  | )       |           |      | (0.03 | )
|                                                                                                                                                                                |                                                                                                                             |                                         |                                         |           |         |           |      |      
|                                                                                                                                                                                |                                                                                                                             |                                         | Income available to common stockholders |           | $       | 5,960,272 |      |       | $ | 0.66 | 
|                                                                                                                                                                                |                                                                                                                             |                                         |                                         |           |         |           |      |      
|Weighted average number of shares                                                                                                                                               |                                                                                                                             |                                         | 7,901,204                               |           |         |           |      |      
|                                                                                                                                                                                |                                                                                                                             |                                         |                                         |           |         |           |      |      
|Plus: Weighted average shares of dilutive
	Series D preferred stock using the if-converted method (at
	$8.99 per share) during the period such preferred stock was
	outstanding |                                                                                                                             |                                         | 1,066,634                               |           |         |           |      |      
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|Weighted average shares of dilutive Series F
	preferred stock using the if-converted method (at $5.60 per
	share) during the period such preferred stock was outstanding        |                                                                                                                             |                                         | 14,677                                  |           |         |           |      |      
|                                                                                                                                                                                |                                                                                                                             |                                         |                                         |           |         |           |      |      
|Weighted average number of shares for diluted
	computation                                                                                                                      |                                                                                                                             |                                         | 8,982,515                               |           |         |           |      |      
|                                                                                                                                                                                |                                                                                                                             |                                         |                                         |           |         |           |      |      

The weighted average shares used for basic and diluted EPS
computation were 7,913,542, and 8,186,772 shares for the years
ended March 31, 2000 and 1999, respectively.

Stock options to purchase the following number of shares of
common stock at exercise prices per share ranging from
$.39  $21.00, $2.00  $21.00, and
$5.25  $21.00 in fiscal years ended March 31,
2001, 2000, and 1999, respectively, were not included in the
computation of diluted earnings per share as their effect would
have been antidilutive:

|              |  |      |           |      |  |      |           |  |  |  |           | 
|------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|              |  | 2001 |           | 2000 |  | 1999
|              |  |      |           |      |  |     
|Stock options |  |      | 1,430,375 |      |  |      | 1,621,567 |  |  |  | 1,689,876 | 

Warrants to purchase 98,000 shares of common stock at $17.50 per
share expired as of March 31, 2000. These warrants were not
included in the computation of diluted earnings per share for
the year ended March 31, 1999 as their effect would have
been anti-dilutive.

F-9



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Convertible debentures, Series C redeemable preferred stock
and Series D redeemable preferred stock convertible into
the following number of shares of common stock, at a conversion
price of $15.86, $16.62 and $8.99 per share, were not included
in the computation of diluted earnings per share for the years
ended March 31, 2000, and 1999, respectively, as their
effect would have been anti-dilutive:

|                                    |  |      |           |      |  |  |           | 
|----------------------------------- |  | ---- | --------- | ---- |  |  | --------- | 
|                                    |  | 2000 |           | 1999
|                                    |  |      |           |     
|Convertible debentures              |  |      | 614,123   |      |  |  | 929,382   | 
|                                   
|                                   
|                                   
|                                   
|Series C redeemable preferred stock |  |      | 611,593   |      |  |  | 611,593   | 
|                                   
|                                   
|                                   
|                                   
|Series D redeemable preferred stock |  |      | 1,112,347 |      |  |  | 1,112,347 | 

Convertible debentures convertible into 556,817 shares of common
stock and Series C Redeemable Preferred Stock convertible
into 463,779 shares of common stock were not included in
the computation of diluted earnings per share for the year ended
March 31, 2001 as the effect would have been anti-dilutive.

Use of Estimates

Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue
and expenses during the reporting period to prepare these
financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual
results could differ from those estimates.

Reclassifications

Certain reclassifications of prior year amounts have been made
in order to conform to the current years presentation.

Note 2. Restricted Cash:

Under the Companys Strategic Relationship Agreement (the
SRA) with Sociedad General de Aguas de Barcelona,
S.A. (Agbar), the Company agreed to use the proceeds
from the sale of Series D Preferred Stock only to fund
development costs of specific water projects and related capital
costs, including Series D Preferred Stock dividends, that
were identified and agreed upon by Agbar. On March 16,
2001, the remaining restricted cash was returned to Agbar
(Note 13) in conjunction with the termination of the SRA.

Note 3. Notes Receivable:

Notes receivable arose from the sale of farm property in Yuba
County, California. The notes receivable bear interest at rates
ranging from 8% to 9.5%, with a weighted average of 8.7%. The
note receivable maturity dates range from June, 2002 to April,
2009. The notes are secured by the lots sold.

Aggregate principal maturities due on notes receivable at
March 31, 2001 are as follows:

|           |       |       |        |         | 
|---------- | ----- | ----- | ------ | ------- | 
|Year Ended |       |      
|March 31,  |       | Total
|           |       |      
|2002       |       | $     | 86,413 |        
|          
|          
|          
|          
|2003       |       |       | 39,332 |        
|          
|          
|          
|          
|2004       |       |       | 1,499  |        
|          
|          
|          
|          
|2005       |       |       | 1,794  |        
|          
|          
|          
|          
|2006       |       |       | 2,105  |        
|          
|          
|          
|          
|Thereafter |       |       | 90,979 |        
|           |       |       |        |        
|           | Total |       | $      | 222,122 | 
|           |       |       |        |        

F-10



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 4. Property and Equipment:

Property and equipment at March 31, 2001 and 2000 consists
of the following:

|                              |  |      |          |      |  |   |          |  
|----------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                              |  | 2001 |          | 2000
|                              |  |      |          |     
|Land                          |  | $    | 2,952    |      |  | $ | 2,952    |  
|                             
|                             
|                             
|                             
|Equipment                     |  |      | 214,244  |      |  |   | 297,635  |  
|                              |  |      |          |      |  |   |          |  
|                              |  |      | 217,196  |      |  |   | 300,587  |  
|                             
|                             
|                             
|                             
|Less accumulated depreciation |  |      | (130,722 | )    |  |   | (127,884 | )
|                              |  |      |          |      |  |   |          |  
|                              |  | $    | 86,474   |      |  | $ | 172,703  |  
|                              |  |      |          |      |  |   |          |  

Note 5. Land Held for Sale:

Land held for sale at March 31, 2001 and 2000 consists of
the following:

|                                                           |  |      |           |      |  |   |           | 
|---------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                           |  | 2001 |           | 2000
|                                                           |  |      |           |     
|Cherry Creek Basin, Colorado                               |  | $    | 1,299,120 |      |  | $ | 1,299,120 | 
|                                                          
|                                                          
|                                                          
|                                                          
|San Bernardino County, California                          |  |      | 725,226   |      |  |   | 1,042,996 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Rice farms and ranches, Yuba and Glenn County,
	California |  |      | 3,080,490 |      |  |   | 3,080,490 | 
|                                                           |  |      |           |      |  |   |           | 
|                                                           |  | $    | 5,104,836 |      |  | $ | 5,422,606 | 
|                                                           |  |      |           |      |  |   |           | 

Note 6. Water Rights:

Water rights held at March 31, 2001 and 2000 consist of the
following:

|                                                           |  |      |            |      |  |   |            |  
|---------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                           |  | 2001 |            | 2000
|                                                           |  |      |            |     
|Cherry Creek Basin, Colorado                               |  | $    | 10,750,442 |      |  | $ | 10,725,357 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Los Angeles County, California                             |  |      | 577,836    |      |  |   | 5,132,886  |  
|                                                          
|                                                          
|                                                          
|                                                          
|San Bernardino County, California                          |  |      | 1,668,153  |      |  |   | 2,500,000  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Rice farms and ranches, Yuba and Glenn County,
	California |  |      | 280,798    |      |  |   | 280,798    |  
|                                                          
|                                                          
|                                                          
|                                                          
|Inyo County, California                                    |  |      |           |      |  |   | 1,274,678  |  
|                                                           |  |      |            |      |  |   |            |  
|                                                           |  |      | 13,277,229 |      |  |   | 19,913,719 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Less: Allowance for project costs                          |  |      | (9,842     | )    |  |   | (1,532,912 | )
|                                                           |  |      |            |      |  |   |            |  
|                                                           |  | $    | 13,267,387 |      |  | $ | 18,380,807 |  
|                                                           |  |      |            |      |  |   |            |  

During the fiscal year ended March 31, 2001, the Company
abandoned its Olancha project in Inyo County, California, due to
insurmountable local regulatory impediments. In connection with
that abandonment, the Company returned an associated real
property and related water rights to the seller of the property
in exchange for full satisfaction and retirement of the
Companys note in favor of the seller in the amount of
$758,000 and accrued interest of $11,000 (see Note 11). The
Company also wrote off the remaining water rights associated
with the Olancha project for which an allowance had been
provided in prior years.

During the fiscal year ended March 31, 2001, the Company
sold 1,219 acre feet of annual groundwater extraction rights in
the Central Basin in Los Angeles, California to a municipality
in the Los Angeles area. The Company realized a gain on that
sale in the amount of $428,225. The aforementioned gain is
included in the gain on sale of assets in the accompanying
consolidated statement of operations.

During the fiscal year ended March 31, 2000, the Company
recognized the impairment of the value of certain water rights
it owns in the Mojave Basin of San Bernardino County and reduced
the carrying value of

F-11



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


such water rights by $826,618 to its estimated fair value. This
impairment was due, in part, to uncertainty surrounding the
appeal of the Mojave Basin adjudication to the California
Supreme Court. During the fiscal year ended March 31, 2001,
important aspects of the groundwater law were clarified by the
California Supreme Court. However, due to remaining
uncertainties, the Company has not reduced its allowance for
project costs in relation to these rights. During the fiscal
year ended March 31, 2001, the Company also sold 1,000 acre feet
of its water rights in the Mojave Basin of California to a water
utility company, and realized a gain on that sale in the amount
of $464,554.

