Document:

Exhibit 10.4

 

2005
EXECUTIVE BONUS PLAN

 

	
  Eligibility:

  	
  Eligible employees are all officers of the company
  with the title of vice president or above.

  
	
   

  	
   

  
	
  Target Bonus:

  	
  Target bonuses for each eligible employee will be
  determined by the Compensation Committee based on input from the Chief
  Executive Officer.

  
	
   

  	
   

  
	
  Actual Bonus:

  	
  A bonus payout ratio will be calculated, based on the
  Company’s performance to specific objectives, using the methodology described
  in this plan. The target bonus of each employee will be multiplied by the
  bonus payout ratio to calculate the actual bonus.

  
	
   

  	
   

  
	
  Payments:

  	
  Bonuses will be payable 45 days after the end of the
  fiscal year.

  

 

Company Objectives:

 

Bonuses will be based on performance to the
following five objectives.  Specific criteria
under each objective will be determined by the Compensation Committee based on
input from the Chief Executive Officer.

 

	
  A.

  	
  Product Development

  
	
  B.

  	
  Technology Qualification

  
	
  C.

  	
  New Product Design-Ins

  
	
  D.

  	
  New Product Revenue

  
	
  E.

  	
  Total Revenue

  

 

Calculation of Bonus Payout Ratio:

 

Performance to each objective will be determined and a
weighting factor will be calculated for each objective.  The weighting factors will be determined by the Compensation Committee
based on input from the Chief Executive Officer.  The weighting factors for each objective will
then be added.  Bonus payout ratios will
then be calculated as follows:

 

	
  •

  	
   

  	
  Group A:

  	
   

  	
  Bonus Payout Ratio

  	
  =

  	
   

  	
  50% + Sum of Weighting Factors

  

 

 

 

	
  •

  	
   

  	
  Group B:

  	
   

  	
  Bonus Payout Ratio

  	
  =

  	
   

  	
  Sum of Weighting Factors

  

 

Bonus Payment Approval:

 

Performance to objectives, weighting factors and individual bonuses
will be calculated by the Company and presented during the February 2006
Compensation Committee meeting.  All
individual bonuses will be approved by the Compensation Committee prior to
employee distribution.EXHIBIT 10.1

                            ASSET PURCHASE AGREEMENT
                                 BY AND BETWEEN

                                SJWTX WATER, INC.
                              A TEXAS CORPORATION,

                                  AS PURCHASER,

                                       AND

                      CANYON LAKE WATER SUPPLY CORPORATION,
                   A TEXAS NONPROFIT WATER SUPPLY CORPORATION,

                                    AS SELLER

                                 OCTOBER 4, 2005

<PAGE>
<TABLE>
<CAPTION>
                                TABLE OF CONTENTS
                                                                                                                 PAGE
<S>               <C>                                                                                            <C>
ARTICLE I DEFINITIONS.............................................................................................1
         1.1      Defined Terms...................................................................................1
         1.2      References and Titles...........................................................................9
ARTICLE II        SALE OF ASSETS AND ASSUMPTION OF LIABILITIES...................................................10
         2.1      Sale of Assets.................................................................................10
         2.2      Excluded Assets................................................................................11
         2.3      Assumption of Liabilities......................................................................11
         2.4      Retained Liabilities...........................................................................13
         2.5      Casualty Loss..................................................................................13
ARTICLE III       PURCHASE PRICE.................................................................................14
         3.1      Purchase Price.................................................................................14
         3.2      The Closing....................................................................................14
ARTICLE IV        SELLER'S REPRESENTATIONS AND WARRANTIES........................................................14
         4.1      Organization of Seller.........................................................................14
         4.2      Authorization of Transaction...................................................................14
         4.3      Required Regulatory Approvals and Filings; Consents............................................14
         4.4      Non-contravention..............................................................................15
         4.5      Brokers' Fees..................................................................................15
         4.6      Title to Assets................................................................................15
         4.7      Subsidiaries...................................................................................15
         4.8      Financial Statements...........................................................................15
         4.9      Events Subsequent to Most Recent Fiscal Year End...............................................16
         4.10     Undisclosed Liabilities........................................................................17
         4.11     Legal Compliance...............................................................................17
         4.12     Tax Matters....................................................................................17
         4.13     Real Property..................................................................................18
         4.14     Intellectual Property..........................................................................20
         4.15     Tangible Assets................................................................................20
         4.16     Inventory......................................................................................21
         4.17     Material Contracts.............................................................................21
         4.18     Notes and Accounts Receivable..................................................................22
         4.19     Powers of Attorney; Authorized Signatories; Bank Accounts......................................22
         4.20     Insurance......................................................................................22
         4.21     Litigation.....................................................................................23
         4.22     Product & Service Warranty.....................................................................23
         4.23     Product Liability..............................................................................23
         4.24     Employees......................................................................................23
         4.25     Employee Benefits..............................................................................24
         4.26     Guaranties.....................................................................................26
         4.27     Environmental, Health, and Safety Matters......................................................26
         4.28     Intentionally Omitted..........................................................................27
         4.29     Customers and Suppliers........................................................................27
         4.30     Solvency.......................................................................................27
         4.31     Disclosure.....................................................................................27
</TABLE>
                                        i
<PAGE>
<TABLE>
<CAPTION>
<S>               <C>                                                                                            <C>
ARTICLE V PURCHASER'S REPRESENTATIONS AND WARRANTIES.............................................................28
         5.1      Organization of Purchaser......................................................................28
         5.2      Authorization of Transaction...................................................................28
         5.3      Required Regulatory Approvals and Filings; Consents............................................28
         5.4      Non-contravention..............................................................................28
         5.5      Brokers' Fees..................................................................................28
         5.6      Disclosure.....................................................................................28
ARTICLE VI        PRE-CLOSING COVENANTS..........................................................................28
         6.1      General........................................................................................28
         6.2      Regulatory Matters and Approvals...............................................................29
         6.3      Requisite Member Consent.......................................................................29
         6.4      Operation of Business..........................................................................29
         6.5      Preservation of Business.......................................................................29
         6.6      Full Access....................................................................................30
         6.7      Notice of Developments.........................................................................30
         6.8      Exclusivity....................................................................................30
         6.9      Maintenance of Real Property...................................................................30
         6.10     Leases.........................................................................................30
         6.11     Title Insurance and Surveys....................................................................31
         6.12     Lease Consents.................................................................................31
         6.13     Debt Pay-Off Letters...........................................................................31
         6.14     Expense Pay-off Letters........................................................................31
         6.15     Seller's Bank Accounts.........................................................................31
         6.16     Purchaser Employment Offers....................................................................31
         6.17     Employee Benefit Matters.......................................................................31
         6.18     Change of Name.................................................................................32
         6.19     Delivery of Updated Financial Statements.......................................................32
         6.20     Transaction Materials..........................................................................32
         6.21     Notice of Additional Indebtedness; Alternative Interim Financing...............................32
ARTICLE VII       CONDITIONS TO OBLIGATION TO CLOSE..............................................................33
         7.1      Conditions to Purchaser's Obligation...........................................................33
         7.2      Conditions to Seller's Obligation..............................................................35
ARTICLE VIII      CLOSING DELIVERIES.............................................................................36
         8.1      Items to be Delivered by the Seller............................................................36
         8.2      Items to be Delivered by Purchaser.............................................................37
ARTICLE IX        TERMINATION....................................................................................37
         9.1      Termination of Agreement.......................................................................37
         9.2      Effect of Termination..........................................................................38
ARTICLE X         POST-CLOSING COVENANTS & OTHER AGREEMENTS......................................................38
         10.1     Survival of Representations and Warranties.....................................................38
         10.2     Press Releases and Public Announcements........................................................39
         10.3     Liquidation and Dissolution of Seller..........................................................39
         10.4     Rate Moratorium................................................................................39
         10.5     Reimbursable Seller Income Tax; Tax Refunds....................................................39
         10.6     Tax Returns....................................................................................40
         10.7     Litigation and other Proceedings...............................................................41
</TABLE>
                                       ii
<PAGE>
<TABLE>
<CAPTION>
<S>               <C>                                                                                            <C>
         10.8     Certain Payroll Reporting Obligations..........................................................41
         10.9     Further Assurances.............................................................................41
ARTICLE XI        MISCELLANEOUS..................................................................................42
         11.1     Notices........................................................................................42
         11.2     No Third-Party Beneficiaries...................................................................42
         11.3     Succession and Assignment......................................................................43
         11.4     Amendments and Waivers.........................................................................43
         11.5     Severability...................................................................................43
         11.6     Expenses.......................................................................................43
         11.7     Construction...................................................................................43
         11.8     Remedies.......................................................................................43
         11.9     Governing Law; Choice of Forum.................................................................44
         11.10    Consent to Jurisdiction; Venue.................................................................44
         11.11    Consultation with Independent Counsel..........................................................44
         11.12    Incorporation of Exhibits and Schedules........................................................44
         11.13    Entire Agreement...............................................................................44
         11.14    Effective Date of Agreement....................................................................45
         11.15    Counterparts...................................................................................45
</TABLE>

                                      iii
<PAGE>
EXHIBITS
--------
Exhibit "A" - Form of Opinions of Counsel of Seller

DISCLOSURE SCHEDULES
--------------------

Purchaser's Disclosure Schedules
Schedule 5.3 - Purchaser's Required Consents
Schedule 5.4 - Purchaser's Noncontravention

Seller's Disclosure Schedules
Schedule 2.1(a) - Contracts
Schedule 2.1(g) - Permits, Licenses, Other Certificates
Schedule 2.2(c) - Excluded Contracts
Schedule 2.2(e) - Excluded Property and Assets
Schedule 2.3(d) - Third Party Debt
Schedule 3.1 - Excluded Bank Account
Schedule 4.3 - Seller's Required Consents
Schedule 4.4 - Seller's Noncontravention
Schedule 4.8 - Financial Statements
Schedule 4.9 - Events Subsequent to Most Recent Fiscal Year End
Schedule 4.12(b) - Tax Returns
Schedule 4.13(a) - Owned Real Property
Schedule 4.13(b) - Leased Real Property
Schedule 4.14(b) - Intellectual Property
Schedule 4.14(c) - Intellectual Property Subject to License/Sublicense Agreement
Schedule 4.15 - Tangible Personal Property
Schedule 4.16 - Inventory
Schedule 4.17 - Material Contracts
Schedule 4.18 - Accounts Receivable
Schedule 4.19 - Powers of Attorney; Authorized Signatories; Bank Accounts
Schedule 4.20 - Insurance
Schedule 4.21 - Litigation
Schedule 4.22 - Product & Service Warranty
Schedule 4.24(a) - Employment Matters
Schedule 4.24(b) - Employment Contracts
Schedule 4.24(c) - Employees
Schedule 4.25 - Employee Benefit Plans
Schedule 4.27(a) - Exceptions to Environmental, Health and Safety Requirements
Schedule 4.27(b) - Water System Permits
Schedule 4.27(d) - Hazardous Materials
Schedule 4.27(e) - Disposal Matters
Schedule 4.27(f) - Transaction Triggered/Responsible Property Transfers
Schedule 4.27(h) - Environmental Audits and Reports
Schedule 4.28 - Affiliated Transactions
Schedule 4.29 - Customers
Schedule 7.1(k) - Lawful Rates and Fees

                                       iv
<PAGE>
                            ASSET PURCHASE AGREEMENT

          THIS ASSET PURCHASE AGREEMENT (this  "Agreement")  executed as of this
4th day of October,  2005, but shall be effective only upon  satisfaction of the
condition  specified in Section  11.14,  is by and between SJWTX Water,  Inc., a
Texas corporation  ("Purchaser"),  and Canyon Lake Water Supply  Corporation,  a
Texas nonprofit water supply  corporation  ("Seller").  The Purchaser and Seller
are referred to individually as a "Party" and collectively as the "Parties."

                                    RECITALS
                                    --------

          WHEREAS,  Seller  operates a local water supply  company in the Canyon
Lake, Texas area (the "Water System"); and

          WHEREAS,  Purchaser desires to purchase from Seller and Seller desires
to sell to Purchaser  substantially  all of Seller's assets which it utilizes in
the Water System on the terms and conditions set forth herein; and

          WHEREAS,  the Parties acknowledge and agree that Seller gave notice to
Purchaser  of the  requirements  of Section  13.301(k)  of the Water Code before
either Party executed this Agreement.

          NOW,  THEREFORE,  in  consideration  of the  above  premises  and  the
respective  representations,  warranties,  agreements and conditions  herein set
forth, and other good and valuable consideration, the receipt and sufficiency of
which are hereby  acknowledged,  the  Parties,  intending  to be legally  bound,
hereby agree as follows:

                                   ARTICLE I
                                  DEFINITIONS.

          1.1 Defined Terms.  As used in this  Agreement,  each of the following
terms has the meaning  given in this  Section 1.1 or in the Section  referred to
below:

          "Accounts Receivable" has the meaning set forth in Section 4.18.

          "Acquired Assets" has the meaning set forth in Section 2.1.

          "Acquired Bank Accounts" has the meaning set forth in Section 4.19.

          "Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.

          "Affiliated  Group" means any  affiliated  group within the meaning of
Section  1504(a)  of the  Code or any  similar  group  defined  under a  similar
provision of state, local, or foreign law.

          "Alternative  Interim Financing Agreement" means any written agreement
between Purchaser, as lender, and Seller, as borrower,  wherein Purchaser agrees
to lend Seller  funds to perform or  complete  any system  renovation,  upgrade,
expansion or  acquisition  necessary  to comply with any  existing  Contracts or
Legal Requirements.

<PAGE>
          "Asbestos  Liabilities"  shall  mean  any  Liabilities  arising  from,
relating  to, or based on the  presence  or  alleged  presence  of  asbestos  or
asbestos-containing  materials  in any product or item  designed,  manufactured,
sold, marketed,  installed, stored, transported,  handled, or distributed at any
time,  or  otherwise  based on the  presence or alleged  presence of asbestos or
asbestos-containing  materials at any property or facility or in any  structure,
including, any Liabilities arising from, relating to or based on any personal or
bodily injury or illness.

          "Assumed Liabilities" Has the meaning set forth in Section 2.3.

          "Bexarmet" Means the Bexar Metropolitan Water District.

          "Cash"  means  cash  and  cash   equivalents   (including   marketable
securities  and  short-term  investments)  calculated  in  accordance  with GAAP
applied on a basis consistent with the preparation of the Financial Statements.

          "Cash Consideration" has the meaning set forth in Section 3.1.

          "CERCLA" means the Comprehensive Environmental Response,  Compensation
and Liability Act of 1980, as amended, and any analogous state statutes, and any
regulations promulgated thereunder.

          "Closing" has the meaning set forth in Section 3.2.

          "Closing Date" has the meaning set forth in Section 3.2.

          "COBRA" means the  requirements  of Part 6 of Subtitle B of Title I of
ERISA and Section 4980B of the Code and of any similar state law.

          "Code" means the Internal Revenue Code of 1986, as amended.

          "Contemplated Transactions" means all of the transactions contemplated
by this Agreement.

          "Controlled  Group" has the meaning  set forth in Section  1563 of the
Code.

          "Contract"   means  all   agreements,   contracts  or  other   binding
commitments,  understandings,  arrangements,  written  or  oral  (including  any
amendments and other modifications thereto).

          "Construction  Fund" means the construction fund established  pursuant
to the terms and  conditions  of that  certain  "Resolution  of the Texas  Water
Development  Board Approving  Application for Financial  Assistance  Through the
Purchase  of  $7,500,000  Canyon Lake Water  Supply  Corporation,  Water  System
Revenue Bonds, Proposed Taxable Series 2005".

                                       2
<PAGE>
          "Debt  Pay-off  Letters"  means  the  pay-off  letters,  in  substance
reasonably  satisfactory  to  Purchaser,  from each  lender of Third  Party Debt
requiring  that Seller's  indebtedness  be fully paid and discharged at Closing,
setting forth (i) the aggregate  amount,  including  interest,  breakage  costs,
prepayment  penalties,  and other fees, required to be paid to fully satisfy all
of the  Seller's  obligations  to such  lender of Third Party Debt and (ii) wire
transfer instructions for such lender. Each Debt Pay-Off Letter will provide for
the  release  and  termination  of all  Liens,  recourse  and other  obligations
associated  with the Third Party Debt that is the  subject of such Debt  Pay-Off
Letter upon receipt of the amount  specified  in such Debt Pay-Off  Letter to be
paid on the Closing Date.

          "Employee  Benefit  Plan" means any  "employee  benefit plan" (as such
term is defined in ERISA Section 3(3)) and any other material  employee  benefit
plan, program or arrangement of any kind.

