GENERALTable ANDof ADMINISTRATIVE EXPENSES Contents

13 Table of Contents

15 Table of Contents

BasedTable on the foregoing decisions, the Company’s ability to generate material revenue in the future is dependent on (i) its ability to sell some or all of its remaining California assets and (ii) its ability to develop and market its Cherry Creek Project, through the sale of Water Delivery Contract Units, the sale of the entire Project, or the creation of a joint venture to develop the Project to a higher long-term value. There can be no assurance that the Company will be able to sell assets on favorable terms or at all or to make other arrangements to maximize the value of the Cherry Creek Project. In addition, despite recent progress in permitting and completing infrastructure necessary to make water deliveries from the Cherry Creek Project to Colorado customers, before the Company can consummate significant water deliveries from the Project, the Company or its prospective customers or a prospective joint venture partner will have to build additional infrastructure. The need for such additional infrastructure will affect the ability of the Company to sell water from the Cherry Creek Project and the prices at which it will be able make such sales. Contents

18 Table of Contents

32.1 andTable 32.2 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Contents

~~UNITED~~SECURITIES ~~STATESSECURITIES~~ AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2003~~2004

Commission file number 0-18756

WESTERN WATER COMPANY

(Exact name of registrant as specified in its charter)


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

102 Washington Avenue, Point Richmond, CA		94801
(Address of principal executive offices)		(Zip code)

102 Washington Avenue, Point Richmond, CA 94801
(Address of principal executive offices) (Zip code)

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

Securities registered pursuant to Section 12(b) of the Act:	Title of each class	Name of each exchange on which registered
		Name of each exchange
	Title of each class	on which registered
Securities registered pursuant to Section 12(b) of the Act:
	None	None
Securities registered pursuant to Section 12(g) of the Act:	Common Stock, $.001 par value
	Right to Purchase Series E Junior Participating
	Preferred Stock, $.001 par value

Securities registered pursuant to Section 12(g) of the Act:		Common Stock, $.001 par value
		Right to Purchase Series E Junior Participating
		Preferred Stock, $.001 par value

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

YES x þ NO o

~~Indicate~~As byof ~~check~~December 16, ~~mark~~2004, ~~whether~~there ~~the~~were ~~registrant~~8,069,012 isshares anof ~~accelerated~~registrant’s ~~filer~~common ~~(as defined~~stock ~~in Rule 12 b-2 of the Act)~~outstanding.

~~YES~~Indicate oby NOcheck xmark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).

AsYES ofo NO ~~November 10, 2003, there were 8,069,012 shares of registrant’s common~~þ ~~stock outstanding.~~

~~TABLE~~WESTERN OFWATER ~~CONTENTS~~COMPANY AND SUBSIDIARIES INDEX PART I — FINANCIAL INFORMATION

PART I — FINANCIAL INFORMATION
Item				Page
	Item 1. Financial Statements
	1		Financial statements:
		Consolidated Balance Sheets — September 30 and March 31, 2003
			Condensed consolidated balance sheets — September 30 (unaudited) and March 31, 2004		3
		Consolidated Statements of Operations Three and six months ended September 30, 2003 and 2002
			Condensed consolidated statements of operations — Three and six months ended September 30, 2004 and 2003 (unaudited)		4
		Consolidated Statements of Cash Flows Six months ended September 30, 2003 and 2002
			Condensed consolidated statements of cash flows- Six months ended September 30, 2004 and 2003 (unaudited)		5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
			Notes to condensed consolidated financial statements (unaudited)		6
	Item 3. Quantitative and Qualitative Market Risk Disclosures
	2		Management’s discussion and analysis of financial condition and results of operations		12
	Item 4. Controls and Procedures
	3		Quantitative and qualitative disclosures about market risk		28
	4		Controls & procedures		29
PART II — OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	5		Other information		29
	Item 5. Other Matters
	6		Exhibits		29
	Item 6. Exhibits and Reports on Form 8-K
			Signature		30
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

WESTERN WATER COMPANY AND SUBSIDIARIES INDEX

PART I — FINANCIAL INFORMATION

Item			Page
1	Financial statements — unaudited:
		Consolidated balance sheets - September 30 and March 31, 2003	3
		Consolidated statements of operations - Three and six months ended September 30, 2003 and 2002	4
		Consolidated statements of cash flows - Six months ended September 30, 2003 and 2002	5
		Notes to consolidated financial statements	6
2	Management’s discussion and analysis of financial condition and results of operations		10
3	Quantitative and qualitative market risk disclosures		17
4	Controls & procedures		18
	PART II — OTHER INFORMATION
4	Submission of Matters to a Vote of Security Holders		19
5	Other Information		19
6	Exhibits and Reports on Form 8-K		19
	SIGNATURES		20