Note 7. Prepaid Leasing Costs:

On September 30, 1998, the Company entered into a pumping
rights lease and a water sale agreement with the City of
Inglewood, California (Inglewood). Beginning
October 1, 1998, Inglewood leased the rights to pump 4,450
acre-feet of water per year to the Company for a five-year
period. In consideration of the lease, the Company made a
$3,603,200 lump-sum cash payment to Inglewood. Under the water
sale agreement, the Company agreed to sell, and Inglewood agreed
to buy, 5,950 acre-feet of water each year for the next five
years. In the first year, Inglewood paid $200 per acre-foot
($1,190,000). The per acre-foot price will escalate over the
remaining four-year period at a rate equal to the sum of 3.75%
per year plus 25% of any increase in the Metropolitan Water
District of Southern Californias (MWD) rate
for water, as defined. For the years ended March 31, 2001,
2000 and 1999, the Company recognized revenue of $1,286,971,
$1,282,660 and $641,330 respectively from the agreement with
Inglewood.

In order to secure a portion of the water that the Company
agreed to sell to Inglewood, the Company entered into a
five-year and a fifteen-year water rights lease during the year
ended March 31, 1999. The five-year water rights lease is
expected to provide 1,008 acre-feet per year for a payment of
$150 per acre-foot in the first year ($151,200), which was
prepaid. The fifteen-year water rights lease is expected to
provide 250 acre-feet per year for a payment of $135 per
acre-foot in the first year ($33,750).

In February 1999, the Company entered into a water transfer
agreement with Natomas Central Mutual Water Company
(Natomas) pursuant to which Natomas agreed, subject
to certain conditions that have not been satisfied, to transfer
to the Company the temporary use of up to 30,000 acre-feet of
non-Central Valley Project water from the Sacramento River by
October 1999. In February 1999, the Company paid a nonrefundable
deposit of $275,000 to Natomas and is obligated to pay Natomas,
upon delivery of the water to a third party purchaser, $20 per
acre-foot for any of the water transferred for use within or
north of the Delta and $50 per acre-foot for any of the water
transferred for use south of the Delta. In addition, the Company
also agreed to pay Natomas 50% of the net proceeds, as defined,
from the sale of water to a third party purchaser. During the
year ended March 31, 2000, the State Water Resources
Control Board entered its Water Rights Order 99-012 limiting the
amount of water available for transfer under the Companys
agreement with Natomas and imposing certain restrictions on any
such transfer. As a result, the Company provided an allowance
for water project costs of 100% of its investment in this
agreement as of March 31, 2000. During the fiscal year
ended March 31, 2001 the Company took delivery of 1,187.7
acre feet of water under this agreement and resold a portion of
such water to an unaffiliated water district. Accordingly, the
Company reclassified the proportionate amount of $59,385 of the
aforementioned allowance to cost of water sales.

During Fiscal 2000, the Company entered into a similar
arrangement with Sutter Mutual Water Company, and paid a
nonrefundable deposit of $100,000, and incurred other costs as
well. The Company has provided an allowance for water project
costs of 100% of its investment in this agreement as of
March 31, 2000 because of the uncertainty regarding its
ability to obtain and sell the water based on the possible
application of similar transfer limitations. During the fiscal
year ended March 31, 2001 the Company purchased and resold
1,302 acre feet of water under this agreement. Accordingly,
the Company reclassified the proportionate amount of $26,040 of
the aforementioned allowance to cost of water sales.

F-12



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


As of March 31, 2001, and 2000, the allowance for prepaid
leasing costs was $564,703, and $650,128, respectively.
Accumulated amortization as of March 31, 2001, and 2000 was
$2,253,475, and $1,348,872, respectively.

Note 8. Investment in Limited Liability Company:

In October 1995, the Company and a joint venture composed of The
Morgan Stanley Real Estate Fund II, L.P. (Morgan
Stanley), an affiliate of Morgan Stanley Group, and two
affiliates of Morgan Stanley (collectively, Western Land
Joint Venture) formed Nevada Land and Resource Company,
LLC, a Delaware limited liability company (Nevada
LLC) which was owned 35.3% by the Company and 64.7% by
Western Land Joint Venture. Nevada LLC acquired approximately
1,400,000 acres of land and related water rights in the state of
Nevada. The Companys $12,000,000 investment in Nevada LLC
was funded with the proceeds from the sale of 9% Convertible
Subordinated Debentures.

On April 23, 1997, the Company sold its interest in Nevada
LLC to Global Equity Corporation (Global) for
$13,360,000, of which $12,024,000 was received in cash and
$1,336,000 was received in the form of a note. During August
1997, the note plus the accrued unpaid interest was converted
into 723,911 shares of Global. During the year ended
March 31, 1998, the Company sold 147,300 Global shares at a
gain of $51,201. During the year ended March 31, 1999,
Global was acquired by PICO Holdings, Inc. (PICO).
Also during the year ended March 31, 1999, the Company sold
its entire holdings in PICO, realizing a loss of $186,620. The
Company realized proceeds of $1,222,695 from the sale of the
723,911 shares. In connection with the sale of the
Companys interest in the Nevada LLC, the Nevada LLC
entered into a consulting agreement with Western Agua, L.P. (the
Consulting Agreement). Western Agua, L.P. is a
Delaware limited partnership formed by the Company and Western
Land Joint Venture. The Company owns a 70% interest in Western
Agua, L.P. and is the sole general partner of the partnership.
In exchange for providing consulting services to the Nevada LLC,
Western Agua, L.P. is to receive 50% of all the net proceeds, if
any, derived from the subsequent sale, leasing or other
disposition of all or any portion of the Nevada LLC or
refinancing of the Nevada LLC or other revenues derived from the
disposition of Nevada LLC by Global after they both recoup their
investment in the Nevada LLC and earn a 20% cumulative return,
as defined, compounded annually on their investment, provided
such net proceeds have begun to be earned within five years from
the date of sale. In addition, the Western Land JV has agreed to
provide the Company with a three-year right of first offer to
review all Western Land JVs water investment opportunities
in the Western United States. The Nevada LLC has contested
Western Agua L.P.s right to the interest in the net
proceeds. Legal action has been stayed by mutual agreement of
the parties until June 30, 2002.

As a result of the sale of the Companys interest in the
Nevada LLC, the Company realized a gain of $2,419,193, net of
legal and other closing costs totaling $60,242 and deferred
$120,000 of the gain relating to estimated future consulting
services that were to be provided in accordance with the
Consulting Agreement. All of the deferred gain has been
recognized as of March 31, 2001. During Fiscal 2001, 2000,
and 1999, $3,333, $40,000, and $40,000, respectively, of the
deferred gain was realized.

Note 9. Fair Value of Financial Instruments:

Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial
Instruments,requires that the fair values be
disclosed for the Companys financial instruments. The
carrying amount of cash and cash equivalents, cash and cash
equivalents-restricted, other current assets, accounts payable,
and accrued expenses and other liabilities are reasonable
estimates of their fair values due to the short-term nature of
those instruments.

The carrying amount of the notes receivable is a reasonable
estimate of fair value based on managements belief that
the terms are not materially different than the terms that would
be offered to land buyers with similar credit ratings.

F-13



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The carrying amount of the long-term debt and Debentures is
based on the principal amount owed, and does not represent
managements belief that the interest rates and terms of
the debt are comparable to those commercially available to the
Company in the marketplace for similar instruments. The Company
repurchased $909,000 principal amount of its debentures for
$500,000 during the fiscal year ended March 31, 2001, and
$5,000,000 principal amount of its debentures for $1,500,000
during the fiscal year ended March 31, 2000.

Note 10. Accrued Expenses and Other Liabilities:

Accrued expenses and other liabilities at March 31, 2001
and 2000 consists of the following:

|                                                              |  |      |         |      |  |   |         | 
|------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                              |  | 2001 |         | 2000
|                                                              |  |      |         |     
|Severance and costs of closing San Diego office               |  | $    |        |      |  | $ | 20,768  | 
|                                                             
|                                                             
|                                                             
|                                                             
|Consulting and engineering                                    |  |      |        |      |  |   | 377,124 | 
|                                                             
|                                                             
|                                                             
|                                                             
|Professional fees                                             |  |      | 30,000  |      |  |   | 89,153  | 
|                                                             
|                                                             
|                                                             
|                                                             
|Printing costs                                                |  |      | 36,000  |      |  |   | 95,269  | 
|                                                             
|                                                             
|                                                             
|                                                             
|Vacation                                                      |  |      | 29,168  |      |  |   | 51,147  | 
|                                                             
|                                                             
|                                                             
|                                                             
|Interest                                                      |  |      | 88,852  |      |  |   | 66,573  | 
|                                                             
|                                                             
|                                                             
|                                                             
|Residual interest  Cucamonga
	Water Fee Agreement (Note  20) |  |      | 408,230 |      |  |   |        | 
|                                                             
|                                                             
|                                                             
|                                                             
|Other                                                         |  |      | 206,732 |      |  |   | 158,229 | 
|                                                              |  |      |         |      |  |   |         | 
|                                                              |  | $    | 798,982 |      |  | $ | 858,263 | 
|                                                              |  |      |         |      |  |   |         | 

During the year ended March 31, 2001, the Company
consolidated its corporate headquarters into its Point Richmond,
California office and closed its San Diego office. The
consolidation resulted in the reduction of administrative
personnel from its San Diego office, and the early termination
of its office and equipment leases in San Diego. During the year
ended March 31, 2000, total severance costs for payroll and
related charges were $70,836, which were charged to general and
administrative expenses, of which $20,768 were accrued at
March 31, 2000.