          "Employee  Pension  Benefit  Plan" has the  meaning set forth in ERISA
Section 3(2).

          "Employee  Welfare  Benefit  Plan" has the  meaning set forth in ERISA
Section 3(1).

          "Environmental,  Health,  and  Safety  Requirements"  shall  mean,  as
amended and as now and hereafter in effect,  all Legal  Requirements  (including
CERCLA and SWDA) concerning public health and safety,  worker health and safety,
pollution, or protection of the environment, including all those relating to the
presence,  use, production,  generation,  handling,  transportation,  treatment,
storage,  disposal,  distribution,  labeling,  testing,  processing,  discharge,
release,  threatened  release,  control,  or cleanup of water (whether  treated,
untreated, affluent or otherwise),  hazardous materials,  substances, or wastes,
chemical substances, or mixtures, pesticides,  pollutants,  contaminants,  toxic
chemicals,   petroleum   products  or  byproducts,   asbestos,   polychlorinated
biphenyls, noise, or radiation.

          "ERISA" means the Employee  Retirement Income Security Act of 1974, as
amended.

          "Excluded Assets" has the meaning set forth in Section 2.2.

          "Excluded Bank Account" has the meaning set forth in Section 3.1.

          "Expense  Pay-off  Letters"  means the pay-off  letters,  in substance
reasonably   satisfactory  to  Purchaser,   from  each  Person  to  whom  Seller
Transaction  Fees are owed, (i) setting forth (A) the identity of each Person to
whom such  obligations  are owed, (B) the amount owed or to be owed to each such
Person,  and (C) the bank account and wire  transfer  information  for each such
Person and (ii) providing for the release and termination of all Liens, recourse
and other obligations associated with the Seller Transaction Fees that is or are
the subject of such Expense Pay-Off Letter upon receipt of the amount  specified
in such Expense Pay-Off Letter to be paid on the Closing Date.

          "Financial Statements" has the meaning set forth in Section 4.8(a).

          "GAAP" means United States generally accepted accounting principles as
in effect from time to time, consistently applied.

                                       3
<PAGE>
          "GBRA" means the Guadalupe-Blanco River Authority.

          "Governmental Authority" means any federal, state, county or municipal
government,  any agency or commission with statewide jurisdiction,  or any court
or any arbitrator in any case that has  jurisdiction  over such Person or any of
its respective properties or assets.

          "Improvements" has the meaning set forth in Section 4.13(d).

          "Income Tax" means any federal,  state,  local, or foreign income Tax,
including any interest, penalty, or addition thereto, whether disputed or not.

          "Income Tax Return" means any return,  declaration,  report, claim for
refund, or information return or statement  relating to Income Taxes,  including
any schedule or attachment thereto, and including any amendment thereof.

          "Intellectual Property" means all of the following: (a) all inventions
(whether patentable or unpatentable and whether or not reduced to practice), all
improvements  thereto,  and  all  patents,   patent  applications,   and  patent
disclosures,      together     with     all     reissuances,      continuations,
continuations-in-part,  revisions,  extensions,  and reexaminations thereof, (b)
all  trademarks,  service  marks,  trade  dress,  logos,  slogans,  trade names,
corporate  names,  Internet  domain  names,  and  rights in  telephone  numbers,
together  with all  translations,  adaptations,  derivations,  and  combinations
thereof and including all goodwill associated  therewith,  and all applications,
registrations,  and  renewals in  connection  therewith,  (c) all  copyrightable
works,  all copyrights,  and all  applications,  registrations,  and renewals in
connection  therewith,  (d) all mask works and all applications,  registrations,
and renewals in connection  therewith,  (e) all trade  secrets and  confidential
business  information  (including  ideas,  research and  development,  know-how,
formulas,  compositions,  manufacturing and production processes and techniques,
technical data, designs, drawings, specifications,  customer and supplier lists,
pricing and cost  information,  and business and marketing plans and proposals),
(f) all  computer  software  (including  source  code,  executable  code,  data,
databases,  and  related  documentation),   (g)  all  material  advertising  and
promotional materials,  (h) all other proprietary rights, and (i) all copies and
tangible embodiments thereof (in whatever form or medium).

          "Inventory" has the meaning set forth in Section 4.16.

          "Knowledge"  means with respect to a specified  individual,  that such
individual  is actually or in the  exercise of  reasonable  diligence  should be
aware of that fact or matter after reasonable investigation.

          "Lease Consents" has the meaning set forth in Section 6.12.

          "Leased Real Property" means all leasehold or subleasehold estates and
other  similar  rights  to  use  or  occupy  any  land,  buildings,  structures,
improvements, fixtures or other interest in real property held by Seller.

          "Leases" means all leases, subleases,  licenses, concessions and other
Contracts, including all amendments,  extensions, renewals, guaranties and other
agreements with respect thereto,  pursuant to which Seller holds any Leased Real
Property.

                                       4
<PAGE>
          "Legal  Requirement"  means  any  Order  or  federal,   state,  local,
municipal, foreign,  international,  multinational constitution, law, ordinance,
principle of common law, code,  regulation,  statute, or treaty (including under
the Code  regulations  thereunder  and  applicable  judicial and  administrative
pronouncements).

          "Liability"  means any  liability or  obligation  of whatever  kind or
nature (whether asserted or unasserted,  whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated,  and whether due or to
become due).

          "Lien" means any lien, mortgage,  security interest,  charge,  pledge,
retention of title agreement, easement, encroachment or other encumbrance of any
sort whatsoever affecting title.

          "Material  Adverse  Effect" or  "Material  Adverse  Change"  means any
effect or change  (individually  or in the  aggregate)  that would be materially
adverse to the Water  System,  or any of the  assets,  condition  (financial  or
otherwise), operating results, operations, or business prospects of Seller or to
the ability of any Party to consummate timely the Contemplated Transactions.

          "Material Contracts" has the meaning set forth in Section 4.17.

          "Material Contract Consents" means the consent or authorization of any
other  party to a  Material  Contract  other than  Seller  that is  required  in
connection with the consummation of the Contemplated Transactions.

          "Member" means any Person having membership rights in Seller under the
TNPCA, Water Code or Seller's Organizational Documents.

          "Most Recent Balance Sheet" means the balance sheet  contained  within
the Most Recent Financial Statements.

          "Most  Recent  Financial  Statements"  has the  meaning  set  forth in
Section 4.8(a).

          "Most  Recent  Fiscal  Month End" has the meaning set forth in Section
4.8(a).

          "Most  Recent  Fiscal  Year End" has the  meaning set forth in Section
4.8(a).

          "Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).

          "Order"  means  any  order,  injunction,   judgment,  decree,  ruling,
assessment or arbitration award of any Governmental Authority or arbitrator.

          "Ordinary  Course of Business"  means the ordinary  course of business
consistent with past custom and practice (including with respect to quantity and
frequency).

          "Organizational  Documents"  means as applicable,  the  certificate of
incorporation,   articles  of  incorporation,  bylaws,  certificate  of  limited
partnership,   partnership  or  limited  partnership   agreement,   articles  of
organization,   certificate   of   organization,   certificate   of   formation,
regulations,  operating  agreement,  joint  venture  agreement  and  each  other
Contract  or  instrument  (i)  pursuant  to which a Person  is  established  and
organized, or (ii) which establishes the governance of such Person.

                                       5
<PAGE>
          "Owned Real Property" means (i) the Seller's  Easement Rights and (ii)
all land, together with all buildings,  structures,  improvements,  and fixtures
located thereon, and other rights and interests  appurtenant  thereto,  owned by
Seller.

          "Party" has the meaning set forth in the preamble of this Agreement.

          "PBGC" means the Pension Benefit Guaranty Corporation.

          "Permitted  Encumbrances"  means with  respect to each  parcel of Real
Property:  (a) real estate Taxes,  assessments  and other  governmental  levies,
fees, or charges imposed with respect to such Real Property that are (i) not due
and payable as of the Closing Date or (ii) being  contested  in good faith,  for
which adequate  reserves have been established in accordance with GAAP and which
reserves are included in the Acquired  Assets;  (b) mechanics' liens and similar
liens for labor,  materials,  or  supplies  provided  with  respect to such Real
Property  incurred in the  Ordinary  Course of Business for amounts that are (i)
not due and payable as of the Closing Date or (ii) being contested in good faith
that would not,  individually or in the aggregate,  materially impair the use or
occupancy of the Real Property or the operation of the Water System as currently
conducted on such Real Property; (c) zoning,  building codes, and other land use
laws  regulating  the use or occupancy of such Real  Property or the  activities
conducted  thereon  that  are  imposed  by  any  Governmental  Authority  having
jurisdiction over such Real Property that are not violated by the current use or
occupancy  of such  Real  Property  or the  operation  of the  Water  System  as
currently  conducted  thereon;  (d) Liens  securing  Third Party  Debt;  and (e)
easements,  covenants,  conditions,  restrictions,  and other similar matters of
record affecting title to such Real Property that do not or would not materially
impair the use or occupancy of such Real  Property in the operation of the Water
System as currently conducted thereon.

          "Person" means an individual, a partnership,  a corporation, a limited
liability  company,  an  association,  a joint stock  company,  a trust, a joint
venture,  an  unincorporated  organization,  any  other  business  entity  or  a
Governmental Authority.

          "Prohibited  Transaction"  has the meaning set forth in ERISA  Section
406 and Section 4975 of the Code.

          "Post-signing  Fiscal  Year End" has the  meaning set forth in Section
6.19.

          "Proceeding"   means  any   action,   arbitration,   audit,   hearing,
investigation,  litigation or suit  (whether  civil,  criminal,  administrative,
judicial  or  investigative,  whether  formal  or  informal,  whether  public of
private)  commenced,  brought,  conducted  or heard by or before,  or  otherwise
involving any Governmental Authority or other third party.

          "Purchase Price" has the meaning set forth in Section 3.1.

          "Purchaser"  has  the  meaning  set  forth  in the  preamble  of  this
Agreement.

          "Purchaser's  Required  Consents" has the meaning set forth in Section
5.3.

                                       6
<PAGE>

          "Purchaser  Transaction  Fees" means all  reasonable  fees,  costs and
expenses  incurred by Purchaser  prior to Closing or that Purchaser is otherwise
obligated to discharge regardless if the Contemplated Transaction is consummated
in connection with or arising out of the planning,  structuring,  negotiation or
consummation  of this  Agreement and the  Contemplated  Transactions,  including
without  limitation  all  fees  and  expenses  of  legal  counsel,  accountants,
consultants, brokers, financial advisors and other professionals.

          "Real Property" has the meaning set forth in Section 4.13(c).

          "Real Property Laws" has the meaning set forth in Section 4.13(f).

          "Reimbursable  Seller  Income  Tax"  means any United  States  federal
income tax  obligation  of Seller for its taxable year that includes the Closing
Date,  but only to the extent  that the  obligation  (i) results  from  Seller's
failure to be an  organization  described  in Section  501(c)(12)  for such year
because of Seller's sale of the Acquired Assets pursuant to this Agreement,  and
(ii) is reflected on the applicable federal Income Tax Return of Seller for such
year.

          "Reportable Event" has the meaning set forth in ERISA Section 4043.

          "Requisite  Member  Consent"  means the  consent  of at least at least
two-thirds  (2/3) of the Members present in person or by proxy at any meeting or
special  meeting of the Seller  authorizing and approving this Agreement and all
of the Contemplated Transactions.

          "Restricted Period" has the meaning set forth in Section 10.8(a).

          "Retained Liabilities" has the meaning set forth in Section 2.4.

          "Securities  Exchange Act" means the Securities  Exchange Act of 1934,
as amended.

          "Seller" has the meaning set forth in the preamble of this Agreement.

          "Seller  Transaction  Fees"  means  all  reasonable  fees,  costs  and
expenses  incurred by the Seller prior to Closing in connection  with or arising
out of the planning, structuring,  negotiation or consummation of this Agreement
and the  Contemplated  Transactions,  including  all fees and  expenses of legal
counsel (John O. Houchins,  Esq.), accountants (Holtman, Wagner & Company, LLP),
consultants (GDS Associates, Inc.), brokers, financial advisors (First Southwest
Company) and other professionals.

          "Seller  Transaction  Fees Limit" means a maximum of $250,000 in total
Seller   Transaction  Fees  regardless  if  such  Seller  Transaction  Fees  are
discharged by Purchaser or Seller on or before the Closing Date.

          "Seller  Transaction  Materials"  has the meaning set forth in Section
6.20.

          "Seller's  Easement  Rights"  means any and all  easements  or similar
rights of Seller  to use the  property  of any  Person  in  connection  with the
operation of the Water System.

                                       7
<PAGE>
          "Seller's Required Consents" has the meaning set forth in Section 4.3.

          "Service Agreement" has the meaning set forth in Section 8.1(j).

          "STMP" means an "Application for Sale,  Transfer or Merger of a Retail
Public Utility" and all addendums,  schedules and annexes thereto,  or any other
similar form or application required by the TCEQ in connection with the sale and
transfer of the Water System from  Purchaser to Seller as  contemplated  by this
Agreement.

          "Subsidiary"  means,  with  respect to any  Person,  any  corporation,
limited liability company, partnership, association, or other business entity of
which (i) if a  corporation,  a majority of the total  voting power of shares of
stock entitled  (without regard to the occurrence of any contingency) to vote in
the election of directors, managers, or trustees thereof is at the time owned or
controlled,  directly or indirectly,  by that Person or one or more of the other
Subsidiaries  of that  Person  or a  combination  thereof  or (ii) if a  limited
liability  company,  partnership,  association,  or other business entity (other
than a corporation),  a majority of the  partnership or other similar  ownership
interests thereof is at the time owned or controlled, directly or indirectly, by
that Person or one or more Subsidiaries of that Person or a combination  thereof
and for this purpose,  a Person or Persons own a majority  ownership interest in
such a business  entity  (other  than a  corporation)  if such Person or Persons
shall be allocated a majority of such business entity's gains or losses or shall
be or control any managing  director or general  partner of such business entity
(other than a corporation). The term "Subsidiary" shall include all Subsidiaries
of such Subsidiary.

          "SWDA" means the Solid Waste  Disposal Act, as amended,  any analogous
state statutes,  and any  regulations  promulgated  thereunder,  and regulations
modeled thereon.

          "Tangible Assets" has the meaning set forth in Section 4.15.

          "Tax Returns" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes,  including any schedule or
attachment thereto, and including any amendment thereof.

          "Tax" or "Taxes" means taxes of any kind,  levies or other assessments
related to taxes,  and  customs,  duties,  imposts,  charges or fees,  including
income,  profits,  gross  receipts,  ad valorem,  value added,  excise,  real or
personal  property,  asset,  sales,  use,  federal  royalty,  license,  payroll,
transaction,  capital, net worth,  franchise and gross receipts taxes, estimated
taxes, withholding, employment, social security, workers' compensation, utility,
severance, production, unemployment compensation,  occupation, premium, windfall
profits, net proceeds,  alternative,  turnover,  environmental,  stamp, leasing,
lease, user, capital stock, registration,  fuel, excess profits,  alternative or
add on minimum, transfer and gains taxes and other governmental taxes imposed or
payable to any Taxing  Authority,  and in each  instance such term shall include
any  interest,  penalties  or  additions  to tax  attributable  to any such tax,
including penalties for the failure to file any Tax Return or report.

          "Taxing  Authority"  means,  with respect to any Tax, the Governmental
Authority  that  imposes  such Tax,  and the  agency (if any)  charged  with the
collection  of  such  Tax  for  such  entity  or   subdivision,   including  any
governmental or quasi governmental  entity or agency that imposes, or is charged
with collecting, social security or similar charges or premiums.

                                       8
<PAGE>
          "TCEQ" means the Texas Commission on Environmental Quality.

          "TCEQ Approval" means the written  approval of the TCEQ for all of the
following:  (i)  Purchaser's  acquisition of the assets which Seller utilizes in
connection with its operation of the Water System, (ii) Seller's transfer of the
"Certificate  of  Convenience  and  Necessity" for the Water System to Purchaser
pursuant  to the STMP  submitted  by  Purchaser,  and (iii)  all  other  matters
presented by Purchaser or Seller to the TCEQ for approval in connection with the
Contemplated Transactions.

          "Third  Party Debt" means all  outstanding  indebtedness  for borrowed
money of Seller, including any indebtedness relating to the TWDB Bond Debt.

          "TNPCA" means Texas Non-Profit Corporation Act, as amended.

          "Transaction  Documents" means this Agreement and all other agreements
and documents  entered into by one or more of the Parties in connection with the
Contemplated Transactions.

          "TWDB" means the Texas Water Development Board.

          "TWDB Bond Debt" has the meaning set forth in Section 2.3(b).

          "Water Code" means the Texas Water Code, as amended.

