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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934For the transaction period from___________to__________


Commission File Number: 0-25248

CONSOLIDATED WATER CO. LTD.

(Exact name of Registrant as specified in its charter)


CAYMAN ISLANDS
    
    N/A(State or other jurisdiction of incorporation or
organization)
    
    (I.R.S. Employer Identification No.)Trafalgar Place, West Bay Road, P.O. Box 1114 GT,Grand Cayman, B.W.I
    
    N/A(Address of principal executive offices)
    
    (Zip Code)


Registrants telephone number, including area code:   (345) 945-4277

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes x   No o

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

Yes o   No x

As at July 31, 2003,there were 5,477,973 of the registrants ordinary shares
of common stock, with CI$ 1.00 par value, outstanding.





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EXCHANGE RATES

Unless otherwise indicated, all dollar amounts are in United States Dollars and
references to $, U.S., or U.S. $ are to United States Dollars.

The official fixed exchange rate for conversion of CI$ into U.S.$, as
determined by the Cayman Islands Monetary Authority, has been fixed since April
1974 at U.S. $1.20 per CI$1.00.

The official fixed exchange rate for conversion of BZE$ into U.S.$, as
determined by the Central Bank of Belize, has been fixed since 1976 at U.S.$
0.50 per BZE$ 1.00.

The official fixed exchange rate for conversion of BAH$ into U.S.$, as
determined by the Central Bank of The Bahamas, has been fixed since 1973 at
U.S. $1.00 per BAH $1.00.

The official fixed exchange rate for conversation of BDS$ into U.S.$ as
determined by the Central Bank of Barbados has been fixed since 1975 at
U.S.$ 0.50 = BDS$ 1.00.

The British Virgin Islands currency is U.S.$.





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TABLE OF CONTENTS



|                                                |                                                                                               |                                                          |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                 
|                                                | Item 1. Financial Statements                                                                 
|                                                |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                   
|                                                |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME             
|                                                |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS         
|                                                |                                                                                               | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                                | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION                    
|                                                | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                      
|EX-31.1 CEO CERTIFICATION                      
|EX-31.2 CFO CERTIFICATION                      
|EX-32.1 CEO CERTIFICATION PURSUANT SECTION 1350
|EX-32.2 CFO CERTIFICATION PURSUANT SECTION 1350



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TABLE OF CONTENTS

Section
    
    Description
    
    PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as at June 30, 2003
and December 31, 2002.
    
    1Condensed Consolidated Statements of Income for each of the
three and six months ended June 30, 2003 and 2002
    
    2Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and 2002
    
    3Notes to Condensed Consolidated Financial Statements
    
    4Item 2.
    
    Managements Discussions and Analysis of Financial Condition
and Results of Operations
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    19Item 4.
    
    Controls and Procedures
    
    19PART II
    
    OTHER INFORMATIONItem 2.
    
    Changes in Securities and Use of Proceeds
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    21Item 6.
    
    Exhibits and Reports on Form 8-K
    
    22SIGNATURE
    
    
    
    23


Forward-Looking Statements

This Form 10-Q for Consolidated Water Co. Ltd. (the Company) includes
statements that may constitute forward-looking statements, usually containing
the words believe, estimate, project, intend, expect or similar
expressions. These statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements inherently involve risks and uncertainties that could cause actual
results to differ materially from the forward-looking statements. Factors that
would cause or contribute to such differences include, but are not limited to,
the ability to successfully integrate the recently acquired companies into our
business, the ability of the Company to repay the debt incurred to complete the
recent acquisitions described in this Form 10-Q, continued acceptance of the
Companys products and services in the marketplace, changes in its relationship
with the governments of the jurisdictions in which it operates, the ability to
successfully secure contracts for water projects in other countries, the
ability to develop and operate such projects profitably, and other risks
detailed in the Companys other periodic report filings with the Securities and
Exchange Commission. By making these forward-looking statements, the Company
undertakes no obligation to update these statements for revisions or changes
after the date of this Form 10-Q.





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PART I  FINANCIAL INFORMATION




Item 1. Financial Statements




CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States Dollars)

June 30,
    
    December 31,2003
    
    2002(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    
    4,038,433
    
    
    
    568,304Accounts receivable
    
    
    2,463,187
    
    
    
    1,406,947Inventory
    
    
    943,518
    
    
    
    388,131Prepaid expenses and other assets
    
    
    407,452
    
    
    
    370,429Deferred expenditures
    
    
    1,573,857
    
    
    
    887,856Current portion of loans receivable
    
    
    1,080,127
    
    
    
    Total current assets
    
    
    10,506,574
    
    
    
    3,621,667Loans receivable
    
    
    3,776,074
    
    
    
    Property, plant and equipment, net
    
    
    21,711,438
    
    
    
    20,253,646Investments in affiliates (Note 4)
    
    
    10,501,278
    
    
    
    12,450Intangible assets (Note 6)
    
    
    6,045,990
    
    
    
    1,619,874Goodwill
    
    
    2,673,733
    
    
    
    Total assets
    
    $
    55,215,087
    
    
    $
    25,507,637LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesDividends payable
    
    
    506,209
    
    
    
    508,444Accounts payable and other liabilities
    
    
    1,874,123
    
    
    
    1,143,850Current portion of long term debt (Note 7)
    
    
    9,893,269
    
    
    
    518,275Total current liabilities
    
    
    12,273,601
    
    
    
    2,170,569Long term debt (Note 7)
    
    
    17,368,571
    
    
    
    2,074,609Security deposits and other liabilities
    
    
    136,235
    
    
    
    136,235Total liabilities
    
    
    29,778,407
    
    
    
    4,381,413Stockholders equityRedeemable preferred stock, $1.20 par value. Authorized 100,000
shares; issued and outstanding 22,751 shares as at June 30,
2003 and 19,740 shares at as December 31, 2002
    
    
    27,301
    
    
    
    23,688Class A common stock, $1.20 par value. Authorized 9,840,000
shares; issued and outstanding 4,275,568 shares as at June 30,
2003 and 3,993,419 shares at as December 31, 2002
    
    
    5,130,682
    
    
    
    4,792,103Class B common stock, $1.20 par value. Authorized 60,000 shares;
issued and outstanding nil shares as at June 30, 2003 and nil
shares as at December 31, 2002
    
    
    
    
    
    
    Stock and options earned but not issued
    
    
    97,115
    
    
    
    424,841Additional paid-in capital
    
    
    10,518,210
    
    
    
    7,354,395Retained earnings
    
    
    9,663,372
    
    
    
    8,531,197Total stockholders equity
    
    
    25,436,680
    
    
    
    21,126,224Total liabilities and stockholders equity
    
    $
    55,215,087
    
    
    $
    25,507,637


The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

1



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CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Expressed in United States Dollars)

Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2002
    
    2003
    
    2002Retail water sales
    
    
    2,862,424
    
    
    
    2,897,128
    
    
    
    5,681,376
    
    
    
    5,756,027Bulk water sales
    
    
    1,505,716
    
    
    
    394,801
    
    
    
    2,510,857
    
    
    
    720,708Service revenue
    
    
    382,241
    
    
    
    
    
    
    
    576,873
    
    
    
    Total revenue
    
    
    4,750,381
    
    
    
    3,291,929
    
    
    
    8,769,106
    
    
    
    6,476,735Retail cost of sales
    
    
    (1,214,120
    )
    
    
    (1,543,129
    )
    
    
    (2,433,996
    )
    
    
    (2,964,816
    )Bulk cost of sales
    
    
    (1,041,637
    )
    
    
    (254,005
    )
    
    
    (1,778,106
    )
    
    
    (498,770
    )Service cost of sales
    
    
    (143,139
    )
    
    
    
    
    
    
    (260,707
    )
    
    
    Total cost of sales
    
    
    (2,398,896
    )
    
    
    (1,797,134
    )
    
    
    (4,472,809
    )
    
    
    (3,463,586
    )Gross profit
    
    
    2,351,485
    
    
    
    1,494,795
    
    
    
    4,296,297
    
    
    
    3,013,149General and administrative expenses
    
    
    (1,328,090
    )
    
    
    (658,246
    )
    
    
    (2,356,716
    )
    
    
    (1,236,984
    )Income from operations
    
    
    1,023,395
    
    
    
    836,549
    
    
    
    1,939,581
    
    
    
    1,776,165Other income (expenses):Interest income
    
    
    16,740
    
    
    
    
    
    
    
    32,371
    
    
    
    6,040Interest expenses
    
    
    (367,491
    )
    
    
    (31,181
    )
    
    
    (558,884
    )
    
    
    (52,272
    )Other income
    
    
    100,345
    
    
    
    5,891
    
    
    
    191,608
    
    
    
    7,827Equity in earnings of affiliates
    
    
    255,572
    
    
    
    
    
    
    
    448,002
    
    
    
    5,166
    
    
    
    (25,290
    )
    
    
    113,097
    
    
    
    (38,405
    )Net income before income taxes
    
    
    1,028,561
    
    
    
    811,259
    
    
    
    2,052,678
    
    
    
    1,737,760Income taxes
    
    
    (15,520
    )
    
    
    
    
    
    
    (21,513
    )
    
    
    Net income
    
    $
    1,013,041
    
    
    $
    811,259
    
    
    $
    2,031,165
    
    
    $
    1,737,760Basic earnings per share
    
    $
    0.24
    
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    0.44Diluted earnings per common share
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.47
    
    
    $
    0.43Dividends declared per share
    
    $
    0.105
    
    
    $
    0.105
    
    
    $
    0.21
    
    
    $
    0.21Weighted average number of common
shares used in the determination of:Basic earnings per share
    
    
    4,273,574
    
    
    
    3,978,827
    
    
    
    4,198,056
    
    
    
    3,951,172Diluted earnings per share
    
    
    4,369,010
    
    
    
    4,097,902
    
    
    
    4,310,270
    
    
    
    4,077,390


The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

2



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CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Expressed in United States Dollars)

Six Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2003
    
    2002Net cash flows provided by operating activities
    
    
    3,330,998
    
    
    
    2,145,823Cash flows provided by (used in) investing
activitiesDeferred expenditures
    
    
    301,714
    
    
    
    Purchase of property, plant and equipment
    
    
    (1,225,482
    )
    
    
    (1,978,141
    )Business combinations, net of cash acquired
    
    
    (11,885,839
    )
    
    
    Investment in affiliate
    
    
    (8,961,624
    )
    
    
    Collections from loans receivable
    
    
    448,070
    
    
    
    Net cash used in investing activities
    
    
    (21,323,161
    )
    
    
    (1,978,141
    )Cash flows provided by (used in) financing
activitiesProceeds from new credit facility
    
    
    28,056,126
    
    
    
    1,500,000Deferred expenditures
    
    
    (1,230,427
    )
    
    
    Dividends paid
    
    
    (901,218
    )
    
    
    (836,020
    )Proceeds from issuance of stock
    
    
    584,980
    
    
    
    347,855Principal payments of long term debt
    
    
    (5,047,169
    )
    
    
    (226,470
    )Proceeds from bank loans
    
    
    
    
    
    
    500,000Repurchase of redeemable preferred stock
    
    
    
    
    
    
    (3,841
    )Net cash provided by financing activities
    
    
    21,462,292
    
    
    
    1,281,524Net increase in cash and cash equivalents
    
    
    3,470,129
    
    
    
    1,449,206Cash and cash equivalents at beginning of period
    
    
    568,304
    
    
    
    516,446Cash and cash equivalents at end of period
    
    $
    4,038,433
    
    
    $
    1,965,652Interest paid in cash
    
    $
    480,826
    
    
    $
    48,943Interest received in cash
    
    $
    7,399
    
    
    $
    6,040


The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

3



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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Presentation of Financial Information

The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America. All adjustments
that are, in the opinion of management, of a normal recurring nature and are
necessary for a fair presentation of the interim financial statements have been
included. The results of operations for the three and six month periods ended
June 30, 2003 are not necessarily indicative of the results that may be
expected for the entire fiscal year or any other interim period.

The accompanying consolidated financial statements of the Company should be
read in conjunction with the consolidated financial statements and notes
included in the Companys Annual Report on Form 10K and Form 10-K/A for the
year ended December 31, 2002.

2. Principles of Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of Belize Water Limited, DesalCo Limited, its wholly owned
subsidiary DesalCo (Barbados) Limited, and Ocean Conversion (Cayman) Limited.
All significant intercompany balances and transactions have been eliminated in
consolidation.

3. Acquisitions

Effective February 1, 2003, the Company acquired 100% of the outstanding voting
common shares of DesalCo Limited, its wholly owned subsidiary DesalCo
(Barbados) Limited and Ocean Conversion (Cayman) Limited. The total
consideration paid was $28,298,555, comprised of $25,500,000 in cash and
185,714 ordinary shares of the Company and $506,122 in costs related to the
acquisitions.

These acquisitions provide the Company with a reverse osmosis plant design,
construction and facility management and engineering services firm, as well as
facilities and contracts to supply additional bulk potable water services in
the Cayman Islands, Bahamas and Barbados and investments in desalination
companies in the British Virgin Islands.

