##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

| |  |                                                                                             
| |  | --------------------------------------------------------------------------------------------
| |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|
| |  | For the fiscal year ended March 31,
    2003.                                               

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 þ          No o

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of
September 30, 2002 was approximately $1,821,967 (based on
last reported sale price of $.25 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 27,
2003.

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.     þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined by Rule 12b-2 of the
Securities Exchange Act of
1934).     Yes o          No þ

DOCUMENTS INCORPORATED BY REFERENCE:

None




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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 and Related Stockholder Matters
|             | Item 13. Certain Relationships and Related Transactions                                                
|             | Item 14. Controls and Procedures                                                                       
|PART IV     
|             | Item 15. Exhibits, Consolidated Financial Statement Schedules and Reports On Form 8-K                  
|SIGNATURES  
|EXHIBIT 21  
|EXHIBIT 23.1
|EXHIBIT 99.3
|EXHIBIT 99.4



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TABLE OF CONTENTS

|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|PART I  
|Item 1.  |  | Business                                                                                           |  |      | 1  | 
|Item 2.  |  | Properties                                                                                         |  |      | 12 | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |      | 12 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 13 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |  |      | 13 | 
|Item 6.  |  | Selected Financial Data                                                                            |  |      | 14 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 15 | 
|Item 7A. |  | Quantitative and Qualitative Market Risk
    Disclosures                                           |  |      | 25 | 
|Item 8.  |  | Consolidated Financial Statements and
    Supplementary Data                                       |  |      | 26 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |      | 26 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                 |  |      | 26 | 
|Item 11. |  | Executive Compensation                                                                             |  |      | 27 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |      | 30 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 31 | 
|Item 14. |  | Controls and Procedures                                                                            |  |      | 31 | 
|PART IV 
|Item 15. |  | Exhibits, Consolidated Financial Statement
    Schedules and Reports On Form 8-K                   |  |      | 31 | 

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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 2003 and 2004 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 certain
water rights, as well as a limited amount of real estate, in
California and Colorado.

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 in which demand is expected to exceed the water
resources currently available. However, the Company has
encountered significant regulatory obstacles to its attempts to
develop and transfer water for delivery to potential customers
in California. During 2001, these regulatory obstacles were
compounded by the electric energy crisis in California, which
rendered many transfers uneconomic because of the high and
unrecoverable cost of pumping water over long distances. During
2002, these regulatory obstacles were compounded by the
Companys weakened financial condition. In addition, the
process for developing the regulatory framework and physical
infrastructure necessary to complete commercial deliveries in
Colorado has taken longer than originally anticipated. As a
result, the Companys water sales were lower during the
fiscal year ended March 31, 2001 than in the prior fiscal
year. The Company did not complete any new water sales during
the fiscal year ended March 31, 2002, and the Company
completed only one water sale during the fiscal year ended
March 31, 2003.

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 development activities other
than activities related to its Cherry Creek assets in Colorado.

The Company is continuing its efforts to develop
its own existing water assets in both Colorado and California.
The Companys principal Northern California water assets
consist of certain riparian and appropriative water rights,
together with certain groundwater rights, associated with
approximately 9,055 acres of real property (the Yuba
Goldfields) located along the Yuba River, and the water
rights associated with approximately 1,372 acres of
California rice farms and ranches located in Yuba County (the
Farm Properties). The Company does not own the fee
title to the Yuba Goldfields, but the Company does own fee title
to the Farm Properties. During the fiscal year ended
March 31, 2003, the Company continued to concentrate its
efforts in Yuba County on protecting and developing both its
water and real estate assets. During the fiscal year ended
March 31, 2003, the Company completed the annexation of
certain of the Farm

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Properties into the Wheatland Water District. The
Company has also participated in negotiations for the extension
of a canal to provide surface water deliveries for the purpose
of developing a conjunctive use (river water/ groundwater)
project in cooperation with the Yuba County Water Agency and the
Wheatland Water District. During the fiscal year ended
March 31, 2003, the canal extension project was awarded a
construction grant by the California Department of Water
Resources. Commencement of construction of the canal was
delayed, however, based on issues that arose in the
environmental review process. Although the Company is continuing
to pursue the canal project in cooperation with the sponsoring
agencies, the Company is not in control of the project, nor is
the Company able to predict when the canal will be completed so
as to serve its Farm Properties in the Wheatland Water District.


Another one of the Farm Properties in Yuba County
is being developed as an environmental mitigation site for
regional construction projects. In connection with developing
the mitigation site, the Company solicited and received a letter
of interest from the California Department of Transportation to
use the site to offset projected impacts from local road
improvement projects. However, in light of California budgetary
impacts and priorities, a number of construction and
transportation projects have been deferred, and it is not
possible to predict when regional construction activity will
create demand for the environmental mitigation credits that the
Company may be able to produce on the Yuba County site.

At March 31, 2003, the Companys
remaining Southern California water assets included shares in
the Bear Valley Mutual Water Company (BVMWC). On
June 18, 2003, the Company sold its interest in the BVMWC
shares to a local city water department as a part of its
previously announced program of selling non-strategic assets.
Upon disposition of the BVMWC shares, the Company received cash
proceeds of approximately $723,000 and realized a gain on the
sale of approximately $79,000.

The Company also owns approximately
247 acres of real estate in San Bernardino County. The
Company has listed this real estate for sale and expects to
dispose of the real estate as subdivision approvals and market
conditions allow.

The Company also owns 242 acre-feet per year
of West Basin (Los Angeles County, California) groundwater
pumping rights. These rights, together with certain West Basin
groundwater pumping rights that the Company has leased from
others, have been pledged to meet the Companys obligations
to sell water to the City of Inglewood, California. During the
fiscal year ended March 31, 2003, the Company repaid the
remaining principal of the bank loan arranged in 1998 to support
the Inglewood transaction and thereby cancelled the banks
security interest in the West Basin groundwater pumping rights.
The five-year term of the Inglewood transaction will expire
during fiscal year 2004. The Company has not yet determined how
it will use or whether it will sell its residual West Basin
groundwater pumping rights when the Inglewood transaction
expires.

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 since then 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 372 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 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.

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Overview of Water Markets



| |           
| | ----------
| | California

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 both periodic 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
current 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. The Company believes that
uncertainty over the reliability of groundwater
rightsparticularly in over-drafted basinsenhances
the attractiveness of voluntary water transfers as an
alternative source of reliable supply.

In an effort to update the estimate of water
supply and demand, DWR is in the process of updating the State
Water Plan. Bulletin 160-03 is due out later this year.
However, the reliability of supply predictions has been
compromised by the failure of multi-year negotiations related to
Californias supply of Colorado River water. Unless the
negotiations are revived, California will lose access to surplus
Colorado River water over the next fourteen years. Reductions in
the Colorado River supplies, although not directly affecting the
Company or its water rights, are likely to tighten the overall
balance between supply and demand, particularly in Southern
California.

Reacting, in part, to the risk of losing surplus
Colorado River water, the Metropolitan Water District of
Southern California (MWD), the regions primary
importer of supplemental water supplies, arranged to buy
additional water from farming interests in Northern California.
These arrangements, however, consisted of direct transactions
between MWD and selected Northern California irrigation
districts. Thus, the Company has been unable to arrange
high-value, long-distance, farm-to-urban water transfers, such
as it had formerly pursued. A secondary effect of MWDs
arrangements has been to absorb available conveyance capacity
between Northern and Southern California, making it more
difficult for third-party transfers to be accommodated. As a
result, much of the water to which the Company has access has
been stranded in areas of the State where water
tends to be more plentiful and where value, reflected in market
prices, tends to be lower.

The Sacramento Valley Water Management Agreement
(SVWMA) is a current attempt to negotiate a
settlement of contested water rights as between water rights
holders located upstream of the Sacramento/ San Joaquin/Bay/
Delta (the Delta) and entities that hold water
rights in or downstream of the Delta. These long-standing
disputes were deferred by the Bay/Delta Accords negotiated in
1994. However, the issues were brought to a head because of
pending State Water Resources Control Board (SWRCB)
proceedings to allocate responsibilities for environmental
mitigation plans that require additional water. Based on the
initial SVWMA Statement of Policy Principles, a document
published on December 14, 2001, the Company was concerned
with potential effects of prospective implementation of the
SVWMA. Therefore, the Company participated actively in review of
the Principles and the process for drafting specific
implementation agreements thereunder. Many of the Companys
concerns with the SVWMA have been addressed in the course of
further negotiations. The Company now believes that successful
implementation of the SVWMA could enhance the value of senior
water rights and clarify ownership issues necessary to permit
efficient

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transfers between willing sellers and willing
buyers. Because the implementation agreements are still in the
process of negotiation, the actual impacts of the SVWMA cannot
be accurately predicted. Uncertainty related to those
negotiations have caused certain upstream senior water rights
holders, including clients and partners of the Company, to defer
new water transfer transactions until the details of the SVWMA
are set or to undertake only those near-term water transfers
which are sanctioned by SVWMA participants. Thus, even though
the long-term implications of successful negotiation of the
SVWMA are positive for water transfers in California, the
pending negotiations have deferred or canceled transfers that
might otherwise have been completed, including transactions in
which the Company intended to participate.




| |         
| | --------
| | Colorado

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, because 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 meet 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.

Regulatory Overview



| |           
| | ----------
| | California

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. The Company claims
various appropriative rights on the Yuba River that were
perfected by its predecessor in interest, some of which predate
SWRCB jurisdiction (pre-1914 rights) and should therefore be
grandfathered from regulatory jurisdiction. However,
recent developments, including the SWRCBs decision in the
Lower Yuba River water rights case (currently on appeal),
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.

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 for use on their land. 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 and has unrelated
groundwater rights associated with the Farm Properties. However,
the extension and possible perfection of SWRCB jurisdiction
could further complicate development of the Companys
groundwater rights, so

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development of such rights will take longer and
cost more than the Company 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. Accordingly,
the Company does not currently anticipate that it will derive
significant revenues from its water rights associated with the
Yuba Property during the current fiscal year.


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. During the fiscal year
ended March 31, 2001, important aspects of groundwater law
were clarified by the California Supreme Court in its Mojave
decision. As previously reported, the Company sold its remaining
1,966 acre-feet per year of such rights to two cities in San
Bernardino County in October, 2002 for a gain of $964,000.

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 to the Company water to which they have independent
rights to appropriate from the Sacramento River. Such water has
been made available for transfer through various conservation
activities undertaken by the petitioners. Following approval of
such petitions, the Company successfully managed to convey and
resell such water to unaffiliated water retailers in the Bay
Area and Southern California during the fiscal year ended
March 31, 2001, although conveyance and regulatory costs
prevented the Company from making a profit on such sales.
However, during the fiscal year ended March 31, 2002,
regulatory obstacles and the high cost of energy during the
electricity crisis precluded the Company from successfully
transferring similarly conserved water from the same clients. In
order to preserve the water for later use, the Company
negotiated water storage agreements with the United States
Bureau of Reclamation (USBR). Thus, a portion of the
water conserved during the 2001 agricultural season was reserved
in storage and was sold during the fiscal year ending
March 31, 2003, at a profit which was immaterial to the
Company. In addition, the difficult and time-consuming process
required to complete such transfers between willing sellers and
willing buyers underscores the need for reform of the regulatory
regime. Nonetheless, the Company believes that the successful
completion of small-scale transfers will ultimately open the way
for more significant and more profitable sales in the future.

In order to transport water from area of origin
(where the water may be temporarily 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 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 such independent, third-party water
transfers, the Company has sought clarification through request,
negotiation and further legislation. The outcome of the
Companys efforts to gain such clarification continues to
be uncertain. Therefore, even as to water rights 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

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assets. The results of the Companys efforts
to gain such clarification have been unsatisfactory, and the
Company anticipates that obtaining clarification of these issues
could take several more years.


The most difficult aspect of arranging for the
transfer and sale of water from Northern California to Southern
California involves negotiation of conveyance through
publicly-owned facilities controlled by MWD, DWR and/or by USBR.
The Company believes that conveyance agreements are particularly
difficult to negotiate because these agencies face internal
conflicts between their roles as regulators and their roles as
facility operators and water rights holders. For example,
conserved water that is refused conveyance capacity often flows
to DWR and/or USBR for their own appropriation and sale to
south-of-Delta contractors, including MWD. 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. Thus, there can be no assurance that these issues
will be resolved in a manner that will enable the Company to
either profitably develop a water transfer business in
California, or to profitably develop and manage its California
water assets.



| |         
| | --------
| | Colorado

The regulatory environment in Colorado is
substantially more transparent, less costly and more predictable
in terms of outcome than in California. The Company believes the
Colorado system is more conducive to water asset development and
protection and more hospitable to water sales than
Californias system. First, water rights matters are
adjudicated by a state-wide system of Water Courts presided over
by judges with specialized subject matter knowledge from which
appeal may be taken directly to the Colorado Supreme Court. The
Water Courts retain jurisdiction over cases, so that changes of
facts or circumstances can be submitted to further adjudication
without re-trying complicated issues determined in prior phases
of the case. Second, the Colorado Office of the State Engineer
and regional Water Commissioners are independent and
disinterested regulators who oversee compliance with
well-developed and integrated precepts of water use
administration without conflict based on direct competition for
water. Water rights are described as being tributary
(generally similar to surface water in California)
or nontributary (generally similar to groundwater in
confined aquifers in California). The Company owns Water
Court-recognized rights to a minimum of 6,475 acre-feet of
annual production of nontributary water, plus additional rights
to tributary appropriations from Cherry Creek, as well as a
Water Court approved Plan for Augmentation to operate the
separate sources on a conjunctive basis that increases overall
flexibility, reliability and value.

As a result of the more hospitable regulatory
environment in Colorado, the Company concentrated its efforts
there to develop its water assets in conformance with Colorado
law and in cooperation with regional water purveyors. Upon
successful demonstration of its ability to develop, permit,
construct and operate an integrated conjunctive use project in
Colorado, the Company planned to adapt the project model to
Californias more complex regulatory environment.

Description of Business

The Companys business goal has been to
create recurring income through identifying undervalued and/or
underused water assets, and enhancing the value of those assets
via development, transmission and delivery to customers in the
arid regions of California and Colorado. However, significant
delays in the Companys attempts to overcome regulatory
obstacles to economic water transfers in California have forced
it to reconsider its business plans. As a result, the Company
has sold most of its non-strategic assets during the three most
recent fiscal years, in accordance with a plan to manage the
Companys liquidity position and to reduce its operating
expenses. 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 sold or
disposed of certain of its assets that it no longer believed it
would be able to profitably develop, manage and/or monetize

6



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within a reasonable period. The following
non-strategic assets were sold or disposed of during the three
most recent fiscal years:


Fiscal Year ended March 31, 2003:

|                    |  |      |         | 
|------------------- |  | ---- | ------- | 
|Asset               |  | Gain
|                    |  |     
|Mojave Water Rights |  | $    | 964,000 | 

Fiscal Year ended March 31, 2002:

|                                  |  |      |       | 
|--------------------------------- |  | ---- | ----- | 
|Asset                             |  | Gain
|                                  |  |     
|Glenn County, California Farmland |  | $    | 1,000 | 

Fiscal Year ended March 31, 2001:

|                                         |  |            |          |  
|---------------------------------------- |  | ---------- | -------- | -
|Asset                                    |  | Gain(Loss)
|                                         |  |           
|Central Basin (Los Angeles) Water Rights |  | $          | 428,000  |  
|Mojave Water Rights (Partial Sale)       |  | $          | 465,000  |  
|Olancha Project                          |  | $          | (763,000 | )
|Cucamonga Water Fee Agreement            |  | $          | 879,000  |  

In addition, as a part of the aforementioned plan
to sell non-strategic assets in order to manage liquidity and
reduce operating expenses, the Company sold its Bear Valley
Mutual Water Company stock in June 2003 for a gain of
approximately $79,000, and plans to sell its remaining
Mojave land holdings in San Bernardino County,
California (current book value $553,000) during the current
fiscal year ending March 31, 2004.

The disposal of the Olancha Project during the
year ended March 31, 2001 also resulted in an extraordinary
gain on forgiveness of debt totaling $769,000.

In addition to the planned sale of the Mojave
land, the Company is considering the sale or other re-deployment
of the West Basin groundwater pumping rights that are currently
dedicated to the lease and sale agreement with the City of
Inglewood, California which agreement is scheduled to expire
during the current fiscal year.

Recently, the prospects for conveying available
water from Northern California to customers in Southern
California have dimmed as a result of cross-Delta pumping
limitations and regulatory allocations of conveyance capacity.
In light of these constraints, water to which the Company has
access in Northern California may continue to be blocked from
transfer and sale to willing buyers in Southern California, and
the Company may not be able to generate any revenues from its
Northern California assets for an undeterminable period of time
unless it sells such assets. Because the time and financial
resources that may be required to overcome transfer obstacles
appear to be beyond the Companys means, the Company has
been considering the sale of its Northern California assets in a
single transaction or through sales of the individual assets. To
date, however, the Company has not finally decided that it will,
in fact, sell its Northern California assets, and it has not
entered into any agreements for such sale. Should the Company
decide to sell its water rights and other assets in Northern
California prior to favorable resolution of the obstacles to
cross-Delta transfers, it does not expect to receive sales
proceeds that reflect the value of the associated water rights
had it been able to transport and sell water, in accordance with
its business plan, to Southern California consumers.

California
Water Transfer Program

Prior to the fiscal year ended March 31,
2001, the Companys business plan had assumed that
California water transfer transactions would require the Company
to complete the following three steps: (i) Acquire water
supplies that could be delivered to urban areas in California;
(ii) Arrange for sale water supplies to be delivered to its
customers through existing water conveyance systems; and
(iii) Enter into agreements with utilities, cities, or
water districts for the sale or lease of the Companys
developed water supplies to such water retailers. The Company
had 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

7



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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.


The Company believes that it has successfully
completed the first and third steps of the foregoing business
plan. For example, the Company completed the first step by
acquiring the water rights associated with the Yuba Property in
Northern California, water rights associated with the Farm
Properties, creating agreements for transferring conserved water
developed by its clients and entering into long-term water
supply agreements with Elsinore Valley Municipal Water District
the San Bernardino Valley Municipal Water District, and the City
of San Bernardino. Accordingly, the Company had acquired
significant management control over available water resources at
favorable prices relative to consumers costs for water in
much of Southern California.

The Company also completed much of the third step
of its water transfer business plan by entering into various
agreements to sell water to municipalities and other water
users, including water sale agreements with Santa Margarita
Water District, the Contra Costa Water District, the City of San
Diego and other water retailers in Southern California.
Unfortunately, the Company has not been able to economically
complete the middle step of arranging for water to be delivered
to its customers through excess capacity in public conveyance
facilities. Due to various regulatory impediments and actions
taken by governmental agencies (including lawsuits against the
Company and imposition of excessive costs and other burdens) the
Company has not been able to complete profitable water sales on
a commercial basis. The Company believes that many of access
restrictions violate the Wheeling Statute (Section 1810 of
the California Water Code). Therefore, in order to complete
profitable water sales, the Company undertook a variety of
administrative, legal, regulatory and legislative initiatives to
identify and remove such artificial barriers to voluntary water
transfers. However, because of its limited financial resources,
the Company has had to reduce its efforts to clarify or
eliminate barriers to profitable water transfers. Given its
current financial position, the Company cannot continue to
pursue profitable water transfers indefinitely, and it may have
to sell more of its assets to sustain its operations and protect
its remaining assets.

California 
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 SWRCB.)
Additionally, the Company holds overlying rights to the
groundwater aquifer beneath the Yuba property.

The Company has been attempting to develop its
Yuba Property water for sale or lease through a long-term
conjunctive use program in cooperation with the Yuba County
Water Agency. The Company has not, however, developed a plan for
marketing and selling its Yuba Property water. In addition,
there are various regulatory hurdles that could delay or limit
the Companys ability to deliver or sell its Yuba Property
water. Based on the limitations imposed by the SWRCBs
Decision 1644 entered in the Lower Yuba River water rights case
as well as on delays in negotiating a satisfactory conjunctive
use program, the Company believes that development and delivery
of water from the Yuba Property will take longer and cost more
than it had formerly anticipated. Since the Companys
carrying value of these assets is zero on its financial
statements, the delays and uncertainties surrounding the
Companys abilities to monetize these assets will not
entail an impairment charge against the value of the assets.

Other Water Assets

At March 31, 2003 the Company owned shares
of the Bear Valley Mutual Water Company, an entity that owns
certain senior water rights and distribution facilities on the
Santa Ana River. Under the aforementioned plan to sell
non-strategic assets, the Company sold its BVMWC interests on
June 18, 2003,

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and recorded a gain on the sale of approximately
$79,000. These assets were classified as assets held for sale as
of March 31, 2003.


Colorado 
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 Colorados
Cherry Creek basin. Cherry Creek is a tributary of the South
Platte River, 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
nontributary supplies. However, under Colorado law, by combining
various water rights under a court-approved plan for
augmentation, junior water rights can effectively be used
out of priority without injury to the senior
appropriators. Because court-approved plans for augmentation
allow water to be diverted from junior tributary 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 fiscal
year ended March 31, 2002, the Parker Water &
Sanitation District (PW&SD), a special purpose
water agency in Douglas County, initiated a condemnation action
for 36 acres of that 128-acre parcel for use in connection
with its own proposed new water supply program. The Company
defended the property against this proposed taking. During the
fiscal year ended March 31, 2003, the Company settled
issues related to possession of the disputed property by
PW&SD for a combination of a cash deposit (as against an
ultimate determination of the value of the 36 acres) and
preservation of rights and easements necessary to complete
development of the Cherry Creek Project. As previously reported,
the cash deposit in the amount of $294,000 was disbursed by the
Court to the Company in the first quarter of Fiscal 2003. The
Company expects further judicial proceedings to require
PW&SD to make certain additional payments to the Company to
reflect the actual value of the condemned property and to
reimburse the Company for certain costs of defending its
property rights; however, the outcome of such judicial
proceedings is inherently uncertain. A valuation hearing in the
condemnation action has been scheduled for later in Fiscal 2004.
In connection with the condemnation action, the Company has
commissioned various analyses and appraisals of portions of the
Cherry Creek Project implicated in that dispute. As a result of
the current status of the condemnation litigation and in light
of the third-party estimates of value, the Company has
determined that the Cherry Creek Project assets are properly
valued on the Companys books.