          "Water  System" has the meaning set forth in the first recital of this
Agreement.

          1.2  References  and  Titles.  All  references  in this  Agreement  to
Schedules, Articles, Sections,  subsections, and other subdivisions refer to the
corresponding Schedules, Articles, Sections, subsections, and other subdivisions
of this Agreement unless expressly provided otherwise. All references to cash or
monetary amounts refer to U.S. Dollars only unless  specifically stated to be in
the currency of another  government.  Titles  appearing at the  beginning of any
Articles, Sections, subsections, or other subdivisions of this Agreement are for
convenience  only,  do not  constitute  any  part  of such  Articles,  Sections,
subsections  or other  subdivisions,  and shall be disregarded in construing the
language  contained  therein.  The words "this Agreement,"  "herein,"  "hereby,"
"hereunder," and "hereof," and words of similar import,  refer to this Agreement
as a whole and not to any particular  subdivision  unless  expressly so limited.
The words "this Section," "this subsection," and words of similar import,  refer
only to the Sections or  subsections,  respectively,  hereof in which such words
occur.  The word  "including"  (in its various forms) means  "including  without
limitation".  Pronouns  in  masculine,  feminine,  or  neuter  genders  shall be
construed  to state and include any other  gender and words,  terms,  and titles
(including  terms  defined  herein) in the  singular  form shall be construed to
include  the  plural and vice  versa,  unless the  context  otherwise  expressly
requires.  Unless the context  otherwise  requires,  all defined terms contained
herein shall include the singular and plural and the conjunctive and disjunctive
forms of such defined terms.

                                       9
<PAGE>
                                   ARTICLE II
                  SALE OF ASSETS AND ASSUMPTION OF LIABILITIES

          2.1 Sale of Assets.  On the Closing Date,  Seller shall sell,  assign,
transfer and convey to Purchaser,  and Purchaser shall accept from Seller,  free
and clear of all Liens and  adverse  claims  of any kind  except  for  Permitted
Encumbrances,  all of the assets used by or for the benefit of the Seller in any
way, directly or indirectly,  related to the Water System,  including the assets
set forth in this  Section 2.1 as they exist on the  Closing  Date and no others
(collectively, the "Acquired Assets"):

               (a) all rights,  titles and  interests of Seller in, to and under
the Seller's  Contracts,  including those listed on Schedule  2.1(a);  provided,
that Purchaser is not acquiring the Contracts listed on Schedule 2.2(c).

               (b) all of the Owned Real Property set forth on Schedule  4.13(a)
and all of Seller's  interest in the Leased Real  Property set forth on Schedule
4.13(b);

               (c)  all  of  Seller's  Intellectual   Property,   including  the
Intellectual  Property set forth on Schedule  4.14(b),  and the right to sue and
collect for any and all infringements,  and the right to receive royalties, with
respect to the foregoing;

               (d) all of Seller's  tangible  personal  property,  including the
Tangible Assets set forth on Schedule 4.15;

               (e) all of Seller's inventory and other raw goods,  including the
Inventory set forth on Schedule 4.16;

               (f) all of the Seller's  accounts,  notes, and other receivables,
including the Accounts Receivables set forth on Schedule 4.18;

               (g) all of Seller's  permits,  licenses,  orders,  registrations,
certificates,  variances,  and similar  rights  obtained  from any  Governmental
Authority  which  are   transferable  to  Purchaser   under   applicable   Legal
Requirements,   including   the  permits,   licenses,   orders,   registrations,
certificates, variances, and similar rights set forth on Schedule 2.1(g);

               (h) all of Seller's books, records,  ledgers,  files,  documents,
correspondence, lists, plats, architectural plans, drawings, and specifications,
studies, reports, and other printed or written materials;

               (i) the Acquired Bank Accounts;

               (j) all of  Seller's  Cash,  including  all Member  deposits  and
Member fees held by Seller to the extent an  assignment  thereof is permitted by
applicable Legal Requirements or deposits of Seller held by third parties,  debt
reserves and restricted cash;

               (k) all of  Seller's  rights in and with  respect  to the  assets
associated  with its Employee  Benefit Plans to the extent  assumed by Purchaser
pursuant to Section 6.17;

                                       10
<PAGE>
               (l) all of  Seller's  intangible  assets  and  goodwill  directly
related to the Seller's Water System; and

               (m)  all  of  Seller's  claims,  deposits,  prepayments,  refunds
(including Tax refunds described in Section 10.5(b)),  causes of action,  choses
in action,  rights of recovery,  rights of set-off,  and rights of recoupment of
Seller,  including claims,  deposits,  prepayments,  refunds,  causes of action,
choses in action,  rights of recovery under any insurance  policies or otherwise
existing at law or equity,  rights of set-off,  and rights of recoupment arising
from or related to any asset described in Section 2.1(a) through (l).

          2.2 Excluded Assets. Notwithstanding anything in this Agreement to the
contrary,  Seller shall not sell, and Purchaser shall not acquire, the following
assets, properties, interests and rights of Seller (the "Excluded Assets"):

               (a) the  Seller's  charter,  taxpayer  and  other  identification
numbers, and other books, records, documents and seals relating to the corporate
or company  organization,  maintenance  and existence of Seller,  that Seller is
required by applicable Legal Requirements to retain in its possession;

               (b) subject to Section  2.1(m) and  Section  2.5,  all  insurance
policies;

               (c) all of Contracts listed on Schedule 2.2(c);

               (d) all  personnel  records  and  other  records  that  Seller is
required by applicable Legal Requirements to retain in its possession;

               (e) the  property  and assets  expressly  designated  on Schedule
2.2(e);

               (f) the Excluded Bank Account;

               (g) any of  Seller's  rights in and with  respect  to the  assets
associated with its Employee Benefit Plans not assumed by Purchaser  pursuant to
Section 6.17; and

               (h) all rights of the Seller  under this  Agreement or any of the
other Transaction Documents.

          2.3 Assumption of Liabilities.  As part of the  consideration  for the
purchase and sale of the Acquired  Assets,  on the Closing  Date,  the Purchaser
shall assume each of the following except as otherwise set forth in this Section
2.3 and Section 2.4 (collectively, the "Assumed Liabilities"):

               (a) all  Liabilities  arising  from or relating  to the  Acquired
Assets accruing on or after the Closing Date;

               (b) all  Liabilities  of Seller set forth on the face of the Most
Recent Balance Sheet (rather than in any notes thereto)  (other than,  except as
provided in Section  10.5(a),  any  Liability  resulting  from,  arising out of,
relating  to, in the nature of, or caused by any breach of  contract,  breach of
warranty,  tort,   infringement,   violation  of  law,  Asbestos  Liability,  or

                                       11
<PAGE>
environmental matter,  including those arising under Environmental,  Health, and
Safety  Requirements  or any of Seller's  Employee  Benefit Plans not assumed by
Purchaser  pursuant to Section 6.17). It is expressly agreed and understood that
all notes and/or  bonds issued to the TWDB as listed on the Balance  Sheet shall
include  not only the  principle  and  interest  due  thereunder  but shall also
include any and all  prepayment  penalties,  defeasance  cost or like or similar
penalty or cost of whatsoever kind or nature and howsoever described that Seller
may  potentially be  responsible to discharge  under the terms and conditions of
its sale to the TWDB of the following bond issues (the "TWDB Bond Debt"):

          (i)  Canyon Lake Water System  Revenue Bonds  (Taxable),  Series 1995,
               $7,105,000;

          (ii) Canyon Lake Water System  Revenue Bonds  (Taxable),  Series 1998,
               $3,040,000;

          (iii)Canyon Lake Water System  Revenue Bonds  (Taxable),  Series 2000,
               $2,960,000; and

          (iv) Canyon Lake Water System  Revenue Bonds  (Taxable),  Series 2005,
               $7,500,000.

          Purchaser  hereby  expressly  acknowledges  the  above  and  fully and
completely  assumes  any and all  liabilities  of Seller of  whatsoever  kind or
nature  as same  relates  to  and/or is  associated  in any  manner to debts and
obligations to the TWDB arising from or relating to the TWDB Bond Debt.

               (c) all Liabilities of Seller that have arisen before the Closing
and after the Most Recent  Fiscal Month End in the  Ordinary  Course of Business
(other than,  except as provided in Section  10.5(a),  any  Liability  resulting
from,  arising out of, relating to, in the nature of, or caused by any breach of
contract,  breach of warranty,  tort,  infringement,  violation of law, Asbestos
Liability, or environmental matter, including those arising under Environmental,
Health,  and Safety  Requirements or any of Seller's  Employee Benefit Plans not
assumed by Purchaser pursuant to Section 6.17);

               (d) all Third Party Debt set forth on Schedule 2.3(d);

               (e) all  obligations  of  Seller  under the  Contracts  and other
arrangements  arising  from the  Acquired  Assets  either (i) to furnish  goods,
services, and other non-Cash benefits to another party after the Closing or (ii)
to pay for goods,  services, and other non-Cash benefits that another party will
furnish to it after the Closing;

               (f) the accrued  vacation  and sick leave for those  employees of
Seller who accept employment with Purchaser as of the Closing Date; and

               (g)  all  unpaid  Seller   Transaction  Fees  up  to  the  Seller
Transaction Fees Limit.

          Purchaser will not assume or have any  responsibility  whatsoever with
respect to any other  Liability  of Seller  not  expressly  included  within the
definition of Assumed  Liabilities,  including (i) except as provided in Section
10.5(a),  any  Liabilities  or  obligations  of or relating to any violations by

                                       12
<PAGE>
Seller under any Legal  Requirements,  including any  Environmental,  Health and
Safety Requirements,  on or before the Closing Date regardless if such matter is
disclosed  on a Schedule  hereto;  (ii) any  Liability  of Seller for  transfer,
sales,  use or other Taxes arising in connection  with the  consummation  of the
Contemplated  Transactions;  or (iii) any Taxes of the Members  arising  from or
related to the Contemplated Transactions.

          2.4 Retained Liabilities. Except for the Assumed Liabilities expressly
set forth in Section 2.3, Seller shall retain and be solely responsible for, and
Seller  acknowledges  that  Purchaser has not agreed to pay, is not assuming and
shall not have any Liability or obligation for any other Liability or obligation
of the Seller or the Water System (the "Retained Liabilities"). Without limiting
the generality of the foregoing,  the following  Liabilities or obligations will
remain the sole responsibility of Seller:

               (a) any  Liability  arising out of or  relating  to the  Excluded
Assets;

               (b) any  Liability  arising  out of or  resulting  from  Seller's
compliance or  non-compliance  with any Legal  Requirement  of any  Governmental
Authority related directly or indirectly to any Environmental, Health and Safety
Requirements,  on or  before  the  Closing  Date  regardless  if such  matter is
referenced on a Schedule hereto;

               (c) any  Liability  of Seller  under this  Agreement or any other
document executed in connection with the Contemplated Transactions;

               (d) any Liability of Seller based upon Seller's acts or omissions
occurring after the Closing Date;

               (e) any  Liability  arising out of or relating to any of Seller's
Employee Benefit Plans not assumed by Purchaser pursuant to Section 6.17;

               (f)  notwithstanding  an  assumption  by Purchaser of an Employee
Benefit Plan pursuant to Section  6.17,  any Liability not set forth on the face
of the Most Recent Balance Sheet (rather than in any notes thereto); and

               (g)  any  Seller   Transaction  Fees  in  excess  of  the  Seller
Transaction Fees Limit.

          2.5 Casualty Loss. Prior to Closing,  the risk of loss to the Acquired
Assets shall remain with Seller.  After Closing,  the risk of such loss shall be
transferred  to Purchaser.  In the event that any of the Acquired  Assets of the
Seller are  materially  damaged or destroyed by fire or other  casualty prior to
the Closing,  Seller shall (i) immediately  notify the Purchaser  promptly after
Seller  learns of such event,  (ii)  preserve  all  insurance  proceeds  for the
benefit of the Purchaser,  and (iii) upon Closing assign to Purchaser (or at the
direction of Purchaser) all insurance  claims or proceeds to which Seller may be
entitled as a result of such fire or other casualty.

                                       13
<PAGE>
                                   ARTICLE III
                                 PURCHASE PRICE

          3.1 Purchase Price. In consideration for Seller's sale and transfer of
the Acquired Assets to Purchaser,  Purchaser  agrees to (i) pay to Seller at the
Closing  the sum of Three  Million  Two  Hundred  Thousand  and  No/100  Dollars
($3,200,000) (the "Cash Consideration")  payable by wire transfer or delivery of
other immediately  available funds to the account set forth on Schedule 3.1 (the
"Excluded   Bank  Account")  and  (ii)  assume  or  discharge  the  (A)  Assumed
Liabilities, (B) Seller Transaction Fees up to the Seller Transaction Fees Limit
and (C) Reimbursable Seller Income Tax (collectively, the "Purchase Price").

          3.2 The Closing. The closing of the transactions  contemplated by this
Agreement  (the  "Closing")  shall take place at the  offices of Jackson  Walker
L.L.P. at 112 E. Pecan Street,  Suite 2100, San Antonio,  Texas 78205 commencing
at  9:00  a.m.  local  time  on the  fifth  (5th)  business  day  following  the
satisfaction  or waiver of all  conditions to the  obligations of the Parties to
consummate the Contemplated  Transactions (other than conditions with respect to
actions the  respective  Parties will take at the Closing  itself) or such other
date as the Parties may  mutually  determine  (the  "Closing  Date");  provided,
however,  that the Closing  Date shall not be later than  October 1, 2007 unless
agreed to in writing by the Parties.

                                   ARTICLE IV
                    SELLER'S REPRESENTATIONS AND WARRANTIES.

          Seller   represents   and  warrants  to  Purchaser  as  follows  (such
representations and warranties being deemed to be made as of the date hereof and
on a continuous  basis until the Closing Date).  Seller  acknowledges and agrees
that each of the representations and warranties set forth in this Article IV has
been  materially  relied upon by Purchaser and that each of the  representations
and warranties set forth in this Article IV have served as a material inducement
for the Purchaser to enter into this Agreement.

          4.1  Organization  of  Seller.  Seller  is  duly  organized,   validly
existing,  and in good standing under the Legal Requirements of the jurisdiction
of its incorporation.

          4.2  Authorization of Transaction.  Upon Seller's  obtaining  Seller's
Required Consents,  Material Contract Consents, and Lease Consents,  Seller will
have full power and authority to execute and deliver the  Transaction  Documents
to which it is a party and to perform  all of the  obligations  thereunder.  The
Transaction  Documents  constitute the valid and legally  binding  obligation of
Seller,  enforceable  in accordance  with their terms and  conditions  except as
limited  by  applicable  bankruptcy,  insolvency,  moratorium,   reorganization,
fraudulent conveyance and similar laws affecting creditors' rights generally and
except  to  the  extent  that  general  equitable   principles  may  affect  the
availability  of certain  remedies.  The execution,  delivery and performance of
this  Agreement  and all  other  Transaction  Documents  to  which it is a party
contemplated hereby have been duly authorized by Seller.

          4.3 Required Regulatory Approvals and Filings; Consents. Except as set
forth on Schedule 4.3 (the "Seller's Required  Consents"),  no Material Contract
Consent, Lease Consent, or any other approval of or filing with any Governmental

                                       14
<PAGE>
Authority  or any other  Person on the part of Seller is required in  connection
with the  execution,  delivery and  performance  of this Agreement and the other
Transaction Documents or the consummation of the Contemplated Transactions.

          4.4  Non-contravention.  Except as set forth on Schedule 4.4,  neither
the execution and delivery of this  Agreement by Seller,  the other  Transaction
Documents to which it is a party,  nor the Contemplated  Transactions,  will (i)
violate any Legal Requirement to which Seller is subject or any provision of its
Organizational  Documents, (ii) conflict with, result in a breach of, constitute
a default under, result in the acceleration of, create in any party the right to
accelerate,  terminate,  modify,  or  cancel,  or require  any notice  under any
Contract  to which  Seller is a party or by which it is bound or to which any of
its assets are subject,  or (iii) result in the imposition or creation of a Lien
upon or with respect to the Acquired Assets.

          4.5 Brokers'  Fees.  Seller has no Liability or  obligation to pay any
fees or commissions to any broker,  finder, or similar agent with respect to the
Contemplated  Transactions  for which Purchaser could become liable or obligated
to pay or discharge.

          4.6 Title to Assets.  Seller has good and indefeasible  title to, or a
valid  leasehold  interest  in, the  properties  and  assets  used by or for the
benefit of Seller,  located on its premises, or shown on the Most Recent Balance
Sheet or acquired after the date thereof, free and clear of all Liens except for
Permitted  Encumbrances,  except for  properties  and assets  disposed of in the
Ordinary  Course of Business  since the date of the Most Recent  Balance  Sheet.
Without  limiting  the  generality  of  the  foregoing,   Seller  has  good  and
indefeasible title to all of the Acquired Assets, free and clear of any Liens or
restriction on transfer except for Permitted Encumbrances.