4



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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. Acquisitions (continued)

The following table summarizes the estimated fair values of assets acquired and
liabilities assumed at February 1, 2003. The Company is in the process of
finalizing the allocations of purchase price, which is subject to refinement:

Current assets
    
    
    4,940,343Property, plant and equipment
    
    
    949,800Investments in affiliates
    
    
    13,023,539Intangible assets
    
    
    4,868,861Goodwill
    
    
    2,673,733Other assets
    
    
    4,224,145Total assets acquired
    
    
    30,680,421Current liabilities
    
    
    1,201,870Long term debt and liabilities
    
    
    1,179,996Total liabilities assumed
    
    
    2,381,866Net assets acquired
    
    $
    28,298,555


The goodwill represents the excess of costs over fair value of assets of
businesses acquired. Goodwill and any intangible assets acquired in a business
combination accounted for using the purchase method and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. Intangible
assets with useful lives are amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets.

The results of operations of the acquired companies are included in the
condensed consolidated statements of income from February 1, 2003. The
unaudited pro forma consolidated results of operations of Consolidated Water
Co. Ltd., DesalCo Limited, DesalCo (Barbados) Limited, Ocean Conversion
(Cayman) Limited, an equity interest in Ocean Conversion (BVI) Ltd. and
investment in Waterfields Company Limited, had the companies been acquired at
January 1, 2003 or 2002 would be as follows:

Six Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2003
    
    2002Pro forma revenue
    
    $
    9,201,009
    
    
    $
    9,721,648Pro forma net income
    
    $
    2,082,800
    
    
    $
    2,608,228Pro forma earnings per share
Basic
    
    $
    0.50
    
    
    $
    0.62Diluted
    
    $
    0.48
    
    
    $
    0.61


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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Investments in Affiliates

The Company also acquired as part of the acquisition described in Note 3, 50%
and 100% of the outstanding voting common shares and non-voting common shares
of Ocean Conversion (BVI) Ltd, and 12.7% of the outstanding voting common
shares of Waterfields Company Limited (Waterfields). On May 9, 2003, the
Company sold 100% of its non-voting shares in Ocean Conversion (BVI) Ltd., to
Sage Water Holdings (BVI) Ltd. for approximately $2.1 million. The Company now
owns 50% of the voting common shares of Ocean Conversion (BVI) Ltd.

The Companys investment in Ocean Conversion (BVI) Ltd. is accounted for using
the equity method of accounting. The investment in Waterfields is accounted
for using the cost method of accounting.

5. Segment Information

Due to the recent acquisitions, management changed the Companys internal
organizational structure to effectively assimilate the business activities of
the acquired companies. Consequently, management no longer considers it
appropriate to report separate business segments based on geographical
location. Under the Statements of Financial Accounting Standards 131,
Disclosure about Segments of an Enterprise and Related Information,
management now considers; (i) the operations to supply water to retail
customers, (ii) the operations to supply water to bulk customers, and (iii) the
provision of engineering and management services, as separate business
segments. The segmented information that was previously reported for the
Cayman Islands and the Bahamas is now reported as part of the Retail Water
segment, and segmented information for Belize is now reported as part of the
Bulk Water segment. The Services segment is new as a result of the recent
acquisitions.

For purposes of segment information the accounts of Ocean Conversion (BVI) Ltd.
have been proportionally consolidated into the Bulk Water segment. An
adjustment has been made in reconciling items to account for the investment
under the equity method. Also included in reconciling items are corporate
expenses including interest expense that do not relate to any specific
operating segment.

6



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5. Segment Information (continued)

As at June 30 and for the three months then ended

Retail Water
    
    Bulk Water
    
    Services
    
    Reconciling items
    
    Total2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002Revenue
    
    
    2,862,424
    
    
    
    2,897,128
    
    
    
    2,102,815
    
    
    
    394,801
    
    
    
    382,241
    
    
    
    
    
    
    
    (597,099
    )
    
    
    
    
    
    
    4,750,381
    
    
    
    3,291,929Cost of sales
    
    
    1,214,120
    

    
    
    1,543,129
    
    
    
    1,267,692
    
    
    
    254,005
    
    
    
    143,139
    
    
    
    
    
    
    
    (226,055
    )
    
    
    
    
    
    
    2,398,896
    
    
    
    1,797,134Net income
    
    
    981,549
    
    
    
    723,553
    
    
    
    124,077
    
    
    
    87,706
    
    
    
    77,827
    
    
    
    
    
    
    
    (170,412
    )
    
    
    
    
    
    
    1,013,041
    
    
    
    811,259Property, plant and
equipment
    
    
    19,050,174
    
    
    
    18,299,626
    
    
    
    4,420,400
    
    
    
    1,467,726
    
    
    
    11,607
    
    
    
    
    
    
    
    (1,763,171
    )
    
    
    
    
    
    
    21,719,010
    
    
    
    19,767,352


As at June 30 and for the six months then ended

Retail Water
    
    Bulk Water
    
    Services
    
    Reconciling items
    
    Total2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002Revenue
    
    
    5,681,376
    
    
    
    5,756,027
    
    
    
    3,594,741
    
    
    
    720,708
    
    
    
    576,873
    
    
    
    
    
    
    
    (1,083,884
    )
    
    
    
    
    
    
    8,769,106
    
    
    
    6,476,735Cost of sales
    
    
    2,433,996
    
    
    
    2,964,816
    
    
    
    2,182,320
    
    
    
    498,770
    
    
    
    260,707
    
    
    
    
    
    
    
    (404,214
    )
    
    
    
    
    
    
    4,472,809
    
    
    
    3,463,586Net income
    
    
    1,995,053
    
    
    
    1,604,246
    
    
    
    207,305
    
    
    
    133,514
    
    
    
    49,868
    
    
    
    
    
    
    
    (221,061
    )
    
    
    
    
    
    
    2,031,165
    
    
    
    1,737,760Property, plant and
equipment
    
    
    19,050,174
    
    
    
    18,299,626
    
    
    
    4,420,400
    
    
    
    1,467,726
    
    
    
    11,607
    
    
    
    
    
    
    
    (1,763,171
    )
    
    
    
    
    
    
    21,719,010
    
    
    
    19,767,352


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6. Intangible Assets

Effective February 1, 2003, the Company acquired 100% of the outstanding voting
common shares of DesalCo Limited, its wholly-owned subsidiary DesalCo
(Barbados) Ltd., and Ocean Conversion (Cayman) Limited. A portion of the
purchase price was allocated to the following identifiable intangible assets.

(a) As part of the acquisition of DesalCo Limited the Company attributed
$650,978 to intangible assets which represents the fair value of a Management
Service Agreement dated December 4, 2000, under which DesalCo Limited provides
management and engineering services to Ocean Conversion (BVI) Ltd. Management
of the Company has determined that this intangible asset has an indefinite
life, and therefore it is not being amortized.