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). The real estate parcels that have been sold are not
needed to further the principal purposes of the Cherry Creek
Project. The Company

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has the right to operate 14 wells drawing
tributary water in the Cherry Creek alluvium, of which 12 are
existing wells. Ten of the 14 well rights (including two
completed alluvial wells on property recently acquired by
PW&SD under threat of condemnation) are located on property
that is not owned by the Company. With respect to these ten
wells, the Company owns the right to drill and operate the wells
and to enter the real property on which such wells may be
located or drilled in order to operate, maintain or establish
such wells.


In addition to the outright sales of Cherry Creek
Project land, the Company, in April 1995, transferred
approximately 257 acres of the Companys Cherry Creek
Project real estate to the State of Colorado for annexation into
the Castlewood Canyon State Park in exchange for the rights to
withdraw and use 1,290 acre-feet of nontributary water per
year associated with the adjacent park land owned by the State.

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 for 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 nontributary well to begin
implementation of the plan for augmentation. 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. During the fiscal year ended
March 31, 2003, the Company produced and sold its first
water from this nontributary source. Although the amount and
value of these water sales are not material, the Company
believes that completion of construction, permitting, sale and
successful delivery of Cherry Creek Project water are important
milestones in development of the Cherry Creek Project.

During the year ended March 31, 2003, the
Company (i) acquired a permanent easement for the
development of a series of additional nontributary wells,
(ii) sought and received federal regulatory approval to
complete the first such well, and (iii) successfully
constructed our Arapaho Aquifier well and related our fall
facilities to connect the new wells to Cherry Creek. Based on
completion of the additional water production and delivery
facilities, the Cherry Creek Project now has the legal and
physical capability of delivering in excess of 600 acre-feet of
water per year to users with alluvial production facilities
along Cherry Creek.

With the Plan for Augmentation approved and
implementation begun, the Company is currently seeking to expand
the market for Cherry Creek Project water in the Cherry Creek
basin. The Company is considering a number of alternatives, from
sale of water (or the entire Project) 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
collected within the Cherry Creek Project. Capital expenditures
necessary to produce and deliver all of the water available to
the Cherry Creek Project are expected to be significant;
however, the Company expects that such expenditures can be
phased to coincide with increased demand for water in the area
and sales of water from the Cherry Creek Project. The Company
believes, however, that its recent success in acquiring permits
for the Project and in developing the initial elements of the
infrastructure have reduced uncertainties and enhanced the
commercial viability of the Project.

During the fiscal year ended March 31, 2001,
the Company initiated or continued discussions with several
local water agencies aimed at determining a basis on which the
Cherry Creek Project could be integrated into the long-term
water resource planning in the area. In the fiscal year ended
March 31, 2002, the Company began marketing Water
Delivery Contract Units (WDCUs) as contract
rights to an undivided portion of the water production capacity
of the Cherry Creek Project. During the fiscal year ended
March 31, 2003, three local water agencies executed
non-binding letters of intent to purchase WDCUs to meet a
portion of their future water requirements.

In order to satisfy conditions to purchase
recited in the non-binding letters of intent to purchase WDCUs,
the Company secured the additional production capacity necessary
to meet the demand represented by the initial WDCUs. Based on
the new well capacity and completion of the delivery facilities,
the Cherry Creek Project will have the capacity, upon receipt of
final regulatory approvals, to deliver in excess of
600 acre-feet of nontributary water annually beginning in
July, 2003. The Company and the prospective purchasers of the

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WDCUs are currently seeking various approvals for
making water deliveries from the Cherry Creek Project via Cherry
Creek itself. The Company currently anticipates making limited
municipal water deliveries during the current fiscal year.
However, the Company has not yet completed the sale of any
WDCUs, and, as a result, there can be no assurance that the
Company will, in fact, sell WDCUs on terms that are satisfactory
to 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 (such as in the project to extend
surface water deliveries to the Companys Farm Properties
located in the Wheatland Water District in Yuba County).
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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| |          
| | ---------
| | Employees

As of the date of this report, the Company has 11
(eleven) employees, none of whom is covered by any collective
bargaining agreement.






|        |           
|------- | ----------
|Item 2. | Properties

The principal 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
    (less the 36 acres to which PW&SD recently gained
    immediate possession in a settlement of the partial condemnation
    of one of the Companys real estate parcels), and
    associated water rights. See Item 1.
    Business  Description of Business 
    Colorado Cherry Creek Water Rights Project. The
    Companys Cherry Creek land is zoned for agricultural and
    residential uses or for use by special permit for a water
    project.
|
| |  | Various rice farms and ranches, located in Yuba
    County, California, that collectively comprise 1,424 acres,
    together with the water rights associated with such land. The
    rice farms are graded for cultivation and watered by wells on
    the properties. The Company leases the rice farms and ranches to
    unaffiliated operators.                                                                                                                                                                                                                        
|
| |  | The Company owns 30 acres of real estate
    located on the Yuba Property, in Yuba County, California,
    approximately ten miles northeast of Marysville, California. The
    30 acres are zoned industrial-extractive and may be used
    for commercial but not residential purposes. However, the
    Company has deeded title to the water rights associated with
    approximately 9,025 acres of adjacent land that is owned by
    unaffiliated third parties. The Company maintains a project
    office on the parcel.                                           
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                
|
| |  | Various cattle and crop farms with four
    associated residences, located in San Bernardino County, that
    collectively comprise 247 acres.                                                                                                                                                                                                                                                                                                                                                                                                                              

One of the Companys foregoing real estate
properties in Yuba County, California is encumbered by a
mortgage. 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
at 102 Washington Avenue in Point Richmond, California,
containing 2,400 net square feet, pursuant to a lease that
expires in February 2005. The Companys current monthly
rental obligation for the facility is $4,800.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

During the fiscal year ended March 31, 2002,
the Parker Water & Sanitation District
(PW&SD) commenced a condemnation action in order
to take ownership of a 36-acre portion of a land parcel
(the Vessel Parcel) owned by the Company and held as
part of the Cherry Creek Project in Colorado. (Case Number
01-CV-821, Douglas County District Court.) In the fiscal year
ended March 31, 2003, the Company and PW&SD entered
into a Stipulation for Immediate Possession under which the
Company agreed to allow PW&SD to take possession of the
36-acre portion of the Vessel Parcel (the Condemned
Property). Under the Stipulation for Immediate Possession,
the Company preserved the water rights associated with the
Condemned Property and was granted easements necessary for the
Company to access and use such water rights. PW&SD made a
deposit to the Court of $294,134 against the to-be-determined
value of the Condemned Property. The court subsequently paid the
deposit to the Company. The Company believes that the ultimate
value of the Condemned Property is in excess of the deposit paid
by PW&SD in connection with the Stipulation for Immediate
Possession. Such value will be decided in accordance with
Colorado law, subject to judicial review. A valuation hearing is
scheduled for August, 2003. Based on the inherent uncertainty of
the condemnation valuation process, it is impossible to predict
the value that will ultimately accrue to the Company in exchange
for the Condemned Property.

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|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters To A Vote of Security
    Holders

None.




PART II




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

The Companys common stock is currently
traded electronically on the OTC Bulletin Board under the symbol
WWTR. 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, 2003        |  |     |     |      |  |   |      | 
|First Quarter (April-June)       |  | $   | .86 |      |  | $ | 1.24 | 
|Second Quarter (July-September)  |  |     | .25 |      |  |   | .85  | 
|Third Quarter (October-December) |  |     | .17 |      |  |   | .37  | 
|Fourth Quarter (January-March)   |  |     | .19 |      |  |   | .36  | 
|YEAR-ENDED MARCH 31, 2002        |  |     |     |      |  |   |      | 
|First Quarter (April-June)       |  | $   | .20 |      |  | $ | 1.10 | 
|Second Quarter (July-September)  |  |     | .48 |      |  |   | .91  | 
|Third Quarter (October-December) |  |     | .36 |      |  |   | .59  | 
|Fourth Quarter (January-March)   |  |     | .22 |      |  |   | .89  | 

On March 31, 2003, the Company had 1,552
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, 2003 and 2002, there were
outstanding 2,251.018 and 2,121.8 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 in January and July. 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, such dividends have
been declared and paid through the issuance of 251.018
additional shares of Series F Preferred Stock.

As of March 31, 2003 and 2002, 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 in arrears in January and July. During the fiscal
year ended March 31, 2003, the Company declared and paid
the Series C dividend due on July 15, 2002 but
deferred declaring the Series C dividends due on
January 15, 2003. Provisions related to the Series C
Preferred Stock allow the holders of such securities to elect a
majority of the Companys Board in the event two
consecutive dividends are unpaid. On June 25, 2003 the
Companys Board of Directors declared the Series C
dividend which had been deferred from its due date of
January 15, 2003. The dividend was paid on June 26,
2003.

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Equity Compensation Plan Information

The following table sets forth certain
information as of March 31, 2003 regarding securities
authorized for issuance under the Companys equity
compensation plans.

|                                                               |  |                      |           |                      |  |                      |      |  |  |  |         | 
|-------------------------------------------------------------- |  | -------------------- | --------- | -------------------- |  | -------------------- | ---- |  |  |  | ------- | 
|                                                               |  | Number of Securities |           |                      |  | Number of Securities
|                                                               |  | to be Issued upon    |           | Weighted-average     |  | Remaining Available 
|                                                               |  | Exercise of          |           | Exercise Price of    |  | for Future Issuance 
|                                                               |  | Outstanding Options, |           | Outstanding Options, |  | under Equity        
|                                                               |  | Warrants and Rights  |           | Warrants and Rights  |  | Compensation Plan   
|                                                               |  |                      |           |                      |  |                     
|Equity compensation plans approved by security
    holders     |  |                      | 1,599,666 |                      |  | $                    | 1.54 |  |  |  | 600,334 | 
|Equity compensation plans not approved by
    security holders |  |                      | -0-       |                      |  |                      | N/A  |  |  |  | N/A     | 
|Total                                                          |  |                      | 1,599,666 |                      |  | $                    | 1.54 |  |  |  | 600,334 | 

The compensation plans approved by the security
holders represent the Companys 1993 and 1997 Stock Option
Plans, which are described in this Form 10-K at
Item 12, below.




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.

|                                                                                                    |  |      |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                    |  | 2003 |            | 2002 |  | 2001 |            | 2000 |  | 1999
|                                                                                                    |  |      |            |      |  |      |            |      |  |     
|Statement of Operations Data:                                                                       |  |      |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|Revenue                                                                                             |  | $    | 1,529,235  |      |  | $    | 1,464,200  |      |  | $    | 2,126,695  |   |  | $ | 2,796,037  |   |  | $ | 1,822,990  |  
|Cost of revenue                                                                                     |  |      | 1,040,917  |      |  |      | 981,311    |      |  |      | 1,517,610  |   |  |   | 1,767,714  |   |  |   | 1,184,998  |  
|                                                                                                    |  |      |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|Gross profit                                                                                        |  |      | 488,318    |      |  |      | 482,889    |      |  |      | 609,085    |   |  |   | 1,028,323  |   |  |   | 637,992    |  
|General and administrative expenses                                                                 |  |      | 3,080,810  |      |  |      | 3,075,609  |      |  |      | 3,933,995  |   |  |   | 7,448,615  |   |  |   | 5,805,192  |  
|                                                                                                    |  |      |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|Operating income (loss)                                                                             |  |      | (2,592,492 | )    |  |      | (2,592,721 | )    |  |      | (3,324,910 | ) |  |   | (6,420,292 | ) |  |   | (5,167,200 | )
|Interest income (expense), net                                                                      |  |      | (766,094   | )    |  |      | (689,693   | )    |  |      | (660,745   | ) |  |   | (624,966   | ) |  |   | (586,464   | )
|Other income (expense), net                                                                         |  |      | 996,585    |      |  |      | 5,220      |      |  |      | 1,757,324  |   |  |   | 373,352    |   |  |   | 222,300    |  
|                                                                                                    |  |      |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations
    before income taxes                                    |  |      | (2,362,001 | )    |  |      | (3,277,194 | )    |  |      | (2,228,331 | ) |  |   | (6,671,906 | ) |  |   | (5,531,364 | )
|Income taxes                                                                                        |  |      | (3,200     | )    |  |      | (3,200     | )    |  |      | (3,200     | ) |  |   | (3,200     | ) |  |   | (3,200     | )
|                                                                                                    |  |      |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle |  |      | (2,365,201 | )    |  |      | (3,280,394 | )    |  |      | (2,231,531 | ) |  |   | (6,675,106 | ) |  |   | (5,534,564 | )
|Extraordinary income on extinguishment of debt,
    net of income taxes                             |  |      | 219,000    |      |  |      |           |      |  |      | 1,154,094  |   |  |   | 3,489,803  |   |  |   | 99,656     |  
|Cumulative effect of change in accounting
    principle                                             |  |      |           |      |  |      |           |      |  |      | (237,065   | ) |  |   |           |   |  |   |           |  
|                                                                                                    |  |      |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|Net income (loss)                                                                                   |  |      | (2,146,201 | )    |  |      | (3,280,394 | )    |  |      | (1,314,502 | ) |  |   | (3,185,303 | ) |  |   | (5,434,908 | )
|Accretion of preferred stock to redemption value                                                    |  |      | (130,604   | )    |  |      | (108,298   | )    |  |      | (38,255    | ) |  |   | (35,819    | ) |  |   | (33,099    | )
|Excess of carrying value over amount paid to
    retire convertible redeemable preferred stock      |  |      |            |      |  |      |           |      |  |      | 7,678,597  |   |  |   |           |   |  |   |           |  
|Preferred stock dividends                                                                           |  |      | (303,565   | )    |  |      | (860,453   | )    |  |      | (930,977   | ) |  |   | (1,486,954 | ) |  |   | (990,401   | )
|                                                                                                    |  |      |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common
    stockholders                                             |  | $    | (2,580,370 | )    |  | $    | (4,249,145 | )    |  | $    | 5,394,863  |   |  | $ | (4,708,076 | ) |  | $ | (6,458,408 | )
|                                                                                                    |  |      |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |            |  

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|                                                                                  |                                                                                                      |      |      |      |   |      |      |      |   |      |     |      |   |   |      |       |   |   |      |      |  
|--------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ---- | ---- | ---- | - | ---- | ---- | ---- | - | ---- | --- | ---- | - | - | ---- | ----- | - | - | ---- | ---- | -
|                                                                                  |                                                                                                      | 2003 |      | 2002 |   | 2001 |      | 2000 |   | 1999
|                                                                                  |                                                                                                      |      |      |      |   |      |      |      |   |     
|Basic net income (loss) per common share
    applicable to common stockholders:   |                                                                                                      |      |      |      |   |      |      |      |   |      |     |      |   |   |      |       |   |   |      |     
|                                                                                  | Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle  |      | $    | (.35 | ) |      | $    | (.53 | ) |      | $   | .56  |   |   | $    | (1.03 | ) |   | $    | (.80 | )
|                                                                                  | Extraordinary income on early extinguishment of
    debt, net                                        |      |      | .03  |   |      |      |     |   |      |     | .15  |   |   |      | .44   |   |   |      | .01  |  
|                                                                                  | Cumulative effect of change in accounting
    principle                                              |      |      |     |   |      |      |     |   |      |     | (.03 | ) |   |      |      |   |   |      |     |  
|                                                                                  |                                                                                                      |      |      |      |   |      |      |      |   |      |     |      |   |   |      |       |   |   |      |     
|                                                                                  | Net income (loss) per common share
    applicable to common stockholders                             |      | $    | (.32 | ) |      | $    | (.53 | ) |      | $   | .68  |   |   | $    | (0.59 | ) |   | $    | (.79 | )
|                                                                                  |                                                                                                      |      |      |      |   |      |      |      |   |      |     |      |   |   |      |       |   |   |      |     
|Diluted net income (loss) per common share
    applicable to common stockholders: |                                                                                                      |      |      |      |   |      |      |      |   |      |     |      |   |   |      |       |   |   |      |     
|                                                                                  | Income (loss) before, extraordinary item and
    cumulative effect of change in accounting principle |      | $    | (.35 | ) |      | $    | (.53 | ) |      | $   | .56  |   |   | $    | (1.03 | ) |   | $    | (.80 | )
|                                                                                  | Extraordinary income on early extinguishment of
    debt, net                                        |      |      | .03  |   |      |      |     |   |      |     | .13  |   |   |      | .44   |   |   |      | .01  |  
|                                                                                  | Cumulative effect of change in accounting
    principle                                              |      |      |     |   |      |      |     |   |      |     | (.03 | ) |   |      |      |   |   |      |     |  
|                                                                                  |                                                                                                      |      |      |      |   |      |      |      |   |      |     |      |   |   |      |       |   |   |      |     
|Net income (loss) per common share
    applicable to common stockholders          |                                                                                                      | $    | (.32 | )    |   | $    | (.53 | )    |   | $    | .66 |      |   | $ | (.59 | )     |   | $ | (.79 | )   
|                                                                                  |                                                                                                      |      |      |      |   |      |      |      |   |      |     |      |   |   |      |       |   |   |      |     

|                              |  |                 |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|----------------------------- |  | --------------- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                              |  |                
|                              |  | As of March 31,
|                              |  |                
|                              |  | 2003            |            | 2002 |  | 2001 |            | 2000 |  | 1999
|                              |  |                 |            |      |  |      |            |      |  |     
|Balance Sheet Data:           |  |                 |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|                              |  |                 |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Current assets                |  | $               | 2,419,099  |      |  | $    | 6,350,497  |      |  | $    | 7,701,501  |  |  | $ | 3,117,578  |  |  | $ | 15,536,283 | 
|Total assets                  |  |                 | 19,914,197 |      |  |      | 24,224,892 |      |  |      | 29,646,307 |  |  |   | 37,700,950 |  |  |   | 47,630,860 | 
|Working capital               |  |                 | 1,134,371  |      |  |      | 3,900,325  |      |  |      | 5,932,450  |  |  |   | 703,780    |  |  |   | 13,616,371 | 
|Long-term debt and debentures |  |                 | 8,446,675  |      |  |      | 9,011,979  |      |  |      | 10,325,976 |  |  |   | 12,015,366 |  |  |   | 17,712,349 | 
|Redeemable preferred stock    |  |                 | 8,127,179  |      |  |      | 7,972,855  |      |  |      | 7,842,030  |  |  |   | 19,816,686 |  |  |   | 19,780,867 | 
|Common stockholders equity   |  |                 | 2,055,615  |      |  |      | 4,790,245  |      |  |      | 8,885,130  |  |  |   | 3,451,767  |  |  |   | 8,174,399  | 




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 believed that there
was a growing demand for water resources in both of these areas,
which demand is expected to exceed the water resources currently
available to these areas. During the fiscal years ended
March 31, 2001 and 2000, the Company executed a variety of
wholesale water supply contracts with a number of retail
municipal water agencies. However, the Company encountered
significant regulatory obstacles to its attempts to develop and
transfer water for delivery to such customers. Accordingly, the
Company reduced its overhead expenditures, has deferred
development activities, and has concentrated its efforts in
California on overcoming the regulatory obstacles to water
transfers and on arranging water transfers that do not face such
obstacles. However, based on continuing regulatory difficulties
and administrative delays in completing water transfers and
generating revenue from water sales, the Company 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, the Company has been
exploring 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. While
the Company has no formal plan to liquidate all or substantially
all of its assets, it is continuing to pursue a strategy of
selling non-strategic assets to bolster its cash position while
concentrating its efforts on the development and monetization of
its existing strategic

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water-related assets. The Company has also been
exploring the sale of its Northern California assets, including
both its strategic and non-strategic assets.


In connection with its plans to sell assets to
generate liquidity and working capital, and voluntarily
restructure the Companys debt and preferred stock
capitalization in order to reduce the Companys interest
and preferred dividend burdens, the Company has, since the
beginning of the March 31, 2001 fiscal year effected the
following:



| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During Fiscal 2001, the Company sold (a) its
    fee interest in the Cucamonga Water Fee Agreement; (b) its
    Central Basin (California) water rights; and (c) 1000
    acre-feet of its Mojave Basin (California) water rights.
|
| |  | During Fiscal 2002, the Company completed the
    sale of its Glenn County, California farm property and 123 acres
    of its land holdings in San Bernardino County California.                                                  
|
| |  | During Fiscal 2003, the Company sold the
    remaining 1,966 acre-feet of its Mojave water rights (leaving
    only 30 acre-feet of such rights, which the Company has
    dedicated to its San Bernardino County real estate).   

With regard to the restructuring strategy, in
Fiscal 2001 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 $10,000,000 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 and 175,000 shares of the Companys common
stock; and (c) retired $909,000 of its 9% Convertible
Debentures at a 45% discount from their face value. In Fiscal
2003, the Company retired an additional $500,000 of its 9%
Convertible Debentures at a 45% discount from their face value.

Critical Accounting Policy

In response to the Securities and Exchange
Commissions release No. 33-8040, Cautionary
Advice Regarding Disclosure About Critical Accounting
Policies, the Company has identified its most critical
accounting policy as that related to the carrying value of its
water rights, which are carried at cost. Any event or
circumstance that indicates to the Company that there is an
impairment of the fair value of its water rights is recorded in
the period in which such event or circumstance becomes known to
the Company. During the fiscal years ended March 31, 2003,
2002, and 2001 no such event or circumstance occurred that
would, in the opinion of management, signify the need for a
material reduction in the carrying value of any of the
Companys water rights, except as described in Note 16
in the consolidated financial statements of the Company included
in this Annual Report on Form 10-K.

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

16



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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.