          4.7  Subsidiaries.  Seller does not own or has ever owned of record or
beneficially,  any Subsidiary or otherwise  maintain or hold any equity interest
in any other Person.

          4.8 Financial Statements.

               (a) Attached  hereto as Schedule 4.8 are the following  financial
statements (collectively the "Financial Statements"): (i) audited balance sheets
and  statements  of income,  and cash flow as of and for the fiscal  years ended
December 31, 2002, December 31, 2003 and December 31, 2004 for Seller (the "Most
Recent  Fiscal  Year End") and the  audited  balance  sheets and  statements  of
income,  and cash flow delivered to Purchaser pursuant to Section 6.19; and (ii)
unaudited balance sheet and statement of income, and cash flow (the "Most Recent
Financial  Statements") as of and for the seventh-months  ended July 31, 2005 or
covering the period set forth in the  unaudited  balance  sheet and statement of
income, and cash flow delivered to Purchaser pursuant to Section 6.19 (the "Most
Recent Fiscal Month End") for the Seller.  The Financial  Statements  (including
the notes  thereto)  have been  prepared in  accordance  with GAAP  consistently
applied throughout the periods covered thereby, present accurately the financial
condition of Seller as of such dates and the results of operations of Seller for
such periods, are correct and complete in all respects,  and are consistent with
the books and  records  of Seller  (which  books and  records  are  correct  and
complete in all respects).

                                       15
<PAGE>
               (b) Each transaction by Seller is properly  recorded on the books
and records of such Seller,  and each  document  upon which  entries in Seller's
Financial  Statements  and all of its  other  books  and  records  are  based is
complete and  accurate in all  respects.  Seller  maintains a system of internal
accounting  controls which are adequate to insure that its Financial  Statements
and all of its  other  books  and  records  are  complete  and  accurate  in all
respects.  Seller maintains a system of internal accounting controls adequate to
insure that it maintains no off-the-books accounts.

          4.9 Events  Subsequent to Most Recent  Fiscal Year End.  Except as set
forth on Schedule 4.9,  since the Most Recent  Fiscal Year End and  Post-Signing
Fiscal Year End, if any, there has not been any Material Adverse Change. Without
limiting the generality of the  foregoing,  except as set forth on Schedule 4.9,
since that date:

               (a) Seller has not sold,  leased,  transferred,  or assigned  any
material  assets,  tangible  or  intangible,  outside  the  Ordinary  Course  of
Business;

               (b) Seller has not entered into any material Contract outside the
Ordinary Course of Business;

               (c) no party (including Seller) has accelerated, terminated, made
material modifications to, or cancelled any material Contract to which Seller is
a party or by which any of them is bound;

               (d)  Seller  has not  imposed  any Lien  upon any of its  assets,
tangible or intangible;

               (e) Seller has not made any material capital expenditures outside
the  Ordinary  Course of  Business  and in no event in excess of  $12,000  on an
individual or aggregate basis;

               (f) Seller has not made any material  capital  investment  in, or
any material loan to, any other Person  outside the Ordinary  Course of Business
and in no event in excess of $12,000 on an individual or aggregate basis;

               (g) Seller has not created, incurred, assumed, or guaranteed more
than  $12,000  in  indebtedness   for  borrowed  money  and  capitalized   lease
obligations on an individual or aggregate basis;

               (h) Seller has not transferred,  assigned, or granted any license
or sublicense of any material  rights under or with respect to any  Intellectual
Property;

               (i)  there  has  been  no  change  made  or   authorized  in  the
Organizational Documents of Seller;

               (j) Seller has not experienced any material damage,  destruction,
or loss (whether or not covered by insurance) to its property;

               (k) Seller  has not made any loan to, or  entered  into any other
transaction with, any of its directors, officers, and employees;

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<PAGE>
               (l)  Seller  has not  entered  into any  employment  contract  or
collective bargaining  agreement,  written or oral, or modified the terms of any
existing such Contract;

               (m) Seller has not granted any increase in the base  compensation
of any of its directors,  officers, and employees outside the Ordinary Course of
Business and in no event in excess of $5,000 per annum;

               (n) Seller has not adopted, amended,  modified, or terminated any
bonus,  profit  sharing,  incentive,  severance,  or other  plan,  contract,  or
commitment for the benefit of any of its directors,  officers, and employees (or
taken any such action with respect to any other Employee Benefit Plan);

               (o) Seller has not made any other  material  change in employment
terms for any of its  directors,  officers,  and employees  outside the Ordinary
Course of Business;

               (p)  Seller  has  not  changed  its  normal  business  practices,
instituted  any rate  increases,  changed any of its methods of  accounting,  or
taken any other action outside the Ordinary Course of Business;

               (q) Seller has not made any loans or advances of money; and

               (r) Seller has not committed to any of the foregoing.

          4.10  Undisclosed  Liabilities.  Seller  does not  have  any  material
Liability  (whether known or unknown,  whether  asserted or unasserted,  whether
absolute or  contingent,  whether  accrued or unaccrued,  whether  liquidated or
unliquidated,  and whether due or to become due,  including  any  Liability  for
Taxes or  Liabilities  arising  from or relating to  Employee  Benefit  Plans or
Environmental,  Health, and Safety Requirements), except for (i) Liabilities set
forth on the face of the Most Recent  Balance  Sheet  (rather  than in any notes
thereto)  and (ii)  Liabilities  that have arisen  after the Most Recent  Fiscal
Month End in the Ordinary Course of Business.

          4.11 Legal  Compliance.  Seller has complied with all applicable Legal
Requirements of all Governmental Authorities,  save and except those proceedings
initiated by the Texas  Commission on  Environmental  Quality for  violations of
their  rules  as more  particularly  described  in  Section  4.27,  and no other
Proceeding,  demand,  or  notice  has been  filed or  commenced  against  Seller
alleging any failure so to comply. To the Knowledge of each of the directors and
officers of Seller (i) no other  Proceeding  alleging the Seller's  violation of
any applicable Legal Requirements is or has been threatened and (ii) there is no
other basis for any such Proceeding against or otherwise involving the Seller or
any of its  directors,  officers or  employees  in any way  relating to Seller's
Water System.

          4.12 Tax Matters.

               (a) (i) Seller has filed all Income Tax Returns and all other Tax
Returns that it is required to file,  (ii) all such Tax Returns were correct and
complete in all  respects,  (iii) all Taxes due and owing by Seller  (whether or

                                       17
<PAGE>
not shown on any Tax Return) have been paid,  (iv) Seller is not  currently  the
beneficiary  of any  extension of time within which to file any Tax Return,  and
(v) there are no Liens for Taxes (other than Taxes not yet due and payable) upon
any of the assets of Seller.

               (b) Schedule 4.12(b) lists all federal, state, local, and foreign
Tax Returns filed with respect to the Seller or for taxable  periods ended on or
after December 31, 2000, indicates those Tax Returns that have been audited, and
indicates those Tax Returns that currently are the subject of audit.  Seller has
made  available  to  Purchaser  correct  and  complete  copies of all Income Tax
Returns,  examination reports, and statements of deficiencies  assessed against,
or agreed to by Seller  since  December  31,  2000.  Seller  has not  waived any
statute of  limitations  in respect of Taxes or agreed to any  extension of time
with respect to a Tax assessment or deficiency.

               (c) The  Seller is not a party to any Income  Tax  allocation  or
sharing agreement.

               (d) The  Seller  has not been a  member  of an  Affiliated  Group
filing a consolidated Income Tax Return.

               (e)  Seller  has  never  filed or been  required  to file any Tax
Return on Internal Revenue Service Form 990-T (or any predecessor  form) related
to Tax on unrelated business taxable income.

               (f) Seller is and has been  continuously  since its  inception an
organization  exempt from federal income Taxes pursuant to Section 501(a) of the
Code by reason of being an organization of 501(c)(12) of the Code.

          4.13 Real Property.

               (a) Schedule  4.13(a) sets forth the address and  description  of
each parcel of Owned Real  Property.  With  respect to each parcel of Owned Real
Property:

                  (i) except as set forth in  Schedule  4.13(a),  Seller has not
leased or otherwise  granted to any Person the right to use or occupy such Owned
Real Property or any portion thereof; and

                  (ii) there are no outstanding  options,  rights of first offer
or rights of first  refusal to purchase  such Owned Real Property or any portion
thereof or interest therein.

               (b)  Schedule  4.13(b)  sets forth the  address of each parcel of
Leased Real  Property,  and a true and complete list of all Leases for each such
Leased Real Property  (including  the date and name of the parties to such Lease
document).  Seller has  delivered to Purchaser a true and complete  copy of each
such Lease document, and in the case of any oral Lease, a written summary of the
material  terms of such  Lease.  Except as set forth in Schedule  4.13(b),  with
respect to each of the Leases:

                  (i) to the  Knowledge of each of the directors and officers of
Seller,  except for those  Leases for which Lease  Consents  are  obtained,  the

                                       18
<PAGE>
consummation of the  Contemplated  Transactions  will not require the consent of
any other party to such Lease,  will not result in a breach of or default  under
such Lease, and will not otherwise cause such Lease to cease to be legal, valid,
binding,  enforceable  and in full force and effect on identical terms following
the Closing; and

                  (ii) to the Knowledge of each of the directors and officers of
Seller,  neither  Seller  nor any  other  party to the  Lease is in breach of or
default  under such Lease,  and, to the  Knowledge of each of the  directors and
officers,  no event has occurred or circumstance  exists that, with the delivery
of  notice,  the  passage  of time or both,  would  constitute  such a breach or
default,  or permit the termination,  modification or acceleration of rent under
such Lease.

               (c) The Owned Real Property  identified  in Schedule  4.13(a) and
the Leased Real Property identified in Schedule 4.13(b) (collectively, the "Real
Property")  includes all of the real property used or intended to be used in the
Water  System;  and Seller is not a party to any agreement or option to purchase
any real property or interest therein.

               (d) All buildings,  structures,  fixtures,  building  systems and
equipment,  and all  components  thereof,  included  in the Real  Property  (the
"Improvements")  are in reasonably  good condition and repair and sufficient for
the  operation of the Water System.  There are no facts or conditions  affecting
any of the Improvements that would, individually or in the aggregate,  interfere
in any material  respect with the use or  occupancy of the  Improvements  or any
portion  thereof in the  operation of the Water  System as  currently  conducted
thereon.

               (e) Seller has not received  written notice of any  condemnation,
expropriation or other Proceeding in eminent domain affecting any parcel of Real
Property or any portion thereof or interest therein. To the Knowledge of and the
directors and officers of Seller, there is no injunction,  decree,  order, writ,
or judgment  outstanding,  or any claim,  litigation,  administrative  action or
similar Proceeding, pending or threatened, relating to the ownership, lease, use
or occupancy of the Real  Property or any portion  thereof,  or the operation of
the Water System as currently conducted thereon.

               (f) To the  Knowledge  of each of the  directors  and officers of
Seller, the Real Property is in material compliance with all Legal Requirements,
and all insurance  requirements affecting the Real Property  (collectively,  the
"Real  Property  Laws").  Seller has not received any notice of violation of any
Real  Property  Laws and, to the Knowledge of each of the directors and officers
of Seller,  there is no basis for the  issuance of any such notice or the taking
of any action for such violation.

               (g) Each parcel of Real  Property  has direct  access to a public
street  adjoining  the  Real  Property  or has  access  to a public  street  via
insurable easements benefiting such parcel of Real Property,  and such access is
not dependent on any land or other real  property  interest that is not included
in the  Real  Property.  None of the  Improvements  or any  portion  thereof  is
dependent for its access, use or operation on any land, building, improvement or
other real property interest that is not included in the Real Property.

                                       19
<PAGE>

               (h) All water,  oil,  gas,  electrical,  steam,  compressed  air,
telecommunications,  sewer,  storm and waste  water  systems  and other  utility
services  or  systems  for  the  Real  Property  have  been  installed  and  are
operational  and  sufficient  for the operation of the Water System as currently
conducted thereon.

               (i) Seller's use or occupancy of the Real Property or any portion
thereof and the operation of the Water System as currently  conducted are not to
the  Knowledge of each of the  directors  and officers of Seller  dependent on a
"permitted  non-conforming  use"  or  "permitted  non-conforming  structure"  or
similar variance, exemption or approval from any Governmental Authority.

               (j) To the  Knowledge  of each of the  directors  and officers of
Seller,  the  current  use and  occupancy  of the Owned  Real  Property  and the
operation of the Water System as currently conducted thereon does not violate in
any material respect any easement, covenant,  condition,  restriction or similar
provision in any instrument of record or other  unrecorded  agreement  affecting
such Owned Real Property.

          4.14 Intellectual Property.

               (a) To the  Knowledge  of each of the  directors  and officers of
Seller,  Seller has not interfered  with,  infringed upon,  misappropriated,  or
violated  any  material  Intellectual  Property  rights of third  parties in any
material respect, and Seller has not ever received any charge, complaint, claim,
demand,    or   notice   alleging   any   such    interference,    infringement,
misappropriation,  or violation (including any claim that Seller must license or
refrain from using any Intellectual  Property rights of any third party). To the
Knowledge of each of the  directors  and officers of Seller,  no third party has
interfered  with,  infringed  upon,  misappropriated,  or violated  any material
Intellectual Property rights of Seller in any material respect.

               (b) Schedule 4.14(b)  identifies each patent or registration that
has been  issued to Seller  with  respect to any of its  Intellectual  Property,
identifies each pending patent  application or application for registration that
Seller has made with respect to any of its Intellectual Property, and identifies
each material license, agreement, or other permission that Seller has granted to
any third party with respect to any of its Intellectual  Property (together with
any exceptions).

               (c)  Schedule   4.14(c)   identifies   each   material   item  of
Intellectual Property that any third party owns and that Seller uses pursuant to
license, sublicense, agreement, or permission. Seller has delivered to Purchaser
correct and complete copies of all such licenses,  sublicenses,  agreements, and
permissions, as amended to date.

          4.15 Tangible  Assets.  Except for (i) the Owned Real Property that is
set forth on Schedule  4.13(a),  (ii) the Leased Real Property that is set forth
on  Schedule  4.13(b),  and (iii) the  Inventory  set  forth on  Schedule  4.16,
Schedule  4.15  sets  forth  all of  Seller's  machinery,  equipment,  and other
tangible assets (the "Tangible Assets"). The Tangible Assets that Seller owns or

                                       20
<PAGE>

leases are free from material defects (patent and latent),  have been maintained
in accordance with normal industry practice, and are in good operating condition
and repair (subject to normal wear and tear).

          4.16  Inventory.  Schedule  4.16 sets forth all of Seller's  inventory
(the  "Inventory").  The Inventory of Seller  consists of untreated  water,  raw
materials,  supplies,  treated water,  manufactured parts, work in process,  and
finished goods,  all of which is merchantable  and fit for the purpose for which
it was procured.

          4.17 Material  Contracts.  Schedule 4.17 lists the following executory
Contracts to which Seller is a party (collectively, the "Material Contracts"):

               (a) any agreement (or group of related  agreements) for the lease
of  personal  property  to or from any Person  providing  for lease  payments in
excess of $12,000 per annum;

               (b) any  agreement  (or  group  of  related  agreements)  for the
purchase or sale of raw materials,  commodities,  supplies,  products,  or other
personal property, or for the furnishing or receipt of services, the performance
of which will extend over a period of more than 1 year or involve  consideration
in excess of $12,000;

               (c) any  agreement  concerning  any  joint  operating  agreement,
collaboration, partnership or joint venture;

               (d) any agreement (or group of related agreements) under which it
has created,  incurred,  assumed,  or guaranteed any  indebtedness  for borrowed
money, or any capitalized lease obligation,  in excess of $12,000 or under which
it has imposed a Lien on any of its assets, tangible or intangible;

               (e)  any  material   agreement   concerning   confidentiality  or
non-competition;

               (f) any collective bargaining agreement;

               (g) any  agreement  for the  employment  of any  individual  on a
full-time,  part-time,  consulting, or other basis providing annual compensation
in excess of $12,000 or providing material severance benefits;

               (h) any  agreement  under  which it has  advanced  or loaned  any
amount to any of its  directors,  officers,  and employees  outside the Ordinary
Course of Business;

               (i) any agreement  under which the  consequences  of a default or
termination could have a Material Adverse Effect;

               (j)  any  settlement,  conciliation  or  similar  agreement,  the
performance   of  which  will  involve   payment   after  the  Closing  Date  of
consideration in excess of $12,000;

               (k) any  agreement  under which Seller has advanced or loaned any
other Person amounts; or

                                       21
<PAGE>

               (l) any other  agreement  (or group of  related  agreements)  the
performance of which involves consideration in excess of $12,000.