Item 1. Financial Statements

WESTERN WATER COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

September 30 and March 31, ~~2003 (Unaudited)~~ 2004

				2003
		2004
		September 30,		~~September 30,~~		March 31,		~~March 31,~~
Assets
		(unaudited)
Current assets:
Assets
	Cash and cash equivalents			$	209,539			$	1,144,292
Current assets:
	Accounts receivable				435,560				20,335
Cash and cash equivalents			1,043,694				1,416,645
	Current portion of notes receivable				8,076				6,491
Accounts receivable			18,357				50,369
	Assets held for sale				553,005				1,196,937
Current portion of notes receivable			110,268				9,434
	Other current assets				149,162				51,044
Assets held for sale			557,150				1,623,851
		Total Current Assets			1,355,342				2,419,099
Other current assets			112,456				77,191
Notes receivable, less current portion					156,430				160,319
Total Current Assets			1,841,925				3,177,490
Land					4,366,896				4,367,932
Notes receivable, less current portion			243,537				152,889
Water rights					11,604,193				11,605,014
Land			1,503,517				1,503,517
Prepaid leasing costs, net of accumulated amortization					—				474,104
Water rights			11,044,737				11,045,848
Other water assets			658,686		~~658,686~~		661,261		~~656,755~~
Deferred debt costs, net of accumulated amortization			40,563		~~88,774~~		64,668		~~112,879~~
Property and equipment, net of accumulated depreciation			227,013		~~276,074~~		254,645		~~93,767~~
Other assets					—				24,328
		$	15,559,978			$	16,860,318
				$	18,506,395			$	19,914,197
Liabilities and Stockholders’ Deficit
Liabilities and Stockholders’ Equity
Current liabilities:
Current liabilities:
Accounts payable and accrued liabilities			287,964				242,857
	Accounts payable			$	452,914			$	352,522
Deferred revenue on water contract			824,120				824,120
	Accrued expenses and other liabilities				164,665				82,228
Total Current Liabilities			1,112,084				1,066,977
	Deferred revenue on water contract				824,120				824,120
Deferred gain on sale of asset			130,985				—
	Current maturities of long-term debt				28,186				25,858
Long-term debt, less current maturities			867,443				558,857
		Total Current Liabilities			1,469,885				1,284,728
9% Convertible subordinated debentures			8,317,778				8,317,778
Long-term debt, less current maturities					100,711				128,897
Total Liabilities			10,428,289				9,943,612
9% Convertible subordinated debentures					8,317,778				8,317,778
Series C convertible redeemable preferred stock, $1,000 stated value, 100,000 shares authorized; 7,708 shares issued and outstanding (aggregate liquidation preference of $7,708,000) at September 30 and March 31, 2004			7,596,075				7,581,810
		Total Liabilities			9,888,374				9,731,403
Series F convertible redeemable preferred stock, $1,000 stated value, 6,000 shares authorized; 2,459.749 and 2,388.105 shares issued and outstanding (aggregate liquidation preference of $2,459,749 and $2,388,105), respectively, at September 30 and March 31, 2004			844,027				751,913
Series C convertible redeemable preferred stock, $1,000 stated value, 100,000 shares authorized; 7,708 shares issued and outstanding (aggregate liquidation preference of $7,708,000) at September 30 and March 31, 2003					7,546,444				7,532,179
Stockholders’ deficit:
Series F convertible redeemable preferred stock, $1,000 stated value, 6,000 shares authorized; 2,318.549 and 2,251.018 shares issued and outstanding (aggregate liquidation preference of $2,319,000 and $2,251,000) at September 30 and March 31, 2003, respectively					669,468				595,000
Common stock, $0.001 par value, 20,000,000 shares authorized; 8,410,212 shares issued at September 30 and March 31, 2004			8,410				8,410
Stockholders’ equity:
Additional paid-in capital			24,487,116				24,487,116
	Common stock, $0.001 par value, 20,000,000 shares authorized; 8,410,212 shares issued at September 30 and March 31, 2003				8,410				8,410
Accumulated deficit			(26,429,069	)			(24,537,673	)
	Additional paid-in capital				24,487,116				24,487,116
Treasury stock, at cost, 341,200 shares at September 30, and March 31, 2004			(1,374,870	)			(1,374,870	)
	Accumulated deficit (accumulated since October 1, 1994)				(22,718,547	)			(21,065,041	)
Total Stockholders’ Deficit			(3,308,413	)			(1,417,017	)
	Treasury stock, at cost, 341,200 shares at September 30, and March 31, 2003				(1,374,870	)			(1,374,870	)
		$	15,559,978			$	16,860,318
		Total Stockholders’ Equity			402,109				2,055,615
				$	18,506,395			$	19,914,197

See accompanying notes to condensed consolidated financial statements.