F-14



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 11. Long-Term Debt:

Long-term debt at March 31, 2001 and 2000 consists of debt
related to assets acquired in Cherry Creek Basin, Colorado, the
rice farms and ranches in Yuba and Glenn County, California, and
a ranch in Inyo County, California and the financing of the
lump-sum payment to the City of Inglewood related to the pumping
rights lease (see Note 7):

|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      |           |           |   |   |           |            |  
|---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | --------- | --------- | - | - | --------- | ---------- | -
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 2001 |           | 2000     
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      |           |          
|Water leasing program  |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      |           |           |   |   |           |           
|                      
|                      
|                      
|                      
|                       | Five-year amortizing term loan beginning
	September 30, 1998. The loan accrues interest at the
	banks Reference Rate, as defined, or LIBOR (capped at 6%)
	plus 1.5%, and is payable quarterly, or sooner, at the
	Companys option Principal is payable quarterly, at the
	following annual rate, based on the loan year of October 1
	through September 30: Year 1, $560,000; Year 2,
	$628,000; Year  3, $708,000; Year 4, $790,000;
	Year 5, $874,000 |      | $         | 2,018,000 |   |   | $         | 2,686,000  |  
|Cherry Creek Basin     |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      |           |           |   |   |           |           
|                      
|                      
|                      
|                      
|                       | Mortgage note payable bearing interest at 8%.
	Principal and interest are payable in annual installments of
	$14,307. Balance is due December 2002. At maturity, a
	balloon payment of $47,386 plus any accrued interest is due                                                                                                                                                                                                                            |      |           | 57,123    |   |   |           | 66,139     |  
|Rice farms and ranches |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      |           |           |   |   |           |           
|                      
|                      
|                      
|                      
|                       | Mortgage note payable bearing interest at 9%.
	Principal and interest are payable in annual installments of
	$39,786. Balance is due July 2007                                                                                                                                                                                                                                                                                                             |      |           | 200,243   |   |   |           | 220,210    |  
|                      
|                      
|                      
|                      
|                       | Mortgage note payable bearing interest at 8%.
	Interest was payable in semi-annual installments. The entire
	principal balance was retired in a deed-in-lieu transaction with
	the payee, effective February, 2001                                                                                                                                                                                                                                         |      |           |          |   |   |           | 758,000    |  
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      |           |           |   |   |           |           
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      | 2,275,366 |           |   |   | 3,730,349 |           
|                      
|                      
|                      
|                      
|                       | Less current maturities of long-term obligations                                                                                                                                                                                                                                                                                                                                                                                                           |      |           | (780,502  | ) |   |           | (1,454,983 | )
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      |           |           |   |   |           |           
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            | $    | 1,494,864 |           |   | $ | 2,275,366 |           
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      |           |           |   |   |           |           

Each of the notes payable above is collateralized by the related
individual property. As of March 31,2001, the carrying
value of the collateral for notes payable was $2,853,436.

During the year ended March 31, 1999, the Company incurred
$89,400 of deferred debt costs related to the five-year
amortizing term loan. Amortization expense on the deferred debt
costs totaled $16,980, $16,980 and $8,490 for the years ended
March 31, 2001, 2000 and 1999, respectively. Accumulated
amortization as of March 31, 2001, and 2000 was $42,450,
and $25,470, respectively.

During the year ended March 31, 2000, the Company purchased
a ranch in Inyo County, California. As partial consideration, it
gave a mortgage note payable of $800,000. Certain personal
property assets acquired with the land were sold, and the
proceeds of $42,000 were used to reduce the balance of the note
to $758,000 at March 31, 2000. In February, 2001, the
Company returned the ranch property to the seller/payee of the
aforementioned note payable in full satisfaction of the note and
related accrued interest. (Note 6).

F-15



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Aggregate principal maturities required on long-term debt at
March 31, 2001 are as follows:

|                      |  |   |           | 
|--------------------- |  | - | --------- | 
|Years ended March 31, |  |   |           | 
|                     
|                     
|                     
|                     
|2002                  |  | $ | 780,502   | 
|                     
|                     
|                     
|                     
|2003                  |  |   | 903,109   | 
|                     
|                     
|                     
|                     
|2004                  |  |   | 462,858   | 
|                     
|                     
|                     
|                     
|2005                  |  |   | 28,186    | 
|                     
|                     
|                     
|                     
|2006                  |  |   | 30,722    | 
|                     
|                     
|                     
|                     
|Thereafter            |  |   | 69,989    | 
|                      |  |   |           | 
|Total                 |  | $ | 2,275,366 | 
|                      |  |   |           | 

Note 12. 9% Convertible Subordinated Debentures:

On September 22, 1995 the Company issued $15,000,000 of 9%
Convertible Subordinated Debentures (the
Debentures), due in September, 2005. The Debentures
are unsecured and subordinate to all secured debt. Interest
accrues at 9% per annum and is payable on September 30 and
March 31 of each year.

The Debentures are initially convertible into shares of the
Companys common stock at a conversion price of $15.86 per
share (after the effect of the March 28, 1996 stock
dividend). Effective October 1, 1997, the Company may
redeem the Debentures at a cash redemption price equal to 100%
of the principal amount redeemed (plus accrued and unpaid
interest thereon) if the trading price of the common stock was
150% of the conversion price for the 20 preceding trading days.
During the year ended March 31, 2001, the Company
repurchased $908,888 of its outstanding 9% Debentures, plus
accrued interest of $13,714, for $513,602 in cash. After
reducing related deferred debt costs of $49,617, net of
accumulated amortization of $26,094, the Company recognized a
$385,477 extraordinary gain on the early extinguishment of debt.
During the year ended March 31, 2000, the Company repurchased
$5,000,000 of the Debentures for $1,500,000 in cash. As a result
of this transaction, gross deferred debt costs and accumulated
amortization were reduced by $272,956 and $89,287, respectively.
During the year ended March 31, 1999, the Company
repurchased $260,000 of the Debentures for $151,006 in cash. As
a result of this transaction, gross deferred debt costs and
accumulated amortization were reduced by $14,193 and $4,856,
respectively. Amortization expense on the deferred debt costs
was $53,071, $62,659 and $81,888 for the years ended
March 31, 2001, 2000 and 1999. Accumulated amortization as
of March 31, 2001 and 2000 was $266,803 and $239,826,
respectively.

Note 13. Preferred Stock:

On April 21, 1997, the Company issued 5,000 shares of
Series C Convertible Redeemable Preferred Stock
(Series C Preferred Stock) through a private
offering. The Company received $5,000,000 in cash and incurred
$255,212 of placement costs. The Series C Preferred Stock
was recorded at fair value on the date of issuance less issue
costs. The excess of the preference value over the carrying
value of $447,695 is being accreted by periodic charges to
accumulated deficit until the redemption date in April 2007.
Each share of Series C Preferred Stock has a stated value
of $1,000, a par value of $.001, and is convertible at any time
at the option of the holder into shares of common stock at a
conversion price of $16.62 per share. The conversion price, and
therefore the number of shares of common stock issuable upon the
conversion of the Series C Preferred Stock, is subject to
adjustment in certain events to prevent dilution.

The holders of Series C Preferred Stock are entitled to
vote on all matters presented to the stockholders, together with
the holders of common stock as one class, except as otherwise
required by law. Each share of Series C Preferred Stock is
entitled to the number of votes equal to the number of shares of
common stock into which such share of Series C Preferred
Stock would have been convertible, if such conversion had taken
place on the record date set for determining stockholders
entitled to vote at a meeting or the date of the

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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


consent of stockholders if action is being taken by written
consent. The holders of Series C Preferred Stock are
entitled to receive, when, and if declared, annual dividends in
the amount of $72.50 per share, payable semi-annually on
January 15 and July 15 of each year. During the fiscal
years ended March 31, 2001 and 2000, the Company paid cash
dividends of $368,477 and $736,954, respectively, on the
Series C Preferred Stock. The Company deferred payment of
the cash dividend due on January 15, 2001 pending the
current discussions with the holders of the Series C
Preferred Stock related to a possible restructuring. On
June 18, 2001, the Company declared the January 15,
2001 dividend, and, based on mutual agreement with the holders
of the Series C Preferred Stock, terminated restructuring
discussions.

In the event that the Company is in default in the payment of
two or more semi-annual dividends, the holders of the
Series C Preferred Stock would have the right, voting as a
class, to elect a majority of the directors of the Company, and
the holders of the common stock would have the right to elect
the remaining directors. The right of the holders to elect a
majority of the directors of the Company would continue until
dividends are paid for at least two consecutive semi-annual
periods, after which the right to elect directors shall revert
to the common stock and the Series C Preferred Stock,
voting as a single class.

The Company may, upon 30 days written notice to the
holders, redeem all or any portion of the Series C
Preferred Stock at any time after April l, 1999 at a cash
redemption price of $1,000 per share plus accrued but unpaid
dividends. However, the Company may redeem the Series C
Preferred Stock only if the average closing price of the common
stock during the 20 consecutive trading days prior to the
notice of redemption is not less than 150% of the conversion
price (initially $16.62 per share, subject to adjustment).

Commencing on April 1, 2006 and continuing until
March 31, 2007, each holder of shares of the Series C
Preferred Stock may, from time to time during such period, at
such holders option, cause the Company to redeem for cash,
out of funds legally available, up to an aggregate of one-half
of all shares of Series C Preferred Stock owned by such
holder on April 1, 2006. Commencing on April 1, 2007,
each holder of shares of Series C Preferred Stock may, from
time to time thereafter, at such holders option, cause the
Company to redeem for cash, out of funds legally available, some
or all of such holders shares of Series C Preferred
Stock. The redemption price for each share of Series C
Preferred Stock shall be $1,000 per share, plus, in each case,
all declared and unpaid dividends, if any.

The Series C Preferred Stock has a preference in
liquidation over the holders of common stock of $1,000 per share
plus accrued and unpaid dividends.