          Seller has  delivered to Purchaser a correct and complete copy of each
written Contract listed on Schedule 4.17 and a written summary setting forth the
material  terms and  conditions  of each oral  Contract  referred to in Schedule
4.17.  With respect to each such  Contract:  (A) the agreement is legal,  valid,
binding, enforceable, and in full force and effect in all material respects; (B)
no party is in material  breach or default,  and no event has occurred that with
notice or lapse of time would constitute a material breach or default, or permit
termination,  modification,  or  acceleration,  under the agreement;  and (C) no
party has repudiated any material provision of the Contract.

          4.18 Notes and Accounts  Receivable.  Schedule  4.18 sets forth all of
the notes and accounts  receivable of Seller (the  "Accounts  Receivable").  All
Accounts Receivable of Seller are reflected properly on their books and records,
are valid receivables  subject to no setoffs or  counterclaims,  are current and
collectible,  and will be  collected  in  accordance  with their  terms at their
recorded  amounts,  subject  only to the  reserve for bad debts set forth on the
face of the Most Recent  Balance  Sheet  (rather  than in any notes  thereto) as
adjusted for operations and transactions  through the Closing Date in accordance
with the past custom and practice of Seller.

          4.19  Powers  of  Attorney;  Authorized  Signatories;  Bank  Accounts.
Schedule 4.19 lists:  (i) the names and addresses of all Persons  holding powers
of attorney on behalf of Seller;  and (ii) except for the Excluded Bank Account,
the  names of all  banks  and  other  financial  institutions  in  which  Seller
currently  has one or more bank accounts or safe deposit  boxes,  along with the
account numbers and the names of all persons authorized to draw on such accounts
or to have access to such safe deposit  boxes (the  "Acquired  Bank  Accounts").
Except as set forth on Schedule  4.19, to the Knowledge of each of the directors
and  officers of Seller,  there are no material  outstanding  powers of attorney
executed on behalf of Seller.

          4.20  Insurance.  Schedule 4.20 sets forth the  following  information
with respect to each insurance policy (including  policies  providing  property,
casualty,  Liability,  and  workers'  compensation  coverage and bond and surety
arrangements)  with  respect to which  Seller is a party,  a named  insured,  or
otherwise the beneficiary of coverage:

               (a) the name, address, and telephone number of the agent;

               (b) the name of the insurer,  the name of the  policyholder,  and
the name of each covered insured;

               (c) the policy number and the period of coverage;

               (d) the scope (including an indication of whether the coverage is
on  a  claims  made,  occurrence,  or  other  basis)  and  amount  (including  a
description  of how  deductibles  and  ceilings are  calculated  and operate) of
coverage; and

               (e) a description of any retroactive premium adjustments or other
material loss-sharing arrangements.

                                       22
<PAGE>
          With respect to each such insurance  policy:  (A) the policy is legal,
valid,  binding,  enforceable,  and in full  force and  effect  in all  material
respects;  (B) neither Seller nor any other party thereto is in material  breach
or default  (including  with respect to the payment of premiums or the giving of
notices),  and no event has  occurred  that,  with  notice or the lapse of time,
would  constitute  such a material  breach or  default,  or permit  termination,
modification, or acceleration,  under the policy; and (C) no party to the policy
has  repudiated  any material  provision  thereof.  Schedule 4.20  describes any
material self-insurance arrangements affecting Seller.

          4.21  Litigation.  Schedule  4.21 sets  forth each  instance  in which
Seller  (i) is subject  to any  outstanding  Order or (ii) is a party or, to the
Knowledge of any of the  directors  and officers of Seller,  is threatened to be
made a party to any Proceeding.

          4.22  Product & Service  Warranty.  Substantially  all of the products
processed, treated, manufactured,  sold, leased, and delivered by Seller and all
services  rendered by Seller have  conformed in all material  respects  with all
applicable contractual  commitments and all express and implied warranties,  and
Seller does not have any material Liability  (whether known or unknown,  whether
asserted or  unasserted,  whether  absolute or  contingent,  whether  accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become due)
for  replacement  or repair  thereof or other damages in  connection  therewith,
subject only to the reserve for product or service  warranty claims set forth on
the face of the Most Recent  Balance Sheet (rather than in any notes thereto) as
adjusted for operations and transactions  through the Closing Date in accordance
with the past custom and practice of Seller.  Substantially  all of the products
manufactured,  sold,  leased, and delivered by Seller, and all services rendered
by  Seller  are  subject  to  standard  terms and  conditions  of sale or lease.
Schedule 4.22 includes  copies of the standard  terms and  conditions of sale or
lease for  Seller  (containing  applicable  guaranty,  warranty,  and  indemnity
provisions).

          4.23 Product  Liability.  Seller does not have any material  Liability
(whether known or unknown,  whether asserted or unasserted,  whether absolute or
contingent,  whether accrued or unaccrued,  whether  liquidated or unliquidated,
and whether due or to become due)  arising out of any injury to  individuals  or
property  as a  result  of the  ownership,  possession,  or  use of any  product
manufactured, sold, processed, treated, leased, or delivered by Seller.

          4.24 Employees.

               (a) Except as set forth on Schedule 4.24(a),  with respect to the
Seller's Water System:

                  (i)   there  is  no   collective   bargaining   agreement   or
relationship with any labor organization;

                  (ii) no labor organization or group of employees has filed any
representation petition or made any written demand for recognition, and no union
organizing or  decertification  efforts are underway or have been  threatened in
writing,  and no labor strike, work stoppage,  slowdown,  or other labor dispute
has occurred or has been threatened in writing;

                                       23
<PAGE>
                  (iii) there are no pending worker's  compensation  claims that
could reasonably be expected to have a Material Adverse Effect on the Seller;

                  (iv)  there  is  no  employment-related   charge,   complaint,
grievance,  investigation,  inquiry or obligation of any kind, pending or to the
Knowledge  of any  director or officer of the Seller,  threatened  in any forum,
relating  to an alleged  violation  or breach by the  Seller (or its  directors,
officers or employees) of any employment related Legal Requirement.

                  (v)  Except as set  forth on  Schedule  4.24(b),  there are no
written  employment  Contracts or severance  Contracts with any employees of the
Seller.  Seller has provided Purchaser with a copy of each Contract set forth on
Schedule 4.24(b).

               (b) Schedule  4.24(c)  contains a true and  complete  list of the
names and titles of the Seller's current directors,  officers and employees and,
as  applicable,  each of  such  director's,  officer's  and  employee's  date of
retention/employment,  the total annual salary, wages, bonus, other compensation
and accrued  vacation  time and other  earned  time off as of the Closing  Date.
Except  as set  forth on  Schedule  4.24(c),  the  Seller  is not a party to any
written or oral employment  Contact with any of such individuals which precludes
their termination at will. Except as set forth on Schedule 4.24(c), no director,
officer  or  employee  of the  Seller  is now,  or will by the  passage  of time
hereafter  become,  entitled  to receive  any  vacation  time,  vacation  pay or
severance  pay  attributable  to services  rendered  prior to the Closing  Date.
Except as set forth on Schedule 4.24(c), no director, officer or employee of the
Seller has informed  the Seller in writing of his or her  intention to terminate
his or her employment as a result of or in connection  with the  consummation of
Contemplated Transactions.

               (c) Within the past three (3) years,  Seller has not  implemented
any plant  closing  or layoff of  employees  that  could  implicate  the  Worker
Adjustment and Retraining  Notification Act of 1988, as amended,  or any similar
foreign, state, or local law, regulation,  or ordinance, and no such action will
be implemented without advance notification to Purchaser.

          4.25 Employee Benefits.

               (a) Schedule  4.25 lists each  Employee  Benefit Plan that Seller
maintains or to which Seller  contributes  or has any  obligation to contribute.
With respect to each Employee Benefit Plan set forth on Schedule 4.25:

                  (i) Each such Employee  Benefit Plan (and each related  trust,
insurance  contract,  or fund) has been  maintained,  funded and administered in
accordance with the terms of such Employee Benefit Plan and complies in form and
in operation in all material respects with the applicable requirements of ERISA,
the Code, and other applicable laws.

                  (ii) The  requirements  of COBRA have been met in all material
respects  with  respect to each such  Employee  Benefit Plan that is an Employee
Welfare Benefit Plan subject to COBRA.

                                       24
<PAGE>
                  (iii) All contributions  (including all employer contributions
and employee salary reduction  contributions) that are due have been made within
the time periods  prescribed by ERISA and the Code to each such Employee Benefit
Plan that is an Employee  Pension  Benefit  Plan and all  contributions  for any
period  ending on or before the Closing Date that are not yet due have been made
to each such Employee  Pension  Benefit Plan or accrued in  accordance  with the
past custom and  practice of Seller.  All  premiums  or other  payments  for all
periods ending on or before the Closing Date have been paid with respect to each
such Employee Benefit Plan that is an Employee Welfare Benefit Plan.

                  (iv) Each such Employee  Benefit Plan that is intended to meet
the  requirements  of a "qualified  plan" under  Section  401(a) of the Code has
received a  determination  from the Internal  Revenue Service that such Employee
Benefit Plan is so  qualified,  and the officers and directors of the Seller are
not  aware  of any  facts or  circumstances  that  could  adversely  affect  the
qualified status of any such Employee Benefit Plan.

                  (v) There have been no Prohibited Transactions with respect to
any such  Employee  Benefit  Plan.  No fiduciary  has any Liability for material
breach of  fiduciary  duty or any  other  material  failure  to act or comply in
connection  with the  administration  or  investment  of the  assets of any such
Employee Benefit Plan. No Proceeding with respect to the  administration  or the
investment of the assets of any such  Employee  Benefit Plan (other than routine
claims for  benefits) is pending or, to the  Knowledge of each of the  directors
and officers of Seller, threatened.

                  (vi) Seller has  delivered to  Purchaser  correct and complete
copies of the plan  documents  and summary  plan  descriptions,  the most recent
determination letter received from the Internal Revenue Service, and all related
trust  agreements,  insurance  contracts,  and other funding  arrangements  that
implement each such Employee Benefit Plan.

               (b) With  respect  to each  Employee  Benefit  Plan  that  Seller
maintains, to which any of them contributes or has any obligation to contribute,
or with  respect to which any of them has any  material  Liability  or potential
Liability:

                  (i) No such Employee  Benefit Plan that is an Employee Pension
Benefit  Plan  (other  than  any  Multiemployer  Plan)  has been  completely  or
partially  terminated  or been the  subject  of a  Reportable  Event as to which
notices  would be required to be filed with the PBGC.  No Proceeding by the PBGC
to  terminate   any  such  Employee   Pension   Benefit  Plan  (other  than  any
Multiemployer  Plan) has been  instituted  or, to the  Knowledge  of each of the
directors and officers of Seller,  threatened.  The market value of assets under
each such Employee  Benefit Plan that is an Employee Pension Benefit Plan (other
than any  Multiemployer  Plan) equals or exceeds the present value of all vested
and  non-vested  Liabilities  thereunder  (determined  in  accordance  with then
current funding assumptions).

                                       25
<PAGE>
                  (ii) Seller has not  incurred  any  material  Liability to the
PBGC (other than with respect to PBGC premium payments not yet due) or under the
Code with respect to any such Employee  Benefit Plan that is an Employee Pension
Benefit Plan.

               (c)  Seller  does  not  contribute  to,  has  any  obligation  to
contribute to, or has any Liability  under or with respect to any  Multiemployer
Plan.

               (d) Seller does not maintain, contribute to or have an obligation
to contribute to, or have any Liability or potential  Liability with respect to,
any Employee  Welfare  Benefit Plan providing  health or life insurance or other
welfare-type  benefits for current or future retired or terminated employees (or
any spouse or other  dependent  thereof) of Seller other than in accordance with
COBRA.

          4.26  Guaranties.  Seller is not a surety,  guarantor  or otherwise is
responsible  for any Liability or  obligation  (including  indebtedness)  of any
other Person.

          4.27 Environmental, Health, and Safety Matters.

               (a) Except as set forth on Schedule 4.27(a),  Seller has complied
and is in compliance with all Environmental, Health, and Safety Requirements.

               (b) Except as set forth on Schedule 4.27(b), Seller has obtained,
has  complied,  and is in compliance  with,  in each case in all  respects,  all
permits,  licenses  and  other  authorizations  that are  required  pursuant  to
Environmental,  Health,  and  Safety  Requirements  for  the  occupation  of its
facilities  and the  operation  of the  Water  System;  and a list  of all  such
material  permits,  licenses and other  authorizations  is set forth on Schedule
4.27(b).

               (c) Seller has not received any written or oral notice, report or
other  information  regarding any actual or alleged  violation of Environmental,
Health,  and Safety  Requirements,  or any Liabilities or potential  Liabilities
(whether accrued, absolute,  contingent,  unliquidated or otherwise),  including
any investigatory,  remedial or corrective obligations,  relating to any of them
or  their   facilities   arising  under   Environmental,   Health,   and  Safety
Requirements.

               (d)  Except  as  set  forth  on  Schedule  4.27(d),  none  of the
following  exists at any property or facility  owned or operated by Seller:  (i)
underground storage tanks, (ii) asbestos-containing  material in any friable and
damaged  form  or   condition,   (iii)   materials   or   equipment   containing
polychlorinated biphenyls, or (iv) landfills, surface impoundments,  or disposal
areas.

               (e)  Except  as set forth on  Schedule  4.27(e),  Seller  has not
treated,  stored,  disposed  of,  arranged  for or  permitted  the  disposal of,
transported,  handled,  manufactured,  distributed,  or released any  substance,
including any hazardous substance, or owned or operated any property or facility
(and no such property or facility is  contaminated  by any such substance) so as
to give  rise to any  current  or future  material  Liabilities,  including  any
material  Liability for fines,  penalties,  response  costs,  corrective  action
costs, personal injury, property damage, natural resources damages or attorneys'
fees, pursuant to any Environmental, Health, and Safety Requirements.

                                       26
<PAGE>
               (f)  Except  as set  forth  on  Schedule  4.27(f),  neither  this
Agreement nor the consummation of the Contemplated  Transactions  will result in
any obligations for site investigation or cleanup, or notification to or consent
of  government  agencies  or third  parties,  pursuant  to any of the  so-called
"transaction-triggered"   or  "responsible  property  transfer"   Environmental,
Health, and Safety Requirements.

               (g)  Seller  has  not  designed,  manufactured,  sold,  marketed,
installed,  or distributed products or other items containing asbestos, and none
of such entities are or will become subject to any Asbestos Liabilities.

               (h) Seller has furnished to Purchaser all  environmental  audits,
reports, and other material environmental  documents and correspondence from any
Governmental  Authority  relating to  Seller's or any of Seller's  predecessor's
past or  current  properties,  facilities,  or  operations  which  are in  their
possession or under their reasonable control and any such environmental  audits,
reports, and other material  environmental  documents and correspondence that it
has  conducted,  prepared  or received  during the last two (2) years.  Schedule
4.27(h) lists each of the  environmental  audits,  reports,  and other  material
environmental documents that have been delivered to Purchaser.

          4.28 Intentionally Omitted.

          4.29 Customers and Suppliers.

               (a) Schedule 4.29 lists the twenty-five (25) largest customers of
Seller  (on a  consolidated  basis) for each of the two (2) most  recent  fiscal
years and sets forth  opposite the name of each such customer the  percentage of
consolidated net sales attributable to such customer.

               (b) Since  the Most  Recent  Fiscal  Year End and the date of the
Most Recent  Balance  Sheet,  no supplier of Seller has indicated  that it shall
stop,  or decrease  the rate of,  supplying  materials,  products or services to
Seller,  and no customer  listed on Schedule  4.29 has  indicated  that it shall
stop,  or decrease  the rate of,  buying  materials,  products or services  from
Seller.

          4.30  Solvency.  Seller is not now insolvent and is able to pay all of
its  Liabilities in the Ordinary  Course of Business.  Immediately  after giving
effect to the consummation of the Contemplated Transactions, Seller will be able
to pay all of its  Liabilities  as they  become  due in the  Ordinary  Course of
Business.

          4.31 Disclosure.  The representations and warranties contained in this
Article IV do not contain any untrue or  materially  misleading  statement  of a
fact  or omit to  state  any  material  fact  necessary  in  order  to make  the
statements  and  information   contained  in  this  Article  IV  not  materially
misleading.

                                       27
<PAGE>
                                   ARTICLE V
                   PURCHASER'S REPRESENTATIONS AND WARRANTIES.