WESTERN WATER COMPANY AND SUBSIDIARIES

~~Consolidated~~Condensed Consolidated Statements of Operations

Three and six months ended September 30, ~~2003~~2004 and ~~2002 (Unaudited)~~ 2003

			Three Months Ended September 30,						Six Months Ended September 30,
			2003			2002			2003			2002
Revenue			$	367,183		$	472,852		$	802,966		$	892,943
Cost of revenue				234,730			339,855			468,734			571,922
		Gross Profit		132,453			132,997			334,232			321,021
General and administrative expenses				849,914			621,020			1,600,607			1,349,374
		Operating Income (Loss)		(717,461	)		(488,023	)		(1,266,375	)		(1,028,353	)
Other Income (Expenses):
	Interest income			3,621			67,202			6,788			79,506
	Interest expense			(189,375	)		(208,846	)		(379,384	)		(453,431	)
	Gain on disposition of assets			405,866			10,583			478,915			10,583
	Other, net			(28,857	)		(63,160	)		(120,488	)		(93,465	)
				191,255			(194,221	)		(14,169	)		(456,807	)
Income (Loss) before Income Taxes				(526,206	)		(682,244	)		(1,280,544	)		(1,485,160	)
Income Taxes (Note 4)				—			—			(4,800	)		(3,200	)
		Net Income (Loss)		(526,206	)		(682,244	)		(1,285,344	)		(1,488,360	)
Accretion of preferred stock to redemption value				(39,607	)		(31,490	)		(76,443	)		(61,859	)
Preferred stock dividends				(12,291	)		(291,071	)		(291,719	)		(291,071	)
		Net Income (Loss) Applicable to Common Stockholders	$	(578,104	)	$	(1,004,805	)	$	(1,653,506	)	$	(1,841,290	)
Basic and diluted net income (loss) per share applicable to common stockholders			$	(0.07	)	$	(0.12	)	$	(0.20	)	$	(0.23	)

(Unaudited)

See accompanying notes to consolidated financial statements.


	Three Months Ended September 30,						Six Months Ended September 30,
	2004			2003			2004			2003
Revenue	$	31,652		$	367,183		$	92,282		$	802,966
Cost of revenue		3,763			234,730			11,560			468,734

Gross Profit		27,889			132,453			80,722			334,232
General and administrative expenses		(678,832	)		(849,914	)		(1,273,367	)		(1,600,607	)
Gain on sale of assets		14,346			405,866			102,625			478,915

Operating Loss		(636,597	)		(311,595	)		(1,090,020	)		(787,460	)

Other Income (Expenses):
Interest income		7,393			3,621			12,736			6,788
Interest expense		(203,010	)		(189,375	)		(422,246	)		(379,384	)
Other, net		(13,700	)		(28,857	)		(2,870	)		(120,488	)

		(209,317	)		(214,611	)		(412,380	)		(493,084	)

Loss before Income Taxes		(845,914	)		(526,206	)		(1,502,400	)		(1,280,544	)
Provision for Income Taxes		—			—			3,200			4,800

Net Loss		(845,914	)		(526,206	)		(1,505,600	)		(1,285,344	)
Accretion of preferred stock to redemption value		(48,087	)		(39,607	)		(93,342	)		(76,443	)
Preferred stock dividends		(292,454	)		(12,291	)		(292,454	)		(291,719	)

Net Loss Applicable to Common Stockholders	$	(1,186,455	)	$	(578,104	)	$	(1,891,396	)	$	(1,653,506	)

Basic and diluted net loss per share applicable to common stockholders	$	(0.15	)	$	(0.07	)	$	(0.23	)	$	(0.20	)

See accompanying notes to condensed consolidated financial statements.

WESTERN WATER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows ~~Six months ended September 30, 2003 and 2002 (Unaudited)~~

					2003			2002
Cash Flows from Operating Activities:
	Net loss				$	(1,285,344	)	$	(1,488,360	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation, depletion and amortization				517,798			525,836
		Gain on disposition of property				(478,915	)		(10,583	)
		Compensation income on vested compensatory stock options				—			(154,261	)
		Loss on write-off of property and equipment				—			14,580
		Changes in assets and liabilities:
			(Increase) decrease in:
				Accounts receivable		(9,359	)		(1,265	)
				Assets held for sale		—			(1,931	)
				Other current assets		(98,118	)		(35,376	)
				Other assets and other water assets		24,328			68,907
			Increase (decrease) in:
				Accounts payable		100,392			16,693
				Accrued expenses and other liabilities		82,437			(144,958	)
			Net cash used in operating activities			(1,146,781	)		(1,210,718	)
Cash Flows from Investing Activities:
	Principal payments received on notes receivable					2,304			24,018
	Prepayment of leasing costs					(296	)		(215,190	)
	Additions to land and improvements					(2,875	)		—
	Proceeds from disposition of assets, net of selling costs					716,981			176,731
	Purchase of property and equipment					(196,869	)		(67,867	)
	Additions to water rights					(1,931	)		(1,755	)
			Net cash provided by (used in) investing activities			517,314			(84,063	)
Cash Flows from Financing Activities:
	Preferred stock dividends					(279,428	)		(279,486	)
	Principal payments on long-term debt					(25,858	)		(420,520	)
			Net cash used in financing activities			(305,286	)		(700,006	)
Net decrease in cash and cash equivalents						(934,753	)		(1,994,787	)
Cash and cash equivalents, beginning of period						1,144,292			3,320,917
Cash and cash equivalents, end of period					$	209,539		$	1,326,130

Six months ended September 30, 2004 and 2003

~~See accompanying notes to consolidated financial statements.~~ (Unaudited)