During the fiscal year ended March 31, 2001, the Company
voluntarily purchased 2,456.5124 shares of its Series C
Preferred Stock at a purchase price of $180 per share for a
total purchase consideration of $442,171. The net carrying value
of such shares was $2,376,911 net of related private placement
costs of $79,600. The excess of the Series C Preferred
Stock net carrying value over the consideration paid by the
Company was $1,934,740 and has been credited to accumulated
deficit in the accompanying consolidated financial statements.
Solely for earnings per share purposes, such excess has been
included in the computation of earnings applicable to common
stockholders. The carrying amount of the Series C Preferred
Stock was based on the liquidation preference accorded such
stock and on the Companys obligation to redeem such stock
for cash at the liquidation value at a future date certain, and
did not represent managements belief that the interest
rates, conversion price and other terms of such stock are
comparable to those commercially available to the Company in the
marketplace for similar instruments.

On October 27, 1998, the Company sold $10,000,000 of its
Series D Convertible Redeemable Preferred Stock
(Series D Preferred Stock) to Interagua,
Servicios Integrales del Agua, S.A. (Interagua), an
affiliate of Sociedad General de Aguas de Barcelona, S.A.
(Agbar). Each share of Series D Preferred Stock
had a stated value of $1,000, had a dividend rate of 7.5% of its
stated value, and was convertible at any time at the option of
the holder into the number of shares of common stock determined
by dividing the amount of the liquidation preference on the
conversion date by the conversion price of such shares in effect
on the conversion

F-17



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


date. The conversion price was $8.99 per share (the
Conversion Price) and was subject to adjustment in
certain events to prevent dilution.

During the years ended March 31, 2001, 2000 and 1999, the
Company paid cash dividends of $375,000, $750,000 and
$375,000,respectively, on the Series D Preferred Stock.

On March 16, 2001, the Company entered into an Investment
Restructure Agreement (the Agreement) with Agbar and
its affiliate for the early redemption and retirement of the
entire $10,000,000 of issued and outstanding Series D
Preferred Stock. In consideration of that redemption and
retirement, the Company (1) declared and paid to Interagua
the December 15, 2000 scheduled dividend of $187,500;
(2) returned to Interagua the remaining restricted cash
balance (after giving effect to the reduction of such balance
resulting from the aforementioned dividend) of $3,853,643;
(3) issued 175,000 unregistered shares of the
Companys Common Stock to Interagua; and (4) issued to
Interagua 2,000 shares of its newly authorized Series F
Convertible Redeemable Preferred Stock, which shares of
preferred stock have an aggregate stated value of $2,000,000
with a fair value of $364,000, based upon an independent
third-party valuation. In addition, under the Agreement, the
Strategic Relationship Agreement (SRA) was
cancelled, and the parties thereto agreed to consider
cooperating in the potential joint development of future water
infrastructure and water utility projects. Also, with the
cancellation of the SRA, Interagua no longer has the right to
appoint Directors to the Board of the Company.

The excess of the Series D Preferred Stock carrying value
over the consideration paid by the Company to retire the
Series D Preferred Stock was $5,743,857 and has been
credited to accumulated deficit in the accompanying consolidated
financial statements. Solely for earnings per share purposes,
such excess has been included in the computation of earnings
applicable to common stockholders. The carrying amount of the
Series D Preferred Stock is based on the liquidation
preference accorded such stock and on the Companys
obligation to redeem such stock for cash at the liquidation
value at a future date certain, and does not represent
managements belief that the interest rates, conversion
price and other terms of such stock are comparable to those
commercially available to the Company in the marketplace for
similar instruments.

As described in the Certificate of Designations for the
Series F Convertible Redeemable Preferred Stock
(Series F Preferred Stock), each share of
Series F Preferred Stock has a stated value of $1,000, has
a dividend rate of 6.0% per annum of its stated value, and is
convertible at any time at the option of the holder into the
number of shares of common stock determined by dividing the
amount of the stated value of the shares of Series F
Preferred Stock by the conversion price of such shares in effect
on the conversion date. The conversion price is initially
$5.60 per share and is subject to adjustment in certain
events to prevent dilution. Dividends shall be fully cumulative,
and shall be paid semi-annually in arrears, out of funds legally
available for the payment of dividends, on January 15 and
July 15 of each year. Dividends may be paid in additional
shares of Series F Preferred Stock, or in cash, at the
Companys option. The Series F Preferred Stock is
subject to full redemption at its stated value plus accrued
dividends, at the option of the holder, from cash of the Company
legally available for such purpose, beginning in 2010, or
earlier, at the option of the Company, subject to certain
conditions being met.

Note 14. Treasury stock:

In November 1998, the Companys Board of Directors
authorized the repurchase of up to 500,000 shares of the
Companys common stock in the open market. As of
March 31, 2001 and 2000, the Company had repurchased
341,200 shares of common stock at a cost of $1,374,870. The
purchase of treasury shares was recorded using the cost method.

F-18



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 15. Income Taxes:

Total income taxes for the years ended March 31, 2001, 2000
and 1999, were allocated to continuing operations. Income tax
expense attributable to income (loss) from continuing
operations consists of:

|                                  |  |         |       |          |  |       |   |  |  |   |       | 
|--------------------------------- |  | ------- | ----- | -------- |  | ----- | - |  |  | - | ----- | 
|                                  |  | Current |       | Deferred |  | Total
|                                  |  |         |       |          |  |      
|Year ended March 31, 2001 (State) |  | $       | 3,200 |          |  |       |  |  |  | $ | 3,200 | 
|                                 
|                                 
|                                 
|                                 
|Year ended March 31, 2000 (State) |  | $       | 3,200 |          |  |       |  |  |  | $ | 3,200 | 
|                                 
|                                 
|                                 
|                                 
|Year ended March 31, 1999 (State) |  | $       | 3,200 |          |  |       |  |  |  | $ | 3,200 | 

Income tax expense attributable to net income (loss) from
continuing operations was $3,200 for each of the years ended
March 31, 2001, 2000, and 1999, respectively, and differed
from the amounts computed by applying the U.S. federal income
tax rate of 34% to pretax net income (loss) from continuing
operations as a result of the following:

|                                                         |  |      |          |      |  |      |            |   |  |   |            |  
|-------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                         |  | 2001 |          | 2000 |  | 1999
|                                                         |  |      |          |      |  |     
|Computed expected income tax expense
	(benefit)        |  | $    | (447,000 | )    |  | $    | (1,083,000 | ) |  | $ | (1,847,900 | )
|                                                        
|                                                        
|                                                        
|                                                        
|Depreciation and amortization of property and
	equipment |  |      | 279,000  |      |  |      | 85,800     |   |  |   |           |  
|                                                        
|                                                        
|                                                        
|                                                        
|Accrued expenses                                         |  |      | (525,000 | )    |  |      | 666,000    |   |  |   |           |  
|                                                        
|                                                        
|                                                        
|                                                        
|Cost of sale related to quasi-reorganization             |  |      | 88,000   |      |  |      |           |   |  |   |           |  
|                                                        
|                                                        
|                                                        
|                                                        
|NOL carry-forward                                        |  |      | 539,000  |      |  |      | 289,000    |   |  |   | 1,853,000  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Other                                                    |  |      | 66,000   |      |  |      | 42,200     |   |  |   | (5,100     | )
|                                                        
|                                                        
|                                                        
|                                                        
|State income taxes                                       |  |      | 3,200    |      |  |      | 3,200      |   |  |   | 3,200      |  
|                                                         |  |      |          |      |  |      |            |   |  |   |            |  
|                                                         |  | $    | 3,200    |      |  | $    | 3,200      |   |  | $ | 3,200      |  
|                                                         |  |      |          |      |  |      |            |   |  |   |            |  

The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at March 31, 2001 and 2000 are presented below.

|                     |                                                                                                                         |                                      |   |             |          |   |   |             |          |  
|-------------------- | ----------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | - | ----------- | -------- | - | - | ----------- | -------- | -
|                     |                                                                                                                         | 2001                                 |   | 2000       
|                     |                                                                                                                         |                                      |   |            
|Deferred tax assets: |                                                                                                                         |                                      |   |             |          |   |   |            
|                    
|                    
|                    
|                    
|                     | Allowance for water projects                                                                                            |                                      | $ | 359,000     |          |   | $ | 1,483,000   |         
|                    
|                    
|                    
|                    
|                     | Property and equipment                                                                                                  |                                      |   | 54,000      |          |   |   | 103,000     |         
|                    
|                    
|                    
|                    
|                     | Deferred revenue                                                                                                        |                                      |   | 77,000      |          |   |   |            |         
|                    
|                    
|                    
|                    
|                     | Net operating loss carry-forwards                                                                                       |                                      |   | 10,500,000  |          |   |   | 9,136,000   |         
|                     |                                                                                                                         |                                      |   |             |          |   |   |            
|                     | Total gross deferred tax assets                                                                                         |                                      |   | 10,990,000  |          |   |   | 10,722,000  |         
|                    
|                    
|                    
|                    
|                     | Less valuation allowance                                                                                                |                                      |   | (10,542,000 | )        |   |   | (10,250,000 | )       
|                     |                                                                                                                         |                                      |   |             |          |   |   |            
|                     | Net deferred tax assets                                                                                                 |                                      |   | 448,000     |          |   |   | 472,000     |         
|                     |                                                                                                                         |                                      |   |             |          |   |   |            
|                     | Deferred tax liabilities: Land held for sale and
	water rights, principally due to differences in capitalized
	interest |                                      |   | (448,000    | )        |   |   | (472,000    | )       
|                    
|                    
|                    
|                    
|                     |                                                                                                                         | Total gross deferred tax liabilities |   |             | (448,000 | ) |   |             | (472,000 | )
|                     |                                                                                                                         |                                      |   |             |          |   |   |            
|                     |                                                                                                                         | Net deferred tax asset               |   | $           |         |   |   | $           |         |  
|                     |                                                                                                                         |                                      |   |             |          |   |   |            

The valuation allowance for deferred tax assets as of
April 1, 2001 and 2000 was $10,542,000 and $10,250,000,
respectively. The net change in the total valuation allowance
for the years ended March 31, 2001 and 2000 was an increase
of $292,000 and $803,000, respectively. In assessing the
realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax

F-19



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


planning strategies in making this assessment. During the years
ended March 31, 2001, 2000 and 1999, the valuation
allowance was increased as a result of the current years
net operating loss carry-forward.