California Operations

|                                                        |  |                       |           |      |  |      |           |  |  |  |           |  
|------------------------------------------------------- |  | --------------------- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | -
|                                                        |  |                      
|                                                        |  | Years Ended March 31,
|                                                        |  |                      
|                                                        |  | 2003                  |           | 2002 |  | 2001
|                                                        |  |                       |           |      |  |     
|Revenue                                                 |  | $                     | 1,519,000 |      |  |      | 1,464,000 |  |  |  | 2,127,000 |  
|Cost of Revenue                                         |  |                       | 1,041,000 |      |  |      | 981,000   |  |  |  | 1,518,000 |  
|                                                        |  |                       |           |      |  |      |           |  |  |  |           |  
|Gross Profit                                            |  |                       | 478,000   |      |  |      | 483,000   |  |  |  | 609,000   |  
|                                                        |  |                       |           |      |  |      |           |  |  |  |           |  
|Gain on sales of assets                                 |  |                       | 975,000   |      |  |      | 17,000    |  |  |  | 896,000   |  
|                                                        |  |                       |           |      |  |      |           |  |  |  |           |  
|Other, net                                              |  |                       | (6,000    | )    |  |      | 5,000     |  |  |  | 861,000   |  
|                                                        |  |                       |           |      |  |      |           |  |  |  |           |  
|Cumulative effect of change in accounting
    principle |  |                       |          |      |  |      |          |  |  |  | (237,000  | )
|                                                        |  |                       |           |      |  |      |           |  |  |  |           |  

Water revenue for Fiscal 2003 increased $55,000
over Fiscal 2002, primarily due to the completion of a sale to
USBR. The Inglewood transaction will expire during the fiscal
year ending March 31, 2004. Water revenue for Fiscal 2002
decreased $663,000 (31%) from Fiscal 2001 primarily because the
Company disposed of a water payment contract in Fiscal 2001 and
because the Company did not complete any new water transfer
transactions in Fiscal 2002. During Fiscal 2001, revenues
consisted of (i) $1,287,000 that the Company received under
the Inglewood, transaction, and (ii) $840,000 from other
sources, including a water transfer agreement between the
Company and the Santa Margarita Water District. Although the
Company continued to receive payments under the Inglewood
agreement (amounting to $1,306,000) in Fiscal 2002, the Company
did not receive any payments under the Cucamonga Water Fee
Agreement in Fiscal 2002 (because the Agreement had been
disposed of in Fiscal 2001), and the Company did not complete
any new water transfers during Fiscal 2002. The Company was
unable to complete additional water transfer transaction in
Fiscal 2003 primarily due to the laws and regulations that have
hindered the Companys ability to complete such water
transfers on profitable terms. The complex structure of laws and
regulations that govern water transfers in California, along
with the way such constraints are administered so as to hinder
independent transactions, will continue to limit the
Companys ability to effect profitable water transfer
transactions in California in the foreseeable future.

Gain on Sale of Water Rights.During Fiscal 2003 the Company sold
its remaining 1,966 acre-feet of groundwater pumping rights in
the Mojave Basin of California to two municipalities in San
Bernardino County and realized an aggregate gain on those sales
of $964,000. During Fiscal 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 Fiscal 2001, the Company also sold 1,000
acre-feet of its Mojave Basin water rights to an unaffiliated
water utility company, and realized a gain on that sale in the
amount of $465,000. There were no comparable sales in Fiscal
2002.

Cumulative Effect of Change in Accounting
Principle.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 changed 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.

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##### Table of Contents



Colorado Operations

|                |  |                       |        |      |  |      |   |  |  |  |   | 
|--------------- |  | --------------------- | ------ | ---- |  | ---- | - |  |  |  | - | 
|                |  |                      
|                |  | Years Ended March 31,
|                |  |                      
|                |  | 2003                  |        | 2002 |  | 2001
|                |  |                       |        |      |  |     
|Revenue         |  | $                     | 10,000 |      |  |      |  |  |  |  |  | 
|Cost of Revenue |  |                       |       |      |  |      |  |  |  |  |  | 
|                |  |                       |        |      |  |      |   |  |  |  |   | 
|Gross Profit    |  | $                     | 10,000 |      |  |      |  |  |  |  |  | 
|                |  |                       |        |      |  |      |   |  |  |  |   | 

All of the Companys Colorado operations
involve the Companys Cherry Creek Project. During Fiscal
2003, the Company began to make minor water sales in Colorado to
an unaffiliated private entity. In addition, the Company has
continued implementing a plan to market and sell Water Delivery
Contract Units (WDCUs), contractual rights to
receive a specified portion of the undivided water production
capacity of the Cherry Creek Project, to Colorado water
agencies. The Company is currently engaged in negotiations for
the sale of initial WDCUs which, in aggregate, would account for
600 acre-feet of annual production. The Company anticipates that
such sales, if completed, will be made as isolated, individually
negotiated transactions, the timing and terms of which are
inherently unpredictable. Thus, there can be no assurance that
WDCUs will, in fact, be sold on terms satisfactory to the
Company.

General and Administrative Expenses

|                                    |  |                       |           |      |  |      |           |  |  |  |           | 
|----------------------------------- |  | --------------------- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                    |  |                      
|                                    |  | Years Ended March 31,
|                                    |  |                      
|                                    |  | 2003                  |           | 2002 |  | 2001
|                                    |  |                       |           |      |  |     
|General and Administrative Expenses |  | $                     | 3,081,000 |      |  |      | 3,076,000 |  |  |  | 3,934,000 | 

General and administrative expenses for Fiscal
2003 increased by $5,000 (less than 1%) from Fiscal 2002. A 5%
increase in employment-related expenses was partially offset by
a reduction in professional fees in Fiscal 2003, and a reversal
of the Fiscal 2002 non-cash expense for deferred compensation
arising from variable plan accounting for certain incentive
stock options granted to an officer and director of the Company.

In addition to employee compensation expenses,
professional fees, travel/ marketing expenses, office occupancy
charges, and other related expenses, the Company also includes
charges related to the impairment of its assets as part of its
general and administrative expenses. General and administrative
expenses for Fiscal 2002 decreased by $858,000 (22%) from Fiscal
2001. The decrease was primarily due to a $763,000 asset
impairment charge that the Company recognized in Fiscal 2001.
The Company did not have any asset impairment charges in Fiscal
2003 or Fiscal 2002. Therefore, excluding the Fiscal 2001 asset
impairment charge, general and administrative expenses in Fiscal
2002 decreased by $95,000 (2.4%) from Fiscal 2001. During Fiscal
2002, consulting and engineering fees decreased by $335,000 from
the prior year as a result of reduced transaction activity.
Payroll and fringe benefit costs increased by $161,000 due to a
$154,000 non-cash expense for deferred compensation arising from
variable plan accounting for certain incentive stock options
granted to an officer and director of the Company.

During Fiscal 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 a water development project that
the Company had initiated in Olancha, California. During Fiscal
2001, the Company determined that it could not successfully
complete the Olancha project as anticipated. Accordingly, the
Company returned all of the Olancha assets that it had
previously purchased to the seller and former owner of such
assets in exchange for the forgiveness of the outstanding
balance of the Companys obligation (purchase
financing) to the seller and former owner. These
impairment charges, therefore, were made to reduce the recorded
asset values of the returned assets following the return of the
assets to the seller in exchange for full satisfaction and
retirement of the Companys note in favor of the seller and
former owner in the amount of $758,000. (Note that, for
accounting purposes, the Company recognized an extraordinary
gain of $769,000 on the extinguishment of the foregoing debt.
See, Other Non-Segment Information, below.)

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##### Table of Contents



Other Non-Segment Information

|                          |  |                       |          |      |  |      |          |   |  |  |            |  
|------------------------- |  | --------------------- | -------- | ---- |  | ---- | -------- | - |  |  | ---------- | -
|                          |  |                      
|                          |  | Years Ended March 31,
|                          |  |                      
|                          |  | 2003                  |          | 2002 |  | 2001
|                          |  |                       |          |      |  |     
|Interest Income           |  | $                     | 91,000   |      |  |      | 170,000  |   |  |  | 478,000    |  
|Interest Expense          |  |                       | (857,000 | )    |  |      | (860,000 | ) |  |  | (1,139,000 | )
|Extraordinary income, net |  |                       | 219,000  |      |  |      |         |   |  |  | 1,154,000  |  

Interest Income.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 2003 from Fiscal 2002, and for Fiscal 2002 from Fiscal
2001 due primarily to progressively lower interest rates and
investment balances.

Interest Expense.Interest expense for Fiscal 2003,
Fiscal 2002 and Fiscal 2001 included interest of $794,000,
$794,000 and $849,000, respectively, paid to the holders of the
Companys outstanding 9% Convertible Subordinated
Debentures Due 2005 (the Debentures). Fiscal 2003,
2002 and 2001 also included $25,000, $64,000 and $182,000
respectively of interest related to the five-year amortizing
term loan for the Inglewood water sale agreement. The loan was
repaid and extinguished in Fiscal 2003. In Fiscal 2003, $38,000
of interest was paid in connection with the purchase of 12,000
acre-feet of water.

Extraordinary Income, Net.In Fiscal 2003, the Company
repurchased $500,000 of its outstanding Debentures, plus accrued
interest of $21,000 for $296,000 in cash. After reducing related
net deferred debt costs of $6,000, the Company recognized a
$219,000 extraordinary gain on the early extinguishment of debt.
In Fiscal 2001, the Company repurchased $909,000 of its
outstanding 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. During Fiscal 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 and former owner of the
property in exchange for full satisfaction and retirement of the
Companys note in favor of the seller and former owner in
the amount of $758,000 and accrued interest of $11,000, and
recognized an extraordinary gain on extinguishment of debt, net
of income taxes, of $769,000.

Liquidity and Capital Resources

The independent auditors report dated
June 27, 2003 included with this Annual Report on
Form 10-K contains the following explanatory paragraph:

The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company is dependent on
uncommitted sales of Cherry Creek Project Water Delivery
Contract Units or assets in order to generate cash for
operations, which dependence raises substantial doubt about its
ability to continue as a going concern. Managements plans
in regard to these matters are also described in Note 2.
The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.

For the year ended March 31, 2003, the
Company recognized revenues of $1,529,000 and a gross profit of
$488,000, from water sales and the lease of water rights.
However, the gross profit was offset by general and
administrative expenses of $3,081,000 consisting of payroll and
fringe benefits, legal, accounting, consulting and engineering
fees, and miscellaneous administrative expenses. Although the
Company recognized $91,000 from interest income earned primarily
from its cash and cash equivalents investments, the interest
income was offset by $794,000 of interest expense incurred on
its Debentures and $63,000 of interest expense incurred on its
term loan and other obligations. As a result of the foregoing
factors, the Company had negative cash flow from operating
activities of $2,159,000 for the year ended March 31, 2003.

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The Company funded its working capital needs
during the year ended March 31, 2003 through its existing
operating revenue, its existing capital resources, and cash
generated by the sales of assets. The Company sold
1,966 acre-feet of annual groundwater pumping rights in the
Mojave Basin for $2,637,000 in cash. The Company intends to
continue to sell other non-strategic assets to generate cash and
reduce its operating expenses while it continues to develop its
principal water assets to generate operating revenues in the
future. For example, the Company sold its shares in the Bear
Valley Mutual Water Company on June 18, 2003, recognizing a
gain of 79,000, and during the current fiscal year (ending
March 31, 2004), the Company plans to sell its remaining
land in San Bernardino County. These two assets had a combined
book value of $1,195,000 as of March 31, 2003.

The Company will also consider selling or
otherwise redeploying its West Basin groundwater pumping rights
during the current fiscal year, because the Inglewood agreement
to which those rights have been dedicated since 1998 is
scheduled to expire on October 1, 2003. The Company is also
considering the possible sale of some or all of its water rights
and real estate assets in Northern California.

The Companys recurring revenues will be
insufficient to cover general and administrative expenses,
interest on outstanding indebtedness and dividends when and if
declared on outstanding preferred stock. Therefore, the Company
currently plans to fund itself during the twelve months ending
March 31, 2004 from any new water revenues that it may
generate from its Water Delivery Contract Units, from its
existing capital resources, and from sales of assets. As of
March 31, 2003, the Company had working capital (consisting
mostly of cash and cash equivalents) of approximately
$1,134,000. In the event that the Company is unable to generate
new water revenues from the sale of Water Delivery Contract
Units or assets, or if any or all of the revenue on sales
proceeds are significantly less than anticipated, the Company
may not have sufficient cash available to fund its estimated
expenses for the next twelve months. Such shortfall(s) from
anticipated proceeds, if material, could impair the
Companys ability to continue as a going concern.

As of March 31, 2003 the Company had working
capital and a current ratio of $1,134,000 and 1.88 to 1,
compared with $3,900,000 and 2.59 to 1 as of March 31, 2002.

Because the Company anticipated that it would not
generate sufficient revenues from its principal water projects
in the near term, the Company has, during recent years also
attempted to reduce the Companys on-going cash payment
obligations by restructuring some of the Companys fixed
obligations. During Fiscal 2003, the Company repurchased
$500,000 of the Debentures plus accrued interest of $21,000 for
$296,000. This reduction in outstanding indebtedness will save
the Company approximately $45,000 in interest expense in Fiscal
2004. During Fiscal 2001, the Company repurchased $909,000 of
the Debentures plus accrued interest of $14,000 for $514,000.

During Fiscal, 2001, the Company also voluntarily
redeemed 2,456.5124 shares of its $1,000 stated value
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. Also, during Fiscal 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. Since the Series D
Preferred Stock accrued dividends on the $10,000,000 stated
amount at a rate of 7.5% per annum, and the new shares of
Series F Convertible Redeemable Preferred Stock accrue
dividends on the stated value of $2,000,000 at a rate of 6.0%
per annum, the Company has reduced its dividend payment
obligations to Interagua by $630,000 annually. Furthermore, the
Company has the option to pay dividends on the Series F
Convertible Redeemable Preferred Stock in additional shares of
such preferred stock rather than cash, thereby further reducing
its need to make cash payments from its limited resources.

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During Fiscal 2003, the Company retired its bank
debt, making scheduled and voluntary, accelerated principal
payments of the remaining $1,269,000 on such bank debt
associated with the Companys five-year water lease/sale
transaction with the City of Inglewood. During Fiscal 2003, the
Company also retired a purchase mortgage note when due in the
amount of $47,000. The Companys only remaining secured
indebtedness is a purchase money mortgage secured by one of the
Farm Properties with a remaining principal amount of $155,000
with interest at 9% per annum.

During Fiscal 2003, the Company made capital
expenditures totaling $370,000 in connection with the Cherry
Creek Project, in anticipation of the completion of the sale of
WDCUs in Fiscal 2004. The Company believes that its current
resources plus the funds it expects to generate from the sale of
non-strategic assets and the sale of Cherry Creek Project WDCUs
will be sufficient to fund its planned capital outlays and
operating expenses for the fiscal year ending March 31,
2004.

Although the Company has attempted to reduce its
future commitments, the Company is still committed to certain
material expenditures over the next several years, including the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company is obligated to make scheduled
    payments of principal on its remaining secured indebtedness for
    fiscal years ending March 31, 2004, 2005, 2006, 2007 and
    2008 of $26,000, $28,000, $31,000, $33,000 and $37,000,
    respectively.                                                                                                                                                                                                                                                                                                
|
| |  | The Company is required to make semi-annual
    interest payments on March 31 and September 30 of
    $374,000 on the $8,318,000 principal amount of Debentures
    through their maturity on September 30, 2005, and to make
    the payment of the $8,318,000 of principal upon that maturity
    date.                                                                                                                                                                                                                                                
|
| |  | 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 $558,830 per year). During Fiscal 2003,
    the Company declared and paid cash dividends of $279,000.                                                                                                                                                                               
|
| |  | The holders of the 2,251.018 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 $129,000 per year). These dividends may be paid in
    cash or in additional shares of Series F Preferred Stock,
    at the Companys sole discretion. During Fiscal 2003, the
    Company declared and issued scheduled dividends, paid in 129.218
    additional shares of Series F Preferred Stock.

Based on its existing assets and on its projected
operating income and expenses, the Company believes 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
anticipated sale of certain existing assets and the sale of
Cherry Creek Project WDCUs. 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.

Although the Company has attempted to reduce its
future commitments, the Company is still committed to certain
material expenditures over the next several years, including the
following;

|                                                                               |  |      |         |      |  |      |         |      |  |      |           |            |  |   |           |  |  |   |           |  |  |   |           | 
|------------------------------------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | --------- | ---------- |  | - | --------- |  |  | - | --------- |  |  | - | --------- | 
|Commitments expiring in fiscal years:                                          |  | 2004 |         | 2005 |  | 2006 |         | 2007 |  | 2008 |           | Thereafter
|                                                                               |  |      |         |      |  |      |         |      |  |      |           |           
|Scheduled principal payments on existing
    outstanding indebtedness          |  | $    | 26,000  |      |  | $    | 28,000  |      |  | $    | 31,000    |            |  | $ | 33,000    |  |  | $ | 37,000    |  |  | $ |          | 
|Semi-annual interest payments on Debentures                                    |  |      | 749,000 |      |  |      | 749,000 |      |  |      | 749,000   |            |  |   | 375,000   |  |  |   |          |  |  |   |          | 
|Principal redemption of Debentures                                             |  |      |        |      |  |      |        |      |  |      | 8,318,000 |            |  |   |          |  |  |   |          |  |  |   |          | 
|Dividends on Series C Preferred Stock                                          |  |      | 559,000 |      |  |      | 559,000 |      |  |      | 559,000   |            |  |   | 280,000   |  |  |   | 280,000   |  |  |   |          | 
|Redemption of Series C Preferred stock (50%
    in FY 2007 and 50% in FY 2008) |  |      |        |      |  |      |        |      |  |      |          |            |  |   | 3,854,000 |  |  |   | 3,854,000 |  |  |   |          | 
|Redemption of Series F Preferred Stock (in
    FY 2011 and FY 2012)            |  |      |        |      |  |      |        |      |  |      |          |            |  |   |          |  |  |   |          |  |  |   | 2,128,000 | 

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In June 2003, the Company declared and paid the
cash dividend on its Series C Preferred Stock due
January 15, 2003 in the amount of $279,000.

The holders of the 2,251.018 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 $127,000 per year). These dividends may be paid in
cash or in additional shares of Series F.

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

New Accounting Pronouncements

In June 2001, FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations.
SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets that result from the
acquisition, construction, development, and/or normal use of the
assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect
the passage of time and changes in the estimated future cash
flows underlying the obligation. The adoption of
SFAS No. 143 on April 1, 2003 did not have a
material effect on the Companys consolidated financial
statements.

In April 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS No. 145 amends
existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the
gain or loss as extraordinary, as the use of such
extinguishments have become part of the risk management strategy
of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for
certain lease modifications that have economic effects similar
to sale-leaseback transactions. The provisions of the Statement
related to the rescission of Statement No. 4 is applied in
fiscal years beginning after May 15, 2002. Earlier
application of these provisions is encouraged. The provisions of
the Statement related to Statement No. 13 were effective
for transactions occurring after May 15, 2002, with early
application encouraged. The adoption of SFAS No. 145
on April 1, 2003 did not have a material effect on the
Companys consolidated financial statements. The adoption
of SFAS No. 145 will result in the reclassification of
the gain on extinguishment of debt from an extraordinary item to
continuing operations of $219,000 and $1,154,094 in Fiscal 2003
and Fiscal 2001, respectively.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity. The provisions of this Statement are effective for
exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The
adoption of SFAS No. 146 on January 1, 2003 did
not have a material effect on the Companys consolidated
financial statements.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of FASB Statement No. 123. This Statement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements. The Company has elected to continue to account for
its stock based compensation using the intrinsic value method
pursuant to APB Opinion No. 25 and related
interpretations. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002
and are included in the notes to these consolidated financial
statements. The adoption of SFAS No. 148 did not have
a material effect on the Companys consolidated financial
statements.

In January 2003, the FASB approved for issuance
FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities.
FIN 46 clarifies the application of Accounting Research
Bulletin No. 51,

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Consolidated Financial Statements to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003.
FIN 46 may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first
applied or by restating previously issued financial statements
for one or more years with a cumulative-effect adjustment as of
the beginning of the first year restated. The disclosure
requirements of FIN 46 are effective for all financial
statements initially issued after January 31, 2003. The Company
has evaluated the impact of FIN 46 and has concluded that
the Company is not involved with any variable interest entities
and therefore does not expect FIN 46 to have a material
impact on its consolidated financial statements.


On May 15, 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity. SFAS No, 150 requires issuers to
classify as liabilities (or assets in some circumstance) three
classes of freestanding financial instruments that embody
obligations for the issuer. Generally, SFAS No. 150 is
effective for financial instruments entered into or modified
after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after
June 15, 2003. The Company expects to adopt the provisions
of the Statement on July 1, 2003. The Company did not enter
into any financial instruments within the scope of the Statement
during June 2003. However, it is reasonably possible that
adopting SFAS No. 150 on July 1, 2003 for existing
financial instruments entered into before May 31, 2003,
could result in reclassification of the Companys preferred
stock as liabilities. The Company is currently evaluating the
impact of SFAS No. 150. If adoption of SFAS No. 150
ultimately requires re-classification of the Companys
Series C and Series F Preferred Stock as liabilities,
then the Companys liabilities would increase $8,127,179,
and the mezzanine section of the consolidated balance sheet
would decrease by $8,127,179.

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;
    Going Concern Qualification

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 water
and water assets, and water of its clients. The Company has
generated revenues of $1,529,000, $1,464,000, and $2,127,000
during the fiscal years ended March 31, 2003, 2002 and
2001, respectively, while incurring net losses of $2,146,000,
$3,280,000 and $1,315,000 during such years, respectively. Until
Fiscal 2001, the Company had believed that the regulatory
obstacles that have prevented the development of a water market
in California would be lowered and that the Company would be
able to monetize its principal California water assets and to
substantially increase its revenues and generate profits
therefrom. During Fiscal 2002, those obstacles, along with the
spike in electric prices, prevented the Company from completing
any new water transfer transactions. Although electric prices
receded in Fiscal 2003, conveyance capacity constraints, the
trend toward direct transactions between water districts (which
eliminate the opportunity for the Company to earn compensation
for arranging such transactions) and the Companys limited
financial resources prevented the Company from completing
significant new water sales. In light of the Companys
current financial condition, if the Company continues its
operations, losses from operations may not be sustainable for
the period of time required to develop a viable water market,
and it is possible that governmental entities will continue to
monopolize access to conveyance and storage facilities thus
precluding profitable third-party water transfers, particularly
across the Delta.