	2004			2003
Cash Flows from Operating Activities:
Net loss	$	(1,505,600	)	$	(1,285,344	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization		52,846			517,798
Gain on sale of assets		(102,625	)		(478,915	)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable		32,012			(9,359	)
Other current assets		(35,265	)		(98,118	)
Other assets and other water assets		2,575			24,328
Increase in liabilities:
Accounts payable and accrued liabilities		43,737			182,829
Interest accrued on long-term debt		30,540			—

Net cash used in operating activities		(1,481,780	)		(1,146,781	)

Cash Flows from Investing Activities:
Principal payments received on notes receivable		258,518			2,304
Proceeds from sale of assets, net of selling costs		850,311			716,981
Prepayment of leasing costs		—			(296	)
Purchase of property and equipment		—			(196,869	)
Additions to land and improvements		—			(2,875	)
Additions to water rights		—			(1,931	)

Net cash provided by investing activities		1,108,829			517,314

Cash Flows from Financing Activities:
Preferred stock dividends		(279,415	)		(279,428	)
Proceeds from loan by stockholders of Series C Preferred Stock		279,415			—
Principal payments on long-term debt		—			(25,858	)

Net cash used in financing activities		—			(305,286	)

Net decrease in cash and cash equivalents		(372,951	)		(934,753	)
Cash and cash equivalents, beginning of period		1,416,645			1,144,292

Cash and cash equivalents, end of period	$	1,043,694		$	209,539

See accompanying notes to condensed consolidated financial statements.

WESTERN WATER COMPANY AND SUBSIDIARIES ~~Notes to Consolidated Financial Statements~~ ~~September 30, 2003~~ ~~(Unaudited)~~

Notes to Condensed Consolidated Financial Statements
September 30, 2004
(Unaudited)

Note 1. Summary of Significant Accounting Policies and Practices:

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) relating to interim financial statements. These statements reflect all adjustments, consisting only of normal, recurring adjustments necessary to present fairly the condensed consolidated balance sheets of Western Water Company and subsidiaries (the “Company”) as of September 30, and March 31, ~~2003~~2004, and the condensed consolidated statements of operations for the three and six ~~month~~months ~~periods~~ ended September 30, ~~2003~~2004 and ~~2002~~2003, and ~~the~~condensed consolidated statements of cash flows for the six months ended September 30, ~~2003~~2004, and ~~2002~~2003. The results of the three- and six~~-month~~ ~~periods~~months ended September 30, ~~2003~~2004 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements of Western Water Company include Western Water Service Company, Cherry Creek Water Company and YG Procyon Corporation, the Company’s wholly owned subsidiaries, and Western Agua, L.P. a limited partnership in in which the Company is the general partner and owns a 70% interest.

The information included in this Form 10-Q should be read in conjunction with management’s discussion and analysis of financial condition and results of operations, and consolidated financial statements and notes thereto in the Company’s annual report on Form 10-K for the fiscal year ended March 31, ~~2003~~2004.

Stock Option Plan

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its outstanding common stock options. As such, deferred compensation expense would generally be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price of the option when granted. Such deferred compensation is expensed ~~pro rata~~ over the vesting period of the stock option. Re-priced stock options are accounted for using variable plan accounting ~~which~~that requires periodic re-measurement of the intrinsic value of the related stock option until its exercise, forfeiture, or cancellation. No compensation ~~expense~~ expense related to stock options was recorded during the three and six months ended ~~September 30,~~ ~~2003. In the three- and six-month periods ended~~ September 30, ~~2002,~~2004 ~~the Company recorded a $169,000~~ and ~~$154,000 reduction to compensation expense, respectively, according to variable plan accounting, to reverse expense charges previously recorded for stock option-based compensation~~2003.

Had the Company determined compensation expense based on the fair value at the grant date for its stock options under Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation”, the Company’s net loss and basic and diluted loss per share applicable to common stockholders would have been adjusted to the pro forma amounts indicated below.

		Three months ended						Six months ended
		September 30:						September 30:
		2003			2002			2003			2002
Net income (loss) applicable to common stockholders:
	As reported	$	(578,104	)	$	(1,004,805	)	$	(1,653,506	)	$	(1,841,290	)
	Pro forma	$	(611,183	)	$	(1,217,870	)	$	(1,719,664	)	$	(2,009,691	)
Basic and diluted income (loss) per common share:
	As reported	$	(0.07	)	$	(0.12	)	$	(0.20	)	$	(0.23	)
	Pro forma	$	(0.08	)	$	(0.15	)	$	(0.21	)	$	(0.25	)

New Accounting Policies Adopted on July 1, 2003

In January 2003, the FASB approved for issuance FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the

entity to finance its activities without additional subordinated support from other parties. The Company has evaluated the impact of FIN 46 and has concluded that the Company is not involved with any variable interest entities and therefore the adoption of FIN 46 on July 1, 2003 did not have a material impact on its consolidated financial statements.