(b) As part of the acquisition of DesalCo Limited the Company attributed
$239,263 to intangible assets which represents the fair value of the DWEER
Distribution Agreement between DesalCo Limited and DWEER Technology Limited
dated September 24, 2002. Under this agreement DesalCo Limited was granted an
exclusive right, within certain countries in the Caribbean, Central and South
America, to distribute certain patented equipment, which can enhance the
operational efficiency of reverse osmosis seawater desalination plants. The
carrying amount of the DWEER Distribution Agreement is being amortized over
the remaining term of the seven-year agreement.

(c) As part of the acquisition of Ocean Conversion (Cayman) Limited the Company
attributed $3,978,620 to intangible assets which represent the fair value of
two Water Production and Supply Agreements between Ocean Conversion (Cayman)
Limited and the Government of the Cayman Islands, dated April 25, 1994 and
dated December 31, 2001. Under these agreements, Ocean Conversion (Cayman)
Limited built reverse osmosis seawater desalination plants for the Government
of the Cayman Islands. Ocean Conversion (Cayman) Limited operates the plants
until the expiration of the agreement term, as extended, at which time the
plant operations will be transferred to the Government of the Cayman Islands
for no consideration. The carrying amount of the Water Production and Supply
Agreements are being amortized over the remaining term of the agreements which
are approximately 5 and 13 years, respectively.

7. Long term debt

As of June 30, 2003, the Company has two credit facilities with Scotiabank with
the following principal balances:



| |  | $19,285,714 seven-year term loan bearing interest at an annually
adjusted floating rate of LIBOR plus 1.5% to 3%, depending on the ratio
of the Companys consolidated debt to its consolidated earnings before
interest, taxes and depreciation. The average interest rate for the
six months ended June 30, 2003 was 4.07%.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | $6,556,126 six-month term loan bearing interest on the same basis
as the seven-year term loan. The average interest rate for the six
months ended June 30, 2003 was 4.07%. On July 10, 2003, this loan was
repaid in full as discussed in note 10.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In addition to the above two facilities, the Company has an
un-drawn available line of credit for $2,000,000 bearing interest at
the floating base rate as established by Cayman Islands Class A
licensed banks from time to time. The interest rate at June 30, 2003
was 5.00%.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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7. Long term debt (continued)

We have collateralized all borrowings under the three facilities by providing
Scotiabank with a first lien on all of our assets, including the capital stock
we acquired in our recent acquisitions.

In addition to the Scotiabank facilities, the Companys wholly-owned
subsidiary, Ocean Conversion (Cayman) Limited, as at June 30,
2003 has a balance of $1,420,000 on a 5-year term
loan with the Bank of N.T. Butterfield & Son Ltd. bearing interest at 3-month
LIBOR plus 1.5% that is repayable in 10 semi-annual installments. The interest
rate at June 30, 2003 was 2.62%.

The Company is in compliance with restrictive covenants associated with its
long term debt.

8. Earnings Per Share

Basic earnings per common share (EPS) is calculated by dividing net
income available to common stockholders by the weighted average number of
common shares outstanding during the period. The computation of diluted EPS
assumes the issuance of common shares for all dilutive-potential common shares
outstanding during the reporting period. The dilutive effect of stock options
is considered in earnings per common share calculations, if dilutive, using the
treasury stock method.

The following summarizes information related to the computation of basic and
diluted earnings per share for the three and six month periods ended June 30,
2003 and 2002.

Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2002
    
    2003
    
    2002Net income, as reported
    
    $
    1,013,041
    
    
    $
    811,259
    
    
    $
    2,031,165
    
    
    $
    1,737,760Less:Dividends declared and earnings
attributable on preference shares
    
    
    (3,589
    )
    
    
    (3,985
    )
    
    
    (7,188
    )
    
    
    (8,283
    )Net income available to holders of
ordinary shares in the determination
of basic earnings per ordinary share
    
    $
    1,009,452
    
    
    $
    807,274
    
    
    $
    2,023,977
    
    
    $
    1,729,477Weighted average number of ordinary
shares in the determination of basic
earnings per ordinary share
    
    
    4,273,574
    
    
    
    3,978,827
    
    
    
    4,198,056
    
    
    
    3,951,172Plus:Weighted average number of
preference shares outstanding during
the period
    
    
    20,052
    
    
    
    25,195
    
    
    
    19,774
    
    
    
    25,195Potential dilutive effect of
unexercised options
    
    
    75,383
    
    
    
    93,880
    
    
    
    92,441
    
    
    
    101,023Weighted average number of shares
used for determining diluted earnings
per ordinary share
    
    
    4,369,010
    
    
    
    4,097,902
    
    
    
    4,310,270
    
    
    
    4,077,390


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9. Stock Based Compensation

The Company currently has various stock option plans and an employee stock
purchase plan. The Company accounts for stockbased compensation plans for
employees and directors using the intrinsic value method. Under this method,
the Company records no compensation expense for stock options granted when the
exercise price of options granted is equal to or greater than the fair market
value of the Companys common stock on the date of grant.

The following table presents the effect on net income and earnings per share if
the Company had applied a fair value recognition method:

Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2002
    
    2003
    
    2002Net income, as reported
    
    $
    1,013,041
    
    
    $
    811,259
    
    
    $
    2,031,165
    
    
    $
    1,737,760Add: Stock-based employee
compensation expense included in
reported net income
    
    
    37,470
    
    
    
    30,084
    
    
    
    65,340
    
    
    
    59,784Deduct: Total stock-based
compensation expense determined
under fair value based method
for all awards
    
    
    (128,125
    )
    
    
    (51,226
    )
    
    
    (137,494
    )
    
    
    (61,720
    )Pro forma net income
    
    $
    922,386
    
    
    $
    790,117
    
    
    $
    1,959,011
    
    
    $
    1,735,824Earnings per share
Basic  as reported
    
    $
    0.24
    
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    0.44Basic  pro forma
    
    $
    0.21
    
    
    $
    0.20
    
    
    $
    0.46
    
    
    $
    0.44Diluted  as reported
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.47
    
    
    $
    0.43Diluted  pro forma
    
    $
    0.21
    
    
    $
    0.19
    
    
    $
    0.45
    
    
    $
    0.42


10. Impact of Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies immediately to variable interests in
variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. For
public enterprises with a variable interest entity created before February 1,
2003 the Interpretation applies to that enterprise no later than the beginning
of the first interim or annual reporting period beginning after June 15, 2003.
The interpretation requires certain disclosures in financial statements issued
after January 31, 2003 if it is reasonably possible that the Company will
consolidate or disclose information about variable interest entities when the
Interpretation becomes effective. The adoption of this Interpretation is not
expected to have a material effect on the Companys financial statements.

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10. Impact of Recent Accounting Pronouncements (continued)

In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. The Company does not expect the adoption of
the Statement to result in an impact on the Companys financial statements.