Based upon the level of historical taxable income and
projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of
these deductible differences, net of the existing valuation
allowances at March 31, 2001 and 2000. The amount of the
deferred tax asset considered realizable, however, could be
adjusted in the near term if estimates of future taxable income
during the carry-forward period change.

At March 31, 2001, the Company has net operating loss
carry-forwards for federal income tax purposes which are
available to offset future federal taxable income, if any, as
follows:

|     |  |   |            | 
|---- |  | - | ---------- | 
|    
|    
|    
|    
|2002 |  | $ | 1,200,000  | 
|    
|    
|    
|    
|2004 |  |   | 900,000    | 
|    
|    
|    
|    
|2005 |  |   | 400,000    | 
|    
|    
|    
|    
|2006 |  |   | 2,000,000  | 
|    
|    
|    
|    
|2007 |  |   | 1,600,000  | 
|    
|    
|    
|    
|2008 |  |   | 1,800,000  | 
|    
|    
|    
|    
|2009 |  |   | 400,000    | 
|    
|    
|    
|    
|2010 |  |   | 1,300,000  | 
|    
|    
|    
|    
|2011 |  |   | 1,800,000  | 
|    
|    
|    
|    
|2012 |  |   | 4,900,000  | 
|    
|    
|    
|    
|2018 |  |   | 2,400,000  | 
|    
|    
|    
|    
|2019 |  |   | 4,300,000  | 
|    
|    
|    
|    
|2020 |  |   | 850,000    | 
|    
|    
|    
|    
|2021 |  |   | 1,600,000  | 
|     |  |   |            | 
|     |  | $ | 25,450,000 | 
|     |  |   |            | 

Note 16. Impairment of Long-Lived Assets:

During the year ended March 31, 2001, based upon a review
of the value of such assets, the Company recorded a non-cash
impairment of land of $318,000 and an impairment of water rights
of $445,000, all associated with the Olancha Project. These
impairments were to reduce the recorded asset values of these
assets held by the Company to zero, which represented the
consideration received upon returning such assets to the seller
in exchange for full satisfaction and retirement of the
Companys note in favor of the seller in the amount of
$758,000 (Note 6).

During the year ended March 31, 2000, based on a
comprehensive review of the Companys water rights and
other assets, the Company recorded a non-cash impairment of
water rights of $826,618, and an impairment of other water
assets of $339,364. These impairments were to reduce the
recorded asset values of certain water rights held by the
Company in San Bernardino County, California, and certain other
water-related assets to their estimated fair market value.

Note 17. Quasi-Reorganization:

The Companys Board of Directors authorized management to
effect a quasi-reorganization as of October 1, 1994. Such
reorganization was ratified by the Companys stockholders
in March 1995, and accordingly, the assets and liabilities have
been restated to current values as of the date of the
reorganization. The amount of increases, however, is limited to
the amount of decreases in other assets. In this regard,
effective October 1, 1994 the Company recognized a
write-down in the value of the silica plant of $1,830,914. This
write-down was offset by a corresponding write-up of a like
amount which was allocated proportionately,

F-20



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


based on the relative excess of fair market value of each asset
over historic book basis, to land held for sale of $454,604, to
water rights of $1,038,268, and to other water assets of
$338,042. Further, the accumulated deficit of $14,405,252, most
of which was due to the Companys prior and now
discontinued operation, was eliminated by a corresponding
decrease in the Companys additional paid-in capital.
Accumulated deficit is dated to reflect only results of
operations subsequent to October 1, 1994. Any future tax
benefits from deductible temporary differences and net operating
loss carry-forwards that existed at the date of the
quasi-reorganization will be reported as a direct credit to
paid-in capital.

Note 18. Stock Options and Warrants:

Under the Companys 1997 and 1993 stock option plans (the
Plans), the Company may grant options to purchase up
to 1,800,000 shares of common stock to officers, directors, key
employees and others providing significant services to the
Company. The Companys 1990 stock option plan, which
provided for the grant of up to 800,000 options, closed during
the fiscal year ended March 31, 2001. Stock options are
generally granted at an exercise price no less than fair value
of the Companys common stock on the date of grant. There
were 398,631 options available to be granted at March 31,
2001.

The per share weighted-average fair value of stock options
granted during the years ended March 31, 2001, 2000, and
1999 was $.26, $2.40, and $4.60, respectively, on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: Year ended
March 31, 2001  Expected dividend yield of zero,
expected volatility of .7517, risk-free interest rate of 5.97%,
and an expected life of 5 years. Year ended March 31,
2000  Expected dividend yield of zero, expected
volatility of .8319, risk-free interest rates ranging from 4.70%
to 5.68%, and an expected life of 5 years. Year ended
March 31, 1999  Expected dividend yield of zero,
expected volatility of .5832, risk-free interest rates ranging
from 4.49% to 5.68%, and an expected life of 5 years.

The Company applies APB Opinion No. 25 and all related
interpretations in accounting for options granted to its
employees and directors under its Plans and, accordingly, in
Fiscal 2001, 2000, and 1999, compensation expenses of $0,
$101,284, $121,967, respectively, have been recognized in
conjunction with the vesting of stock options. Had the Company
determined compensation expense based on the fair value at the
grant date for its stock options under SFAS No. 123, the
Companys net loss and basic and diluted loss per share
applicable to common stockholders would have been increased to
the pro forma amounts indicated below:

|                                                |  |             |  |             |           |             |  |             |            |   |  |   |            |   |  | 
|----------------------------------------------- |  | ----------- |  | ----------- | --------- | ----------- |  | ----------- | ---------- | - |  | - | ---------- | - |  | 
|                                                |  |             |  | Fiscal 2001 |           | Fiscal 2000 |  | Fiscal 1999
|                                                |  |             |  |             |           |             |  |            
|Income (loss) available to common stockholders: |  | As reported |  | $           | 5,394,863 |             |  | $           | (4,708,076 | ) |  | $ | (6,458,408 | )
|                                               
|                                               
|                                               
|                                               
|                                                |  | Pro forma   |  |             | 5,338,867 |             |  |             | (6,460,011 | ) |  |   | (7,669,176 | )
|                                               
|                                               
|                                               
|                                               
|Basic income (loss) per common share:           |  | As reported |  | $           | .68       |             |  | $           | (.59       | ) |  | $ | (.79       | )
|                                               
|                                               
|                                               
|                                               
|                                                |  | Pro forma   |  |             | .68       |             |  |             | (.82       | ) |  |   | (.94       | )
|                                               
|                                               
|                                               
|                                               
|Diluted income (loss) per common share:         |  | As reported |  | $           | .66       |             |  | $           | (.59       | ) |  | $ | (.79       | )
|                                               
|                                               
|                                               
|                                               
|                                                |  | Pro forma   |  |             | .66       |             |  |             | (.82       | ) |  |   | (.94       | )

Pro forma net loss and loss per share reflect only options
granted during the years ended March 31, 1996 through 2001.
Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the
pro forma net loss and loss per share amounts presented above
because compensation cost is reflected over the options vesting
period of one to five years and compensation cost for options
granted prior to April 1, 1995 is not considered.

F-21



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Stock option activity during the periods indicated is as follows:

|                          |                     |                  |           |                |   |   |       |       | 
|------------------------- | ------------------- | ---------------- | --------- | -------------- | - | - | ----- | ----- | 
|                          |                     |                  |           | Weighted-     
|                          |                     |                  |           | Average       
|                          |                     | Number of Shares |           | Exercise Price
|                          |                     |                  |           |               
|Balance at March 31, 1998 |                     |                  | 1,095,066 |                |   | $ | 10.82 |      
|                         
|                         
|                         
|                         
|                          | Granted             |                  |           | 1,300,000      |   |   |       | 15.21 | 
|                         
|                         
|                         
|                         
|                          | Exercised           |                  |           | (4,000         | ) |   |       | 6.75  | 
|                         
|                         
|                         
|                         
|                          | Cancelled/forfeited |                  |           | (701,190       | ) |   |       | 12.02 | 
|                          |                     |                  |           |                |   |   |       |      
|Balance at March 31, 1999 |                     |                  | 1,689,876 |                |   |   | 13.71 |      
|                          |                     |                  |           |                |   |   |       |      
|                          | Granted             |                  |           | 368,500        |   |   |       | 5.37  | 
|                         
|                         
|                         
|                         
|                          | Exercised           |                  |           |               |   |   |       |       | 
|                         
|                         
|                         
|                         
|                          | Cancelled/forfeited |                  |           | (436,809       | ) |   |       | 10.85 | 
|                          |                     |                  |           |                |   |   |       |      
|Balance at March 31, 2000 |                     |                  | 1,621,567 |                |   |   | 12.58 |      
|                          |                     |                  |           |                |   |   |       |      
|                          | Granted             |                  |           | 1,081,000      |   |   |       | .39   | 
|                         
|                         
|                         
|                         
|                          | Exercised           |                  |           |               |   |   |       |       | 
|                         
|                         
|                         
|                         
|                          | Cancelled/forfeited |                  |           | (1,272,192     | ) |   |       | 12.75 | 
|                          |                     |                  |           |                |   |   |       |      
|Balance at March 31, 2001 |                     |                  | 1,430,375 |                |   |   | 3.17  |      
|                          |                     |                  |           |                |   |   |       |      