          Purchaser  represents  and  warrants  to the Seller as  follows  (such
representations and warranties being deemed to be made as of the date hereof and
on a continuous basis until the Closing Date).

          5.1  Organization  of  Purchaser.  Purchaser  is  a  corporation  duly
organized,  validly  existing,  and in  good  standing  under  the  laws  of the
jurisdiction of its formation.

          5.2  Authorization  of  Transaction.  Purchaser  has  full  power  and
authority  to execute  and deliver the  Transaction  Documents  to which it is a
party  and to  perform  all  of  the  obligations  thereunder.  The  Transaction
Documents  constitute  the valid and legally  binding  obligation  of Purchaser,
enforceable in accordance  with their terms and conditions  except as limited by
applicable  bankruptcy,  insolvency,  moratorium,   reorganization,   fraudulent
conveyance and similar laws affecting  creditors' rights generally and except to
the extent that general  equitable  principles  may affect the  availability  of
certain remedies. The execution,  delivery and performance of this Agreement and
all other Transaction  Documents to which it is a party contemplated hereby have
been duly authorized by Party.

          5.3 Required Regulatory Approvals and Filings; Consents. Except as set
forth on Schedule 5.3 (the "Purchaser's  Required Consents"),  no approval of or
filing  with any  Governmental  Authority  or any  other  Person  on the part of
Purchaser is required in connection with the execution, delivery and performance
of this Agreement and the other Transaction Documents or the consummation of the
Contemplated Transactions.

          5.4  Non-contravention.  Except as set forth on Schedule 5.4,  neither
the execution and delivery of this Agreement by Purchaser, the other Transaction
Documents  to which  it is a  party,  nor the  Contemplated  Transactions,  will
violate any Legal  Requirement to which Purchaser is subject or any provision of
its Organizational Documents.

          5.5 Brokers' Fees. Purchaser has no Liability or obligation to pay any
fees or commissions to any broker,  finder, or similar agent with respect to the
Contemplated  Transactions  for which Seller could become liable or obligated to
pay or discharge.

          5.6 Disclosure.  The representations and warranties  contained in this
Article V do not contain any untrue or materially misleading statement of a fact
or omit to state any material fact necessary in order to make the statements and
information contained in this Article V not materially misleading.

                                   ARTICLE VI
                             PRE-CLOSING COVENANTS.

          The Parties  agree as follows with  respect to the period  between the
execution of this Agreement and the Closing:

          6.1 General. Each of the Parties will use its commercially  reasonable
efforts to take all actions and to do all things necessary, proper, or advisable

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<PAGE>
in  order  to  consummate  and  make  effective  the  Contemplated  Transactions
(including satisfaction,  but not waiver, of the Closing conditions set forth in
Article VI below).

          6.2 Regulatory Matters and Approvals.

               (a) As promptly as practicable  after the date of this Agreement,
each of the Parties  will give any notices  to, make any filings  with,  and use
commercially reasonable efforts to obtain the Material Contract Consents,  Lease
Consents,  Seller's Required Consents,  Purchaser's  Required Consents,  and any
other  authorizations,  consents,  and approvals of governments and governmental
agencies in connection with the matters referred to in Article IV and Article V.

               (b) Promptly after Seller obtains the Requisite  Member  Consent,
Purchaser  shall  file the STMP with the TCEQ.  Seller  covenants  and agrees to
fully  cooperate and assist  Purchaser in connection  with the submission of the
STMP and any other filing requirements or Proceedings  related thereto.  Subject
to the  Seller  Transaction  Fees  Limit,  Purchaser  covenants  and  agrees  to
reimburse  Seller for all  professional  legal  services  required  by Seller to
assist  Purchaser  with its STMP  application  with the TCEQ in accordance  with
Section  8.1(j)  and  Section  11.6.  Purchaser  acknowledges  that said  Seller
Transactions Fees will include fees professional  services to include but not be
limited to accounting, legal, financial and engineering services.

          6.3  Requisite  Member  Consent.  Seller  will  use  its  commercially
reasonable  efforts to obtain the Requisite Member Consent of this Agreement and
the Contemplated  Transactions in accordance with the TNPCA,  Water Code and any
other Legal  Requirements.  Seller will call a special meeting of its Members as
soon as reasonably  practicable  in order that the Members may consider and vote
upon this Agreement and the  Contemplated  Transactions  in accordance  with the
TNPCA,  Water Code and any other Legal  Requirements.  Seller  will  prepare and
distribute to each Member a disclosure  statement and proxy solicitation as soon
as reasonably practicable.

          6.4  Operation  of  Business.  Except as  necessary to comply with the
terms of this  Agreement,  Seller  will not  engage  in any  practice,  take any
action,  or enter into any transaction  outside the Ordinary Course of Business.
Without limiting the generality of the foregoing, Seller will not: (i) engage in
any  practice  or take any action  that  would  cause or result in, or permit by
inaction,  any of the representations and warranties  contained in Article IV to
become untrue, (ii) engage in any practice,  take any action or otherwise act in
any manner that may result in a Material  Adverse  Effect on Seller,  Purchaser,
the Acquired Assets, the Assumed  Liabilities or the Contemplated  Transactions,
or (iii) otherwise  engage in any practice,  take any action,  or enter into any
transaction  of the  sort  described  in  Section  4.9  or  that  would  require
disclosure on Schedule 4.9.

          6.5 Preservation of Business.

               (a) Seller shall carry on its business in the Ordinary  Course of
Business and shall use its  commercially  reasonable  efforts to preserve intact
the  Water  System,  the  Acquired  Assets,  its  present  operations,  physical

                                       29
<PAGE>
facilities, working conditions,  insurance policies, business organization, keep
and endeavor to preserve its relationships with customers,  lessors,  landlords,
partners,  suppliers and others having business dealings with it to the end that
its goodwill and ongoing  business shall not be impaired in any material respect
at the Closing.

               (b) Seller shall use its commercially  reasonable efforts to keep
available the services of its current employees;  provided, however, that Seller
shall not hire any  additional  employees  other than  employees  who are deemed
reasonably  necessary  or who are  hired to  replace  existing  employees  whose
employment  ceases on terms not greater than those applicable to those employees
being replaced.

          6.6 Full  Access.  Seller will  permit  representatives  of  Purchaser
(including  legal counsel and accountants) to have full access at all reasonable
times,  and  in a  manner  so as not  to  interfere  with  the  normal  business
operations of Seller, to all premises,  properties,  personnel,  books,  records
(including Tax records), Contracts, and documents of or pertaining to Seller.

          6.7 Notice of Developments.

               (a) In the spirit of cooperation, and in order to facilitate full
disclosure  of matters,  actions or omissions  related to or involving the Water
System,  each Party  hereto  agrees to  promptly  notify the other  Party of any
potential  or  proposed  action,  transaction  or  Contract  (and the  terms and
conditions  thereof) prior to the execution or  consummation  thereof  involving
such Party that may, in the exercise of reasonable  judgment,  affect the rights
or  obligations  of the  other  Party  after  consummation  of the  Contemplated
Transactions.

               (b) Each Party will give prompt written notice to the other Party
of any adverse  development  causing a breach of any of its own  representations
and  warranties in Article IV and Article V. No disclosure by any Party pursuant
to this  Section  6.7,  however,  shall be  deemed to amend or  supplement  such
Party's disclosure Schedules or to prevent or cure any misrepresentation, breach
of warranty, or breach of covenant.

          6.8 Exclusivity.  Seller will not (i) solicit,  initiate, or encourage
the  submission  of any  proposal  or offer  from  any  Person  relating  to the
acquisition  of all or  substantial  portion  of the  assets  of  Seller or (ii)
participate  in  any   discussions  or  negotiations   regarding,   furnish  any
information  with respect to,  assist or  participate  in, or  facilitate in any
other  manner  any  effort  or  attempt  by any  Person to do or seek any of the
foregoing.  Seller will also promptly  communicate to Purchaser the terms of any
such inquiry or proposal  concerning the  acquisition of the assets or the Water
System that Seller may receive  and, if such  inquiry or proposal is in writing,
Seller will promptly deliver a copy of such inquiry or proposal to Purchaser.

          6.9  Maintenance  of Real  Property.  Seller  shall  maintain the Real
Property, including all of the Improvements, in substantially the same condition
as existed on the date of this Agreement,  ordinary wear and tear excepted,  and
shall not  demolish  or remove any of the  existing  Improvements,  or erect new
improvements  on the Real  Property  or any portion  thereof,  without the prior
written consent of Purchaser.

          6.10  Leases.  Seller  shall  not  amend,  modify,  extend,  renew  or
terminate  any Lease,  nor shall  Seller  enter  into any new  lease,  sublease,

                                       30
<PAGE>
license  or  other  agreement  for the use or  occupancy  of any  Real  Property
requiring  payments  in excess of $10,000  annually  as  averaged  over the term
thereof, without the prior written consent of Purchaser.

          6.11 Title  Insurance  and Surveys.  Seller shall assist  Purchaser in
obtaining at Purchaser's cost all real property  surveys,  title commitments and
title policies in such form and substance reasonably  acceptable to Purchaser in
its sole and absolute discretion. Purchaser acknowledging and accepting full and
total  responsibility  for all financial costs  associated with said surveys and
title  policies  and  further  agrees to be directly  liable to the  provider or
providers  of said  surveys  and title  policies.  Seller  agrees to deliver any
existing survey for Owned Real Property and Material Leased Real Property within
its possession.

          6.12 Lease  Consents.  Seller  shall use its  commercially  reasonable
efforts to obtain a written  consent for the assignment of each of the Leases in
form and substance reasonably satisfactory to Purchaser (the "Lease Consents").

          6.13 Debt Pay-off Letters.  No later than five (5) business days prior
to the  Closing  Date,  Seller  shall  cause the  lenders  of Third  Party  Debt
requiring that Seller's  indebtedness be fully paid and discharged at Closing to
prepare and deliver to Purchaser the Debt Pay-Off Letters.

          6.14 Expense  Pay-off  Letters.  No later than five (5) business  days
prior to the Closing Date,  Seller shall cause each Person to whom Seller is, or
will be, obligated to pay any Seller Transaction Fees, to prepare and deliver to
Purchaser an Expense Pay-Off Letter.

          6.15  Seller's  Bank  Accounts.  Except with  respect to the  Excluded
Account,  Seller shall take all actions necessary to remove existing signatories
of the Seller on each of the Acquired  Bank  Accounts as of the Closing Date and
to replace such signatories,  effective as of the Closing Date, with individuals
to be designated by Purchaser at least five (5) days prior to the Closing Date.

          6.16 Purchaser Employment Offers. No later than five (5) business days
prior to the Closing  Date,  Purchaser  covenants and agrees that it shall offer
employment to then current employees of the Seller on such terms and conditions,
seniority,  and with such benefits  (including  accrued vacation and sick leave)
that are no less  favorable than in effect  immediately  prior to the Closing as
determined in the sole and absolute discretion of the Purchaser.

          6.17  Employee  Benefit  Matters.   Purchaser  will  use  commercially
reasonable  efforts to adopt and assume or at Purchaser's  election establish at
and as of the Closing each of the Employee  Benefit Plans that Seller  maintains
and  each  trust,  insurance  contract,   annuity  contract,  or  other  funding
arrangement  that  Seller has  established  with  respect  thereto to the extent
reasonably  practicable.  In the event Purchaser elects to establish an Employee
Benefit Plan in lieu of adopting or assuming any of Seller's  existing  Employee
Benefit Plans,  Purchaser will use commercially  reasonable  efforts to adopt or
otherwise  establish  Employee  Benefit Plans that treat  employment with Seller

                                       31
<PAGE>
prior to the Closing Date  reasonably the same as employment with Purchaser from
and after the Closing Date to the extent reasonably  practicable for purposes of
eligibility and vesting, but not benefit accrual. Seller will transfer (or cause
the plan administrators to transfer,  if necessary) at and as of the Closing all
of the  corresponding  assets  associated  with the Employee  Benefit Plans that
Purchaser is adopting and assuming. With respect to each Multiemployer Plan, the
Parties  shall take all actions  necessary  to comply with the  requirements  of
ERISA ss.4204.

          6.18 Change of Name. On or before the Closing Date, Seller shall amend
its Organizational Documents and take all such other actions necessary to change
its name to one sufficiently dissimilar to Seller's present name, in Purchaser's
reasonable judgment, to avoid confusion.

          6.19 Delivery of Updated Financial  Statements.  Prior to the Closing,
Seller  covenants  and  agrees  to  promptly  deliver  the  following  financial
statements:  (i) audited balance sheets and statements of income,  and cash flow
as of and for each of the fiscal  years  ended  after the date hereof for Seller
within ninety (90) days of such year end (the  "Post-Signing  Fiscal Year End");
and (ii) unaudited balance sheets and statements of income,  and cash flow as of
and for each monthly period (on an aggregate basis) after the Most Recent Fiscal
Year End or  Post-Signing  Fiscal Year End, as the case may be,  within  fifteen
(15)  days of the end of such  monthly  period  for the  Seller.  The  financial
statements to be delivered  pursuant to this Section 6.19  (including  the notes
thereto)  shall (i) be prepared in  accordance  with GAAP  consistently  applied
throughout the periods covered  thereby,  (ii) present  accurately the financial
condition of Seller as of such dates and the results of operations of Seller for
such  periods,  (iii) be  correct  and  complete  in all  respects,  and (iv) be
prepared  consistent  with the books and  records  of  Seller  (which  books and
records are correct and complete in all respects).

          6.20  Transaction  Materials.  Seller  covenants  and agrees  that any
disclosure  statement,  proxy solicitation  submitted to its Members pursuant to
Section 6.3 or other  documents  submitted  by  Purchaser to any other Person in
connection  with  the  Contemplated  Transactions  (collectively,   the  "Seller
Transaction  Materials")  will not contain any untrue statement of material fact
or omit to state a material fact necessary in order to make the statements  made
therein, in light of the statements made therein, not misleading.  Purchaser and
Seller  each  acknowledge  agree that  Purchaser  has not assumed and shall have
absolutely  no  Liability of any kind  whatsoever,  including  any  Liability to
Seller or any other Person,  arising from or relating to the Seller  Transaction
Materials.

          6.21 Notice of Additional Indebtedness; Alternative Interim Financing.
Seller  agrees  that it will  provide  Purchaser  with notice of any draw by the
Seller of any of the proceeds derived from the TWDB Bond Debt or any increase in
its indebtedness after the date hereof, prior to each such occurrence. Purchaser
acknowledging  and agreeing that Seller's right to draw down additional funds at
any time,  from the  Construction  Fund of its Series 2005 Taxable Revenue Bonds
may be exercised by Seller in its sole and absolute discretion. In the spirit of
cooperation  Purchaser  and  Seller  each  agree to  negotiate  in good faith to
establish an Alternative Interim Financing Agreement to permit Seller to perform
or complete any system renovation,  upgrade,  expansion or acquisition necessary
to comply with any existing Contracts or applicable Legal  Requirements  without
utilizing  proceeds from the TWDB Bond Debt,  including any monies  deposited in
the Construction Fund.

                                       32
<PAGE>
                                  ARTICLE VII
                       CONDITIONS TO OBLIGATION TO CLOSE.