11. Subsequent Events

On July 3, 2003, the Company completed an underwritten public offering of
1,200,000 ordinary shares at a price of $14.75 per share and granted the
underwriters a 30-day option to purchase up to 265,150 additional ordinary
shares on the same terms and conditions to cover over-allotments of shares.
The Company received net proceeds from the offering of approximately
$15,471,000 of which $6,556,126 was used to repay a six-month bridge loan from
Scotiabank (Cayman Islands) Ltd. and approximately $8,100,000 will be used to
complete our acquisition of Waterfields Company Limited. The balance of the
net proceeds from our public offering will be used for general corporate
purposes.

On July 30, 2003, the Company completed the acquisition of an additional 13.5%
of the shares of Waterfields for approximately $1,400,000 and initiated a
tender offer conducted outside of the United States for an additional 64.7% of
the remaining shares of Waterfields for approximately $6,700,000. We expect
our ownership interest in Waterfields to be 90.9% upon completion of the tender
offer.

On August 4, 2003, the underwriters of the Companys public offering of July 3,
2003 exercised their over-allotment option as to 192,150 ordinary shares at a
price of $14.75 per share. We received net proceeds of $2,680,493 which will
be used for repayment of debt and general corporate purposes.

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

Recent Acquisitions

Effective February 1, 2003, the Company acquired 100% of the outstanding voting
common shares of DesalCo Limited, its wholly-owned subsidiary DesalCo
(Barbados) Ltd., and Ocean Conversion (Cayman) Limited. In February 2003, the
Company also acquired 50% of the voting common shares of Ocean Conversion (BVI)
Ltd. These acquisitions increase our daily water production capacity in the
Cayman Islands and the Commonwealth of the Bahamas and expand our geographic
presence to include Barbados and the British Virgin Islands. As a result of
these acquisitions, our daily capacity has more than tripled from approximately
2.9 to approximately 10.9 million U.S. gallons per day. With one of these
acquisitions, we obtained the exclusive right through 2009 to distribute the
DWEER Energy Recovery System for use in reverse osmosis seawater desalination
plants in the Caribbean basin. We believe the DWEER System gives us a distinct
competitive advantage when bidding for new plant construction projects.

Financial results of the acquired businesses from February 1, 2003 have been
included in the condensed consolidated financial statements in Item 1.

Revenue

Revenue is comprised of retail water sales via pipeline to individual
customers, bulk water sales to large commercial or municipal customers, and
fees for management and engineering services.

Expenses

Expenses include the cost of sales (direct expenses) and general and
administrative expenses (indirect expenses). Direct expenses include royalty
payments to the Cayman Islands government; electricity and chemicals expenses;
production equipment and facility depreciation costs; equipment maintenance
expenses, operational staff costs and amortization of intangible assets.
Indirect expenses consist primarily of salaries and employee benefits for
administrative personnel, stock compensation expenses, office lease payments,
depreciation on fixed assets used for administrative purposes and legal and
professional fees. There are no income taxes in the Cayman Islands, and we are
currently exempt from taxes in the British Virgin Islands and Belize. We may be
liable for a business license fee in the Bahamas. We pay income tax in
Barbados.

Critical Accounting Policies

The preparation of our financial statements requires management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to trade accounts receivable, intangible assets and goodwill. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates. We believe the following critical
accounting policies are the most important to the presentation of our financial
condition and results and require managements more significant judgments and
estimates in the preparation of our consolidated financial statements.

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Trade accounts receivable:We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. Management continuously evaluates the collectibility of accounts
receivable and records allowances for doubtful accounts based on estimates of
the level of actual write-offs that might be experienced. These estimates are
based on, among other things, comparisons of the relative age of accounts and
consideration of actual write-off history.

Intangible assets:Intangible assets with a determined useful life are
amortized over their estimated useful lives and reviewed for impairment in
accordance with SFAS No. 142. Management tests for impairment by evaluating the
remaining useful life of an intangible asset that is being amortized each
reporting period to determine whether events and circumstances warrant a
revision to the remaining period of amortization. Impairment is tested based on
projected discounted future cash flows using a discount rate reflecting our
average cost of funds. If our estimated projections are greater than our actual
results there may be an impairment that has not been reflected in the accounts.
Intangible assets with indefinite useful lives are recorded at fair value and
are not amortized. Management reevaluates the indefinite useful life of such
intangible assets at each reporting period. In addition, intangible assets
with indefinite lives are reviewed annually for impairment by comparing the
fair value of the intangible asset with its carrying value.

Goodwill:We account for acquisitions under the purchase method using the
accounting standards established in Statements of Financial Accounting
Statements No. 141, Business Combinations and No. 142, Goodwill and Other
Intangible Assets. These rules require us to assess goodwill which arises
from the acquisition under the purchase method for impairment at least annually
or more frequently if certain indicators are present. These statements require
estimates in both the purchase price allocation and the fair value of our
reporting units. Impairment of goodwill is tested based on projected
discounted future cash flows of our reporting units using a discount rate
reflecting our average cost of funds.

Results of Operations

Three and Six Months Ended June 30, 2003 Compared to Three and Six Months Ended June 30, 2002

Revenue

Total revenue increased by 44.3% from $3,291,929 to $4,750,381 for the three
months ended June 30, 2003 and by 35.4% from $6,476,735 to $8,769,106 for the
six months ended June 30, 2003 when compared to the same three and six month
periods in 2002.

Revenue from our retail water (Retail) operations decreased by 1.2% from
$2,897,128 to $2,862,424 for the three months ended June 30, 2002 and 2003,
respectively, and by 1.3% from $5,756,027 to $5,681,376 for the six months
ended June 30, 2002 and 2003, respectively. This decrease was due to slightly
lower sales in our primary market in the Cayman Islands.

Revenue from our bulk water (Bulk) operations increased by 281.4% from
$394,801 to $1,505,716 for the three months ended June 30, 2002 and 2003,
respectively, and by 248.4% from $720,708 to $2,510,857 for the six months
ended June 30, 2002 and 2003, respectively. This increase was due to our
recent acquisition of Ocean Conversion (Cayman) Limited.

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Revenue from services (Services) increased from nil to $382,241 for the three
months ended June 30, 2002 and 2003, respectively and from nil to $576,873 for
the six months ended June 30, 2002 and 2003, respectively. This increase was
due to our recent acquisition of DesalCo Limited and its wholly-owned
subsidiary DesalCo (Barbados) Ltd.

Other Income (Expenses)

Total other income (expenses) changed by 120.4% from an expense of $25,290 to
income of $5,166 for the three months ended June 30, 2003 and by 394.5% from an
expense of $38,405 to income of $113,097 for the six months ended June 30, 2003
when compared to the same three and six month periods in 2002. This increase
was due primarily to income and profit sharing from our equity investment in
Ocean Conversion (BVI) Ltd. This was offset by the increased interest expense
related to the loan interest and bank fees incurred in connection with our
recent acquisitions and the additional interest paid on the early repayment of
our European Investment Bank loan.