The following table summarizes information about stock options
outstanding at March 31, 2001:

|               |               |             |  |                  |           |                  |  |             |     |                  |  |   |       |  |  |  |         |  |  |   |       | 
|-------------- | ------------- | ----------- |  | ---------------- | --------- | ---------------- |  | ----------- | --- | ---------------- |  | - | ----- |  |  |  | ------- |  |  | - | ----- | 
|               |               |             |  | Weighted Average |           |                  |  |             |     | Weighted Average
|               |               | Number of   |  | Remaining        |           |                  |  | Number of   |     | Exercise Price  
|Range of       |               | Options     |  | Contractual Life |           | Weighted Average |  | Options     |     | of Exercisable  
|Exercise Price |               | Outstanding |  | (Years)          |           | Exercise Price   |  | Exercisable |     | Options         
|               |               |             |  |                  |           |                  |  |             |     |                 
|$              | .39           |             |  |                  | 1,041,000 |                  |  |             | 9.3 |                  |  | $ | .39   |  |  |  |        |  |  |   |      | 
|               | 3.63   5.75  |             |  |                  | 97,708    |                  |  |             | 1.8 |                  |  |   | 4.79  |  |  |  | 97,708  |  |  | $ | 4.79  | 
|               | 9.19  12.06  |             |  |                  | 150,834   |                  |  |             | 2.8 |                  |  |   | 10.34 |  |  |  | 150,834 |  |  |   | 10.34 | 
|               | 13.50  15.88 |             |  |                  | 125,000   |                  |  |             | 2.6 |                  |  |   | 14.24 |  |  |  | 125,000 |  |  |   | 14.24 | 
|               | 18.70  21.00 |             |  |                  | 15,833    |                  |  |             | 2.6 |                  |  |   | 20.03 |  |  |  | 15,833  |  |  |   | 20.03 | 
|               |               |             |  |                  |           |                  |  |             |     |                  |  |   |       |  |  |  |         |  |  |   |       | 
|               | Totals        |             |  |                  | 1,430,375 |                  |  |             | 4.3 |                  |  | $ | 3.17  |  |  |  | 389,375 |  |  | $ | 10.59 | 
|               |               |             |  |                  |           |                  |  |             |     |                  |  |   |       |  |  |  |         |  |  |   |       | 

At March 31, 2001, 2000 and 1999, the number of options
exercisable was 389,375, 685,309 and 447,882, respectively, and
the weighted-average exercise price of those options was $
10.59, $12.58 and $11.00, respectively.

During the year ended March 31, 1996, the Company granted
warrants to purchase a total of 98,000 shares of common stock at
$17.50 per share in consideration for services provided by
unrelated third parties. The warrants expired in September and
October, 1999. No warrants were granted or exercised during the
years ended March 31, 2001, 2000 and 1999.

In June 2000, 735,500 options previously issued were voluntarily
surrendered. In September 2000, the Board of Directors granted a
total of 1,041,000 options, subject to the approval of the
Companys stockholders, which approval was subsequently
given. These new options have an exercise price of $0.39 per
share, which was above the then current market price per share
of the Companys common stock. Pursuant to the provisions
of FASB Interpretation No. 44, 735,500 of these options are
to be accounted for using variable plan accounting until such
options are exercised, forfeited, or expire unexercised. During
the year ended March 31, 2001, no compensation expense was
recorded as the market price of the Companys common stock
remained below the exercise price of such options.

F-22



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 19. Extraordinary Income:

During the fiscal year ended March 31,2001, the Company
abandoned its Olancha project on Inyo County, California, due to
insurmountable local regulatory impediments. In connection with
that abandonment, the Company returned the associated real
property to the seller of the property in exchange for full
satisfaction and retirement of the Companys note in favor
of the seller in the amount of $758,000 and accrued interest of
$11,000 (Note 11), and recognized an extraordinary gain on
extinguishment of debt, net of income taxes, of $758,000.

During the year ended March 31, 2001, the Company
repurchased $908,888 of its outstanding 9% Debentures, plus
accrued interest of $13,714, for $513,602 in cash. After
reducing related deferred debt costs of $49,617, net of
accumulated amortization of $26,094, the Company recognized a
$385,477 extraordinary gain on the early extinguishment of debt.

During the year ended March 31, 2000, the Company
repurchased $5,000,000 of its 9% Convertible Subordinated
Debentures plus accrued interest of $157,808, for $1,500,000.
After reducing related deferred debt costs of $ 272,956, net of
accumulated amortization of $104,951, the Company recognized an
extraordinary gain on extinguishment of debt, net of income
taxes, of $3,489,803.

During the year ended March 31, 1999, the Company
repurchased $260,000 of its 9% Convertible Subordinated
Debentures for $151,006. After reducing related deferred debt
costs of $9,337, net of accumulated amortization of $4,856, the
Company recognized an extraordinary income on extinguishment of
debt, net of income taxes of $99,656.

Note 20. Other Income:

The Company has owned a right to receive 3.7398% of the gross
payments made by the Cucamonga County Water District
(CCWD), located in San Bernardino County,
California, in connection with certain water sold or made
available to CCWD by the Fontana Union Water Company, a mutual
water company principally owned by Kaiser Ventures, Inc.
(KVI), under a 100-year lease. In March, 2001 KVI
completed the sale of its interest in the Fontana Union Water
Company to CCWD. As a result of the sale, the Company became
entitled to 3.7398% of the net sales proceeds to KVI, after
certain offsets for KVIs transaction expenses. On
March 23, 2001, the Company received net proceeds from the
sale realizing a gain of $879,208, after providing for
transaction costs and a residual interest due to an unrelated
third party.

In March 2000, the company sold 714.5 shares of the Fontana
Mutual Water Company, and realized a gain on the sale in the
amount of $394,745.

On June 30, 1998, the Company entered into an agreement
with two of its former officers to sell its 40% interest in an
option (the IWT Option) to purchase certain
outstanding shares of Integrated Water Technologies, Inc., an
unaffiliated water consulting company. In exchange, one former
officer agreed to the cancellation of 56,858 stock options to
purchase Company common stock at $5.4375, and additional options
to purchase 296,000 shares of the Company stock by these two
former officers were cancelled. In addition, the Companys
obligation to pay $290,637 of the remaining severance costs
recorded in the prior fiscal year ended March 31, 1998 to
one of the former officers, was cancelled as of May 15,
1998. Accordingly, the sale of the IWT Option resulted in the
Company recognizing other income of $290,637 for the year ended
March 31, 1999.

F-23



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 21. General and Administrative:

General and administrative expenses for the years ended
March 31, 2001, 2000 and 1999 consist of the following:

|                                                |  |      |           |      |  |      |           |  |  |   |           | 
|----------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                |  | 2001 |           | 2000 |  | 1999
|                                                |  |      |           |      |  |     
|Payroll and related costs                       |  | $    | 1,461,091 |      |  | $    | 2,242,856 |  |  | $ | 1,989,138 | 
|                                               
|                                               
|                                               
|                                               
|Legal and accounting                            |  |      | 331,435   |      |  |      | 425,112   |  |  |   | 576,055   | 
|                                               
|                                               
|                                               
|                                               
|Consulting and engineering                      |  |      | 675,724   |      |  |      | 1,454,902 |  |  |   | 912,050   | 
|                                               
|                                               
|                                               
|                                               
|Travel                                          |  |      | 97,613    |      |  |      | 220,380   |  |  |   | 159,955   | 
|                                               
|                                               
|                                               
|                                               
|(Recovery of) allowance for water project costs |  |      | (85,425   | )    |  |      | 1,018,717 |  |  |   | 1,294,065 | 
|                                               
|                                               
|                                               
|                                               
|Impairment of assets                            |  |      | 762,770   |      |  |      | 1,165,982 |  |  |   |          | 
|                                               
|                                               
|                                               
|                                               
|Other corporate expenses                        |  |      | 690,787   |      |  |      | 920,666   |  |  |   | 873,929   | 
|                                                |  |      |           |      |  |      |           |  |  |   |           | 
|                                                |  | $    | 3,933,995 |      |  | $    | 7,448,615 |  |  | $ | 5,805,192 | 
|                                                |  |      |           |      |  |      |           |  |  |   |           | 

Note 22. Employee Benefit Plan:

The Company has a 401(k) Plan for all employees. Employer
contributions by the Company are discretionary. In the three
most recent fiscal years, the Company has matched a percentage
of the contributions of participating employees. Company
matching contributions for the years ended March 31, 2001,
2000 and 1999 amounted to $7,197, $16,194 and $9,892,
respectively.