The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the

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Company is dependent on uncommitted sales of
Cherry Creek Project Water Delivery Contract Units or assets in
order to generate cash for operations, which dependence raises
substantial doubt about its ability to continue as a going
concern. Managements plans in regard to these matters are
also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.




| |                                        
| | ---------------------------------------
| | 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 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 in its California operations. The Company
has encountered significant regulatory obstacles in its attempts
to develop and transfer water for delivery to California
customers, which regulatory obstacles the Company does not
expect to overcome in the near future. Unless the regulatory
impediments are removed or modified, the Company believes that
its ability to generate significant revenues from its water
assets will be severely limited. No assurance can be given that
the regulatory obstacles currently limiting the Companys
ability to protect, develop and monetize its California water
assets will be changed, or if changed, that the changes will
occur in the near future. Moreover, the Company faces
significant competition in arranging independent water transfers
from governmental agencies, including USBR, DWR and MWD, which
have offered direct water purchase transactions to certain
irrigation districts. This competition is significant because
these agencies also control or influence access to conveyance
and storage facilities necessary to completion of water
transfers. 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 that the Company will ever be able to generate
significant revenues from its water transfer activities in
California.

In addition, before the Company can consummate
significant water deliveries in its Cherry Creek Project in
Colorado, 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.



| |                                                       
| | ------------------------------------------------------
| | Limited Financial Resources; Forced Sale of
    Assets

As a result of the operating losses sustained by
the Company during the last several years, which have been
partially offset in Fiscal 2003, Fiscal 2002 and Fiscal 2001 by
sales of certain assets, the Company may not have sufficient
available cash to carry out its business plans over the longer
term. Regulatory difficulties that the Company has encountered
in California will continue to impact the Companys ability
to protect, develop and monetize its California water assets.
The time period in which a return could be realized on the
investment represented by these assets is unknown. These
uncertainties will make it difficult for the Company to obtain
new financing, if necessary, to pursue its business plans. As a
result of the continuous delays that have affected the
Companys ability to develop/sell water from both its
Northern California assets (primarily the Yuba Property and Farm
Properties) and from its Cherry Creek Project, and the
uncertainty as to when the regulatory difficulties will be
overcome (particularly with regard to the Yuba Properties), the
Company may not have the financial resources to continue to
operate until it can realize the true value of these assets. As
a result, the Company may be forced to sell or encumber one or
more of these assets in order to obtain sufficient working
capital to fund the development of its remaining assets. Because
of the nature of the Companys assets, the limited market
and number of buyers for such assets, the Companys
financial condition, and other related factors, any sale of
either of these assets could be a price that is below the value
that the Company could derive from these assets if it had the
financial resources to properly develop and eventually market
the water associated with its assets. In addition, because of
the Companys financial

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condition, any sale or encumbrance may also
contain other terms that are unfavorable to the Company. As a
result, the Company may decide to sell additional assets.
Because of impediments to market transfers of water derived from
or associated with some of those assets, the Company may not be
able to make such sales at prices which reflect the underlying
value of the water rights.




| |                                               
| | ----------------------------------------------
| | Commitments for Purchase and Sale of
    Water

In May 1999, the Company entered into an
agreement for the purchase of 14,000 acre-feet of water from an
unaffiliated company. In accordance with the agreement, the
Company paid the seller a deposit of 50% of the total purchase
price and agreed to pay the remainder upon periodic delivery of
the water. During the year ended March 31, 2001 the Company
took delivery of 2,000 acre-feet of this water and redelivered
the water to an unaffiliated customer. In accordance with the
terms of the purchase agreement, the Company paid the seller the
remaining 50% of the purchase price for the 2,000 acre-feet
delivered. During Fiscal 2003, the Company paid the seller for
the remaining 12,000 acre-feet of water available under the
purchase contract.

In December 1999, the Company entered into an
agreement to sell the aforementioned 14,000 acre-feet of water
to a third-party buyer at a price that includes a profit to the
Company. As noted above, during the year ended March 31,
2001 the Company delivered 2,000 acre-feet of water to this
third-party buyer. The remaining 12,000 acre-feet of water
cannot currently be delivered to the buyer due to a dispute
between the buyer and certain other water agencies who control
the means of conveying such water to the buyer. The buyer and
the Company have mutually acknowledged that the dispute (which
is not material to the Company) represents a force majeure event
preventing current delivery. Although the buyer has not been
able to accept delivery of the water, the buyer has paid the
Company the entire re-sale purchase price for the full 14,000
acre-feet, as required in the re-sale contract. The balance of
this prepayment against the Companys delivery obligation
is accounted for as current deferred revenue of $824,120
($900,000, less deferred interest income of $75,880).

The Company continues to be willing to deliver
the remaining 12,000 acre-feet of water to the contracted buyer
if and when the force majeure issues are resolved. Because
near-term resolution of these issues is doubtful, the Company
and the buyer are exploring alternatives. Currently, there can
be no assurance that viable and mutually attractive alternatives
will be identified and/or implemented.






Item 7A.     Quantitative
and Qualitative Market Risk Disclosures


The Company has no variable rate debt
outstanding. Its fixed rate debt consists exclusively of
$8,318,000 of principal amount of its Debentures which carry an
interest rate of 9% per annum and which mature on
September 30, 2005 and $155,000 remaining principal amount
(before giving effect to a principal reduction of $29,000
payable on July 21, 2003) on a purchase money mortgage
secured by one of the Companys Farm Properties. The
following table presents principal cash flows and related
weighted average interest rates of the Companys long-term
fixed rate debt for the fiscal periods indicated:

|                               |  |      |        |      |  |      |        |      |  |      |           |            |  |       |        |   |  |   |        |   |  |  |   |  |  |   |           |  
|------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | --------- | ---------- |  | ----- | ------ | - |  | - | ------ | - |  |  | - |  |  | - | --------- | -
|                               |  | 2004 |        | 2005 |  | 2006 |        | 2007 |  | 2008 |           | Thereafter |  | Total
|                               |  |      |        |      |  |      |        |      |  |      |           |            |  |      
|Fixed rate debt                |  | $    | 26,000 |      |  | $    | 28,000 |      |  | $    | 8,349,000 |            |  | $     | 33,000 |   |  | $ | 37,000 |   |  |  |  |  |  | $ | 8,473,000 |  
|Weighted average interest rate |  |      | 9.0    | %    |  |      | 9.0    | %    |  |      | 9.0       | %          |  |       | 9.0    | % |  |   | 9.0    | % |  |  |  |  |  |   | 9.0       | %

The carrying amount of long-term debt is a
reasonable estimate of fair value as management believes the
terms of the debt approximates the interest rate and other terms
currently available to the Company.

The carrying amount of the 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 as compared to those commercially available to
the Company in the marketplace for similar instruments. Over the
past three fiscal years the Company has repurchased debentures
in an unrelated series of voluntary transactions between the
Company and individual debenture holders at 55 cents per dollar
of face amount. At the times consummated, each of these
repurchase transactions represented the fair value of the
debentures. During the fiscal year ended March 31, 2003,
the Company repurchased debentures at the price of 55 cents per
dollar, which is managements best estimate of fair value.
Because there is no quoted market for the debentures, estimating

25



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##### Table of Contents



fair value is uncertain, and the Company is
uncertain as to whether the Company could repurchase further
debentures at this price. Through voluntary, arms length,
negotiated transactions, the Company has repurchased more than
$6.6 million of its Debentures over the last four fiscal
years at prices which, in aggregate, represent 36% of the face
value of Debentures so repurchased.







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-27, 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




PART III






Item 10.     Directors
and Executive Officers of the Registrant


The authorized number of Directors of the Company
is currently fixed at six and is divided into three classes,
each having two members. The Directors in each class are elected
for three-year terms, so that the term of office of one class of
Directors expires at each annual meeting. As of June 28,
2003, there were two vacancies on the Board of Directors.

The following chart sets forth biographical
information concerning the directors and executive officers of
the Company.

|     |                        |     |  |                        |    |                                              |  |                                                                                  |                           |                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                            
|---- | ---------------------- | --- |  | ---------------------- | -- | -------------------------------------------- |  | -------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                        |     |  | Current Positions with |    | Principal Occupation for the Past Five Years
|Name |                        | Age |  | Company                |    | and Certain Other Directorships             
|     |                        |     |  |                        |    |                                             
|     | David A. Abel          |     |  |                        | 57 |                                              |  | Director since November, 1998                                                    |                           | From 1980 to the present, President and Chief
    Executive Officer of ABL, Incorporated, a consulting and
    publishing firm; and Corporate Director of SuperShuttle
    International, Inc. a shared-ride ground transportation company.
|     | Lee K. Harrington      |     |  |                        | 57 |                                              |  | Director since November, 2001                                                    |                           | Mr. Harrington has been the President and CEO of
    the Los Angeles County Economic Development Corporation
    (LAEDC) since 1995, and The World Trade Center Los
    Angeles-Long Beach since 2001.                                     
|     | Robert A. Baker        |     |  |                        | 64 |                                              |  |                                                                                  | Director since July, 2000 |                                                                                                                                                                                                                                             |  | From 1974 to present, President & CEO of
    RAB Associates, a financial consulting firm; from 1998 to 2001,
    Director of Mosaic Capital LLC, an investment banking firm. His
    current public company directorships include Northern Life
    Insurance Company, Bankers National Life Insurance Company,
    Alpen, Inc., American Investment Company and Point.360.
|     | Michael Patrick George |     |  |                        | 53 |                                              |  | Director, President, Chief Executive Officer, Chairman of the Board of Directors |                           | Chairman of the Board of Directors of the Company
    since September 1999; President and Chief Executive Officer of
    the Company since April 1998; Managing Director of
    J.P. Morgan, an investment banking firm, from 1992 to 1998.

26



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##### Table of Contents



|     |                      |     |  |                        |    |                                              |  |                                                   |  |                                                                                                                                                                                                                                                                                                                                                                      |  | 
|---- | -------------------- | --- |  | ---------------------- | -- | -------------------------------------------- |  | ------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|     |                      |     |  | Current Positions with |    | Principal Occupation for the Past Five Years
|Name |                      | Age |  | Company                |    | and Certain Other Directorships             
|     |                      |     |  |                        |    |                                             
|     | James E. Sherman     |     |  |                        | 46 |                                              |  | Executive Vice President, Chief Operating Officer |  | Chief Operating Officer of the Company since
    2000. Executive Vice President of the Company since February
    2000; Chief Financial Officer of Aeromovel U.S.A. from 1997 to
    1999; Corporate finance officer of First Interstate Bank from
    1985 to 1996; Corporate finance officer of Continental Illinois
    Bank and Trust Company from 1980 to 1985.
|     | William T. Gochnauer |     |  |                        | 56 |                                              |  | Senior Vice President, Chief Financial Officer    |  | Controller of the Company since June 2000; Senior
    Vice President and Chief Financial Officer of the Company since
    September 2000; Vice President of a subsidiary of Century
    Business Services, Inc. from 1998 to 2000; Chief Financial
    Officer of the Devon Group of Companies from 1993 to 1998.
    Certified Public Accountant (California).     

Committees and Meetings of the Board of
Directors

The Companys Audit Committee consists of
Messrs. Baker (chairman), Abel, and Harrington. The Audit
Committee reviews the independence, professional services, fees,
plans and results of the independent auditors engagement,
and recommends the engagement, retention or discharge of the
independent auditors to the Board of Directors. All members of
the Audit Committee are independent, as independence is defined
in Rule 4200(a)(15) of the NASD listing standards.

The Companys Compensation Committee
consists of Messrs. Abel (chairman), Baker and Harrington.
The Compensation Committee establishes the compensation of
executive officers and administers the Companys stock
option plans. All members are independent.

The Companys Nomination Committee consists
of Messrs. Harrington (chairman), Abel and Baker. The
Nomination committee identifies, screens and recruits nominees
for election to the Board of Directors, as necessary. All
members are independent.

The Audit Committee, Compensation Committee and
Nomination Committee are the only standing committees of the
Companys Board of Directors.

Messrs. George, Abel, Baker and Harrington
also serve as the members of the Board of Directors of the
Cherry Creek Water Company, the Companys wholly-owned
subsidiary incorporated in Colorado.

Section 16(A) Beneficial Ownership
Reporting Compliance.Section 16(a) of the Securities Exchange Act of 1934
requires the Companys directors and executive officers,
and persons who own more than 10% of a registered class of the
Companys equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company.
Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish the Company with copies of
all Section 16(a) forms they file.

To the Companys knowledge, based solely on
review of the copies of such reports furnished to the Company
and written representations that no other reports were required
during the fiscal year ended March 31, 2003, the
Companys officers, directors, and greater than 10%
beneficial owners complied with all Section 16(a) filing
requirements.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Summary Compensation
Table.The following tables set forth
certain information concerning the annual and long-term
compensation for services rendered to the Company in all
capacities for the fiscal years ended March 31, 2003, 2002,
and 2001 of (i) all persons who served as the Chief
Executive Officer of the

27



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##### Table of Contents



Company during the fiscal year ended
March 31, 2003 and (ii) each of the other executive
officers of the Company whose total annual salary and bonus
during the fiscal year ended March 31, 2003 exceeded
$100,000. (The Chief Executive Officer and the other named
officers are collectively referred to as the Named
Executives.)


|                            |                                          |              |      |        |  |                     |         |                |  |   |        |         |  |  |        |         | 
|--------------------------- | ---------------------------------------- | ------------ | ---- | ------ |  | ------------------- | ------- | -------------- |  | - | ------ | ------- |  |  | ------ | ------- | 
|                            |                                          |              |      |        |  |                    
|                            |                                          | Annual       |      |        |  | Long-Term          
|                            |                                          | Compensation |      |        |  | Compensation Awards
|                            |                                          |              |      |        |  | Number Stock Option
|Name and Principal Position |                                          | Year         |      | Salary |  | Bonus               |         | Shares Granted
|                            |                                          |              |      |        |  |                     |         |               
|Michael Patrick George      |                                          |              | 2003 |        |  | $                   | 382,875 |                |  | $ | 75,000 |         |  |  | 50,000 |        
|                            | Chairman, President, and                 |              |      | 2002   |  |                     | $       | 367,496        |  |   | $      | 75,000  |  |  |        | 50,000  | 
|                            | Chief Executive Officer                  |              |      | 2001   |  |                     | $       | 350,002        |  |   | $      | 225,000 |  |  |        | 600,000 | 
|James E. Sherman            |                                          |              | 2003 |        |  | $                   | 236,976 |                |  |   |       |         |  |  | 30,000 |        
|                            | Executive Vice President,                |              |      | 2002   |  |                     | $       | 225,417        |  |   | $      | 17,906  |  |  |        | 20,000  | 
|                            | Chief Operating Officer and Secretary    |              |      | 2001   |  |                     | $       | 210,000        |  |   | $      | 29,509  |  |  |        | 200,000 | 
|William T. Gochnauer        |                                          |              | 2003 |        |  | $                   | 159,863 |                |  |   |       |         |  |  | 25,000 |        
|                            | Senior Vice President,                   |              |      | 2002   |  |                     | $       | 152,250        |  |   | $      | 6,906   |  |  |        | 6,000   | 
|                            | Treasurer and Chief Financial Officer(1) |              |      | 2001   |  |                     | $       | 114,792        |  |   | $      | 9,308   |  |  |        | 60,000  | 



|    |                                                   
|--- | --------------------------------------------------
|(1) | Mr. Gochnauer joined the Company in June
    2000.

Aggregated Option Exercises in Last Fiscal
Year and Year-End Option Values.The
following table sets forth information regarding stock options
that were exercised by the Named Executives during the last
fiscal year and the number and value of unexercised options
owned at March 31, 2003 by the Named Executives.

|                       |  |             |     |          |  |                     |     |                      |  |             |         |               |  |  |         |  |  |   |     |  |  |   |     | 
|---------------------- |  | ----------- | --- | -------- |  | ------------------- | --- | -------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  | - | --- |  |  | - | --- | 
|                       |  |             |     |          |  |                     |     |                     
|                       |  |             |     |          |  | Number of           |     | Value of            
|                       |  |             |     |          |  | Unexercised Options |     | Unexercised Options 
|                       |  | Shares      |     |          |  | at March 31, 2003   |     | At March 31, 2003(1)
|                       |  | Acquired    |     | Value    |  |                     |     |                     
|Name                   |  | On Exercise |     | Realized |  | Exercisable         |     | Unexercisable        |  | Exercisable |         | Unexercisable
|                       |  |             |     |          |  |                     |     |                      |  |             |         |              
|Michael Patrick George |  |             | -0- |          |  | $                   | -0- |                      |  |             | 450,000 |               |  |  | 250,000 |  |  | $ | -0- |  |  | $ | -0- | 
|James E. Sherman       |  |             | -0- |          |  | $                   | -0- |                      |  |             | 156,666 |               |  |  | 93,334  |  |  | $ | -0- |  |  | $ | -0- | 
|William T. Gochnauer   |  |             | -0- |          |  | $                   | -0- |                      |  |             | 32,333  |               |  |  | 58,667  |  |  | $ | -0- |  |  | $ | -0- | 



---



|    |                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The value of unexercised options represents the
    excess, if any, of the market value of the Common Stock on
    March 31, 2003, based on the closing price on that day of
    $.25 per share, over the exercise price of the options.

Director
Compensation.Directors who are not
employees of the Company receive a fee of $10,000 per year for
service on the Board of Directors and an additional fee of
$10,000 per year for service as the chairman of any committee of
the Board of Directors. In addition, all directors receive
$1,000 for each Board meeting they attend, and all directors are
reimbursed for out-of-pocket expenses incurred by them in
connection with attending Board meetings. Each non-employee
director is automatically granted an option on the first
business day of each fiscal year to purchase 20,000 shares
of Common Stock at an exercise price equal to the closing price
for the Common Stock as reported on the date of grant of such
option. Such options are exercisable as to one-third on the
first, second and third anniversary of grant. On April 1,
2003, the Companys three independent directors each
received 20,000 options exercisable at a price of $.8625 per
share.

Employment
Agreements.None of the Named
Executives currently is a party to any written or oral
employment agreement with the Company. The Company has adopted
an Employee Retention Policy under which the Company agrees to
provide any employee (with the exception of the Chief Executive
Officer) whose position is eliminated as a result of a corporate
reduction in force one month notice of such termination and
three months of salary continuation upon satisfactory conclusion
of employment.

Compensation Committee Interlocks and Insider
Participation in Compensation Decisions

No members of the Compensation Committee are, or
since April 1, 2002 have been, officers of the Company, nor
have such members had any material business relationship with
the Company.

28



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##### Table of Contents



Stock Option Plans

1993 Stock Option
Plan.The 1993 Stock Option Plan (the
1993 Plan) authorized the granting of both incentive
stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the
Code), and nonqualified stock options to officers,
non-employee directors, employees, consultants and others
performing services for the Company to purchase in the aggregate
800,000 shares of the Companys Common Stock. The 1993
Plan expired in April 2003. As a result, the Company cannot
issue any additional options under the 1993 Plan. However, the
termination of the 1993 Plan does not affect the validity of
currently outstanding options.

Options granted under the 1993 Plan expire on
such date as the Compensation Committee has determined
(typically ten years after the date of grant). Options are not
transferable except by will or by the laws of descent and
distribution; during the life of the person to whom the option
is granted, that person alone may exercise them. All rights to
exercise options terminate three months from the date a grantee
ceases to be an employee of the Company or any subsidiary for
any reason other than death or disability.

If a grantee dies while in the employ of the
Company, his or her option may be exercised at any time within
12 months following the grantees death by his or her
estate or by the person or persons to whom the grantees
rights under the option passed by will or operation of law, but
only to the extent such option was exercisable by the grantee at
the time of his or her death. Except for certain stated
provisions covering termination, disability or death, no option
may be exercised after the expiration of its original term.

1997 Stock Option Plan.The 1997 Stock Option Plan currently
provides for the grant of 1,400,000 options to officers,
directors, other key employees and consultants of the Company.
The 1997 Stock Option Plan is administered by the Board of
Directors or a committee of the Board, and is currently
administered by the Compensation Committee of the Board of
Directors, which has complete discretion to select the optionees
and to establish the terms and conditions of each option,
subject to the provisions of the 1997 Stock Option Plan. If
necessary in order to comply with Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the Exchange
Act), and Section 162(m) of the Code, the committee
shall, in the Boards discretion, be comprised solely of
non-employee directors within the meaning of said
Rule 16b-3 and outside directors within the
meaning of Section 162(m) of the Code. Options granted
under the 1997 Stock Option Plan may be incentive stock
options as defined in Section 422 of the Code, or
nonqualified options, and will be designated as such.

The exercise price of incentive stock options may
not be less than the fair market value of the Companys
Common Stock as of the date of grant (110% of the fair market
value if the grant is to an employee who owns more than 10% of
the total combined voting power of all classes of capital stock
of the Company). The Code currently limits to $100,000 the
aggregate value of Common Stock that may be acquired in any one
calendar year pursuant to incentive stock options under the 1997
Stock Option Plan or any other option plan adopted by the
Company. Nonqualified options may be granted under the 1997
Stock Option Plan at an exercise price less than the fair market
value of the Common Stock on the date of grant. Nonqualified
options also may be granted without regard to any restriction on
the amount of Common Stock that may be acquired pursuant to such
options in any one year.

In general, upon termination of employment of an
optionee, all options granted to such person which were not
exercisable on the date of such termination would immediately
terminate, and any options that are exercisable would terminate
up to one year following termination of employment.