We expect loan interest costs to decrease because a portion of the proceeds
received from our completed equity offering was used to repay our Scotiabank
six-month term loan. We are also amortizing our bridge financing fees over a
period of six months starting February 1, 2003. During the three months ended
June 30, 2003 we expensed $123,768 of bridge financing fees and
$79,618 of
bridge financing interest. During the six months ended June 30, 2003 we
expensed $206,280 of bridge financing fees and $124,097 of bridge financing
interest.

Cost of Sales

Total cost of sales increased by 33.5% from $1,797,134 to $2,398,896 for the
three months ended June 30, 2003 and by 29.1% from $3,463,586 to $4,472,809 for
the six months ended June 30, 2003 when compared to the same three and six
month periods in 2002. During these same periods in 2003 our total revenue
increased by 44.3% and 35.4%, respectively.

Cost of sales of our Retail operations decreased by 21.3% from $1,543,129 to
$1,214,120 for the three months ended June 30, 2002 and 2003, respectively, and
by 17.9% from $2,964,816 to $2,433,996 for the six months ended June 30, 2002
and 2003, respectively, while our Retail revenue decreased by 1.2% and 1.3% for
the same periods. This decrease in cost of sales resulted primarily from the
cancellation of the Governors Harbour plant operating contract on February 7,
2003, which decreased our water purchase expense. Due to our recent
acquisitions and cancellation of the Governors Harbour plant operating
contract, we expect our Retail cost of sales going forward to remain at this
lower percentage of Retail revenues.

Cost of sales of our Bulk operations increased by 310.1% from $254,005 to
$1,041,637 for the three months ended June 30, 2002 and 2003, respectively, and
by 256.5% from $498,770 to $1,778,106 for the six months ended June 30, 2002
and 2003, respectively, while our Bulk revenue increased by 281.4% and 248.4%
for the same periods. This increase in cost of sales resulted almost entirely
from the operating costs of our recent acquisition of Ocean Conversion (Cayman)
Limited which included the amortization costs of the intangible assets that was
recognized in conjunction with our recent acquisition of Ocean Conversion
(Cayman) Limited.

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Cost of sales of our Services reporting segment were $143,139 for the three
months ended June 30, 2003 and $260,707 for the six months ended June 30, 2003.
These relate to our recent acquisition of DesalCo Limited and its wholly-owned
subsidiary DesalCo (Barbados) Ltd. which include the amortization cost of the
intangible asset that was recognized in conjunction with our recent acquisition
of DesalCo Limited.

Gross Profit

Overall gross profit margin increased from 45.4% to 49.5% for the three months
ended June 30, 2003 and from 46.5% to 49.0% for the six months ended June 30,
2003 when compared to the same three and six month periods in 2002, for the
reasons explained below.

Gross profit margin for our Retail operations increased from 46.7% to 57.6% for
the three months ended June 30, 2003 and from 48.5% to 57.2% for the six months
ended June 30, 2003 when compared to the same three and six month periods in
2002. The primary reason for this increase is that our Retail cost of sales
decreased as a result of the cancellation of the Governors Harbour plant
operating contract.

Gross profit margin for our Bulk operations decreased from 35.7% to 30.8% for
the three months ended June 30, 2003 and from 30.8% to 29.2% for the six months
ended June 30, 2003 when compared to the same three and six month periods in
2002. The primary reason for this decrease is the increased cost of sales in
our Belize Bulk operations due to leasing costs for a potable Reverse Osmosis
unit which we are operating to meet our customers water demand needs while we
upgrade our permanent Reverse Osmosis units. We generally sell water to our
Bulk customers at a lower profit margin than to our Retail customers.

Gross profit margin for our Services reporting segment was 62.6% for the three
months ended June 30, 2003 and 54.8% for the six months ended June 30, 2003.

General and Administrative Expenses

Total general and administrative expenses increased by 101.8% from $658,246 to
$1,328,090 for the three months ended June 30, 2003 and by 90.5% from
$1,236,984 to $2,356,716 for the six months ended June 30, 2003 when compared
to the same three and six month periods in 2002. General and administrative
expenses were at 20.0% and 28.0% of total revenue for the three months ended
June 30, 2002 and 2003, respectively and at 19.1% and 26.9% of total revenue
for the six months ended June 30, 2002 and 2003, respectively.

General and administrative expenses for our Retail operations increased by 7.2%
from $607,796 to $651,672 for the three months ended June 30, 2002 and 2003,
respectively, and by 6.8% from $1,145,704 to $1,223,652 for the six months
ended June 30, 2002 and 2003, respectively. This increase is comprised
primarily of higher insurance, rent and staff costs.

General and administrative expenses for our Bulk operations increased by 976.3%
from $50,450 to $543,007 for the three months ended June 30, 2002 and 2003,
respectively, and by 892.8% from $91,280 to $906,251 for the six months ended
June 30, 2002 and 2003, respectively. This increase is almost entirely the
result of the inclusion of the general and administrative expenses of Ocean
Conversion (Cayman) Limited. We expect to reduce general and administrative
expenses as we continue to assimilate the administrative functions of our
recent acquisitions.

General and administrative expenses for our Services reporting segment were
$133,411 for the three months ended June 30, 2003 and $226,813 for the six
months ended June 30, 2003. This is entirely the

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result of our recent acquisitions of DesalCo Limited and its wholly-owned
subsidiary DesalCo (Barbados) Ltd. We expect to reduce general and
administrative expenses as we continue to assimilate the administrative
functions of our recent acquisitions.

Net Income

Net income increased by 24.9% from $811,259 to $1,013,041 for the three months
ended June 30, 2003 and by 16.9% from $1,737,760 to $2,031,165 for the six
months ended June 30, 2003 when compared to the same three and six month
periods in 2002. We expect net income to increase because interest expense has
decreased since we repaid the acquisition bridge financing from Scotiabank
using the proceeds from our equity offering, and in August 2003, we will have
fully amortized the bank fees related to this bridge financing.

Dividends

On January 31, 2003, we paid a dividend of $0.105 to shareholders of record on
December 31, 2002, on April 30, 2003, we paid a dividend of $0.105 to
shareholders of record on March 31, 2003 and on July 31, 2003, we paid a
dividend of $0.105 to shareholders of record on June 30, 2003. We have
consistently paid dividends to owners of our ordinary and redeemable preferred
shares since we began declaring dividends in 1985. Our board of directors has
established a policy, but not a binding obligation, that we will seek to
maintain a dividend pay out ratio in the range of 50% to 60% of net income.
While this policy is subject to modification by our board of directors, we
expect to continue increasing our dividends, if our earnings grow. Our payment
of any future cash dividends, however, will depend upon our earnings, financial
condition, capital demand and other factors, including the condition in our new
loan agreement effective February 7, 2003, with Scotiabank (Cayman Islands)
Ltd. that dividends be paid only from current cash flows.