          7.1 Conditions to Purchaser's Obligation.  The obligation of Purchaser
to consummate  the  transactions  to be performed by it in  connection  with the
Closing is subject to satisfaction of the following conditions:

               (a)  in  compliance  with  Section  13.301  of  the  Water  Code,
Purchaser  shall have obtained the TCEQ Approval  without the  imposition of any
restrictions,  conditions, or obligations which are deemed to be unacceptable to
Purchaser in its sole and absolute discretion, and Purchaser shall have received
all other necessary authorizations,  consents, and approvals of any Governmental
Authorities in order to consummate the Contemplated Transactions;

               (b) the  representations  and  warranties set forth in Article IV
shall be true and  correct in all  material  respects  at and as of the  Closing
Date,  except  to the  extent  that  such  representations  and  warranties  are
qualified by the term  "material,"  or contain  terms such as "Material  Adverse
Effect" or "Material  Adverse  Change," in which case such  representations  and
warranties (as so written, including the term "material" or "Material") shall be
true and correct in all respects at and as of the Closing Date;

               (c) Seller  shall have  performed  and  complied  with all of its
covenants hereunder in all material respects through the Closing,  except to the
extent that such  covenants  are  qualified by the term  "material,"  or contain
terms such as "Material  Adverse Effect" or "Material  Adverse Change," in which
case Seller shall have  performed and complied with all of such covenants (as so
written,  including the term  "material" or "Material") in all respects  through
the Closing;

               (d) no  Proceeding  shall  be  pending  before  any  Governmental
Authority wherein an unfavorable Order would (i) prevent  consummation of any of
the Contemplated  Transactions,  (ii) cause any of the Contemplated Transactions
to be rescinded  following  consummation,  (iii)  adversely  affect the right of
Purchaser  to own the  Acquired  Assets,  to operate the Water  System,  or (iv)
materially and adversely affect the right of any Purchaser to own its assets and
to operate its business (and no such Order shall be in effect);

               (e) the water rate changes for Seller's customers  resulting from
the TWDB Bond Debt shall have been implemented;

               (f) there shall have been no Material Adverse Change with respect
to the  Seller  or the  Water  System  as  determined  in the sole and  absolute
discretion of the Purchaser and no damage or  destruction  or other change shall
have occurred with respect to any of the Acquired  Assets or any portion thereof
that,  individually or in the aggregate,  would materially impair the use or the
operation of any of this Acquired Assets by Purchaser;

               (g)  Purchaser  shall be  satisfied  with the  results of its due
diligence  investigation  of each of the Acquired  Assets,  Seller and the Water
System in all respects in its sole and absolute discretion;

                                       33
<PAGE>
               (h)  all  actions  to be  taken  by  Seller  in  connection  with
consummation of the Contemplated  Transactions and all  certificates,  opinions,
instruments,   and  other   documents   required  to  effect  the   Contemplated
Transactions will be reasonably satisfactory in form and substance to Purchaser;

               (i) Purchaser shall have obtained  Purchaser's  Required Consents
(all of which shall be in full force and effect as of the Closing);

               (j) Seller shall have obtained Seller's Required Consents (all of
which shall be in full force and effect as of the  Closing),  including  (i) the
Requisite  Member  Consent,  (ii) the Material  Contract  Consents,  (iii) Lease
Consents,  (iv) the GBRA's  consent and  assignment of the right to purchase raw
water and other rights of Seller under Seller's  Contract with the GBRA, and (v)
BexarMet's  consent to the sale or  assignment of Contracts  between  Seller and
BexarMet to Purchaser;

               (k) Seller shall have provided  Purchaser  with evidence that the
lawful  rates and fees  defined  by the Water  Code which may be charged to each
customer  of the Water  System as of the  Closing  Date are at least the amounts
shown on Schedule 7.1(k);

               (l) Seller and the Purchaser shall each be in compliance with all
material  regulatory  requirements  of all applicable  Governmental  Authorities
necessary to consummate the Contemplated  Transactions (all of which shall be in
full force and effect as of the Closing);

               (m) all waiting  periods in respect of approvals or consents from
Governmental Authorities shall have expired or been terminated;

               (n)  Seller  shall have  amended  its  Organizational  Documents,
including its articles of incorporation and bylaws, to the extent required to be
in compliance with all applicable Legal Requirements (including requirements and
conditions for qualification as an organization  described in Section 501(c)(12)
of the Code and operation  thereof on a cooperative basis under the Code) and to
comply and fully perform all of the terms and conditions of this Agreement;

               (o)  Purchaser  shall have  received  on the  Closing  Date title
policies (from a title company reasonably  acceptable to Purchaser) covering the
Real Property in such form and substance  reasonably  acceptable to Purchaser in
sole and absolute discretion;

               (p)  Purchaser   shall  have  received  Lease  Consents  for  the
assignment of each of the Leases to Purchaser;

               (q)  Purchaser   shall  have  received   executed   copies  of  a
non-competition,  non-solicitation  and  non-disparagement  agreement  from  the
directors,  officers or key  employees of Seller  requested by Purchaser in such
form satisfactory to Purchaser;

               (r)  Seller  shall  have  amended  its  vacation  and sick  leave
policies (and any other  Contracts or other  agreements  containing  any similar
obligation  of  Seller to  provide  similar  benefits)  to  provide  that all of
Seller's  obligations  thereunder  may be  assumable by Purchaser at Closing and
will not otherwise dischargeable by Seller;

                                       34
<PAGE>
               (s)  Purchaser  shall  have  received  all of  the  certificates,
instruments and documents set forth in Section 8.1; and

               (t) Seller shall have delivered to Purchaser a certificate to the
effect  that  each  of the  conditions  specified  in  Section  7.1(a)  - (t) is
satisfied in all respects.

          Purchaser may waive any condition  specified in this Section 7.1 if it
executes a writing so stating at or prior to the Closing.

          7.2  Conditions to Seller's  Obligation.  The  obligation of Seller to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:

               (a) the  representations  and  warranties set forth in Article IV
shall be true and  correct in all  material  respects  at and as of the  Closing
Date,  except  to the  extent  that  such  representations  and  warranties  are
qualified by the term  "material,"  or contain  terms such as "Material  Adverse
Effect" or "Material  Adverse  Change," in which case such  representations  and
warranties (as so written, including the term "material" or "Material") shall be
true and correct in all respects at and as of the Closing Date;

               (b) Purchaser  shall have  performed and complied with all of its
covenants hereunder in all material respects through the Closing,  except to the
extent that such  covenants  are  qualified by the term  "material,"  or contain
terms such as "Material  Adverse Effect" or "Material  Adverse Change," in which
case Purchaser  shall have performed and complied with all of such covenants (as
so written, including the term "material" or "Material") in all respects through
the Closing;

               (c) no  Proceeding  shall  be  pending  before  any  Governmental
Authority wherein an unfavorable Order would (i) prevent  consummation of any of
the Contemplated Transactions or (ii) cause any of the Contemplated Transactions
to be rescinded following consummation (and no such Order shall be in effect);

               (d) Purchaser shall have obtained  Purchaser's  Required Consents
(all of which shall be in full force and effect as of the Closing);

               (e) Seller shall have obtained Seller's Required Consents (all of
which shall be in full force and effect as of the Closing);

               (f) Seller  shall have  received  all  necessary  authorizations,
consents,  and approvals of any Governmental  Authorities in order to consummate
the Contemplated Transactions (all of which shall be in full force and effect as
of the Closing);

               (g) Seller and the Purchaser shall each be in compliance with all
material  regulatory  requirements  of all applicable  Governmental  Authorities
necessary to consummate the Contemplated Transactions;

               (h) all waiting  periods in respect of approvals or consents from
Governmental Authorities shall have expired or been terminated;

                                       35
<PAGE>
               (i)  Purchaser  shall have fully  paid and  discharged  the Third
Party Debt that is being  required to be fully paid and discharged at Closing by
the lenders thereunder in accordance with Debt Pay-Off Letters.

               (j)  Purchaser  shall have fully paid and  discharged  all Seller
Transaction Fees as said fees are defined in Article I to the extent such Seller
Transaction  Fees have not already been discharged by Seller pursuant to Section
6.4(v) up to the  Seller  Transaction  Fees  Limit in  accordance  with  Expense
Pay-Off Letters where applicable.

               (k)  Seller  shall  have   received  all  of  the   certificates,
instruments and documents set forth in Section 8.2; and

               (l) Purchaser shall have delivered to Seller a certificate to the
effect  that  each  of the  conditions  specified  in  Section  7.2(a)  - (l) is
satisfied in all respects;

          Seller may waive any  condition  specified  in this  Section 7.2 if it
executes a writing so stating at or prior to the Closing.

                                  ARTICLE VIII
                               CLOSING DELIVERIES.

          8.1 Items to be  Delivered by the Seller.  At the Closing,  the Seller
shall deliver or cause to be delivered to Purchaser the following:

               (a) a  certificate  duly  executed by the Secretary of the Seller
certifying  (i) the  resolutions  of the Board of  Directors  and Members of the
Seller approving this Agreement and authorizing the  Contemplated  Transactions,
(ii) the incumbency of the executive  officers of Seller;  (iii) the articles of
incorporation of the Seller,  as amended;  and (iv) the bylaws of the Seller, as
amended;

               (b) Seller's Required Consents, if any;

               (c) the Material Contract Consents, if any;

               (d) the Lease Consents, if any;

               (e) duly executed bills of sale,  certificates of title, and such
other certificates and assignments executed by Seller for the Acquired Assets as
appropriate  depending the particular  Purchased Asset involved in such form and
substance reasonably satisfactory to Purchaser;

               (f) a  general  warranty  deed  executed  by the  Seller  for the
benefit of the Purchaser for each of the Owned Real Property;

               (g) a  non-foreign  affidavit  executed  by  Seller  in form  and
substance  satisfactory  to Purchaser  and the title  company  issuing the title
policies to Purchaser;

                                       36
<PAGE>
               (h) an opinion  of  counsel  to the Seller in form and  substance
satisfactory  to  Purchaser  covering  the  opinions  described  on Exhibit "A",
addressed to Purchaser, and dated as of the Closing Date; and

               (i)  such  other  documents,   instruments  and  certificates  as
Purchaser may reasonably request to consummate the Contemplated Transactions.

          8.2 Items to be Delivered  by  Purchaser.  At the  Closing,  Purchaser
shall deliver:

               (a) the Cash Consideration;

               (b)  certificate  duly executed by the Secretary of the Purchaser
certifying  (i) the  resolutions  of the  Board of  Directors  of the  Purchaser
approving this Agreement and authorizing the Contemplated Transactions, (ii) the
incumbency  of the  executive  officers  of  Purchaser;  (iii) the  articles  of
incorporation  of  the  Purchaser,  as  amended;  and  (iv)  the  bylaws  of the
Purchaser, as amended;

               (c) Purchaser's Required Consents, if any;

               (d) such other documents, instruments and certificates the Seller
may reasonably request to consummate the Contemplated Transactions.

                                   ARTICLE IX
                                  TERMINATION.

          9.1 Termination of Agreement. The Parties may terminate this Agreement
as provided below or as specifically set forth elsewhere in this Agreement:

               (a) Purchaser and Seller may terminate  this  Agreement by mutual
written consent at any time prior to the Closing;

               (b)  Purchaser  may terminate  this  Agreement by giving  written
notice to the Seller and  discharging  (or  reimbursing  Seller  for) all of the
Seller  Transaction  Fees up to the  Seller  Transaction  Fees Limit at any time
prior  to  the   Closing  (i)  in  the  event  the  Seller  has   breached   any
representation, warranty, or covenant contained in this Agreement, Purchaser has
notified the Seller of the breach, and the breach has continued without cure for
a period of ten (10) days after the notice of breach, (ii) if there has been any
Material  Adverse  Change  in  the  Assumed  Liabilities  (including  the  total
indebtedness of Seller),  Acquired  Assets,  Seller or the cost to discharge the
indebtedness  of  Seller,  (iii)  upon the  initiation  of any  Proceeding  (not
contemplated  herein) the outcome of which could have an Material Adverse Effect
on Purchaser,  Seller or the Contemplated Transactions,  or the rendering of any
Orders,  damages,  dues, penalties,  fines on Seller,  Purchaser or any of their
Affiliates in  connection  with or arising from the  Contemplated  Transactions,
(iv) if Purchaser shall not be satisfied with its due diligence investigation of
the  Acquired  Assets  or  Seller,  (v)  if  any  consent  or  approval  of  any
Governmental Authority or Person providing a Seller Required Consent has imposed
any restrictions, conditions, or obligations which are deemed to be unacceptable
to  Purchaser,  (vi)  Seller  breaches,  defaults or suffers an event of default

                                       37
<PAGE>
under any Alternative Interim Financing Agreement,  if any, (vii) if the Closing
shall not have  occurred on or before  October 1, 2007, by reason of the failure
of any  condition  precedent  under  Section 7.1  (unless  the  failure  results
primarily from Purchaser  breaching any  representation,  warranty,  or covenant
contained in this Agreement);

               (c) Seller may terminate  this Agreement by giving written notice
to the Purchaser at any time prior to the Closing (i) in the event the Purchaser
has  breached  any  representation,  warranty,  or  covenant  contained  in this
Agreement,  Seller has notified the Purchaser of the breach,  and the breach has
continued without cure for a period of ten (10) days after the notice of breach,
(ii) if there has been a Material  Adverse Change in the  Purchaser,  (iii) upon
the initiation of any Proceeding (not contemplated  herein) the outcome of which
could have a Material  Adverse Effect on Purchaser,  Seller or the  Contemplated
Transactions, or the rendering of any Orders, damages, dues, penalties, fines on
Seller,  Purchaser or any of their Affiliates in connection with or arising from
the  Contemplated  Transactions,   (iv)  if  any  consent  or  approval  of  any
Governmental   Authority  or  any  other  Person  necessary  to  consummate  the
Contemplated  Transactions is withheld or delayed or such Governmental Authority
or Person granting a Purchaser  Required  Consent has imposed any  restrictions,
conditions,  or obligations  which are deemed to be unacceptable to Seller,  (v)
Purchaser breaches any Alternative Interim Financing Agreement, if any, and (vi)
if the Closing shall not have  occurred on or before  October 1, 2007, by reason
of the failure of any condition  precedent under Section 7.2 (unless the failure
results  primarily  from  Seller  breaching  any  representation,  warranty,  or
covenant contained in this Agreement).

          9.2  Effect  of  Termination.  In the event of a  termination  of this
Agreement by a Party hereto in  accordance  with Section 9.1,  there shall be no
Liability on the part of any Party  hereto,  except for  Liability of such Party
arising  out  of  an  intentional  breach  of  this  Agreement  by  such  Party.
Notwithstanding  the  termination of this  Agreement in accordance  with Section
9.1, the  provisions  set forth in Article XI and this Section 9.2 shall survive
the termination of this Agreement.

                                   ARTICLE X
                    POST-CLOSING COVENANTS & OTHER AGREEMENTS

          10.1  Survival  of  Representations   and  Warranties.   None  of  the
representations  and warranties  and covenants of the Parties  contained in this
Agreement  shall  survive the Closing  except for  representations  set forth in
Section 4.12(a),  Section 4.30 and the covenants set forth in Section 6.20, this
Article X and Article XI.

                                       38
<PAGE>
          10.2 Press Releases and Public Announcements. No Party shall issue any
press  release or make any public  announcement  or  statement  relating  to the
subject matter of this Agreement  prior to the Closing without the prior written
approval  of the other  Party;  provided,  however,  that any Party may make any
public disclosure it believes in good faith after consultation with counsel that
it or its  Affiliates  is  required to make under any Legal  Requirement  or any
listing or trading agreement concerning its publicly traded securities (in which
case the  disclosing  Party will use its best  efforts to advise the other Party
prior to making  the  disclosure).  The  Parties  shall  instruct  each of their
directors,  officers,  or employees to comply with the  provisions  set forth in
this Section 10.2. Each Party hereto  acknowledges and agrees that they shall be
responsible  for any  violation of this  Section  10.2 by any of its  directors,
officers, or employees.

          10.3 Liquidation and Dissolution of Seller.

               (a) If after the Closing Date,  Seller shall dissolve and wind up
its affairs,  such  dissolution and winding-up  shall be conducted in accordance
with and subject to the  Organizational  Documents of Seller,  the TNPCA,  Water
Code and all other applicable Legal Requirements.

               (b)  Notwithstanding  anything in this Agreement to the contrary,
Purchaser and Seller each acknowledge agree that Purchaser shall have absolutely
no Liability of any kind whatsoever,  including any Liability to Seller,  any of
Seller's  Members or any other Person,  arising from or relating any dissolution
and winding up of Seller and  distribution  of assets by Seller to any Member or
other Person after the Closing.  Seller hereby holds Purchaser harmless from any
Liability  whatsoever  arising  directly or indirectly from any of the foregoing
acts.

          10.4 Rate Moratorium. Subject to water rate adjustments which shall be
permitted  to directly  offset  increases  in the cost of raw water  acquired by
Purchaser,  or other  rate  adjustments  permitted  or  required  by  applicable
Governmental  Authorities or Legal Requirements,  Purchaser covenants and agrees
that it shall not  increase  the water rates set forth on Schedule  7.1(k) for a
period  of two (2) years  from the date that the  Requisite  Member  Consent  is
obtained. Thereafter,  Purchaser may increase the water rates only in accordance
with applicable Legal Requirements.