Options may not be exercised more than ten years
after the grant date (five years after the grant date if the
grant is an incentive stock option to an employee who owns more
than 10% of the total combined voting power of all classes of
capital stock of the Company). Except with the express approval
of the administrator with respect to nonqualified options,
options granted under the 1997 Stock Option Plan are not
transferable and may be exercised only by the respective
grantees during their lifetime or by their heirs, executors or
administrators in the event of death. Under the 1997 Stock
Option Plan, shares subject to cancelled or terminated options
are reserved for subsequently granted options. The number of
options outstanding and the exercise price thereof are subject
to adjustment in the case of certain transactions such as stock
splits, stock

29



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##### Table of Contents



dividends, recapitalizations or
reclassifications. The 1997 Stock Option Plan is effective for
ten years, unless sooner terminated or suspended. The 1997 Stock
Option Plan provides that options covering no more than 650,000
shares of Common Stock may be granted to any one employee in any
twelve-month period.







|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The following table sets forth certain
information regarding the beneficial ownership of the
Companys Common Stock, Series C Preferred Stock and
Series F Preferred Stock as of June 27, 2003 by
(i) each person who is known by the Company to own more
than 5% of the outstanding Common Stock, Series C Preferred
Stock or Series F Preferred Stock; (ii) each of the
Companys directors; and (iii) all current officers
and directors (including the director nominees) of the Company
as a group.

|                                                                |                          |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|--------------------------------------------------------------- | ------------------------ | ------------ | --------- | ------------------ |  | ------------------ | ----- | -------------- |  | --------- | ----- | -------- |  | -------- | ---- | - |  |  | --------- |  |  |  | --- | - |  |  | ----- |  | 
|                                                                |                          |              |           |                    |  |                    |       |                |  |          
|                                                                |                          |              |           | Series C Preferred |  | Series F Preferred |       |               
|                                                                |                          | Common Stock |           | Stock              |  | Stock              |       | % Votes Of All
|                                                                |                          |              |           |                    |  |                    |       | Classes of    
|Name and Address of                                             |                          | Number       |           | Percent of         |  | Number             |       | Percent        |  | Number    |       | Percent  |  | Capital 
|Beneficial Owner(1)                                             |                          | of Shares    |           | Class              |  | of Shares          |       | of Class       |  | of Shares |       | of Class |  | Stock(2)
|                                                                |                          |              |           |                    |  |                    |       |                |  |           |       |          |  |         
|Michael P. George                                               |                          |              | 468,180   | (3)                |  |                    | 5.5%  |                |  |           | 0     |          |  |          | 0    | % |  |  | 0         |  |  |  | 0   | % |  |  | 4.8%  | 
|David A. Abel                                                   |                          |              | 55,298    | (3)                |  |                    | *     |                |  |           | 0     |          |  |          | 0    | % |  |  | 0         |  |  |  | 0   | % |  |  | *     | 
|Robert A. Baker                                                 |                          |              | 26,667    | (3)                |  |                    | *     |                |  |           | 0     |          |  |          | 0    | % |  |  | 0         |  |  |  | 0   | % |  |  | *     | 
|Lee K. Harrington                                               |                          |              | 13,333    | (3)                |  |                    | *     |                |  |           | 0     |          |  |          | 0    | % |  |  | 0         |  |  |  | 0   | % |  |  | *     | 
|T. Rowe Price Associates, Inc.                                  |                          |              | 1,040,524 | (4)(5)             |  |                    | 12.9% |                |  |           | 4,516 |          |  |          | 58.6 | % |  |  | 0         |  |  |  | 0   | % |  |  | 12.0% | 
|                                                                | 100 East Pratt Street    |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|                                                                | Baltimore, MD 21202      |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|T. Rowe Price New Era Fund Inc.                                 |                          |              | 135,912   | (5)                |  |                    | 1.7%  |                |  |           | 2,258 |          |  |          | 29.3 | % |  |  | 0         |  |  |  | 0   | % |  |  | 1.4%  | 
|                                                                | 100 East Pratt Street    |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|                                                                | Baltimore, MD 21202      |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|T. Rowe Price Small-Cap Value Fund, Inc.                        |                          |              | 800,412   | (4)(5)             |  |                    | 9.9%  |                |  |           | 2,258 |          |  |          | 29.3 | % |  |  | 0         |  |  |  | 0   | % |  |  | 9.0%  | 
|                                                                | 100 East Pratt Street    |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|                                                                | Baltimore, MD 21202      |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|Wisconsin Alumni Research Foundation                            |                          |              | 67,928    | (5)                |  |                    | *     |                |  |           | 1,129 |          |  |          | 14.6 | % |  |  | 0         |  |  |  | 0   | % |  |  | *     | 
|                                                                | B-107, 3801 Kennett Pike |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|                                                                | P.O. Box 4172            |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|                                                                | Wilmington, DE 19807     |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|Ashford Capital Management, Inc.                                |                          |              | 124,007   | (5)                |  |                    | 1.5 % |                |  |           | 2,061 | (6)      |  |          | 26.7 | % |  |  | 0         |  |  |  | 0   | % |  |  | 1.3%  | 
|as investment advisor for certain investment
    accounts       |                          |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       | 
|                                                                | B-107, 3801 Kennett Pike |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|                                                                | P.O. Box 4172            |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|                                                                | Wilmington, DE 19807     |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|Interagua, Servicios Integrales del                             |                          |              | 576,968   | (7)                |  |                    | 6.7%  |                |  |           | 0     |          |  |          | 0    | % |  |  | 2,251.018 |  |  |  | 100 | % |  |  | 5.1%  | 
|                                                                | Agua, S.A.               |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|                                                                | Paseo de San Juan, 39    |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|                                                                | Barcelona, Spain 08009   |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       |  | 
|All directors and executive officers as a group
    (6 persons) |                          |              | 781,145   | (8)                |  |                    | 8.8%  |                |  |           | 0     |          |  |          | 0    | % |  |  | 0         |  |  |  | 0   | % |  |  | 6.9%  | 
|                                                                |                          |              |           |                    |  |                    |       |                |  |           |       |          |  |          |      |   |  |  |           |  |  |  |     |   |  |  |       | 



---



|  |              
|- | -------------
|* | Less than 1%.



|    |                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Except as otherwise indicated, the address of
    each stockholder is c/o the Company at 102 Washington
    Avenue, Point Richmond, California 94801.                                                                                                                                                                                            
|   
|(2) | Based on 8,069,012 votes entitled to be cast
    by the holders of the outstanding Common Stock,
    463,779 votes entitled to be cast by the holders of the
    7,708 shares of outstanding Series C Preferred Stock,
    and 378,893 votes entitled to be cast by the holder of the
    2,121.8 shares of outstanding Series F Preferred Stock.

30



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Includes the following shares issuable under
    currently exercisable Common Stock purchase options and options
    which will become exercisable within 60 days hereof:
    M.P. George, 468,180 shares; D.A. Abel, 55,298 shares;
    L.K. Harrington, 13,333 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(4) | Based on information contained in a statement on
    Schedule 13G/A filed by T. Rowe Price Associates, Inc. with
    the Securities and Exchange Commission on February 14,
    2003. Represents 768,700 shares of Common Stock
    beneficially owned by T. Rowe Price Associates, Inc., and
    271,824 shares of Common Stock issuable upon the conversion
    of the 4,516 shares of Series C Preferred Stock
    beneficially owned by T. Rowe Price Associates, Inc.
    T. Rowe Price Associates, Inc. is the investment advisor of
    various registered investment companies and investment advisory
    clients, including (a) T. Rowe Price Small-Cap Value
    Fund, Inc. representing 664,500 shares of Common Stock
    owned by T. Rowe Price Small-Cap Value Fund, Inc. and
    135,912 shares of Common Stock issuable upon the conversion
    of 2,258 shares of Series C Preferred Stock
    beneficially owned by T. Rowe Price Small-Cap Value Fund
    Inc., and (b) T. Rowe Price New Era Fund Inc.,
    representing 135,912 and shares of Common Stock issuable upon
    the conversion of 2,258 shares of Series C Preferred Stock
    beneficially owned by T. Rowe Price New Era Fund Inc.
    T. Rowe Price Associates, Inc. disclaims beneficial
    ownership of the shares described under (a) and (b), above.
|   
|(5) | Represents shares of Common Stock issuable upon
    the conversion of the shares of Series C Preferred Stock
    owned by such beneficial owners.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(6) | Reflects shares held of record and beneficially
    owned by separate investment accounts on behalf of 10 different
    investors for which Ashford Capital Management, Inc. acts as
    investment advisor and has the sole power to vote and dispose of
    such securities as attorney-in-fact with respect to such
    accounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(7) | Includes 401,968 shares of Common Stock issuable
    upon the conversion of the shares of Series F Preferred
    Stock owned by such beneficial owner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(8) | Included 742,667 shares of Common Stock issuable
    upon exercise of currently exercisable options and options which
    will become exercisable within 60 days hereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       






Item 13.     Certain
Relationships and Related Transactions


None




Item 14.     Controls
and Procedures

The Companys President and Chief Executive
Officer, along with the Companys Senior Vice President and
Chief Financial Officer, evaluated the Companys disclosure
controls and procedures (as defined in Rule 13a-14(c) under
the Securities Exchange Act of 1934) within 90 days of the
filing date of this annual report. Based upon this evaluation,
the Companys President and Chief Executive Officer, along
with the Companys Senior Vice President and Chief
Financial Officer, concluded that, for a company this size, the
Companys disclosure controls and procedures are effective
in ensuring that material information required to be disclosed
is included in the reports that it files with the Securities and
Exchange Commission.

There were no significant changes in the
Companys internal controls or, to the knowledge of the
management of the Company, in other factors that could
significantly affect these controls subsequent to the evaluation
date.




PART IV




Item 15.     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)      

31



---



##### Table of Contents



| |      |  |  |                                                                                                                                                                                             
| | ---- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.(5)                                                                                                     
| | 4.4  |  |  | Certificate of Designations for Series D
    Convertible Redeemable Preferred Stock.(7)                                                                                                     
| | 4.5  |  |  | Certificate of Designations of Series E
    Participating Preferred Stock.(9)                                                                                                               
| | 4.6  |  |  | Certificate of Designations of Series F
    Convertible Redeemable Preferred Stock.(10)                                                                                                     
| | 10.1 |  |  | Form of Indemnity Agreement between the Company
    and its officers and directors.(2)                                                                                                      
| | 10.2 |  |  | 1993 Stock Option Plan.(4)                                                                                                                                                                  
| | 10.3 |  |  | Amendment to 1993 Stock Option Plan.(4)                                                                                                                                                     
| | 10.4 |  |  | 1997 Stock Option Plan.(6)                                                                                                                                                                  
| | 10.5 |  |  | Point Richmond Office Lease, dated March 1,
    2003, as amended, by and between Western Water Company and Janis
    & Martin McNair.(9)                                                    
| | 21   |  |  | Subsidiaries of the Company.                                                                                                                                                                
| | 23.1 |  |  | Consent of KPMG LLP.                                                                                                                                                                        
| | 99.1 |  |  | 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.(8)
| | 99.2 |  |  | Investment Restructure Agreement, dated
    March 16, 2001.(10)                                                                                                                             
| | 99.3 |  |  | Certification of Chief Executive Officer.                                                                                                                                                   
| | 99.4 |  |  | Certification of Chief Financial Officer.                                                                                                                                                   



---



|    |                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 Proxy Statement on Schedule 14A filed on
    February 7, 1994, which exhibit is hereby incorporated
    herein by reference.   
|   
|(5) | 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.
|   
|(6) | 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. 
|   
|(7) | 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.       
|   
|(8) | 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.  
|   
|(9) | 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.



|     |                                                                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | 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.

32



---



##### Table of Contents



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

|                                                                                                      |  |  |     | 
|----------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of KPMG LLP, independent auditors                                                              |  |  | F-1 | 
|Consolidated Balance Sheets as of March 31,
    2003 and 2002                                         |  |  | F-2 | 
|Consolidated Statements of Operations for the
    years ended March 31, 2003, 2002 and 2001           |  |  | F-3 | 
|Consolidated Statements of Stockholders
    Equity for the years ended March 31, 2003, 2002 and 2001 |  |  | F-4 | 
|Consolidated Statements of Cash Flows for the
    years ended March 31, 2003, 2002 and 2001           |  |  | F-5 | 
|Notes to Consolidated Financial Statements                                                            |  |  | F-6 | 

Reports on Form 8-K

None

33



---



##### 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



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

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

Date: June 27, 2003

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 27, 2003
|                                                
|/s/ WILLIAM T. GOCHNAUERWilliam T. Gochnauer     |  | Senior Vice President, Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | June 27, 2003
|                                                
|/s/ LEE K. HARRINGTONLee K. Harrington           |  | Director                                                                                        |  | June 27, 2003
|                                                
|/s/ DAVID A. ABELDavid A. Abel                   |  | Director                                                                                        |  | June 27, 2003
|                                                
|/s/ ROBERT A. BAKERRobert A. Baker               |  | Director                                                                                        |  | June 27, 2003

34



---



##### Table of Contents



I, Michael Patrick George, certify that:



| |    |                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Western Water Company (the registrant) for the
    fiscal year ended March 31, 2003;                                                                                                                                                                          
|
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact necessary to
    make the statements made, in light of the circumstances under
    which such statements were made, not misleading with respect to
    the period covered by this annual report;           
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                 



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                                                    
| | ---------------------------------------------------
| | /s/MICHAEL PATRICK GEORGE                          
| |                                                    
| | Michael Patrick George                             
| | Chairman, President and Chief Executive
    Officer

Date: June 27, 2003

35



---



##### Table of Contents



I, William T. Gochnauer, certify that:



| |    |                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Western Water Company (the
    registrant) for the fiscal year ended March 31,
    2003;                                                                                                                                                                    
|
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact necessary to
    make the statements made, in light of the circumstances under
    which such statements were made, not misleading with respect to
    the period covered by this annual report;           
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                 



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                                                      
| | -----------------------------------------------------
| | /s/ WILLIAM T. GOCHNAUER                             
| |                                                      
| | William T. Gochnauer                                 
| | Senior Vice President and Chief Financial
    Officer

Date: June 27, 2003

36



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors

Western Water Company:


We have audited the accompanying consolidated
balance sheets of Western Water Company and subsidiaries (the
Company) as of March 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders equity
and cash flows for each of the years in the three-year period
ended March 31, 2003. 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the years
in the three-year period ended March 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.

The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company is dependent on
uncommitted sales of Cherry Creek Project Water Delivery
Contract Units or assets in order to generate cash for
operations, which dependence raises substantial doubt about its
ability to continue as a going concern. Managements plans
in regard to these matters are also described in Note 2.
The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.



| |             
| | ------------
| | /s/ KPMG LLP

San Francisco, California

June 27, 2003


F-1



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2003 and 2002


|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |             |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ----------- | ---------- | - | ---------- | ----------- | ---------- | 
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         | 2003                       |            | 2002       
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |            
|ASSETS                                                                                                                                                                                                                                                                                                
|Current Assets:                                                                                                                                                                                                                                                                                        |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                                       | Cash and cash equivalents                                                                                               |                            | $          | 1,144,292   |            |   | $          | 3,320,917   |           
|                                                                                                                                                                                                                                                                                                       | Accounts receivable  trade                                                                                             |                            |            | 20,335      |            |   |            | 12,625      |           
|                                                                                                                                                                                                                                                                                                       | Current portion of notes receivable (Note 3)                                                                            |                            |            | 6,491       |            |   |            | 50,240      |           
|                                                                                                                                                                                                                                                                                                       | Assets held for sale (Note 8)                                                                                           |                            |            | 1,196,937   |            |   |            | 2,863,158   |           
|                                                                                                                                                                                                                                                                                                       | Other current assets                                                                                                    |                            |            | 51,044      |            |   |            | 103,557     |           
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         | Total Current Assets       |            |             | 2,419,099  |   |            |             | 6,350,497  | 
|Notes receivable, less current portion (Note 3)                                                                                                                                                                                                                                                        |                                                                                                                         |                            | 160,319    |             |            |   | 166,488    |            
|Land (Notes 5, 11 and 16)                                                                                                                                                                                                                                                                              |                                                                                                                         |                            | 4,367,932  |             |            |   | 4,163,880  |            
|Water rights (Notes 6 and 17)                                                                                                                                                                                                                                                                          |                                                                                                                         |                            | 11,605,014 |             |            |   | 11,602,744 |            
|Prepaid leasing costs, net of accumulated
    amortization (Note 7)                                                                                                                                                                                                                                    |                                                                                                                         |                            | 474,104    |             |            |   | 1,204,826  |            
|Other water assets, net of accumulated
    amortization (Note 1)                                                                                                                                                                                                                                       |                                                                                                                         |                            | 656,755    |             |            |   | 359,835    |            
|Deferred debt costs, net of accumulated
    amortization (Note 11 and 12)                                                                                                                                                                                                                              |                                                                                                                         |                            | 112,879    |             |            |   | 192,559    |            
|Property and equipment, net of accumulated
    depreciation (Note 4)                                                                                                                                                                                                                                   |                                                                                                                         |                            | 93,767     |             |            |   | 51,705     |            
|Other assets                                                                                                                                                                                                                                                                                           |                                                                                                                         |                            | 24,328     |             |            |   | 132,357    |            
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         | Total Assets               |            | $           | 19,914,197 |   |            | $           | 24,224,892 | 
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |            
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                                                                                                                                              
|Current Liabilities:                                                                                                                                                                                                                                                                                   |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                                       | Accounts payable                                                                                                        |                            | $          | 352,522     |            |   | $          | 104,709     |           
|                                                                                                                                                                                                                                                                                                       | Accrued expenses and other liabilities (Notes 10)                                                                       |                            |            | 82,228      |            |   |            | 218,883     |           
|                                                                                                                                                                                                                                                                                                       | Deferred revenue on water contract (Note 1)                                                                             |                            |            | 824,120     |            |   |            | 824,120     |           
|                                                                                                                                                                                                                                                                                                       | Current maturities of long-term debt (Note 11)                                                                          |                            |            | 25,858      |            |   |            | 1,302,460   |           
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         | Total Current Liabilities  |            |             | 1,284,728  |   |            |             | 2,450,172  | 
|Long-term debt, less current maturities (Note 11)                                                                                                                                                                                                                                                      |                                                                                                                         |                            | 128,897    |             |            |   | 194,201    |            
|9% Convertible subordinated debentures (Note 12)                                                                                                                                                                                                                                                       |                                                                                                                         |                            | 8,317,778  |             |            |   | 8,817,778  |            
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         | Total Liabilities          |            |             | 9,731,403  |   |            |             | 11,462,151 | 
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |            
|Series C convertible redeemable preferred
    stock, $.001 par value, $1,000 stated value, 100,000 shares
    authorized; 7,708 shares issued and outstanding (aggregate
    liquidation preference of $7,708,000) at March 31, 2003 and
    2002. (Note 13)                                           |                                                                                                                         |                            | 7,532,179  |             |            |   | 7,503,650  |            
|Series F convertible redeemable preferred
    stock, $.001 par value, $1,000 stated value, 6,000 shares
    authorized; 2,251.018 and 2,121.8 shares issued and outstanding
    (aggregate liquidation preference of $2,251,018 and $2,121,800)
    at March 31, 2003 and 2002, respectively (Note 13) |                                                                                                                         |                            | 595,000    |             |            |   | 468,845    |            
|Stockholders Equity (Notes 13, 17, and
    18):                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                                       | Common stock, $.001 par value, 20,000,000 shares
    authorized; 8,410,212 shares issued at March 31, 2003 and
    2002 |                            |            | 8,410       |            |   |            | 8,410       |           
|                                                                                                                                                                                                                                                                                                       | Additional paid-in capital                                                                                              |                            |            | 24,487,116  |            |   |            | 24,787,116  |           
|                                                                                                                                                                                                                                                                                                       | Deferred compensation                                                                                                   |                            |            |            |            |   |            | (145,740    | )         
|                                                                                                                                                                                                                                                                                                       | Accumulated deficit (accumulated since
    October 1, 1994)                                                             |                            |            | (21,065,041 | )          |   |            | (18,484,671 | )         
|                                                                                                                                                                                                                                                                                                       | Treasury stock, at cost, 341,200 shares at
    March 31, 2003 and 2002                                                  |                            |            | (1,374,870  | )          |   |            | (1,374,870  | )         
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |            
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         | Total Stockholders Equity |            |             | 2,055,615  |   |            |             | 4,790,245  | 
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |            
|Commitments and contingencies (Note 24)
    Total Liabilities and Stockholders Equity                                                                                                                                                                                                                 |                                                                                                                         | $                          | 19,914,197 |             |            | $ | 24,224,892 |            
|                                                                                                                                                                                                                                                                                                       |                                                                                                                         |                            |            |             |            |   |            |            

See accompanying notes to consolidated financial
statements.