	Three months ended						Six months ended
	September 30:						September 30:
	2004			2003			2004			2003
Net loss applicable to common stockholders:
As reported	$	(1,186,455	)	$	(578,104	)	$	(1,891,396	)	$	(1,653,506	)
Deduct — Total stock-based employee compensation expense determined under fair value based method for all awards		(10,214	)		(33,079	)		(20,428	)		(66,108	)
Pro Forma		(1,196,669	)		(611,183	)		(1,911,824	)		(1,719,614	)
Basic and diluted loss per common share:
As reported	$	(0.15	)	$	(0.07	)	$	(0.23	)	$	(0.20	)
Pro forma	$	(0.15	)	$	(0.08	)	$	(0.24	)	$	(0.21	)

OnRecently ~~May 15,~~Issued ~~2003, the FASB issued SFAS No. 150,~~ Accounting ~~for Certain Financial~~Pronouncements ~~Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150~~ ~~requires issuers to classify as liabilities (or assets in some circumstances)~~ three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No. 150 on July 1, 2003 for existing financial instruments, all of which were entered into prior to June 30, 2003, and has concluded that the adoption of SFAS No. 150 did not have a material impact on its consolidated financial statements.

~~Net~~ On ~~Income~~May 15, 2003, the Financial Accounting Standards Board (~~Loss~~“FASB”) ~~Per~~issued ~~Share~~SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No. 150 on July 1, 2003 for existing financial instruments, all of which were entered into prior to June 30, 2003. The Company has concluded that the adoption of SFAS No. 150 did not have a material impact on its consolidated financial statements.

~~The~~ In ~~weighted~~March 2004, ~~average~~the ~~shares~~FASB ~~used~~issued a proposed Statement, “Share-Based Payment, an Amendment of FASB Statements Nos. 123 and 95” that, if adopted, will significantly change the accounting for employee ~~basic~~stock options and ~~diluted~~other ~~net~~equity-based ~~income~~compensation. ~~per~~In ~~share~~October 2004, the FASB voted to ~~were~~delay 8the initially proposed effective date for six months rather than making it effective on January 2,~~069~~ 2005,~~012~~ ~~shares~~as originally proposed. The proposed standard would require companies to expense the fair value of stock options on the grant date and, ~~respectively~~if adopted, is currently anticipated to be effective for interim or annual periods beginning after June 15, 2005. The Company will continue to monitor communications on this subject from the ~~three~~FASB ~~and~~in ~~six~~order ~~months~~to ~~ended~~determine the impact on the ~~September~~Company’s consolidated financial statements. However, it appears that the expense attributable to stock options granted or vested subsequent to July 301, ~~2003~~2005 ~~and~~will ~~2002~~be required to be recognized by the Company.

~~Stock~~Net ~~options~~Loss toPer ~~purchase 1,769,166 and 1,603,166 shares of common stock at~~Share ~~exercise prices ranging from $0.23 — $18.69 for the three and six months ended~~ ~~in each of September 30, 2003 and 2002, respectively, were not included in the~~ ~~computation of diluted net loss per share as their effect would have been anti-dilutive.~~

~~Convertible~~ The ~~debentures,~~weighted ~~Series C~~average ~~redeemable~~shares ~~preferred~~used ~~stock~~for ~~and~~basic ~~Series F redeemable preferred stock convertible into 524,450, 463,779~~ and ~~414,027~~diluted ~~shares of~~net ~~common~~loss ~~stock, respectively at conversion prices of $15.86, $16.62 and $5.60~~ per share, ~~respectively,~~ were ~~not included in the computation of diluted net~~8,069,012 ~~loss~~shares ~~per share~~ for the three and six months ended September 30, ~~2003~~2004 asand ~~their effect would have been anti-dilutive~~2003.

~~Convertible~~ Stock ~~debentures~~options to purchase 1,322,334 ~~Series C~~shares ~~redeemable~~of ~~preferred~~common stock ~~and~~at ~~Series F redeemable~~exercise ~~preferred~~prices ~~stock~~ranging ~~convertible~~from $0.10 ~~into~~— ~~555,976,~~$0.86 ~~463,779~~ and ~~390~~1,~~260~~769,166 shares of common stock, ~~respectively,~~ at ~~conversion~~exercise prices ofranging ~~$15.86,~~from $160.6223 ~~and~~— $518.6069 ~~per~~for ~~share~~the three and six months ended in September 30, 2004 and 2003, respectively, were not included in the computation of diluted net loss per share ~~for the three and six months ended September 30, 2002~~ as their effect would have been anti-dilutive.

Convertible Subordinated Debentures, due September 30, 2005 (the “Subordinated Debentures”) and the Series C Convertible Redeemable Preferred Stock (the “Series C Preferred Stock”) convertible into 524,450 and 463,779 shares of common stock, respectively, at conversion prices of $15.86 and $16.62 per share, respectively, were not included in the computation of diluted net loss per share for the three and six months ended September 30, 2004, as their effect would have been anti-dilutive. Series F Convertible Redeemable Preferred Stock (the “Series F Preferred Stock”) convertible into 437,294 and 431,900 shares of common stock at the conversion price of $5.60 per share were not included in the computation of net loss per share for the three and six months ended September 30, 2004, respectively, as their effect would have been anti-dilutive.