Liquidity and Capital Resources

Overview

Prior to our completion of the recent acquisitions, we generated cash primarily
from our operations in the Cayman Islands, the Bahamas and Belize and, to a
lesser extent, from the sale of our shares and through loans and credit
facilities obtained from two banks. As a result of our recent acquisitions, we
began to generate cash from our recently acquired operations in the Cayman
Islands, the Bahamas and Barbados; and from dividends and profit sharing from
our equity investment in the British Virgin Islands. Cash flow is affected by
the timely receipt of customer payments, by operating expenses, the timeliness
and adequacy of rate increases (excluding automatic adjustments to our rates
for inflation and electricity costs), and various factors affecting tourism in
the Cayman Islands, Belize, the British Virgin Islands, Barbados and the
Bahamas, such as weather conditions and the economy. We use cash to fund our
operations in the Cayman Islands, Belize, the British Virgin Islands, Barbados
and the Bahamas, to fund capital projects, to expand our infrastructure, to pay
dividends, to repay principal on our loans, to repurchase our shares when
appropriate and to take advantage of new investment opportunities which expand
our operations.

Operating Activities

Cash generated from operating activities for the six months ended June 30, 2002
and 2003 was $2,145,823 and $3,330,998, respectively. We generate cash through
the utilization of our existing plants, equipment and resources in all segments
of the business, minimization of water losses and operating efficiencies
created by our management team. We believe that our administrative staff will
be able to

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manage all our combined operations so that our indirect costs will
not increase in proportion to water sales.

Investing Activities

Cash used in investing activities during the six months ended June 30, 2002 and
2003 was $1,978,141 and $21,323,161, respectively. Cash in the amount of
$23,955,837 was used for our recent acquisitions. During the same period in
2002, our investing activities consisted of expenditures for new property,
plant and equipment, including $1,500,000 on the purchase of the Britannia
reverse osmosis plant.

Financing Activities

On February 7, 2003, we utilized a credit facility with Scotiabank (Cayman
Islands) Ltd. in order to exchange consideration for our recent acquisitions
and repay our existing debt. Cash provided by financing activities for the six
months ended June 30, 2002 and 2003 was $1,281,524 and $21,462,292,
respectively. During the six months ended June 30, 2003, our primary financing
activity was to draw down $28,056,126 from our Scotiabank facilities of which
$1,687,500 was used to repay our Royal Bank of Canada credit facility. In
addition, we fully repaid our European Investment Bank loan of $905,384. Also
during the period, $2,214,286 was repaid on our Scotiabank facilities, and on
July 10, 2003, we repaid the remaining balance of our bridge facility with
proceeds from our equity offering. During the six months ended June 30, 2002,
our primary financing activity was a draw down of our Royal Bank of Canada
credit facility for an additional $1,500,000 in order to finance our investment
in the Britannia reverse osmosis plant, plus an increase in our short-term bank
indebtedness.

Material Commitments for Capital Expenditures and Contingencies

At June 30, 2003, we had committed approximately $300,000 for capital
expenditures for the purchase, construction and site preparation of two water
storage tanks at our Governors Harbour plant. We intend to finance these
projects using cash from operations.

On February 7, 2003, we entered into a loan agreement with Scotiabank (Cayman
Islands) Ltd. to finance the recent acquisitions and pay off our existing debt.
The facilities are comprised of the following:



| |  | $2 million revolving line of credit bearing interest at the
floating base rate as established by Cayman Island Class A licensed
banks from time to time. The present interest rate is 5.00%
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | $20 million seven-year term loan bearing interest at an annually
adjusted floating rate of LIBOR plus 1.5% to 3%, depending on the ratio
of our consolidated debt to our consolidated earnings before interest,
taxes and depreciation. The average interest rate for the six months
ended June 30, 2003 was 4.07%. The current interest rate is 3.86%.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | $17.1 million six-month term loan bearing interest on the same
basis as the seven-year term loan. The average interest rate for the
six months ended June 30, 2003 was 4.07%. The present interest rate is
3.86%.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have used the proceeds from these facilities to repay our debt with Royal
Bank of Canada and the European Investment Bank, for working capital and to
finance our recent acquisitions.

On July 30, 2003, we purchased an additional 13.5% equity interest in
Waterfields Company Limited, a Bahamian company, from Bacardi & Co. for
BAH$1,397,250. In addition to the transaction with
Bacardi, we also have an agreement to acquire an additional 64.7% of the shares
of Waterfields Company

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Limited, at a price of BAH$690 per share, through a
tender offer conducted outside of the United States to the remaining
shareholders of Waterfields Company Limited. We intend to use $6,715,770 from
our share offering proceeds to complete the tender offer.

As of June 30, 2003, we have an outstanding balance of $25,841,840 on our
Scotiabank loan facilities. We are required to make monthly payments of
interest for all borrowings under the revolving line of credit and quarterly
payments of interest for all amounts drawn down under the two term loans. We
are obligated to make 28 equal quarterly payments of principal under the
seven-year term loan. All amounts borrowed under the six-month term loan were
repaid on July 10, 2003.

As part of our acquisition of our interests in Ocean Conversion (Cayman)
Limited, with the approval of Scotiabank (Cayman Islands) Ltd., we have
guaranteed the performance of Ocean Conversion (Cayman) Limited to the Cayman
Islands government, pursuant to the water supply contract with the Water
Authority-Cayman dated April 25, 1994 as amended.

As part of the acquisition of our interests in Ocean Conversion (Cayman)
Limited, we agreed to indemnify the seller in respect of a guarantee given by
the seller to the bank of N. T. Butterfield & Son Ltd. for 100% of the
borrowings of Ocean Conversion (Cayman) Limited totaling US$2.4 million. We are
in the process of refinancing Ocean Conversion (Cayman) Limiteds loan with
Scotiabank (Cayman Islands) Ltd. and we will guarantee 100% thereof.

As part of the acquisition of our interests in Ocean Conversion (BVI) Ltd., we
agreed to indemnify the seller in respect of a guarantee given by the seller to
the bank of N. T. Butterfield & Son Ltd. for 55% of the borrowings of Ocean
Conversion (BVI) Ltd. totaling US$1.25 million. We are in the process of
refinancing Ocean Conversion (BVI) Ltds loan with Scotiabank (Cayman Islands)
Ltd. and we will guarantee 50% thereof.

As a result of our acquisition of interests in Waterfields Company Limited, we
guarantee the performance of Waterfields Company Limited to the Water and
Sewerage Corporation of the Bahamas in relation to the water supply contract
between Waterfields Company Limited and the Water & Sewerage Corporation.