F-2



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

Years Ended March 31, 2003, 2002 and
2001


|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |            |            |            |  
|-------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | -------- | ---------- | ---------- | --------- | -------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | -
|                                                                                                         |                                                                                                     | 2003                                                                                                                               |                         | 2002     |            | 2001      
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |           
|Revenue                                                                                                  |                                                                                                     | $                                                                                                                                  | 1,529,235               |          |            | $          | 1,464,200 |          |            | $          | 2,126,695 |           
|Cost of Revenue                                                                                          |                                                                                                     |                                                                                                                                    | 1,040,917               |          |            |            | 981,311   |          |            |            | 1,517,610 |           
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         |                                                                                                     | Gross Profit                                                                                                                       |                         |          | 488,318    |            |           |          | 482,889    |            |           |            | 609,085    |           
|General and Administrative Expenses (Note 21)                                                            |                                                                                                     |                                                                                                                                    | 3,080,810               |          |            |            | 3,075,609 |          |            |            | 3,933,995 |           
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         |                                                                                                     |                                                                                                                                    | Operating Income (Loss) |          |            | (2,592,492 | )         |          |            | (2,592,721 | )         |            |            | (3,324,910 | )
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|Other Income (Expenses):                                                                                 |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         | Interest income                                                                                     |                                                                                                                                    |                         | 90,508   |            |            |           | 170,006  |            |            |           | 478,204    |           
|                                                                                                         | Interest expense                                                                                    |                                                                                                                                    |                         | (856,602 | )          |            |           | (859,699 | )          |            |           | (1,138,949 | )         
|                                                                                                         | Gain on sale of water rights (Note 8)                                                               |                                                                                                                                    |                         | 974,502  |            |            |           |         |            |            |           | 892,779    |           
|                                                                                                         | Gain on sale of land                                                                                |                                                                                                                                    |                         |         |            |            |           | 16,747   |            |            |           |           |           
|                                                                                                         | Gain on sale of investment in limited liability
    company, net                                    |                                                                                                                                    |                         |         |            |            |           |         |            |            |           | 3,333      |           
|                                                                                                         | Other (Note 20)                                                                                     |                                                                                                                                    |                         | 22,083   |            |            |           | (11,527  | )          |            |           | 861,212    |           
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         |                                                                                                     |                                                                                                                                    | 230,491                 |          |            |            | (684,473  | )        |            |            | 1,096,579 |           
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         |                                                                                                     | Income (Loss) from continuing operations before
    income taxes                                                                   |                         |          | (2,362,001 | )          |           |          | (3,277,194 | )          |           |            | (2,228,331 | )         
|Income taxes (Note 15)                                                                                   |                                                                                                     |                                                                                                                                    | 3,200                   |          |            |            | 3,200     |          |            |            | 3,200     |           
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         |                                                                                                     | Income (Loss) from continuing operations before
    extraordinary item and cumulative effect of change in accounting
    principle |                         |          | (2,365,201 | )          |           |          | (3,280,394 | )          |           |            | (2,231,531 | )         
|Extraordinary income on extinguishment of debt,
    net of income taxes (Note 19)                        |                                                                                                     |                                                                                                                                    | 219,000                 |          |            |            |          |          |            |            | 1,154,094 |           
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         |                                                                                                     | Net Income (Loss) before cumulative effect of
    change in accounting principle                                                   |                         |          | (2,146,201 | )          |           |          | (3,280,394 | )          |           |            | (1,077,437 | )         
|Cumulative effect of change in accounting
    principle                                                  |                                                                                                     |                                                                                                                                    |                        |          |            |            |          |          |            |            | (237,065  | )         
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         |                                                                                                     | Net Income (Loss)                                                                                                                  |                         |          | (2,146,201 | )          |           |          | (3,280,394 | )          |           |            | (1,314,502 | )         
|Accretion of preferred stock to redemption value                                                         |                                                                                                     |                                                                                                                                    | (130,604                | )        |            |            | (108,298  | )        |            |            | (38,255   | )         
|Excess of carrying value over amount paid to
    retire convertible redeemable preferred stock (Note 13) |                                                                                                     |                                                                                                                                    |                        |          |            |            |          |          |            |            | 7,678,597 |           
|Preferred stock dividends                                                                                |                                                                                                     |                                                                                                                                    | (303,565                | )        |            |            | (860,453  | )        |            |            | (930,977  | )         
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         |                                                                                                     | Net Income (Loss) Applicable to Common
    Stockholders                                                                            |                         | $        | (2,580,370 | )          |           | $        | (4,249,145 | )          |           | $          | 5,394,863  |           
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|Basic net income (loss) per share applicable
    to common stockholders:                                 |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         | Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle |                                                                                                                                    | $                       | (0.35    | )          |            | $         | (0.53    | )          |            | $         | 0.56       |           
|                                                                                                         | Extraordinary income on extinguishment of debt                                                      |                                                                                                                                    |                         | .03      |            |            |           |         |            |            |           | 0.15       |           
|                                                                                                         | Cumulative effect of change in accounting
    principle                                             |                                                                                                                                    |                         |         |            |            |           |         |            |            |           | (0.03      | )         
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         |                                                                                                     | Basic net income (loss) per share applicable
    to common stockholders                                                            |                         | $        | (0.32      | )          |           | $        | (0.53      | )          |           | $          | 0.68       |           
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|Diluted net income (loss) per share
    applicable to common stockholders:                               |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         | Income (loss) before extraordinary item and
    cumulative effect of change in accounting principle |                                                                                                                                    | $                       | (0.35    | )          |            | $         | (0.53    | )          |            | $         | 0.56       |           
|                                                                                                         | Extraordinary income on extinguishment of debt                                                      |                                                                                                                                    |                         | .03      |            |            |           |         |            |            |           | 0.13       |           
|                                                                                                         | Cumulative effect of change in accounting
    principle                                             |                                                                                                                                    |                         |         |            |            |           |         |            |            |           | (0.03      | )         
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           
|                                                                                                         |                                                                                                     | Diluted net income (loss) per share
    applicable to common stockholders                                                          |                         | $        | (0.32      | )          |           | $        | (0.53      | )          |           | $          | 0.66       |           
|                                                                                                         |                                                                                                     |                                                                                                                                    |                         |          |            |            |           |          |            |            |           |           

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, 2003, 2002 and
2001


|                          |                                        |              |           |            |  |          |       |              |  |          |            |               |   |        |          |          |   |  |             |            |   |  |            |   |  |  |           |            |  
|------------------------- | -------------------------------------- | ------------ | --------- | ---------- |  | -------- | ----- | ------------ |  | -------- | ---------- | ------------- | - | ------ | -------- | -------- | - |  | ----------- | ---------- | - |  | ---------- | - |  |  | --------- | ---------- | -
|                          |                                        |              |           |            |  |          |       |              |  |          |            |              
|                          |                                        | Common Stock |           | Additional |  |          |       |              |  |          |            | Total        
|                          |                                        |              |           | Paid-In    |  | Deferred |       | Accumulated  |  | Treasury |            | Stockholders
|                          |                                        | Shares       |           | Amount     |  | Capital  |       | Compensation |  | Deficit  |            | Stock         |   | Equity
|                          |                                        |              |           |            |  |          |       |              |  |          |            |               |   |       
|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    | ) |  |            |  |  |  |           | (35,346    | )
|                          | 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 |           
|                          | Net loss                               |              |           |           |  |          |       |             |  |          |            |              |   |        |          |         |   |  |             | (3,280,394 | ) |  |            |   |  |  |           | (3,280,394 | )
|                          | Preferred dividends                    |              |           |           |  |          |       |             |  |          |            |              |   |        |          |         |   |  |             | (860,453   | ) |  |            |   |  |  |           | (860,453   | )
|                          | Accretion of preferred stock           |              |           |           |  |          |       |             |  |          |            |              |   |        |          |         |   |  |             | (108,298   | ) |  |            |   |  |  |           | (108,298   | )
|                          | Deferred compensation                  |              |           |           |  |          |       |             |  |          |            | 300,000       |   |        |          | (145,740 | ) |  |             |           |   |  |            |  |  |  |           | 154,260    |  
|                          |                                        |              |           |            |  |          |       |              |  |          |            |               |   |        |          |          |   |  |             |            |   |  |            |   |  |  |           |           
|Balance at March 31, 2002 |                                        |              | 8,410,212 |            |  | $        | 8,410 |              |  |          | 24,787,116 |               |   |        | (145,740 | )        |   |  | (18,484,671 | )          |   |  | (1,374,870 | ) |  |  | 4,790,245 |           
|                          | Net loss                               |              |           |           |  |          |       |             |  |          |            |              |   |        |          |         |   |  |             | (2,146,201 | ) |  |            |  |  |  |           | (2,146,201 | )
|                          | Preferred dividends                    |              |           |           |  |          |       |             |  |          |            |              |   |        |          |         |   |  |             | (303,565   | ) |  |            |  |  |  |           | (303,565   | )
|                          | Accretion of preferred stock           |              |           |           |  |          |       |             |  |          |            |              |   |        |          |         |   |  |             | (130,604   | ) |  |            |  |  |  |           | (130,604   | )
|                          | Deferred compensation                  |              |           |           |  |          |       |             |  |          |            | (300,000      | ) |        |          | 145,740  |   |  |             |           |   |  |            |  |  |  |           | (154,260   | )
|                          |                                        |              |           |            |  |          |       |              |  |          |            |               |   |        |          |          |   |  |             |            |   |  |            |   |  |  |           |           
|Balance at March 31, 2003 |                                        |              | 8,410,212 |            |  | $        | 8,410 |              |  |          | 24,487,116 |               |   |        |         |          |   |  | (21,065,041 | )          |   |  | (1,374,870 | ) |  |  | 2,055,615 |           
|                          |                                        |              |           |            |  |          |       |              |  |          |            |               |   |        |          |          |   |  |             |            |   |  |            |   |  |  |           |           

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, 2003, 2002 and
2001


|                                                                                |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |            |   |          |            |  
|------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------- | -------------------------------------- | ----------------------------------------- | - | -------- | ---------- | --------- | - | -------- | ---------- | ---------- | - | -------- | ---------- | -
|                                                                                |                                                                            | 2003                    |                                        | 2002                                      |   | 2001    
|                                                                                |                                                                            |                         |                                        |                                           |   |         
|Cash Flows from Operating Activities:                                           |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|Net loss                                                                        |                                                                            | $                       | (2,146,201                             | )                                         |   | $        | (3,280,394 | )         |   | $        | (1,314,502 | )         
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|                                                                                | Depreciation and amortization                                              |                         |                                        | 1,059,672                                 |   |          |            | 1,034,378 |   |          |            | 1,236,127  |  
|                                                                                | Compensation (income) expense on vesting of
    compensatory stock options |                         |                                        | (154,260                                  | ) |          |            | 154,260   |   |          |            |           |  
|                                                                                | Gain on sale of water rights                                               |                         |                                        | (974,502                                  | ) |          |            |          |   |          |            | (892,779   | )
|                                                                                | Gain on sale of investment in limited liability
    company                |                         |                                        |                                          |   |          |            |          |   |          |            | (3,333     | )
|                                                                                | Gain on sale of other water assets                                         |                         |                                        |                                          |   |          |            |          |   |          |            | (879,208   | )
|                                                                                | Asset impairment charge                                                    |                         |                                        |                                          |   |          |            |          |   |          |            | 762,770    |  
|                                                                                | Gain on sale of land                                                       |                         |                                        |                                          |   |          |            | (16,747   | ) |          |            |           |  
|                                                                                | Loss on disposal of other water rights                                     |                         |                                        | (3,080                                    | ) |          |            |          |   |          |            |           |  
|                                                                                | Loss on write-off of property and equipment                                |                         |                                        | 14,580                                    |   |          |            |          |   |          |            |           |  
|                                                                                | Extraordinary income on extinguishment of debt                             |                         |                                        | (219,000                                  | ) |          |            | (5,925    | ) |          |            | (1,154,094 | )
|                                                                                | Cumulative effect of change in accounting
    principle                    |                         |                                        |                                          |   |          |            |          |   |          |            | 237,065    |  
|                                                                                | Allowance for (recovery of) water project costs                            |                         |                                        |                                          |   |          |            |          |   |          |            | (85,425    | )
|                                                                                | Loss on discount of notes receivable                                       |                         |                                        |                                          |   |          |            |          |   |          |            | 11,108     |  
|                                                                                | Changes in assets and liabilities:                                         |                         |                                        |                                           |   |          |            |           |   |          |            |            |  
|                                                                                |                                                                            | (Increase) decrease in: |                                        |                                           |   |          |            |           |   |          |            |            |   |         
|                                                                                |                                                                            |                         | Accounts receivable                    |                                           |   | (7,710   | )          |           |   |         |            |            |   |         |           
|                                                                                |                                                                            |                         | Other current assets                   |                                           |   | 52,513   |            |           |   | 360,291  |            |            |   | 515,256  |           
|                                                                                |                                                                            |                         | Land                                   |                                           |   |         |            |           |   |         |            |            |   |         |           
|                                                                                |                                                                            |                         | Water rights                           |                                           |   |         |            |           |   |         |            |            |   |         |           
|                                                                                |                                                                            |                         | Other assets                           |                                           |   | 108,029  |            |           |   | 5,895    |            |            |   | (26,256  | )         
|                                                                                |                                                                            | Increase (decrease) in: |                                        |                                           |   |          |            |           |   |          |            |            |   |         
|                                                                                |                                                                            |                         | Accounts payable                       |                                           |   | 247,813  |            |           |   | (84,858  | )          |            |   | 89,015   |           
|                                                                                |                                                                            |                         | Accrued expenses and other liabilities |                                           |   | (115,819 | )          |           |   | (580,099 | )          |            |   | 301,336  |           
|                                                                                |                                                                            |                         | Deferred water revenue                 |                                           |   |         |            |           |   |         |            |            |   | (150,000 | )         
|                                                                                |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|                                                                                |                                                                            |                         |                                        | Net cash used in operating activities     |   |          | (2,137,965 | )         |   |          | (2,413,199 | )          |   |          | (1,352,920 | )
|                                                                                |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|Cash Flows from Investing Activities:                                           |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|                                                                                | Principal payments received on notes receivable                            |                         |                                        | 49,918                                    |   |          |            | 107,594   |   |          |            | 448,090    |  
|                                                                                | Purchase of property and equipment                                         |                         |                                        | (96,722                                   | ) |          |            | (12,802   | ) |          |            | (16,410    | )
|                                                                                | Sales of water rights, net of selling costs                                |                         |                                        | 2,636,300                                 |   |          |            |          |   |          |            | 5,589,880  |  
|                                                                                | Sales of other water assets                                                |                         |                                        |                                          |   |          |            |          |   |          |            | 2,700,593  |  
|                                                                                | Sales of land, net of selling costs                                        |                         |                                        | 176,731                                   |   |          |            | 371,476   |   |          |            |            |  
|                                                                                | Additions to water rights                                                  |                         |                                        | (2,270                                    | ) |          |            | (3,510    | ) |          |            | (28,681    | )
|                                                                                | Additions to other water assets                                            |                         |                                        | (300,000                                  | ) |          |            |          |   |          |            |           |  
|                                                                                | Additions to land and land improvements                                    |                         |                                        | (370,200                                  | ) |          |            | (68,978   | ) |          |            |           |  
|                                                                                | Prepayment of leasing costs                                                |                         |                                        | (215,190                                  | ) |          |            | (173,879  | ) |          |            | (166,320   | )
|                                                                                |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|                                                                                |                                                                            |                         |                                        | Net cash provided by investing activities |   |          | 1,878,567  |           |   |          | 219,901    |            |   |          | 8,527,152  |  
|                                                                                |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|Cash flows from Financing Activities:                                           |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|                                                                                | Purchase of convertible subordinated debentures                            |                         |                                        | (295,836                                  | ) |          |            | (7,409    | ) |          |            | (499,888   | )
|                                                                                | Preferred stock dividends                                                  |                         |                                        | (279,485                                  | ) |          |            | (838,286  | ) |          |            | (930,977   | )
|                                                                                | Purchase of convertible redeemable preferred stock                         |                         |                                        |                                          |   |          |            |          |   |          |            | (442,171   | )
|                                                                                | Principal payments on long-term debt                                       |                         |                                        | (1,341,906                                | ) |          |            | (778,705  | ) |          |            | (696,983   | )
|                                                                                | Release of restricted cash                                                 |                         |                                        |                                          |   |          |            |          |   |          |            | 562,788    |  
|                                                                                |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|                                                                                |                                                                            |                         |                                        | Net cash used in financing activities     |   |          | (1,917,227 | )         |   |          | (1,624,400 | )          |   |          | (2,007,231 | )
|                                                                                |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|Net (decrease) increase in cash and cash
    equivalents                        |                                                                            |                         | (2,176,625                             | )                                         |   |          | (3,817,698 | )         |   |          | 5,167,001  |           
|Cash and cash equivalents, beginning of year                                    |                                                                            |                         | 3,320,917                              |                                           |   |          | 7,138,615  |           |   |          | 1,971,614  |           
|                                                                                |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           
|Cash and cash equivalents, end of year                                          |                                                                            | $                       | 1,144,292                              |                                           |   | $        | 3,320,917  |           |   | $        | 7,138,615  |           
|                                                                                |                                                                            |                         |                                        |                                           |   |          |            |           |   |          |            |           

See accompanying notes to consolidated financial
statements.

F-5



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##### 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 certain water rights,
as well as real estate, in California and Colorado. The
Companys current principal activity is the development of
water rights and the sale or lease of its water. The Company is
also engaged in assisting unaffiliated owners of water rights in
protecting, developing and obtaining revenue from their water
rights.



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements of Western
Water Company include Western Water Service Company, YG Procyon
Corporation and Cherry Creek Water Company, the Companys
wholly-owned subsidiaries, and YG Rice Farms, L.P., a
limited partnership which had been directly and indirectly
wholly-owned and controlled by the Company prior to its
dissolution in December, 2002. 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, 2003 and 2002, 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.



| |                     
| | --------------------
| | Assets Held for Sale

Assets held for sale are carried at the lower of
the carrying amount or fair value less costs of sale. The basis
of the properties includes the allocation of original purchase
price and direct development costs. 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.



| |             
| | ------------
| | 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. There has been no development
activity that would result in capitalized interest in any of the
last three fiscal years.

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



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##### 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

As of March 31, 2003 and 2002, other water
assets included certain water ownership rights which generate
revenues from the Inglewood lease transaction, described below
(Note 7).



| |                    
| | -------------------
| | 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 $40,081, $47,372, and $102,639 for the years ended
March 31, 2003, 2002, and 2001, 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. During the fiscal years ended March
31, 2003, 2002 and 2001, compensation expense of $(145,740),
$145,740 and $0 was recognized.

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 adjusted to the pro forma amounts indicated
below:

|                                                         |             |      |   |            |   |      |   |            |   |  |   |           | 
|-------------------------------------------------------- | ----------- | ---- | - | ---------- | - | ---- | - | ---------- | - |  | - | --------- | 
|                                                         |             | 2003 |   | 2002       |   | 2001
|                                                         |             |      |   |            |   |     
|Net income (loss) applicable to common
    stockholders: |             |      |   |            |   |      |   |            |   |  |   |          
|                                                         | As reported |      | $ | (2,580,370 | ) |      | $ | (4,249,145 | ) |  | $ | 5,394,863 | 
|                                                         | Pro forma   |      | $ | (2,610,749 | ) |      | $ | (4,217,333 | ) |  | $ | 5,338,867 | 
|Basic income (loss) per common share:                    |             |      |   |            |   |      |   |            |   |  |   |          
|                                                         | As reported |      | $ | (.32       | ) |      | $ | (.53       | ) |  | $ | .68       | 
|                                                         | Pro forma   |      | $ | (.32       | ) |      | $ | (.52       | ) |  | $ | .68       | 
|Diluted income (loss) per common share:                  |             |      |   |            |   |      |   |            |   |  |   |          
|                                                         | As reported |      | $ | (.32       | ) |      | $ | (.53       | ) |  | $ | .66       | 
|                                                         | Pro forma   |      | $ | (.32       | ) |      | $ | (.52       | ) |  | $ | .66       | 

F-7



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The per share weighted-average fair value of
stock options granted during the years ended March 31,
2003, 2002, and 2001 was $.86, and $.46, and $.26, respectively,
on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: Year
ended March 31, 2003  Expected dividend yield of
zero, expected volatility of 125.62, risk-free interest rate of
4.84%, and an expected life of 5 years. Year ended
March 31, 2002  Expected dividend yield of zero,
expected volatility of .9875, risk-free interest rate of 4.47%,
and an expected life of 5 years. 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.



| |                                
| | -------------------------------
| | Revenue Recognition 
    Water

Water revenue is recorded when realizable and
earned. Revenue from long-term water rights leasing contracts
with fixed rate increases are recognized on a straight line
method over the contractual period of the water rights lease.
Revenue from water sales contracts are recognized in conjunction
with the delivery of such water. Payments received in excess of
such revenue earned are deferred until such water is delivered.
Sales of water rights are 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 the requirements are met.

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
$974,120 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.



| |                                        
| | ---------------------------------------
| | Revenue Recognition  Sales of
    Land

Sales of land are generally accounted for under
the full accrual method. Under that method, a 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, the 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.

F-8



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                            
| | ---------------------------------------------------------------------------
| | 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) that are 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).



| |                            
| | ---------------------------
| | Net Income (Loss) Per Share

Basic net income (loss) per share is
computed by dividing net income (loss) applicable 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) applicable 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 weighted average shares used for basic and
diluted EPS computation were 8,069,012 shares for the years
ended March 31, 2003 and 2002.