Note 23. Segment Information:

The Company has two operating segments: a) the acquisition
and development of water rights and the sale or lease of its
water, and b) the sale of real estate interests acquired in
connection with the acquisition of water rights. Information
concerning the operating segments as of March 31, 2001,
2000 and 1999 and for the years then ended is as follows:

|                                       |             |      |            |            |   |      |            |            |   |   |            |            |  
|-------------------------------------- | ----------- | ---- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                       |             | 2001 |            | 2000       |   | 1999
|                                       |             |      |            |            |   |     
|Segment revenue:                       |             |      |            |            |   |      |            |            |   |   |            |           
|                                      
|                                      
|                                      
|                                      
|                                       | Water       |      | $          | 2,126,695  |   |      | $          | 2,796,037  |   |   | $          | 1,477,375  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Real estate |      |            |           |   |      |            |           |   |   |            | 345,615    |  
|                                       |             |      |            |            |   |      |            |            |   |   |            |           
|                                       |             | $    | 2,126,695  |            |   | $    | 2,796,037  |            |   | $ | 1,822,990  |           
|                                       |             |      |            |            |   |      |            |            |   |   |            |           
|Net income (loss):                     |             |      |            |            |   |      |            |            |   |   |            |           
|                                      
|                                      
|                                      
|                                      
|                                       | Water       |      | $          | 372,020    |   |      | $          | 1,028,323  |   |   | $          | 476,377    |  
|                                      
|                                      
|                                      
|                                      
|                                       | Real estate |      |            |           |   |      |            |           |   |   |            | 161,615    |  
|                                      
|                                      
|                                      
|                                      
|                                       | Non-segment |      |            | (1,686,522 | ) |      |            | (4,213,626 | ) |   |            | (6,072,900 | )
|                                       |             |      |            |            |   |      |            |            |   |   |            |           
|                                       |             | $    | (1,314,502 | )          |   | $    | (3,185,303 | )          |   | $ | (5,434,908 | )         
|                                       |             |      |            |            |   |      |            |            |   |   |            |           
|Depreciation and amortization expense: |             |      |            |            |   |      |            |            |   |   |            |           
|                                      
|                                      
|                                      
|                                      
|                                       | Water       |      | $          | 1,063,437  |   |      | $          | 959,387    |   |   | $          | 477,369    |  
|                                      
|                                      
|                                      
|                                      
|                                       | Non-segment |      |            | 172,690    |   |      |            | 137,959    |   |   |            | 148,578    |  
|                                       |             |      |            |            |   |      |            |            |   |   |            |           
|                                       |             | $    | 1,236,127  |            |   | $    | 1,097,346  |            |   | $ | 625,947    |           
|                                       |             |      |            |            |   |      |            |            |   |   |            |           
|Assets:                                |             |      |            |            |   |      |            |            |   |   |            |           
|                                      
|                                      
|                                      
|                                      
|                                       | Water       |      | $          | 16,221,985 |   |      | $          | 23,581,227 |   |   | $          | 25,579,150 |  
|                                      
|                                      
|                                      
|                                      
|                                       | Real estate |      |            | 5,104,836  |   |      |            | 5,422,604  |   |   |            | 4,505,227  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Non-segment |      |            | 8,319,486  |   |      |            | 8,697,119  |   |   |            | 17,546,483 |  
|                                       |             |      |            |            |   |      |            |            |   |   |            |           
|                                       |             | $    | 29,646,307 |            |   | $    | 37,700,950 |            |   | $ | 47,630,860 |           
|                                       |             |      |            |            |   |      |            |            |   |   |            |           

F-24



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


For the years ended March 31, 2001, 2000 and 1999, the
Company recognized revenue of $1,286,971, $1,282,600 and
$641,330, respectively, from the City of Inglewood. No other
recurring customer accounted for more than 10% of the
Companys revenue.

Note 24. Commitments and Contingencies:

The Company has several non-cancelable office equipment, office
space and farmland operating leases that expire over the next
four years. These leases generally contain renewal options for
periods ranging from three to five years and require the Company
to pay all executory costs such as maintenance and insurance.
Rental expense for operating leases was $74,341, $163,034,
$123,866 for the years ended March 31, 2001, 2000 and 1999,
respectively.

In addition, the Company entered into a pumping rights lease and
a water sale agreement with the City of Inglewood in September
1998. In order to secure a portion of the water that the Company
agreed to sell to Inglewood, the Company entered into a
five-year and a fifteen-year water rights lease. The five-year
water rights lease is expected to provide 1,008 acre-feet per
year for a payment of $150 per acre-foot in the first year. This
amount escalates over the remaining four-year period at $7.50
per acre-foot per year. The fifteen-year water rights lease is
expected to provide 250 acre-feet per year for a payment of $135
per acre-foot in the first year. The fees for subsequent years
are to be determined by multiplying the fee for the first year
by the ratio of the index price for each subsequent year divided
by the index price for the first year. The index price is the
sum of the price established by MWD for full service untreated
water and the price components established by the West Basin
Municipal Water District for MWD readiness-to-serve charge and
the West Basin surcharge for basic non-interruptible water.

Future minimum leases payments under non-cancelable operating
leases (with initial or remaining lease terms in excess of one
year) as of March 31, 2000 are:

|                             |  |              |         |        |  |       |         |  |  |   |           | 
|---------------------------- |  | ------------ | ------- | ------ |  | ----- | ------- |  |  | - | --------- | 
|                             |  | Water Rights |         | Others |  | Total
|                             |  |              |         |        |  |      
|Year ended March 31, 2002    |  | $            | 200,070 |        |  | $     | 124,449 |  |  | $ | 324,519   | 
|                            
|                            
|                            
|                            
|Year ended March 31, 2003    |  |              | 207,630 |        |  |       | 87,630  |  |  |   | 295,260   | 
|                            
|                            
|                            
|                            
|Year ended March 31, 2004    |  |              | 215,190 |        |  |       | 91,135  |  |  |   | 306,325   | 
|                            
|                            
|                            
|                            
|Year ended March 31, 2005    |  |              | 33,750  |        |  |       | 7,619   |  |  |   | 41,369    | 
|                            
|                            
|                            
|                            
|Year ended March 31, 2006    |  |              | 33,750  |        |  |       |        |  |  |   | 33,750    | 
|                            
|                            
|                            
|                            
|Thereafter                   |  |              | 253,133 |        |  |       |        |  |  |   | 253,133   | 
|                             |  |              |         |        |  |       |         |  |  |   |           | 
|Total minimum lease payments |  | $            | 943,523 |        |  | $     | 310,833 |  |  | $ | 1,254,356 | 
|                             |  |              |         |        |  |       |         |  |  |   |           | 

In September 1997, the Company entered into a water purchase
agreement with the San Bernardino Valley Municipal Water
District (SBVMWD) pursuant to which the SBVMWD
agreed, subject to certain conditions still to be satisfied, to
sell to the Company 100,000 acre feet of surplus California
State Water Project water during the next ten years. The
agreement provides for the delivery of 10,000 acre-feet of water
annually, with an option for the Company to accelerate
deliveries if surplus water is available. The Company will pay
SBVMWD $150 per acre-foot of water in the first year, escalating
at 3.5% annually. The agreement requires the approval of the
California Department of Water Resources (DWR) for
the sale of the water from SBVMWD to the Company. On
September 30, 1997, the MWD filed a complaint in the
Superior Court of California for the County of Los Angeles,
against SBVMWD, the Company and Santa Margarita Water District
in order to block the water sale, and separate, but similar
action was filed by DWR in the California Superior Court for the
County of Sacramento against SBVMWD and the Company on
December 22, 1997. While the outcome of these proceedings
cannot be predicted, the Company believes that these lawsuits
will not have a material adverse impact on the Companys
financial condition, or results of operations. Until the
lawsuits are settled, the Company does not expect to purchase
any water under its contract with SBVMWD.

F-25



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The Company is the general partner of Western Agua, L.P.
(Western Agua), a partnership that agreed to provide
consulting services to the Nevada LLC pursuant to the Consulting
Agreement (Consulting Agreement). The Nevada LLC
purported to terminate the Consulting Agreement on
March 13, 1998 based on Western Aguas purported
willful breach of the Consulting Agreement. On November 10,
1998, Western Agua filed an action in the San Diego Superior
Court against the Nevada LLC for breach of contract, specific
performance and an accounting relating to the Consulting
Agreement. Western Aguas complaint seeks a judicial
declaration that the Consulting Agreement is not terminated and
remains in full force and effect. On March 12, 1999, after
the Company successfully challenged the legal sufficiency of the
Nevada LLCs original cross-complaint, the Nevada LLC filed
an amended cross-complaint against Western Agua and the Company.
The amended cross-complaint contains claims for breach of
contract, breach of fiduciary duty, and declaratory relief, and
seeks compensatory damages in excess of $100,000, an order
enjoining cross-defendants from the development, sale and/or
management of sale of water in areas prohibited by
section 5 of the Consulting Agreement, and a judicial
declaration that cross-defendants have breached the Consulting
Agreement and that the Nevada LLC has not.

Effective September 1, 1999 (the Effective
Date), the Company, Western Agua and Nevada LLC entered
into an agreement wherein they agreed that: (1) The action
would be dismissed without prejudice; (2) From the
Effective Date forward, the Company and Western Agua were
relieved of restrictions on certain water-related business
activities; (3) All claims, counterclaims and defenses by
Western Agua and the Company, on the one hand, against Nevada
LLC, on the other hand, and all claims, counterclaims and
defenses by Nevada LLC, on the one hand, against Western Agua
and/or the Company, on the other hand, would be preserved
without regard to the passage of time, from the Effective Date
through and including July 31, 2002; and (4) Nevada
LLC would deliver notice to Western Agua on or before
June 30, 2002 of the amount of the consulting fee, if any,
which would be owed by Nevada LLC to Western Agua if the
Consulting Agreement were in effect as of April 23, 2002.

The Company is subject to claims and legal proceedings arising
in the ordinary course of business. While complete assurance
cannot be given as to the outcome of any pending or threatened
legal actions, the Company, upon advice of its legal counsel,
believes that any financial impact would not be material to its
financial position, annual operating results or cash flows.