Subordinated Debentures and Series C Preferred Stock convertible into 524,450 and 463,779 shares of common stock, respectively, at conversion prices of $15.86 and $16.62 per share, respectively, were not included in the computation of diluted net loss per share for the three and six months ended September 30, 2003, as their effect would have been anti-dilutive. Series F Preferred Stock convertible into 414,027 shares

of common stock at the conversion price of $5.60 per share were not included in the computation of net loss per share for the three and six months ended September 30, 2003, respectively, as their effect would have been anti-dilutive.

Segment reporting

~~Six months ended September 30:~~		Six months ended September 30:	~~2003~~				~~2002~~
Segment revenue:
		2004				2003
	California		$	780,696			$	885,207
Segment revenue:
	Colorado			22,270				7,736
California		$	71,395			$	780,696
			$	802,966			$	892,943
Colorado			20,887				22,270
Operating income (loss):
		$	92,282			$	802,966
	California		$	330,329			$	313,284
Net income (loss):
	Colorado			21,449				7,736
California			174,018				767,208
	Non-segment			(1,618,153	)			(1,349,375	)
Colorado			(212,131	)			(186,604	)
			$	(1,266,375	)		$	(1,028,355	)
Non-segment			(1,467,487	)			(1,865,988	)
Interest income:
		$	(1,505,600	)		$	(1,285,384	)
	California			—				—
Interest income:
	Colorado			—				—
California			4,035				—
	Non-segment		$	6,788			$	79,506
Colorado			3,430				—
			$	6,788			$	79,506
Non-segment			5,271				6,788
Interest expense:
		$	12,736			$	6,788
	California		$	(5,084	)		$	(56,361	)
Interest expense:
	Colorado			—				—
California			(12	)		$	(5,084	)
	Non-segment			(374,300	)			(396,800	)
Colorado			—				—
			$	(379,384	)		$	(453,431	)
Non-segment			(422,234	)			(374,300	)
Depreciation, depletion and amortization expense:
		$	(422,246	)		$	(379,384	)
	California		$	466,731			$	487,116
Depreciation, depletion and amortization expense:
	Colorado			1,184				—
California			(656	)		$	(466,731	)
	Non-segment			49,883				38,720
Colorado			(1,809	)			(1,184	)
			$	517,798			$	525,836
Non-segment			(50,381	)			(49,883	)
		$	(52,846	)		$	(517,798	)

As of September 30, and			September 30,			March 31,
		As of:
March 31, 2003			2003			2003
		September			March 31,
Water rights:
		30, 2004			2004
	California		$	858,634		$	848,790
Assets:
	Colorado			10,745,559			10,756,224
California		$	1,528,258		$	2,632,776
			$	11,604,193		$	11,605,014
Colorado			12,254,189			12,252,069
Assets:
Non-segment			1,777,531			1,975,473
	California		$	5,350,684		$	6,077,753
		$	15,559,978		$	16,860,318
	Colorado			12,267,656			12,261,651
	Non-segment			888,055			1,574,793
			$	18,506,395		$	19,914,197

For the six months ended September 30, 2003 and 2002, the Company recognized revenue of $641,000 and $653,000, respectively, from sales of water to the City of Inglewood (“Inglewood”). No other customer accounted for more than 10% of the Company’s revenue. The Company concluded its five-year agreement with Inglewood during the quarter ended September 30, 2003. The Company and Inglewood have not renewed the agreement.

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

The non-segment amount under operating income (loss) includes general and administrative expenses. The non-segment amount under depreciation, depletion and amortization includes depreciation of the non-segment equipment, and amortization of debt issuance costs.

For the six months ended September 30, 2004, the Company recognized revenue of $61,251 related to consulting services performed on behalf of an unaffiliated third party. No other customers accounted for more than 10% of the Company’s revenue during the six months ended September 30, 2004. The ~~non-segment~~Company’s ~~amount~~consulting ~~under~~services ~~assets~~were ~~includes~~substantially ~~cash~~completed ~~and~~subsequent ~~cash~~to ~~equivalents~~September 30, 2004, and ~~equipment~~ such services are not ~~otherwise~~expected ~~allocated~~to generate significant revenue in future periods. For the six months ended September 30, 2003, the Company recognized revenue of $641,000 from sales of water to athe ~~segment~~City of Inglewood (“Inglewood”). Such sales were completed, ~~and~~according to the terms of the contract with Inglewood, as of September 30, 2003; therefore, there were no such sales recorded during the six months ended September 30, 2004. No other ~~assets~~customer accounted for more than 10% of the Company’s revenue during the six months ended September 30, 2003.

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

The non-segment amount under net loss, above, includes the effect of general and administrative expenses. The non-segment amount under depreciation, depletion and amortization expense includes depreciation of the non-segment equipment, and amortization of debt issuance costs. The non-segment amount under assets includes cash and cash equivalents, and equipment not otherwise allocated to a segment, and other assets. Non-segment interest income is earned from the investment of cash and cash equivalent balances that are available for all of the operating purposes of the Company. Non-segment interest expense was incurred primarily upon the Subordinated Debentures, during 2004 and 2003, and upon long-term debt that consisted of the secured promissory note to the Series C Preferred Stock holders, in 2004, that are obligations of the Company and not directly associated with specifically identified operating segments.