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

|                                                                                                                                   |                                                                                                                                                                                          |       |           |           |   |  |      |       |  
|---------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | --------- | --------- | - |  | ---- | ----- | -
|Basic:                                                                                                                             |                                                                                                                                                                                          | Total |           | Per Share
|                                                                                                                                   |                                                                                                                                                                                          |       |           |          
|Income applicable to common stockholders before
    extraordinary item and cumulative effect of change in accounting
    principle |                                                                                                                                                                                          | $     | 4,477,834 |           |   |  | 0.56 |      
|                                                                                                                                   | Extraordinary income on extinguishments of debt                                                                                                                                          |       |           | 1,154,094 |   |  |      | 0.15  |  
|                                                                                                                                   | Cumulative effect of change in accounting
    principle                                                                                                                                  |       |           | (237,065  | ) |  |      | (0.03 | )
|                                                                                                                                   |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                                                                                                                   | Net income per common share applicable to common
    stockholders                                                                                                                        |       | $         | 5,394,863 |   |  |      | 0.68  |  
|                                                                                                                                   |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                                                                                                                   | Weighted average number of shares                                                                                                                                                        |       |           | 7,901,204 |   |  |      |       |  
|                                                                                                                                   |                                                                                                                                                                                          |       |           |           |   |  |      |      
|Diluted:                                                                                                                           |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                                                                                                                   | Income applicable 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 referred stock                                                                                                                                                     |       |           | 2,909     |   |  |      |       |  
|                                                                                                                                   |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                                                                                                                   |                                                                                                                                                                                          |       | 5,043,243 |           |   |  | 0.56 |      
|                                                                                                                                   |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                                                                                                                   | Extraordinary income on extinguishments of debt                                                                                                                                          |       |           | 1,154,094 |   |  |      | 0.13  |  
|                                                                                                                                   | Cumulative effect of change in accounting
    principles                                                                                                                                 |       |           | (237,065  | ) |  |      | (0.03 | )
|                                                                                                                                   |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                                                                                                                   | Net loss per common share applicable to common
    stockholders                                                                                                                          |       | $         | 5,960,272 |   |  |      | 0.66  |  
|                                                                                                                                   |                                                                                                                                                                                          |       |           |           |   |  |      |      
|                                                                                                                                   | Weighted average number of shares (from above)                                                                                                                                           |       |           | 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                                                                                                                                                        |       |           | 8,982,515 |   |  |      |       |  
|                                                                                                                                   |                                                                                                                                                                                          |       |           |           |   |  |      |      

F-9



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock options to purchase the following number of
shares of common stock at exercise prices per share ranging from
$.23  $18.69, $.23  $18.69, and
$.39  $21.00 in fiscal years ended March 31,
2003, 2002, and 2001, respectively, were not included in the
computation of diluted earnings per share as their effect would
have been antidilutive:

|              |  |      |           |      |  |      |           |  |  |  |           | 
|------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|              |  | 2003 |           | 2002 |  | 2001
|              |  |      |           |      |  |     
|Stock options |  |      | 1,599,666 |      |  |      | 1,546,166 |  |  |  | 1,430,375 | 

The following items were convertible into the
following number of shares of common stock at the conversion
prices listed below were not included in the computation of
diluted earnings per share for the years presented below, as
their effect would have been anti-dilutive:

|                                    |  |      |         |      |  |      |         |  |  |  |         | 
|----------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                                    |  | 2003 |         | 2002 |  | 2001
|                                    |  |      |         |      |  |     
|Convertible debentures              |  |      | 524,450 |      |  |      | 555,976 |  |  |  | 556,817 | 
|Series C redeemable preferred stock |  |      | 463,779 |      |  |      | 463,779 |  |  |  | 463,779 | 
|Series F redeemable preferred stock |  |      | 401,968 |      |  |      | 378,893 |  |  |  |        | 

The conversion price per share for the
convertible Debentures, Series C and Series F
redeemable preferred stock is $15.86, $16.62 and $5.60,
respectively.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

In June 2001, FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143
requires the Company to record the fair value of an asset
retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition,
construction, development, and/or normal use of the assets. The
Company also records a corresponding asset that is depreciated
over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation
will be adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows
underlying the obligation. The adoption of SFAS No. 143 on
April 1, 2003 did not have a material effect on the
Companys consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. SFAS
No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary, as the use
of such extinguishments have become part of the risk management
strategy of many companies. SFAS No. 145 also amends SFAS
No. 13 to require sale-leaseback accounting for certain
lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of the Statement
related to the rescission of Statement No. 4 is applied in
fiscal years beginning after May 15, 2002. Earlier
application of these provisions is encouraged. The provisions of
the Statement related to Statement No. 13 were effective
for transactions occurring after May 15, 2002, with early
application encouraged. The adoption of SFAS No. 145 on
April 1, 2003 did not have a material effect on the
Companys consolidated financial statements. The adoption
of SFAS No. 145 will result in the reclassification of the
gain on extinguishment of debt from an extraordinary item to
continuing operations of $219,000 and $1,154,094 in Fiscal 2003
and Fiscal 2001, respectively.

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force
(EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity. The provisions of this Statement are effective for
exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The
adoption of SFAS No. 146 on January 1, 2003 did not
have a material effect on the Companys consolidated
financial statements.

F-10



---



##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of FASB Statement
No. 123. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements. The Company has elected
to continue to account for its stock based compensation using
the intrinsic value method pursuant to APB Opinion
No. 25 and related interpretations. Certain of the
disclosure modifications are required for fiscal years ending
after December 15, 2002 and are included in the notes to
these consolidated financial statements. The adoption of SFAS
No. 148 did not have a material effect on the
Companys consolidated financial statements.

In January 2003, the FASB approved for issuance
FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities.
FIN 46 clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial
Statements to certain entities in which equity investors
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties. FIN 46 applies
immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it acquired before
February 1, 2003. FIN 46 may be applied prospectively
with a cumulative-effect adjustment as of the date on which it
is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect
adjustment as of the beginning of the first year restated. The
disclosure requirements of FIN 46 are effective for all
financial statements initially issued after January 31,
2003. The Company has evaluated the impact of FIN 46 and
has concluded that the Company is not involved with any variable
interest entities and therefore does not expect FIN 46 to
have a material impact on its consolidated financial statements.

On May 15, 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity. SFAS No, 150 requires issuers to
classify as liabilities (or assets in some circumstance) three
classes of freestanding financial instruments that embody
obligations for the issuer. Generally, SFAS No. 150 is
effective for financial instruments entered into or modified
after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after
June 15, 2003. The Company expects to adopt the provisions
of the Statement on July 1, 2003. The Company did not enter
into any financial instruments within the scope of the Statement
during June 2003. However, it is reasonably possible that
adopting SFAS No. 150 on July 1, 2003 for existing
financial instruments entered into before May 31, 2003,
could result in reclassification of the Companys preferred
stock as liabilities. The Company is currently evaluating the
impact of SFAS No. 150. If adoption of SFAS No. 150
ultimately requires re-classification of the Companys
Series C and Series F Preferred Stock as liabilities,
then the Companys liabilities would increase $8,127,179,
and the mezzanine section of the consolidated balance sheet
would decrease by $8,127,179.



| |                 
| | ----------------
| | 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.

F-11



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Reclassifications

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

Note 2.     Going
Concern

The Company believes that recurring revenues will
be insufficient for some time into the future to cover general
and administrative expenses, interest on outstanding
indebtedness and dividends when and if declared on its
outstanding preferred stock. The Company also deferred the
decision to declare the January 15, 2003 Series C
Preferred Stock dividend and actually declared and paid such
dividend only in June, 2003 (Note 13). Although the Company
believes that foreseeable revenues from operations will be
insufficient to fund such operating expenses, the Company
currently plans to fund itself during the twelve months ending
March 31, 2004 from any new water revenues that it may
generate from its Water Delivery Contract Units, from its
existing capital resources, and from planned sales of assets. As
of March 31, 2003, the Company had working capital
(consisting mostly of cash and cash equivalents) of
approximately $1,134,000. In the event that the Company is
unable to generate new water revenues from the sale of Water
Delivery Contract Units or complete the sale of assets, or if
any or all of the revenue or sales proceeds are significantly
less than anticipated, the Company may not have sufficient cash
available to fund its estimated expenses for the next twelve
months. Such shortfall(s) from anticipated proceeds, if
material, could impair the Companys ability to continue as
a going concern. The consolidated financial statements do not
include any adjustments that might be necessary should the
Company be unable to continue as a going concern.

Note 3.     Notes
Receivable

Notes receivable arose from the sale of farm
property in Yuba County and San Bernardino County, California.
The notes receivable bear interest at rates ranging from 8% to
9.5%, with a weighted average of 9.0%. The note receivable
maturity dates range from April 2005 to August 2011. The notes
are secured by the lots sold.

Aggregate principal maturities due on notes
receivable at March 31, 2003 are as follows:

|                      |  |       |         | 
|--------------------- |  | ----- | ------- | 
|Year ending March 31, |  | Total
|                      |  |      
|2004                  |  | $     | 6,491   | 
|2005                  |  |       | 7,108   | 
|2006                  |  |       | 109,783 | 
|2007                  |  |       | 6,532   | 
|2008                  |  |       | 7,473   | 
|Thereafter            |  |       | 29,424  | 
|                      |  |       |         | 
|Total                 |  | $     | 166,810 | 
|                      |  |       |         | 

F-12



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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, 2003 and
2002 consists of the following:

|                              |  |      |         |      |  |   |          |  
|----------------------------- |  | ---- | ------- | ---- |  | - | -------- | -
|                              |  | 2003 |         | 2002
|                              |  |      |         |     
|Land                          |  | $    | 2,952   |      |  | $ | 2,952    |  
|Equipment                     |  |      | 167,954 |      |  |   | 227,046  |  
|                              |  |      |         |      |  |   |          |  
|                              |  |      | 170,906 |      |  |   | 229,998  |  
|Less accumulated depreciation |  |      | (77,139 | )    |  |   | (178,293 | )
|                              |  |      |         |      |  |   |          |  
|                              |  | $    | 93,767  |      |  | $ | 51,705   |  
|                              |  |      |         |      |  |   |          |  



|        |     
|------- | ----
|Note 5. | Land

Land at March 31, 2003 and 2002 consists of
the following:

|                                                |  |      |           |      |  |   |           | 
|----------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                |  | 2003 |           | 2002
|                                                |  |      |           |     
|Cherry Creek Basin, Colorado                    |  | $    | 1,504,551 |      |  | $ | 1,303,177 | 
|Rice farms and ranches, Yuba County, California |  |      | 2,863,381 |      |  |   | 2,860,703 | 
|                                                |  |      |           |      |  |   |           | 
|                                                |  | $    | 4,367,932 |      |  | $ | 4,163,880 | 
|                                                |  |      |           |      |  |   |           | 

Note 6.     Water
Rights

Water rights held at March 31, 2003 and 2002
consist of the following:

|                                                |  |      |            |      |  |   |            |  
|----------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                |  | 2003 |            | 2002
|                                                |  |      |            |     
|Cherry Creek Basin, Colorado                    |  | $    | 10,756,222 |      |  | $ | 10,753,952 |  
|Los Angeles County, California                  |  |      | 577,836    |      |  |   | 577,836    |  
|Rice farms and ranches, Yuba County, California |  |      | 280,798    |      |  |   | 280,798    |  
|                                                |  |      |            |      |  |   |            |  
|                                                |  |      | 11,614,856 |      |  |   | 11,612,586 |  
|Less: Allowance for project costs               |  |      | (9,842     | )    |  |   | (9,842     | )
|                                                |  |      |            |      |  |   |            |  
|                                                |  | $    | 11,605,014 |      |  | $ | 11,602,744 |  
|                                                |  |      |            |      |  |   |            |  



|        |                      
|------- | ---------------------
|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 escalated 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, 2003,
2002 and 2001, the Company recognized revenue of $1,282,661,
$1,305,809, and $1,286,971, 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, and which has escalated pursuant to the lease
to $181,440 for the

F-13



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

year ended March 31, 2003. The fifteen-year
water rights lease is expected to provide 250 acre-feet per year
for an annual payment of $135 per acre-foot ($33,750).

Accumulated amortization as of March 31,
2003, and 2002 was $4,153,737 and $3,027,085, respectively.



|        |                     
|------- | --------------------
|Note 8. | Assets Held for Sale

Assets held for sale are those California segment
assets which are being actively marketed, and which are expected
to be sold within one year. As of March 31, 2003 and 2002,
the following assets were held for sale:

|                   |  |      |           |      |  |   |           | 
|------------------ |  | ---- | --------- | ---- |  | - | --------- | 
|Asset Category:    |  | 2003 |           | 2002
|                   |  |      |           |     
|Water rights       |  | $    |          |      |  | $ | 1,668,153 | 
|Land               |  |      | 553,005   |      |  |   | 553,005   | 
|Other water assets |  |      | 643,932   |      |  |   | 642,000   | 
|                   |  |      |           |      |  |   |           | 
|                   |  | $    | 1,196,937 |      |  | $ | 2,863,158 | 
|                   |  |      |           |      |  |   |           | 

In October 2002, the Company sold its remaining
Mojave water rights in San Bernardino County, California to two
municipalities. The sales resulted in a gain of approximately
$964,000. Cash proceeds from the sales were received in four
installments totaling approximately $2,632,000 by March 31,
2003.



|        |                                    
|------- | -----------------------------------
|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, accounts
receivable  trade, 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.

The carrying amount of long-term debt is a
reasonable estimate of fair value at issuance (plus accretion
where appropriate) because management believes the terms of the
debt approximate the interest rates and other terms available to
the Company at the time of issuance.

The carrying amount of the Debentures is based on
the principal amount owed, and does not represent
managements estimate that the interest rates or terms of
the debt represent rates and terms that are available to the
Company in todays marketplace for similar instruments.
Over the past three fiscal years the Company has repurchased
Debentures in an unrelated series of voluntary transactions
between the Company and individual Debenture holders at 55 cents
per dollar of face amount. At the times consummated, each of
these repurchase transactions represented the fair value of the
Debentures. During the fiscal year ended March 31, 2003,
the Company repurchased Debentures at the price of 55 cents per
dollar, which is managements best estimate of fair value.
Because there is no quoted market for the Debentures, estimating
fair value is uncertain, and the Company is uncertain as to
whether the Company could repurchase further Debentures at this
price.

F-14



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |                                           
|-------- | ------------------------------------------
|Note 10. | Accrued Expenses and Other
    Liabilities

Accrued expenses and other liabilities at
March 31, 2003 and 2002 consist of the following:

|                       |  |      |        |      |  |   |         | 
|---------------------- |  | ---- | ------ | ---- |  | - | ------- | 
|                       |  | 2003 |        | 2002
|                       |  |      |        |     
|Professional fees      |  | $    | 8,000  |      |  | $ | 99,335  | 
|Annual reporting costs |  |      | 31,800 |      |  |   | 31,944  | 
|Interest               |  |      | 10,450 |      |  |   | 14,093  | 
|Other                  |  |      | 31,978 |      |  |   | 73,511  | 
|                       |  |      |        |      |  |   |         | 
|                       |  | $    | 82,228 |      |  | $ | 218,883 | 
|                       |  |      |        |      |  |   |         | 



|         |               
|-------- | --------------
|Note 11. | Long-Term Debt

Long-term debt at March 31, 2003 and 2002
consists of debt related to Cherry Creek Project assets acquired
in Colorado, the Farm Properties in Yuba 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):

|                                                                                                                                                                                                                                                                                                                                      |  |      |         |      |  |  |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  |  | ---------- | -
|                                                                                                                                                                                                                                                                                                                                      |  | 2003 |         | 2002
|                                                                                                                                                                                                                                                                                                                                      |  |      |         |     
|Water leasing program                                                                                                                                                                                                                                                                                                                 |  |      |         |      |  |  |            |  
|Five-year amortizing term loan beginning
    September 30, 1998. The loan accrued interest at the
    banks Reference Rate, as defined, or LIBOR (capped at 6%)
    plus 1.5%, and was payable quarterly, or sooner, at the
    Companys option. Principal was payable quarterly. The loan
    was repaid in full in December 2002. |  |      |        |      |  |  | 1,269,000  |  
|Cherry Creek Basin                                                                                                                                                                                                                                                                                                                    |  |      |         |      |  |  |            |  
|Mortgage note payable bearing interest at 8%.
    Principal and interest were payable in annual installments of
    $14,307. This note was repaid in full upon its maturity in
    December 2002.                                                                                                                                     |  |      |        |      |  |  | 47,386     |  
|Farm Properties                                                                                                                                                                                                                                                                                                                       |  |      |         |      |  |  |            |  
|Mortgage note payable bearing interest at 9%                                                                                                                                                                                                                                                                                          |  |      |         |      |  |  |            |  
|Principal and interest are payable in annual
    installments of $39,786. Balance is due July 2007.                                                                                                                                                                                                                                   |  | $    | 154,755 |      |  |  | 180,275    |  
|                                                                                                                                                                                                                                                                                                                                      |  |      |         |      |  |  |            |  
|                                                                                                                                                                                                                                                                                                                                      |  |      | 154,755 |      |  |  | 1,496,661  |  
|Less current maturities of long-term obligations                                                                                                                                                                                                                                                                                      |  |      | (25,858 | )    |  |  | (1,302,460 | )
|                                                                                                                                                                                                                                                                                                                                      |  |      |         |      |  |  |            |  
|                                                                                                                                                                                                                                                                                                                                      |  | $    | 128,897 |      |  |  | 194,201    |  
|                                                                                                                                                                                                                                                                                                                                      |  |      |         |      |  |  |            |  

The mortgage note payable above is collateralized
by the related individual property. As of March 31, 2003,
the carrying value of the collateral for the mortgage note
payable was $901,890.

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 $25,470,
$16,980 and $16,980 for the years ended March 31, 2003,
2002 and 2001, respectively. Accumulated amortization as of
March 31, 2003, and 2002 was $89,400 and $59,430,
respectively.

F-15



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Aggregate principal maturities on long-term debt
at March 31, 2003 are as follows:

|                            |  |   |         | 
|--------------------------- |  | - | ------- | 
|Years ending March 31, 2004 |  | $ | 25,858  | 
|2005                        |  |   | 28,186  | 
|2006                        |  |   | 30,722  | 
|2007                        |  |   | 33,487  | 
|2008                        |  |   | 36,502  | 
|                            |  |   |         | 
|Total                       |  | $ | 154,755 | 
|                            |  |   |         | 

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, 2003, the Company
repurchased $500,000 of its outstanding 9% Debentures, plus
accrued interest of $20,836 for $295,836 in cash. During the
year ended March 31, 2002, the Company repurchased $13,334
of its outstanding 9% Debentures, for $7,409 in cash. During the
year ended March 31, 2001, the Company repurchased $908,888
of its outstanding 9% Debentures, plus accrued interest of
$13,714, for $499,888 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. Amortization expense on the
deferred debt costs was $48,211, $48,211, and $53,071 for the
years ended March 31, 2003, 2002 and 2001. Accumulated
amortization as of March 31, 2003 and 2002 was $363,224 and
$315,014, respectively.

Note
13.     Preferred Stock

On February 26, 1997, the Company privately
placed $4,000,000 of a new series of convertible
non-participating preferred stock. Each share of Series B
Convertible Redeemable Preferred Stock (Series B
Preferred Stock) had a stated value of $1,000, a par value
of $.001, and was convertible at any time at the option of the
holder into shares of common stock at an initial conversion
price of $16.62 per share.

The holders of Series B Preferred Stock were
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 16 of each year.

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. In addition, in connection with the
private placement, the shareholders exchanged all 4,000
outstanding shares of Series B Preferred Stock for
Series C Preferred Stock. 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.

F-16



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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. The Company
deferred payment of the cash dividend due on January 15,
2001 pending then-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. The Company declared and
paid the cash dividend due on January 15, 2003 in June
2003. During the fiscal years ended March 31, 2003, 2002
and 2001, the Company paid cash dividends of $279,486, $838,286,
and $368,477, respectively, on the Series C Preferred Stock.

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 1,
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 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 dividend rates, conversion
price and other terms of such stock are comparable to those
commercially available to the Company in the marketplace for
similar instruments.

F-17



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 Intregrales 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
par value of $.001, 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 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 year ended March 31, 2001, the
Company paid cash dividends of $375,000 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 at issuance 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 fair value of 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 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 were 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, a
par value of $.001 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 are fully
cumulative, and required to 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. During the year ended
March 31, 2003, the Company declared and issued 129.218
additional shares of Series F preferred Stock in
satisfaction of these dividend requirements. 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.

F-18



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003 and 2002, 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.

Note 15.     Income
Taxes

Total income taxes for the years ended
March 31, 2003, 2002 and 2001, were allocated to continuing
operations. Income tax expense attributable to income (loss)
from continuing operations consists of:

|                                   |  |         |       |          |  |       |   |  |  |   |       | 
|---------------------------------- |  | ------- | ----- | -------- |  | ----- | - |  |  | - | ----- | 
|                                   |  | Current |       | Deferred |  | Total
|                                   |  |         |       |          |  |      
|Year ended March 31, 2003 (State): |  | $       | 3,200 |          |  |       |  |  |  | $ | 3,200 | 
|Year ended March 31, 2002 (State): |  | $       | 3,200 |          |  |       |  |  |  | $ | 3,200 | 
|Year ended March 31, 2001 (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, 2003, 2002, and 2001, respectively,
and differed from the amounts computed by applying the U.S.
federal and state income tax rate of 40% to pretax net income
(loss) from continuing operations as a result of the following:

|                                                     |  |      |          |      |  |      |            |   |  |  |          |  
|---------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ---------- | - |  |  | -------- | -
|                                                     |  | 2003 |          | 2002 |  | 2001
|                                                     |  |      |          |      |  |     
|Computed expected income tax expense
    (benefit) |  | $    | (729,000 | )    |  |      | (1,114,000 | ) |  |  | (365,000 | )
|Permanent differences  tax effected                 |  |      | 56,000   |      |  |      | 110,000    |   |  |  | 114,000  |  
|Valuation allowance                                  |  |      | 673,000  |      |  |      | 1,004,000  |   |  |  | 251,000  |  
|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, 2003 and 2002 are
presented below.

|                     |                                                                                                             |                        |   |             |   |  |  |             |   | 
|-------------------- | ----------------------------------------------------------------------------------------------------------- | ---------------------- | - | ----------- | - |  |  | ----------- | - | 
|                     |                                                                                                             | 2003                   |   | 2002       
|                     |                                                                                                             |                        |   |            
|Deferred tax assets: |                                                                                                             |                        |   |             |   |  |  |            
|                     | Allowance for water projects                                                                                |                        | $ | 4,000       |   |  |  | 230,000     |  
|                     | Property and equipment                                                                                      |                        |   | 1,000       |   |  |  | 38,000      |  
|                     | Deferred revenue                                                                                            |                        |   | 72,000      |   |  |  | 77,000      |  
|                     | Net operating loss carry-forwards                                                                           |                        |   | 12,370,000  |   |  |  | 11,344,000  |  
|                     |                                                                                                             |                        |   |             |   |  |  |            
|                     | Total gross deferred tax assets                                                                             |                        |   | 12,447,000  |   |  |  | 11,689,000  |  
|                     | Less valuation allowance                                                                                    |                        |   | (12,013,000 | ) |  |  | (11,340,000 | )
|                     |                                                                                                             |                        |   |             |   |  |  |            
|                     | Net deferred tax assets                                                                                     |                        |   | 434,000     |   |  |  | 349,000     |  
|                     | Deferred tax liabilities: Land and water rights,
    principally due to differences in capitalized interest |                        |   | (434,000    | ) |  |  | (349,000    | )
|                     |                                                                                                             |                        |   |             |   |  |  |            
|                     |                                                                                                             | Net deferred tax asset |   | $           |  |  |  |             |  | 
|                     |                                                                                                             |                        |   |             |   |  |  |            

The net change in the total valuation allowance
for the fiscal years ended March 31, 2003 and 2002 was an
increase of $673,000 and $715,000, respectively, which is
primarily due to current year additions to net operating loss
carryforwards of $1,026,000 and $1,197,000, respectively, and
partially offset by the write-off of net operating loss
carryforwards which expired unused of $0 and $462,000, and the
sale of water projects with

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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

a higher tax basis than book by $226,000 and $0,
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 planning strategies in making this assessment. During the
years ended March 31, 2003, 2002 and 2001, 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, 2003 and 2002. 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, 2003, 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:

|     |  |   |            | 
|---- |  | - | ---------- | 
|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 |  |   | 4,800,000  | 
|2020 |  |   | 3,000,000  | 
|2021 |  |   | 2,700,000  | 
|2022 |  |   | 3,200,000  | 
|2023 |  |   | 2,700,000  | 
|     |  |   |            | 
|     |  | $ | 33,900,000 | 
|     |  |   |            | 

The Internal Revenue Code limits the future
availability of net operating loss and tax credit carryforwards
that arose prior to certain cumulative changes in a
corporations ownership resulting in a change of control of
the Company. A detailed analysis of historic ownership changes
pursuant to IRC Section 382 has not yet been performed;
however, it is possible that some of the net operating loss
carryforwards may be limited in their use by the provisions of
IRC Section 382. The extent and impact of such limitation
has not been determined at this time.