          10.5 Reimbursable Seller Income Tax; Tax Refunds.

               (a)  Following  the  Closing and as part of the  Purchase  Price,
Purchaser agrees to make an additional cash payment to Seller in an amount equal
to Seller's  Reimbursable  Seller Income Tax, if any. Except with respect to the
Reimbursable  Seller Income Tax, Seller  acknowledges  and agrees that Purchaser
shall have  absolutely no Liability with respect to any other Taxes of Seller or
its  Members  arising  from or  relating  to the  Contemplated  Transactions  or
otherwise,  including  the  performance  by Seller of any of its  covenants  and
agreements  contained  herein.  Because of Purchaser's  potential  obligation to
Seller with respect to any Reimbursable  Seller Income Tax, Purchaser shall have
the right to prepare  on  Seller's  behalf any Income Tax Return of Seller  that
reflects or could reflect the amount of any Reimbursable  Seller Income Tax, and
it shall be an express and material condition to Purchaser's  obligation to make
a  payment  to  Seller  under  this  Section  10.5(a)  that  Seller  permit  the

                                       39
<PAGE>
preparation  of any such Tax Return by Purchaser and assist and fully  cooperate
with Purchaser in the preparation  thereof and the obtaining of any extension of
the due date  therefor.  Purchaser  shall  deliver a draft of such Tax Return to
Seller for Seller's review at least thirty (30) days prior to the due date (with
regard to extensions) of such Tax Return,  together with appropriate  supporting
information  used in  preparing  the  return  that is not  already  in  Seller's
possession.   Notwithstanding  anything  in  this  Agreement  to  the  contrary,
Purchaser may make, adopt or change any Tax election or Tax accounting method in
connection with the preparation of any such Tax Return and Seller will cooperate
and timely file any  recommended  filings  with any  Governmental  Authority  in
connection therewith.  Seller shall timely file (with regard to extensions) such
Tax Return as  prepared  by Seller,  unless at least seven (7) days prior to the
due date (with regard to extensions) of such return,  Seller shall have obtained
the written  opinion of  competent  tax counsel  acceptable  to Purchaser to the
effect that there is no "substantial  authority,"  within the meaning of Section
1.6662-4(d)  of the Treasury  Regulations  promulgated  under the Code,  for any
position  taken by Purchaser on the return and  delivered  such opinion and such
counsel's  written  recommendation  for  altering  such  position to the minimum
extent  necessary  for  counsel  to opine  that the  position  is  supported  by
substantial  authority.  Purchaser  shall  then have the option  exercisable  by
written  notice to Seller  given  before  such due date to either  (i)  instruct
Seller to file such return with the  modifications  recommended by such counsel,
or (ii) to  instruct  Seller to file the return as prepared  by  Purchaser,  and
Seller shall timely file the return as so instructed.  If Purchaser  chooses the
latter option, Purchaser's obligation to Seller with respect to any Reimbursable
Seller  Income Tax shall be  increased  to include all  additional  Income Taxes
incurred  by Seller as a result of any  subsequent  administrative  or  judicial
Proceedings  related to the return that have  become  final,  together  with all
reasonable  costs  and  expenses  incurred  by Seller  in  connection  with such
Proceedings.

               (b) Any Tax refunds that are received by Seller after the Closing
shall be  immediately  delivered to Purchaser to the extent that  Purchaser  has
paid,  discharged  or assumed  any Tax  obligations  of Seller  pursuant to this
Section 10.5 or otherwise. Upon the request of Purchaser, Seller shall cooperate
in the filing of any request for a refund of any Tax  obligations of Seller that
Purchaser  has paid,  discharged  or assumed  pursuant to this  Section  10.5 or
otherwise.

          10.6 Tax Returns.

               (a) Subject to Section 10.5(a), Seller shall correctly and timely
(with regard to extensions)  file all Tax Returns  required to be filed, and pay
all Taxes required to be paid, by it on or before and after the Closing Date. On
or before and after the Closing Date,  except with the prior written  consent of
Purchaser,  Seller  shall not (i) make,  adopt or change any Tax election or Tax
accounting  method that could have an adverse effect on Purchaser,  the Purchase
Price or the  Contemplated  Transactions,  or (ii) consent to, or enter into any
closing or  settlement  agreement  with  respect to,  Taxes or any  asserted Tax
deficiency,  claim or assessment that could have an adverse effect on Purchaser,
the Purchase Price or the Contemplated Transactions.  All such Tax Returns shall
be prepared  and filed in a manner  consistent  with prior  practice,  except as
required by any change in applicable Legal Requirements relating to Taxes.

               (b)  Purchaser  and  Seller  shall  cooperate  with each other in
connection with any Proceeding  related to Taxes,  the preparation and filing of
any Tax Return,  or any other matter relating to Taxes requested by Purchaser or

                                       40
<PAGE>
Seller.  Such  cooperation  shall  include the  retention  and the  provision of
records and information  that are reasonably  relevant to any such Proceeding or
Tax Return filing and making employees  available on a mutually convenient basis
to provide  additional  information  and  explanation  of any material  provided
hereunder. Seller agrees (i) to abide by all record retention agreements entered
into  with any Tax  Authority,  and (ii) to give  Purchaser  reasonable  written
notice prior to  transferring,  destroying or  discarding  any books and records
relating to Taxes and the opportunity to copy and take possession of same.

          10.7 Litigation and Other Proceedings.

               (a) Seller  acknowledges  and agrees  that prior to the  Closing,
Purchaser  shall  have  the  right to  participate  in any  Proceeding  or other
presentation or meeting  (related to Taxes or otherwise)  with any  Governmental
Authority  or third party the  outcome of which could have an adverse  effect on
the Seller,  Purchaser,  the Purchase Price,  the Acquired  Assets,  the Assumed
Liabilities or the Contemplated Transactions.

               (b) Seller acknowledges and agrees that after Closing,  Purchaser
shall have the right to  participate  and at its election  assume control of and
appoint lead counsel at its sole cost and expense,  in any  Proceeding  or other
presentation or meeting  (related to Taxes or otherwise)  with any  Governmental
Authority  or third party the  outcome of which could have an adverse  effect on
the Purchaser,  the Purchase Price, the Acquired Assets, the Assumed Liabilities
or any of  Purchaser's  obligations  arising  (or  which  may  arise)  from  the
Contemplated Transactions.

               (c) Seller  covenants and agrees to immediately  notify Purchaser
of any Proceeding,  presentation or meeting which Purchaser would have the right
to participate or control under this Section 10.7.

          10.8 Certain Payroll Reporting Obligations.  With respect to employees
of Seller  who after the  Closing  become  employees  of  Purchaser,  Seller and
Purchaser agree to adopt and apply the rules and procedures set forth in Section
5 of Rev.  Proc.  2004-53,  2004-34  I.R.B.  320 (August 18,  2004)  relating to
alternate  procedures to be applied by  predecessors  and successors in business
acquisitions  in determining  their  employment tax reporting  obligations  with
respect to such employees for the calendar year in which the acquisition occurs.
Seller and Purchaser  will fully  cooperate  with each other in connection  with
providing and making available  relevant  records and other  information that is
necessary or appropriate for each party to comply with such procedures.

          10.9  Further  Assurances.  In case at any time after the Closing Date
any  further  actions  are  necessary  to carry out the  purposes  of any of the
Contemplated  Transactions,  each of the Parties will take such further  actions
(including the execution and delivery of such further instruments and documents)
as any other Party may reasonably  request,  all at the sole cost and expense of
the requesting Party.

                                       41
<PAGE>
                                   ARTICLE XI
                                 MISCELLANEOUS.

          11.1 Notices.  All notices given with respect to this Agreement  shall
be in writing and shall be deemed to have been properly  given or served for all
purposes  (i) if sent by a  nationally  recognized  overnight  carrier  for next
business  day  delivery,  on the first  business day  following  deposit of such
notice with such carrier, or (ii) if personally delivered, on the actual date of
delivery,  or (iii) if sent by certified  U.S. Mail,  return  receipt  requested
postage  prepaid,  on the fifth  business day following the date of mailing,  or
(iv) if sent by facsimile,  then on the actual date of delivery (as evidenced by
a facsimile confirmation) provided that a copy of the facsimile and confirmation
is also sent by regular U.S. Mail, addressed as follows:

             If to Seller:     Canyon Lake Water Supply Corporation
                               1399 Sattler Road
                               Canyon Lake, Texas 78133
                               Facsimile: (830) 964-2779
                               Attention: Larry L. Ratliff
                                          President

    with a mandatory copy to:  John O. Houchins, Esq.
                               13738 Kingsride Lane
                               Houston, Texas  77079
                               Facsimile: (713) 461-8711

             If to Purchaser:  SJWTX Water, Inc.
                               374 W. Santa Clara Street
                               San Jose, CA  95113
                               Facsimile: (408) 279-7934
                               Attention: W. Richard Roth
                                          President and Chief Executive Officer

    with a mandatory copy to:  SJWTX Water, Inc.
                               374 W. Santa Clara Street
                               San Jose, CA  95113
                               Facsimile: (408) 279-7934
                               Attention: Suzy Papazian
                                          Corporate Secretary

                 and           Jackson Walker L.L.P.
                               112 E. Pecan Street, Suite 2100
                               San Antonio, Texas 78205
                               Facsimile: (210) 978-7790
                               Attention:  Marshall B. Miller, Jr.

          11.2 No Third-party Beneficiaries. This Agreement shall not confer any
rights or remedies  upon any Person other than the Parties and their  respective
successors and permitted assigns.

                                       42
<PAGE>
          11.3 Succession and  Assignment.  This Agreement shall be binding upon
and inure to the  benefit  of the  Parties  named  herein  and their  respective
successors and permitted  assigns.  No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the other  Parties  hereto  provided  that  Purchaser may assign its
rights, duties and obligations hereunder to an Affiliate.

          11.4  Amendments  and Waivers.  No amendment of any  provision of this
Agreement  shall be valid  unless the same shall be in writing and signed by all
of the Parties hereto. No waiver by any Party of any provision of this Agreement
or any default, misrepresentation,  or breach of warranty or covenant hereunder,
whether  intentional  or not, shall be valid unless the same shall be in writing
and signed by the Party  making  such  waiver nor shall such waiver be deemed to
extend  to any  prior or  subsequent  default,  misrepresentation,  or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any  prior or  subsequent  such  default,  misrepresentation,  or  breach  of
warranty or covenant.

          11.5  Severability.  If any provision of this  Agreement is held to be
illegal,  invalid or unenforceable  under present or future laws, such provision
shall be fully  severable and this Agreement  shall be construed and enforced as
if such  illegal,  invalid or  unenforceable  provision  never  comprised a part
hereof;  and the  remaining  provisions  hereof  shall  remain in full force and
effect  and shall not be  affected  by the  illegal,  invalid  or  unenforceable
provision or by its severance  herefrom.  Furthermore,  in lieu of such illegal,
invalid or unenforceable  provision,  there shall be added automatically as part
of this  Agreement a provision as similar in its terms to such illegal,  invalid
or  unenforceable  provision  as  may  be  possible  and  be  legal,  valid  and
enforceable.

          11.6  Expenses.  Except  as  otherwise  expressly  set  forth  in this
Agreement, Purchaser, Seller and each Affiliate thereof shall bear its own costs
and expenses  (including outside legal fees and expenses) incurred in connection
with this  Agreement  and the  Contemplated  Transactions.  The  Parties  hereto
acknowledge  and agree that Purchaser shall have no duty or obligation to pay or
otherwise  discharge  any  Seller  Transaction  Fees  in  excess  of the  Seller
Transaction Fees Limit.

          11.7  Construction.  The  Parties  have  participated  jointly  in the
negotiation  and  drafting  of this  Agreement.  In the  event an  ambiguity  or
question of intent or interpretation  arises,  this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise  favoring or  disfavoring  any Party by virtue of the authorship of any of
the provisions of this Agreement.  The Parties intend that each  representation,
warranty, and covenant contained herein shall have independent significance.

          11.8  Remedies.  In the  event of any Party  breaches  any of terms or
provisions of this Agreement,  the non-breaching Party shall be entitled,  if it
so elects,  to institute  and  prosecute  Proceedings  in any court of competent
jurisdiction in accordance with Section 11.9 and Section 11.10, either in law or
in equity, to obtain a preliminary or permanent  injunction (without posting any
bond) in order to prevent  activities  in  violation  of this  Agreement  and to
obtain  specific  performance  and/or  money  damages  for  any  breach  of this
Agreement,  but nothing  herein  contained  shall be  construed  to prevent such
remedy  or  combination  of  remedies  as the  non-breaching  Party may elect to
invoke.

                                       43
<PAGE>
          11.9 Governing Law; Choice of Forum. This Agreement shall be construed
in  accordance  with and  governed  by the  internal  law of the  State of Texas
(without  reference  to its rules and to  conflict of laws).  Each Party  hereby
irrevocably  waives any right that such Party  otherwise  might have to transfer
such  Proceeding (or any claims within such  Proceeding) to any court other than
the court selected by the Parties in accordance with Section 11.10.  The Parties
hereby consent to and grant to any such court  jurisdiction  over the persons of
such  Parties  and over the  subject  matter of any such  dispute and agree that
delivery  or mailing  of any  process  or other  papers in the  manner  provided
herein,  or in such other manner as may be permitted by law,  shall be valid and
sufficient service thereof.

          11.10 Consent to Jurisdiction; Venue.

               (a)  The  Parties   hereto  submit  to  the  exclusive   personal
jurisdiction  of the courts of the State of Texas and the Federal  courts of the
United States sitting in Bexar County,  Texas,  and any appellate court from any
such state or Federal court, and hereby  irrevocably and  unconditionally  agree
that all claims and Proceedings arising out of or relating to this Agreement may
be heard and determined in such Texas court or, to the extent  permitted by law,
in such  Federal  court.  The Parties  hereto  agree that a final  nonappealable
judgment in any such claim or Proceeding shall be conclusive and may be enforced
in any  other  jurisdiction  by  suit on the  judgment  or in any  other  manner
provided by law.

               (b) Each of the Parties hereto  irrevocably  and  unconditionally
waives,  to the  fullest  extent  it may  legally  and  effectively  do so,  any
objection  which  it may now or  hereafter  have to the  laying  of venue of any
Proceeding arising out of or relating to this Agreement or any related matter in
any  Texas  state  or  Federal  court  located  therein  and the  defense  of an
inconvenient forum to the maintenance of such claim in any such court.

          11.11 Consultation With Independent Counsel. Purchaser and Seller each
acknowledges  that this Agreement  contains legally binding  provisions and that
the other Party  hereto has not  provided  any legal advice to it or engaged any
counsel  to provide  legal  services  for its  benefit  in  connection  with the
negotiation  and execution of this Agreement or the  Contemplated  Transactions.
Purchaser and Seller each  represents to the other Party that it has  consulted,
or has had an  opportunity to consult,  with its own counsel in negotiating  and
executing this  Agreement and that it has either  consulted with its own counsel
or consciously decided not to consult with its own counsel.

          11.12  Incorporation  of Exhibits  and  Schedules.  The  Exhibits  and
Schedules referred to or identified in this Agreement are incorporated herein by
reference and made a part hereof.

          11.13 Entire  Agreement.  This  Agreement  (including the Schedules of
even date herewith and the other documents  referred to herein)  constitutes the
entire  agreement  between the Parties and supersedes any prior  understandings,
agreements,  or representations  by or between the Parties,  written or oral, to
the extent they relate in any way to the subject matter hereof.

                                       44
<PAGE>
          11.14  Effective  Date  of  Agreement.  It  is  expressly  agreed  and
understood  by the  Parties  hereto  that the  effective  date as opposed to the
execution date of this agreement shall be and same is made expressly  subject to
the date on which the Seller has received  both:  (a) written  approval from the
Texas Water  Development  Board,  setting forth the terms and  conditions  under
which the Seller may  discharge  the TWDB bond debt by a (i)  defeasance or (ii)
the acquisition of the Texas Water Development Board bond debt by the Purchaser,
and (b)  approval  from  the  TWDB to amend  Seller's  organizational  documents
(including  but not limited to Articles of  Incorporation  and By-Laws) that are
required to consummate the transactions contemplated in this agreement.

          11.15  Counterparts.  This  Agreement  may  be  executed  in  multiple
counterparts,  each of  which  shall  be  deemed  an  original  and all of which
together shall  constitute  one and the same  instrument.  Facsimile  signatures
shall be given the same effect as original signatures.

                                       45
<PAGE>
          IN WITNESS WHEREOF,  the undersigned have executed this Asset Purchase
Agreement as of the date first written above.

                                   PURCHASER:

                                   SJWTX WATER, INC.

                                   By: /s/  W. Richard Roth
                                      ------------------------------------------

                                   Printed Name: W. Richard Roth
                                                 -------------------------------
                                   Title: President and Chief Executive Officer
                                         ---------------------------------------

ATTEST:
Secretary
By: /s/  Suzy Papazian
   -----------------------------------------
Printed Name: Suzy Papazian
             -------------------------------

                                   SELLER:

                                   CANYON LAKE WATER SUPPLY COMPANY

                                   By: /s/ Larry L. Ratliff
                                      ------------------------------------------

                                   Printed Name: Larry L. Ratliff
                                                 -------------------------------
                                   Title: President
                                         ---------------------------------------

ATTEST:
Secretary
By: /s/ W.K. Holmes
   -----------------------------------------
Printed Name: W.K. Holmes
             -------------------------------

                                       46

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