F-26



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 25. Supplemental Disclosure of Cash Flow Information:

|                                                  |                                                                                                   |                            |            |           |             |      |         |           |          |   |   |           |        |  
|------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | --------- | ----------- | ---- | ------- | --------- | -------- | - | - | --------- | ------ | -
|                                                  |                                                                                                   | 2001                       |            | 2000      |             | 1999
|                                                  |                                                                                                   |                            |            |           |             |     
|Supplemental disclosure of cash flow information: |                                                                                                   |                            |            |           |             |      |         |           |          |   |   |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash paid during the period for interest                                                          |                            | $          | 1,315,461 |             |      | $       | 1,197,160 |          |   | $ | 1,523,582 |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Interest capitalized during the period                                                            |                            |            |          |             |      |         | 83,749    |          |   |   | 82,565    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash paid during the period for income taxes                                                      |                            |            | 3,200     |             |      |         | 3,200     |          |   |   | 3,200     |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Preferred stock issued in lieu of cash dividend                                                   |                            |            |          |             |      |         |          |          |   |   | 698,736   |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accretion of preferred stock to redemption value                                                  |                            |            | 38,255    |             |      |         | 35,819    |          |   |   | 33,099    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Unrealized gain (loss) on
	available-for-sale-securities                                          |                            |            |          |             |      |         |          |          |   |   | (117,233  | )     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Reduction of debt as a result of transfer of land
	held for sale:                                 |                            |            |           |             |      |         |           |          |   |   |           |       
|                                                 
|                                                 
|                                                 
|                                                 
|Long-term debt                                    |                                                                                                   |                            |           |           |             |      | (42,000 | )         |          |   |  |          
|                                                 
|                                                 
|                                                 
|                                                 
|Land held for sale                                |                                                                                                   |                            |           |           |             |      | 42,000  |           |          |   |  |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Forgiveness of note receivable and related
	accrued interest from purchase of land held for sale: |                            |            |           |             |      |         |           |          |   |   |           |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Land held for sale         |            |           |            |      |         |           | (365,024 | ) |   |           |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Note Receivable            |            |           |            |      |         |           | 343,699  |   |   |           |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Other current assets       |            |           |            |      |         |           | 21,325   |   |   |           |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Write off of water rights and other water assets:                                                 |                            |            |           |             |      |         |           |          |   |   |           |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Other water assets         |            |           |            |      |         |           | (339,364 | ) |   |           |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Water rights               |            |           |            |      |         |           | 826,618  |   |   |           |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Write-off of property, equipment and related
	accumulated depreciation:                           |                            |            |           |             |      |         |           |          |   |   |           |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Property and equipment     |            |           | (99,108     | )    |         |           | (2,678   | ) |   |           | (2,477 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Accumulated depreciation   |            |           | 99,108      |      |         |           | 134      |   |   |           | 495    |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Excess of carrying value over amount paid to
	retire Preferred Stock:                             |                            |            |           |             |      |         |           |          |   |   |           |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Series D Preferred Stock   |            |           | (10,000,000 | )    |         |           |         |   |   |           |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Series F Preferred Stock   |            |           | 364,000     |      |         |           |         |   |   |           |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Common stock               |            |           | 175         |      |         |           |         |   |   |           |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Additional paid-in capital |            |           | 38,325      |      |         |           |         |   |   |           |       |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                                   | Restricted cash            |            |           | 3,853,643   |      |         |           |         |   |   |           |       |  
|                                                  |                                                                                                   |                            |            |           |             |      |         |           |          |   |   |          
|                                                  |                                                                                                   | $                          | (5,743,857 | )         |             | $    |        |           |          | $ |  |          
|                                                  |                                                                                                   |                            |            |           |             |      |         |           |          |   |   |          

F-27



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 26. Quarterly Financial Data (Unaudited):

The Fiscal 2001 quarterly financial data, as reported in the
Companys previously filed Quarterly Reports on
Form 10-Q, have been adjusted to reflect the implementation
of SAB 101 in the fourth quarter of Fiscal 2001, retroactive to
April 1, 2000.

The following is a summary of quarterly results for the fiscal
years ended March 31, 2001 and 2000:

|                                                     |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |           |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------- | ---------- | ------------ | - | ----------- | -------- | --------- | - | - | --------- | --------- |  | - | ---------- | --------- | -
|Fiscal 2001 quarters ended:                          |                                                                                                                                    | June 30 |            | September 30 |   | December 31 |          | March 31 
|                                                     |                                                                                                                                    |         |            |              |   |             |          |          
|Water revenue                                        |                                                                                                                                    | $       | 450,948    |              |   | $           | 525,258  |           |   | $ | 712,132   |           |  | $ | 438,357    |          
|                                                    
|                                                    
|                                                    
|                                                    
|Loss from operations                                 |                                                                                                                                    |         | (598,122   | )            |   |             | (700,897 | )         |   |   | (644,531  | )         |  |   | (1,381,360 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|Extraordinary gain                                   |                                                                                                                                    |         |           |              |   |             |         |           |   |   | 385,477   |           |  |   | 768,617    |          
|                                                    
|                                                    
|                                                    
|                                                    
|Cumulative effect of change in accounting
	principle |                                                                                                                                    |         |           |              |   |             |         |           |   |   |          |           |  |   | (237,065   | )        
|                                                    
|                                                    
|                                                    
|                                                    
|Net income (loss)                                    |                                                                                                                                    | $       | (894,039   | )            |   | $           | (399,172 | )         |   | $ | 165,379   |           |  | $ | (186,670   | )        
|                                                     |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |          
|Net income (loss) available to common stockholders   |                                                                                                                                    | $       | (1,090,944 | )            |   | $           | (964,554 | )         |   | $ | 2,090,714 |           |  | $ | 5,359,647  |          
|                                                     |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |          
|Earnings per share:                                  |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|Basic:                                               |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Income (loss) available to common stockholders
	before extraordinary item and cumulative effect of change in
	accounting principle |         | $          | (.14         | ) |             | $        | (.12      | ) |   | $         | .21       |  |   | $          | .61       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Extraordinary income on extinguishment of debt                                                                                     |         |            |             |   |             |          |          |   |   |           | .05       |  |   |            | .10       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cumulative effect of change in accounting
	principle                                                                               |         |            |             |   |             |          |          |   |   |           |          |  |   |            | (.03      | )
|                                                     |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |          
|                                                     |                                                                                                                                    | $       | (.14       | )            |   | $           | (.12     | )         |   | $ | .26       |           |  | $ | .68        |          
|                                                     |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |          
|Diluted:                                             |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Income (loss) available to common stockholders
	before extraordinary item and cumulative effect of change in
	accounting principle |         | $          | (.14         | ) |             | $        | (.12      | ) |   | $         | .18       |  |   | $          | .52       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Extraordinary income on extinguishment of debt                                                                                     |         |            |             |   |             |          |          |   |   |           | .04       |  |   |            | .08       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cumulative effect of change in accounting
	principle                                                                               |         |            |             |   |             |          |          |   |   |           |          |  |   |            | (.02      | )
|                                                     |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |          
|                                                     |                                                                                                                                    | $       | (.14       | )            |   | $           | (.12     | )         |   | $ | .22       |           |  | $ | .58        |          
|                                                     |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |          
|Weighted average shares:                             |                                                                                                                                    |         |            |              |   |             |          |           |   |   |           |           |  |   |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Basic                                                                                                                              |         |            | 7,894,012    |   |             |          | 7,894,012 |   |   |           | 7,894,012 |  |   |            | 7,923,179 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Diluted                                                                                                                            |         |            | 7,894,012    |   |             |          | 7,894,012 |   |   |           | 9,611,544 |  |   |            | 9,930,254 |  

F-28



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##### Table of Contents



WESTERN WATER COMPANY AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


|                                                           |  |         |            |              |  |             |            |          |  |   |            |   |  |   |            |  
|---------------------------------------------------------- |  | ------- | ---------- | ------------ |  | ----------- | ---------- | -------- |  | - | ---------- | - |  | - | ---------- | -
|Fiscal 2000 quarters ended:                                |  | June 30 |            | September 30 |  | December 31 |            | March 31
|                                                           |  |         |            |              |  |             |            |         
|Water revenue                                              |  | $       | 472,420    |              |  | $           | 376,165    |          |  | $ | 1,580,573  |   |  | $ | 366,879    |  
|                                                          
|                                                          
|                                                          
|                                                          
|Loss from operations                                       |  |         | (1,388,552 | )            |  |             | (1,577,409 | )        |  |   | (1,176,260 | ) |  |   | (2,278,071 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Extraordinary gain                                         |  |         |           |              |  |             | 3,489,803  |          |  |   |           |   |  |   |           |  
|                                                           |  |         |            |              |  |             |            |          |  |   |            |   |  |   |            |  
|Net income (loss)                                          |  | $       | (1,572,129 | )            |  | $           | 1,729,603  |          |  | $ | (1,327,066 | ) |  | $ | (2,015,711 | )
|                                                           |  |         |            |              |  |             |            |          |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common
	stockholders       |  | $       | (1,768,320 | )            |  | $           | 1,164,761  |          |  | $ | (1,523,607 | ) |  | $ | (2,580,910 | )
|                                                           |  |         |            |              |  |             |            |          |  |   |            |   |  |   |            |  
|Earnings per share:                                        |  |         |            |              |  |             |            |          |  |   |            |   |  |   |            |  
|                                                          
|                                                          
|                                                          
|                                                          
|Earnings per share  basic and diluted:                    |  |         |            |              |  |             |            |          |  |   |            |   |  |   |            |  
|                                                          
|                                                          
|                                                          
|                                                          
|Basic and diluted income (loss) before
	extraordinary item |  | $       | (.22       | )            |  | $           | (.29       | )        |  | $ | (.19       | ) |  | $ | (.26       | )
|                                                          
|                                                          
|                                                          
|                                                          
|Extraordinary income on extinguishment of debt             |  |         |           |              |  |             | .44        |          |  |   |           |   |  |   |           |  
|                                                           |  |         |            |              |  |             |            |          |  |   |            |   |  |   |            |  
|                                                           |  | $       | (.22       | )            |  | $           | .15        |          |  | $ | (.19       | ) |  | $ | (.26       | )
|                                                           |  |         |            |              |  |             |            |          |  |   |            |   |  |   |            |  
|Weighted average shares  basic and
	diluted               |  |         | 7,933,440  |              |  |             | 7,899,725  |          |  |   | 7,895,213  |   |  |   | 7,894,012  |  
|                                                           |  |         |            |              |  |             |            |          |  |   |            |   |  |   |            |  

F-29