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

F-20



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

to the seller in exchange for full satisfaction
and retirement of the Companys note and accrued interest
payable in favor of the seller in the amount of $769,000.

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 their 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, which was subsequently sold. This write-down was
offset by a corresponding write-up of a like amount which was
allocated proportionately, 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 2,200,000 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, terminated 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 600,334 options available to be
granted at March 31, 2003.

Stock option activity during the periods
indicated is as follows:

|                          |                             |                  |           |                  |   |   |       |       | 
|------------------------- | --------------------------- | ---------------- | --------- | ---------------- | - | - | ----- | ----- | 
|                          |                             |                  |           | Weighted-Average
|                          |                             | Number of Shares |           | Exercise Price  
|                          |                             |                  |           |                 
|Balance at March 31, 2000 |                             |                  | 1,621,567 |                  |   | $ | 12.58 |      
|                          | Granted                     |                  |           | 1,081,000        |   |   | $     | .39   | 
|                          | Exercised                   |                  |           |                 |   |   | $     |      | 
|                          | Cancelled/forfeited/expired |                  |           | (1,272,192       | ) |   | $     | 12.75 | 
|                          |                             |                  |           |                  |   |   |       |      
|Balance at March 31, 2001 |                             |                  | 1,430,375 |                  |   | $ | 3.17  |      
|                          | Granted                     |                  |           | 188,500          |   |   | $     | .59   | 
|                          | Exercised                   |                  |           |                 |   |   | $     |      | 
|                          | Cancelled/forfeited/expired |                  |           | (72,790          | ) |   | $     | 10.70 | 
|                          |                             |                  |           |                  |   |   |       |      
|Balance at March 31, 2002 |                             |                  | 1,546,166 |                  |   | $ | 2.55  |      
|                          | Granted                     |                  |           | 217,000          |   |   | $     | .86   | 
|                          | Exercised                   |                  |           |                 |   |   | $     |      | 
|                          | Cancelled/forfeited/expired |                  |           | (163,500         | ) |   | $     | 8.86  | 
|                          |                             |                  |           |                  |   |   |       |      
|Balance at March 31, 2003 |                             |                  | 1,599,666 |                  |   | $ | 1.54  |      
|                          |                             |                  |           |                  |   |   |       |      

F-21



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding at March 31, 2003:

|                        |        |             |           |                  |  |                  |      |             |  |                |       |      |  |  |         |         |  |   |       |      | 
|----------------------- | ------ | ----------- | --------- | ---------------- |  | ---------------- | ---- | ----------- |  | -------------- | ----- | ---- |  |  | ------- | ------- |  | - | ----- | ---- | 
|                        |        |             |           | Weighted         |  |                  |      |             |  | Weighted      
|                        |        |             |           | Average          |  |                  |      |             |  | Average       
|                        |        | Number of   |           | Remaining        |  | Weighted         |      | Number of   |  | Exercise Price
|                        |        | Options     |           | Contractual Life |  | Average Exercise |      | Options     |  | of Exercisable
|Range of Exercise Price |        | Outstanding |           | (Years)          |  | Price            |      | Exercisable |  | Options       
|                        |        |             |           |                  |  |                  |      |             |  |               
|$  .23 - .86            |        |             | 1,433,000 |                  |  |                  | 7.53 |             |  | $              | .49   |      |  |  | 742,333 |         |  | $ | .41   |     
|4.38 - 5.44             |        |             | 60,000    |                  |  |                  | .17  |             |  |                | 5.08  |      |  |  | 60,000  |         |  |   | 5.08  |     
|10.88 - 12.06           |        |             | 50,000    |                  |  |                  | .60  |             |  |                | 11.11 |      |  |  | 50,000  |         |  |   | 11.11 |     
|13.65 - 14.50           |        |             | 30,000    |                  |  |                  | 1.00 |             |  |                | 14.01 |      |  |  | 30,000  |         |  |   | 14.01 |     
|15.88 - 18.69           |        |             | 26,666    |                  |  |                  | 1.12 |             |  |                | 16.58 |      |  |  | 26,666  |         |  |   | 16.58 |     
|                        |        |             |           |                  |  |                  |      |             |  |                |       |      |  |  |         |         |  |   |       |     
|                        | Totals |             |           | 1,599,666        |  |                  |      | 6.80        |  |                | $     | 1.51 |  |  |         | 908,999 |  |   | $     | 2.23 | 
|                        |        |             |           |                  |  |                  |      |             |  |                |       |      |  |  |         |         |  |   |       |     

At March 31, 2003, 2002 and 2001 the number
of options exercisable was 908,999, 673,666 and 389,375,
respectively, and the weighted-average exercise price of those
options was $2.23, $5.29 and $10.59, respectively.

During the fiscal year ended March 31, 2001
the exercise price of options to purchase 600,000 shares of
common stock was lowered to the then current market price of the
Companys common stock. This modification of the exercise
price requires the modified stock options to be accounted for
following variable plan accounting until such options are
exercised, are cancelled, or expire unexercised. For fiscal
years ended March 31, 2003, 2002 and 2001, compensation
expense associated with these options totaled ($145,740),
$145,740 and $0, respectively.

Note
19.     Extraordinary Income

During the year ended March 31, 2003, the
Company repurchased $500,000 of its outstanding 9% Debentures,
plus accrued interest of $20,836, for $295,836 in cash. After
reducing related deferred debt costs of $27,000, net of
accumulated amortization of $21,000, the Company recognized a
$219,000 extraordinary gain on the early extinguishment of debt.

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 10), and
recognized an extraordinary gain on extinguishment of debt, net
of income taxes, of $769,000.

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.

Note 20.     Other
Income

The Company previously 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

F-22



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

Note 21.     General
and Administrative Expenses

General and administrative expenses for the years
ended March 31, 2003, 2002 and 2001 consist of the
following:

|                                                |  |      |           |      |  |      |           |  |  |   |           |  
|----------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | -
|                                                |  | 2003 |           | 2002 |  | 2001
|                                                |  |      |           |      |  |     
|Payroll and related costs                       |  | $    | 1,488,443 |      |  | $    | 1,621,838 |  |  | $ | 1,461,091 |  
|Legal and accounting                            |  |      | 368,260   |      |  |      | 333,453   |  |  |   | 331,435   |  
|Consulting and engineering                      |  |      | 260,691   |      |  |      | 340,621   |  |  |   | 675,724   |  
|Travel                                          |  |      | 62,721    |      |  |      | 99,093    |  |  |   | 97,613    |  
|(Recovery of) allowance for water project costs |  |      |          |      |  |      |          |  |  |   | (85,425   | )
|Impairment of assets                            |  |      |          |      |  |      |          |  |  |   | 762,770   |  
|Other corporate expenses                        |  |      | 900,695   |      |  |      | 680,604   |  |  |   | 690,787   |  
|                                                |  |      |           |      |  |      |           |  |  |   |           |  
|                                                |  | $    | 3,080,810 |      |  | $    | 3,075,609 |  |  | $ | 3,933,995 |  
|                                                |  |      |           |      |  |      |           |  |  |   |           |  

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, 2003, 2002 and 2001 amounted to $9,731, $10,000,
and $7,197, respectively.

Note 23.     Segment
Information

|                  |             |      |           |           |  |      |           |           |  |   |           |           | 
|----------------- | ----------- | ---- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                  |             | 2003 |           | 2002      |  | 2001
|                  |             |      |           |           |  |     
|Segment revenue:  |             |      |           |           |  |      |           |           |  |   |           |          
|                  | California  |      | $         | 1,519,163 |  |      | $         | 1,464,200 |  |   | $         | 2,126,695 | 
|                  | Colorado    |      |           | 10,072    |  |      |           |          |  |   |           |          | 
|                  |             |      |           |           |  |      |           |           |  |   |           |          
|                  |             | $    | 1,529,235 |           |  | $    | 1,464,200 |           |  | $ | 2,126,695 |          
|                  |             |      |           |           |  |      |           |           |  |   |           |          
|Interest Income:  |             |      |           |           |  |      |           |           |  |   |           |          
|                  | California  |      | $         |          |  |      | $         |          |  |   | $         |          | 
|                  | Colorado    |      |           |          |  |      |           |          |  |   |           |          | 
|                  | Non-segment |      |           | 90,508    |  |      |           | 170,006   |  |   |           | 478,204   | 
|                  |             |      |           |           |  |      |           |           |  |   |           |          
|                  |             | $    | 90,508    |           |  | $    | 170,006   |           |  | $ | 478,204   |          
|                  |             |      |           |           |  |      |           |           |  |   |           |          
|Interest Expense: |             |      |           |           |  |      |           |           |  |   |           |          
|                  | California  |      | $         | 58,449    |  |      | $         | 83,952    |  |   | $         | 289,536   | 
|                  | Colorado    |      |           |          |  |      |           |          |  |   |           |          | 
|                  | Non-segment |      |           | 798,153   |  |      |           | 775,747   |  |   |           | 849,413   | 
|                  |             |      |           |           |  |      |           |           |  |   |           |          
|                  |             | $    | 856,602   |           |  | $    | 859,669   |           |  | $ | 1,138,949 |          
|                  |             |      |           |           |  |      |           |           |  |   |           |          

F-23



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                       |             |      |            |            |   |      |            |            |   |   |            |           |  
|-------------------------------------- | ----------- | ---- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | --------- | -
|                                       |             | 2003 |            | 2002       |   | 2001
|                                       |             |      |            |            |   |     
|Depreciation and amortization expense: |             |      |            |            |   |      |            |            |   |   |            |          
|                                       | California  |      | $          | 985,992    |   |      |            | 970,452    |   |   |            | 1,063,437 |  
|                                       | Colorado    |      |            |           |   |      |            |           |   |   |            |          |  
|                                       | Non-segment |      |            | 73,680     |   |      |            | 63,926     |   |   |            | 172,690   |  
|                                       |             |      |            |            |   |      |            |            |   |   |            |          
|                                       |             | $    | 1,059,672  |            |   |      | 1,034,378  |            |   |   | 1,236,127  |          
|                                       |             |      |            |            |   |      |            |            |   |   |            |          
|Net income (loss):                     |             |      |            |            |   |      |            |            |   |   |            |          
|                                       | California  |      | $          | (565,831   | ) |      | $          | (571,515   | ) |   | $          | (743,888  | )
|                                       | Colorado    |      |            | 9,708      |   |      |            |           |   |   |            |          |  
|                                       | Non-segment |      |            | (1,590,078 | ) |      |            | (2,708,879 | ) |   |            | (570,614  | )
|                                       |             |      |            |            |   |      |            |            |   |   |            |          
|                                       |             | $    | (2,146,201 | )          |   | $    | (3,280,394 | )          |   | $ | (1,314,502 | )        
|                                       |             |      |            |            |   |      |            |            |   |   |            |          
|Assets:                                |             |      |            |            |   |      |            |            |   |   |            |          
|                                       | California  |      | $          | 6,077,753  |   |      | $          | 8,282,294  |   |   |            |           |  
|                                       | Colorado    |      |            | 12,261,651 |   |      |            | 12,057,131 |   |   |            |           |  
|                                       | Non-segment |      |            | 1,574,793  |   |      |            | 3,885,466  |   |   |            |           |  
|                                       |             |      |            |            |   |      |            |            |   |   |            |          
|                                       |             | $    | 19,914,197 |            |   | $    | 24,224,891 |            |   |   |            |          
|                                       |             |      |            |            |   |      |            |            |   |   |            |          

For the years ended March 31, 2003, 2002 and
2001, the Company recognized revenue of $1,282,661, $1,305,809,
and $1,286,971, respectively, from the City of Inglewood. No
other recurring customer accounted for more than 10% of the
Companys revenue.

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

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

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 $89,526, $121,070, and $74,341 for the years ended
March 31, 2003, 2002 and 2001, respectively.

In addition, the Company entered into a five-year
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

F-24



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##### Table of Contents



WESTERN WATER COMPANY AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003 are:

|                             |  |              |         | 
|---------------------------- |  | ------------ | ------- | 
|                             |  | Water Rights
|                             |  |             
|Year ending March 31,        |  |              |         | 
|2004                         |  | $            | 33,750  | 
|2005                         |  |              | 33,750  | 
|2006                         |  |              | 33,750  | 
|2007                         |  |              | 33,750  | 
|2008                         |  |              | 33,750  | 
|Thereafter                   |  |              | 185,583 | 
|                             |  |              |         | 
|Total minimum lease payments |  | $            | 354,333 | 
|                             |  |              |         | 

In May 1999, the Company entered into an
agreement with the Norte-Sur Water Company (NSWC)
for the purchase of 14,000 acre-feet of water from NSWC for
$50 per acre-foot. In accordance with the agreement, the Company
paid a deposit of $350,000. In December 1999, the Company
entered into an agreement with the Westlands Water District
(WWD) to deliver up to 14,000 acre-feet to WWD
at a price of $75 per acre foot. Per the agreement, WWD made a
series of payments ending in December, 2001 in which WWD has
paid the entire purchase price of $1,050,000 to the Company.
During the year ended March 31, 2001 the Company delivered
to WWD 2,000 acre-feet of water from NSWC. The remaining
12,000 acre-feet cannot currently be delivered to WWD due
to disputes between WWD and certain other water districts in the
area that will not convey the water to WWD. In March 2003,
the Company purchased the remaining water from NSWC with the
payment to NSWC of the remaining $300,000, plus accrued interest
of $19,000.

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-25



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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

|                                                                            |                                                                          |                            |                            |         |          |      |  |         |            |   |  |           |   |             |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------ | -------------------------- | -------------------------- | ------- | -------- | ---- |  | ------- | ---------- | - |  | --------- | - | ----------- | -
|                                                                            |                                                                          | 2003                       |                            | 2002    |          | 2001
|                                                                            |                                                                          |                            |                            |         |          |     
|Supplemental disclosure of cash flow information:                           |                                                                          |                            |                            |         |          |      |  |         |            |   |  |          
|                                                                            | Cash paid during the period for interest                                 |                            | $                          | 850,796 |          |      |  | 982,067 |            |   |  | 1,315,461 |  
|                                                                            | Interest capitalized during the period                                   |                            |                            |        |          |      |  |        |            |   |  |          |  
|                                                                            | Cash paid during the period for income taxes                             |                            |                            | 3,200   |          |      |  | 3,200   |            |   |  | 3,200     |  
|Supplemental disclosure of non-cash investing and
    financing activities: |                                                                          |                            |                            |         |          |      |  |         |            |   |  |          
|                                                                            | Issuance of paid-in-kind Series F Preferred
    Stock dividend           |                            |                            | 24,080  |          |      |  | 22,167  |            |   |  |          |  
|                                                                            | Accretion of preferred stock to redemption value                         |                            |                            | 130,604 |          |      |  | 108,298 |            |   |  | 38,255    |  
|                                                                            | Intrinsic value of variable plan stock options:                          |                            |                            |         |          |      |  |         |            |   |  |           |  
|                                                                            |                                                                          | Deferred compensation      |                            |         | (300,000 | )    |  |         | 300,000    |   |  |           |  |            
|                                                                            |                                                                          | Additional paid-in capital |                            |         | 300,000  |      |  |         | (300,000   | ) |  |           |   |            
|                                                                            | Transfer of assets held for sale:                                        |                            |                            |         |          |      |  |         |            |   |  |           |  
|                                                                            |                                                                          | Assets held for sale       |                            |         |         |      |  |         | 2,863,158  |   |  |           |  |            
|                                                                            |                                                                          | Land                       |                            |         |         |      |  |         | (553,005   | ) |  |           |  |            
|                                                                            |                                                                          | Water rights               |                            |         |         |      |  |         | (1,668,153 | ) |  |           |  |            
|                                                                            |                                                                          | Other water assets         |                            |         |         |      |  |         | (642,000   | ) |  |           |  |            
|                                                                            | Sale of land:                                                            |                            |                            |         |          |      |  |         |            |   |  |           |  
|                                                                            |                                                                          | Notes receivable           |                            |         |         |      |  |         | 102,000    |   |  |           |  |            
|                                                                            |                                                                          | Land                       |                            |         |         |      |  |         | (102,000   | ) |  |           |  |            
|                                                                            | Write-off of property, equipment and related                             |                            |                            |         |          |      |  |         |            |   |  |           |  
|                                                                            |                                                                          | Accumulated depreciation   |                            |         |          |      |  |         |            |   |  |           |   |            
|                                                                            |                                                                          |                            | Property and equipment     |         |          |      |  |         |            |  |  |           |   | (99,108     | )
|                                                                            |                                                                          |                            | Accumulated depreciation   |         |          |      |  |         |            |  |  |           |   | 99,108      |  
|                                                                            | 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   |  

F-26



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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 following is a summary of quarterly results
for the fiscal years ended March 31, 2003, 2002 and 2001:

|                                                                 |  |         |           |              |  |             |            |          |  |  |           |  |  |  |            |  
|---------------------------------------------------------------- |  | ------- | --------- | ------------ |  | ----------- | ---------- | -------- |  |  | --------- |  |  |  | ---------- | -
|Fiscal 2003 Quarters Ended:                                      |  | June 30 |           | September 30 |  | December 31 |            | March 31
|                                                                 |  |         |           |              |  |             |            |         
|Water revenue                                                    |  | $       | 420,091   |              |  |             | 472,852    |          |  |  | 326,084   |  |  |  | 310,208    |  
|Income (loss) from continuing operations
    before income taxes |  |         | (802,916  | )            |  |             | (682,244   | )        |  |  | 125,738   |  |  |  | (1,002,579 | )
|Net income (loss)                                                |  | $       | (806,116  | )            |  |             | (682,244   | )        |  |  | 125,738   |  |  |  | (783,579   | )
|Net income (loss) applicable to common
    stockholders          |  | $       | (836,485  | )            |  |             | (1,004,805 | )        |  |  | 92,299    |  |  |  | (831,379   | )
|                                                                 |  |         |           |              |  |             |            |          |  |  |           |  |  |  |            |  
|Earnings per share  Basic and diluted                           |  | $       | (.10      | )            |  |             | (.13       | )        |  |  | .01       |  |  |  | (.10       | )
|                                                                 |  |         |           |              |  |             |            |          |  |  |           |  |  |  |            |  
|Weighted average shares  Basic and
    diluted                  |  |         | 8,069,012 |              |  |             | 8,069,012  |          |  |  | 8,069,012 |  |  |  | 8,069,012  |  
|                                                                 |  |         |           |              |  |             |            |          |  |  |           |  |  |  |            |  

|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  
|------------------------------------------------------- |  | ------- | ---------- | ------------ |  | ----------- | ---------- | -------- |  |  | --------- | - |  |  | ---------- | -
|Fiscal 2002 Quarters Ended:                             |  | June 30 |            | September 30 |  | December 31 |            | March 31
|                                                        |  |         |            |              |  |             |            |         
|Water revenue                                           |  | $       | 451,740    |              |  |             | 328,729    |          |  |  | 338,033   |   |  |  | 345,698    |  
|Loss from operations                                    |  |         | (568,615   | )            |  |             | (694,844   | )        |  |  | (496,328  | ) |  |  | (832,934   | )
|Net income (loss)                                       |  | $       | (753,804   | )            |  |             | (875,845   | )        |  |  | (613,923  | ) |  |  | (1,036,822 | )
|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  
|Net income (loss) applicable to common
    stockholders |  | $       | (1,089,748 | )            |  | $           | (1,171,518 | )        |  |  | (631,710  | ) |  |  | (1,344,920 | )
|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  
|Earnings per share  Basic and diluted                  |  | $       | (0.14      | )            |  |             | (0.15      | )        |  |  | (0.08     | ) |  |  | (0.16      | )
|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  
|Weighted average shares  Basic and
    diluted         |  |         | 8,069,012  |              |  |             | 8,069,012  |          |  |  | 8,069,012 |   |  |  | 8,069,012  |  
|                                                        |  |         |            |              |  |             |            |          |  |  |           |   |  |  |            |  

Note
27.     Subsequent Event

On June 18, 2003 the Company sold its shares
in the Bear Valley Mutual Water Company to a local municipality
for $722,700 in cash and recognized a gain of the sale of
$78,768. On June 25, 2003 the Companys Board of
Directors declared the January 15, 2003 dividend on the
Series C Preferred Stock; the dividend (in the amount of
$279,428) was paid on June 26, 2003.

F-27