Impact of Inflation

Under the terms of our Cayman Islands license, Belize, Bahamas, British Virgin
Islands and Barbados water sales agreements, there is an automatic price
adjustment for inflation on an annual basis, subject to temporary exceptions.
We, therefore, believe that the impact of inflation on our net income, measured
in consistent dollars, will not be material.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Credit Risk

We are not exposed to significant credit risk on retail customer accounts in
the Cayman Islands and Bimini, Bahamas, as our policy is to cease supply of
water to customers whose accounts are more than 45 days overdue. Our main
exposure to credit risk is from our bulk water sales customers in Belize, the
British Virgin Islands, Barbados and the Cayman Islands. In addition, the
entire balance of our loan receivable is due from the Water Authority-Cayman.

Interest Rate Risk

As of June 30, 2003, we had loans outstanding of $25,841,840 from Scotiabank
(Cayman Islands) Ltd., at an annually adjusted floating rate of LIBOR plus 1.5%
to 3%, depending on the ratio of our consolidated debt to our consolidated
earnings before interest, taxes and depreciation. We are subject to interest
rate risk to the extent that LIBOR or Scotiabank (Cayman Islands) Ltd.s prime
lending rate changes.

Foreign Exchange Risk

All of our foreign currencies have fixed exchanged rates to the U.S. dollar.
If any of these fixed exchange rates become a floating exchange rate our
results of operation could be adversely affected.




Item 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (collectively, the
Certifying Officers) are responsible for establishing and maintaining
disclosure controls and procedures for us. Such officers have concluded (based
upon their evaluation of these controls and procedures as of the end of the
period covered by this report) that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in this
report is accumulated and communicated to management, including our principal
executive officers as appropriate, to allow timely decisions regarding required
disclosure.

The Certifying Officers also have indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.

Our management, including each of the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of these

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inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.




PART II  OTHER INFORMATION




Item 2. Changes in Securities and Use of Proceeds

On April 2, 2003, we issued 30,000 ordinary shares to a vendor, pursuant to the
exercise of stock options. The aggregate exercise price of the option was
$236,250. The issuance of the shares was exempt from registration under
Section 4(2) of the Securities Act of 1933 because the shares were issued to a
vendor who has knowledge of all material information relating to us. Proceeds
of the transaction will be used for general corporate purposes.

On April 28, 2003, we issued 5,609 ordinary shares to one of our directors who
is also an executive officer, pursuant to the exercise of stock options. The
aggregate exercise price of the option was $39,824. The issuance of the shares
was exempt from registration under Section 4(2) of the Securities Act of 1933
because the executive officer has knowledge of all material information
relating to us. Proceeds of the transaction were used for general corporate
purposes.

As consideration for their services to the Company, on June 4, 2003, the
Company granted to 15 of its employees located in the Cayman Islands an
aggregate of 2,993 shares of redeemable preferred stock (Preferred Stock) of
which three of these employees purchased an additional 844 shares at $8.95 per
share. In addition, the Company issued to nine of its employees options to
purchase an additional 14,745 ordinary shares of common stock having an
exercise price of $15.42 per share. The securities issued to the employees
were exempt from registration under Regulation S promulgated under the
Securities Act of 1933 because the shares were offered and sold outside of the
United States to non-US persons, as defined in Regulation S.

If an employee remains employed by the Company for at least four years, or a
person or affiliated group of persons acquires 30% or more of the Companys
ordinary shares of common stock (whether or not the Preferred Stock has been
held for four years), the Company is obligated to exchange the Preferred Stock
for the same number of ordinary shares of common stock. The Company is also
obligated to exchange the Preferred Stock for an equal number of ordinary
shares of common stock if an employees employment with the Company or any of
its affiliates terminates by reason of the employees death, permanent
disability or the employee reaches the age of 65 years. However, if an
employees employment with the Company or any of its affiliates terminates for
any other reason, the Company may at any time up to and including the first
anniversary of such termination, redeem the employees Preferred Stock for cash
equal to 75% of the average of the closing market price for the Companys
ordinary shares of common stock on each of the first seven trading days in the
month of October of the year in which such Preferred Stock was issued to the
employee.

The options to purchase ordinary shares of common stock which were issued to
the employees as discussed above vest on June 29, 2007 and expire one month
thereafter. However, an option may be exercised by an employee at any time
during the period commencing on the earliest of the date of death of the
employee, the date on which the employment of the employee is terminated as a
result of permanent disability or the date on which the employee retires having
reached the age of 65 years.

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



|(a) |  | The Annual Meeting of the Companys shareholders was held on May 21,
2003. Of the 4,239,959 ordinary shares outstanding on the record date of
March 31, 2003, a total of 3,408,965 shares were represented in person or
by proxy.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | (i) The following directors were re-elected effective May 21, 2003
|--- |  | ------------------------------------------------------------------

Votes CastFor
    
    Withheld AuthorityWilmer Pergande
    
    
    3,379,144
    
    
    
    29,781Peter D. Ribbins
    
    
    3,376,974
    
    
    
    31,991Raymond Whittaker
    
    
    3,379,144
    
    
    
    29,781




|(ii) |  | The following directors were not up for reelection at the Annual
Meeting and their terms of office as a director continued after the
Annual Meeting:
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | William T. Andrews
J. Bruce Bugg, Jr.
Brian E. Butler
Steven A. Carr
Jeffrey M. Parker
Carson K. Ebanks
Richard L. Finlay
Clarence B. Flowers, Jr.
Frederick F. McTaggart
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | The vote to approve KPMG as Independent Accountants for the year 2003 at
a fee to be agreed by the directors was 3,331,641 for, 73,910 against and
3,414 abstain.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------

ExhibitNumber
    
    Exhibit Description31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the
Company31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the
Company32.1
    
    Section 1350 Certification of Chief Executive Officer of the Company32.2
    
    Section 1350 Certification of Chief Financial Officer of the Company




|(b) |  | Reports on Form 8-K
|--- |  | -------------------



| |  | A Current Report on Form 8-K/A was filed with the Securities and Exchange
Commission (SEC) on April 25, 2003 by the Company amending a Form 8-K
filed with the SEC on February 13, 2003 in order to include financial
information under Item 7. Financial Statements and Exhibits.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A Current Report on Form 8-K was filed with the SEC on May 19, 2003 by
the Company reporting its first quarter earnings. Information was
included under Item 9 of such Report.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A Current Report on Form 8-K was filed with the SEC on June 20, 2003 by
the Company reporting its anticipated operating results through December
2003. Such information was included under Item 5. Other Events.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A Current Report on Form 8-K was filed with the SEC on June 24, 2003 by
the Company reporting its anticipated operating results through December
2004. Such information was included under Item 5. Other Events.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURE

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

CONSOLIDATED WATER CO. LTDBy: /s/ Jeffrey M. ParkerJeffrey M. Parker
Chairman of the Board of Directors and
Chief Executive Officer


Dated: August 14, 2003

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