Reclassification

The classification of Gain on Sale of Assets in 2003 has been reclassified in order to conform to the presentation in the current year, in conformity with SFAS No. 144.

Note 2. Going Concern:

The Company ~~believes~~has ~~that~~been ~~recurring~~and ~~revenues~~continues ~~will~~to be ~~insufficient~~unable ~~for~~to ~~some~~generate ~~time into~~sufficient ~~the~~cash ~~future~~from operations to pay ~~cover~~for ~~general~~operating ~~and administrative~~ expenses, ~~interest~~to ~~on outstanding~~meet ~~indebtedness~~debt ~~and~~service ~~dividends~~obligations, ~~when~~ and ifto ~~declared,~~pay ~~on its outstanding~~ preferred stock. dividends. The Company had ~~deferred the decision to declare the January 15, 2003 Series C Preferred Stock dividend and actually declared and~~ paid ~~such~~for ~~dividend~~these infinancial ~~June 2003.~~obligations ~~The~~using ~~Company~~cash ~~has deferred the decision to declare the July 15, 2003, Series C Preferred Stock dividend. Although the Company believes that foreseeable revenues~~ from ~~operations will be insufficient to fund~~ its ~~operating~~consulting ~~expenses~~activities, the ~~Company currently plans to fund its working~~ ~~capital~~sale ~~needs during the fiscal year ending March 31, 2004 from new water revenues that it may generate from its Water Delivery Contract Units, from its existing capital resources, from planned sales~~ of assets, and ~~from~~short-term, ~~new~~ asset-secured loans. AsThere ofis ~~September 30,~~substantial ~~2003,~~doubt about the Company ~~had a working capital~~’s ~~deficit~~ability ~~of approximately $115,000. In the event that the Company is unable~~ to generate ~~new~~additional ~~water~~cash ~~revenues~~ from ~~the~~asset ~~sale of Water Delivery Contract Units or complete the sale of assets, or if any or all of the revenue or~~ sales ~~proceeds are~~and ~~significantly~~loans ~~less than anticipated, the Company may not have sufficient cash available~~ to fund its ~~estimated~~operations ~~expenses for the next twelve months. Such~~through ~~shortfall(s) from anticipated revenue or sales proceeds~~September 30, ~~if material~~2005, ~~could impair~~and ~~the~~beyond ~~Company’s~~or ~~ability~~ to ~~continue~~meet asother ~~a going concern. The consolidated~~ financial ~~statements~~obligations dofollowing ~~not~~the ~~include~~expenditure ~~any adjustments that might be necessary~~of ~~should~~its ~~the~~current ~~Company~~cash ~~be unable to continue as a going concern~~balance.

In The ~~the event that the~~ Company is ~~unable~~dependent toupon ~~generate sufficient cash to fund its operations for~~ the ~~next~~orderly ~~twelve~~and ~~months~~timely ~~from~~ sales of ~~assets,~~its ~~sales~~California ofassets ~~Cherry~~to provide ~~Creek~~a ~~Project~~portion ~~WDCUs,~~of ~~or other operating revenues,~~ the ~~Company~~cash ~~would~~necessary ~~have~~ to ~~take~~ ~~further~~fund ~~action that could adversely affect~~ the Company’s ~~ability~~operations ~~to continue~~for tothe ~~operate~~twelve ormonths ~~to recognize full value from its remaining assets. For~~ending ~~example~~September 30, if2005. ~~the~~The ~~Company~~Subordinated isDebentures ~~unable~~will tomature ~~generate~~within ~~sufficient~~the ~~operating~~next ~~cash~~twelve ~~from the~~months ~~foregoing sources~~on September 30, ~~the~~2005. The Company ~~could~~currently beplans ~~forced~~ to ~~(i) further~~meet ~~reduce~~ its ~~general~~ ~~and~~obligation ~~administrative expenses by further reducing its work force, (ii) cease~~ to ~~make~~pay ~~required~~the ~~payments on its outstanding debentures or its~~Subordinated ~~outstanding~~Debentures ~~preferred stock,~~ (~~iii) dissolve the Company~~$8, ~~or (iv~~318,000) ~~enter~~ ~~into~~through ~~a corporate transaction with a third party for~~ the ~~sale~~monetization of the ~~Company or its assets. Should the Company be prevented from developing its~~ Cherry Creek Project ~~and/or~~(as ~~selling~~discussed ~~that Project~~ in greater ~~the~~detail ~~ordinary~~below). ~~course~~However, ~~of operations~~there ~~because~~can ofbe ano ~~lack~~assurance ~~of working~~regarding ~~capital,~~ the Company’s ~~may~~ability beto ~~unable~~sell its toremaining ~~realize~~California ~~the~~assets ~~full~~at fair value ofin ~~the Cherry~~a ~~Creek Project.~~timely

Note 3. Settlement Agreement:

During the quarter ended September 30, 2003, the Company entered into a settlement agreement relating to the condemnation proceedings concerning its Vessel Parcel of land at its Cherry Creek Project in Colorado. The parcel, comprising 36 acres of land, had been condemned in 2002 by the Parker Water and Sanitation District (PW&SD) for its own use. In July 2002, the Company received a preliminary deposit of $294,000 from PW&SD pending a hearing before the Colorado Water Court (the “Court”) to establish the final value of the property. The Company recorded a gain on the disposition of assets of $11,000 for the three and six months ended September 30, 2002 which included the carrying value of the condemned parcel of land. In September 2003, the Company reached a settlement with PW&SD, and the settlement was entered as a final rule and order terminating the condemnation action. Under the settlement, the parties agreed to total valuation (including costs of condemnation) of $700,000. Thus, PW&SD supplemented the preliminary deposit with a further payment to the Company of $406,000, which is reflected as an account receivable as of September 30, 2003. The Company collected the supplemental payment in full on October 3, 2003.

The Company recorded as expenses all of the costs associated with the condemnation proceedings as those costs were incurred. The proceeds from the settlement are recorded as a gain on the disposition of assets for the three and six month periods ended September 30, 2003.

Note 4. Income Taxes:

Management does not expect to have Federal taxable income for the fiscal year ending March 31, 2004. Accordingly, the Company has not recorded a federal income tax provision but has recorded a provision for the state income taxes for the three and six months ended September 30, 2003.

~~Note~~manner 5.in ~~Supplemental~~order ~~Cash~~to ~~Flow~~fund ~~Information:~~operations or to monetize the Cherry Creek Project for an amount or within the time necessary to pay the Subordinated Debentures.

Six months ended September 30:			2003		2002
Supplemental disclosure of cash flow information:
	Cash paid during the period for interest		$	388,299	$	413,134
	Cash paid during the period for income taxes			4,800		3,200
Supplemental disclosure of non-cash investing and financing activities:
	Accretion of preferred stock to redemption value			76,443		61,859
	Recognition of deferred compensation on variable plan stock options:			—		154,261
		Deferred compensation		—		145,740
		Additional paid-in capital		—		(300,000	)
	Issuance of in-kind Series F preferred Stock dividend			12,291		11,585

The Company’s water resources in Colorado consist of the Cherry Creek Project (the “Project”), which is the largest asset on the Company’s condensed consolidated balance sheet. While management believes that demand for the Company’s water resources in Colorado continues to increase, the schedule for monetizing the value of the Project is uncertain (based, in part, on the denial by the Colorado Office of the State Engineer of the Company’s application for approval of a substitute water supply plan which proposed plan included elements designed to assure the Project’s current and prospective customers of reliable water deliveries from the Project). Management believes that the fair value of the Project, if and when fully developed or sold, will exceed the current carrying value of that asset on the Company’s balance sheet. Accordingly, the Company is attempting to marshal its assets in a manner that will provide the Company the working capital required to finance the orderly development and sale of the Project. However, the Company can provide no assurance regarding its ability to monetize the value of the Project, or that any revenue generated from the Project will occur in a timely manner to fund the Company’s operations and financial obligations. Moreover, the Company will be required to incur additional expenses to develop the Project in order to position it to be monetized. The Company can provide no assurances that the Company will have the necessary funds to do so.

~~Note~~ The 6Company plans to fund its foreseeable working capital needs from existing cash, from net proceeds of the anticipated sale of certain existing assets, from the sale of Cherry Creek Project water delivery contract units, and/or from the proceeds of asset-secured loans. ~~Sale~~No assurance can be given that the Company will be able to sell its assets as planned or that the Company will be able to raise additional funds on commercially reasonable terms when and if needed to sustain its operations, including Cherry Creek Project development activities. The inability of ~~Asset:~~the Company to sell its assets as planned or raise additional funds on commercially reasonable terms when and if needed could impair the Company’s ability to operate as a going concern. Additionally, the Company’s outstanding Subordinated Debentures mature in September 2005 and the Series C Preferred Stock and Series F Preferred Stock are subject to mandatory redemption beginning in fiscal 2007 and fiscal 2010, respectively.

In ~~June 2003,~~light of the uncertainties associated with the Company’s ~~sold~~ability ~~its~~to ~~shares~~continue inas a going concern, the ~~Bear~~Company’s ~~Valley~~previous ~~Mutual~~independent ~~Water~~registered public accounting firm provided a going ~~Company~~concern ~~(BVMWC)~~uncertainty explanatory paragraph in its unqualified opinion with respect to athe ~~California~~Company’s consolidated ~~municipality~~financial statements for the year ended March 31, 2004. ~~The~~See ~~sale~~the ~~provided proceeds~~report of ~~approximately~~the ~~$723,000~~previous independent ~~and~~registered ~~resulted~~public accounting firm in athe ~~gain~~Company’s ofAnnual ~~approximately~~Report on Form 10-K for the ~~$73~~year ended March 31,~~000~~ 2004 for more details. Consistent with the fiscal 2004 consolidated financial statements, the accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

Note 73. ~~Domestic~~Water ~~Disposal Site~~Rights:

In Water ~~September 2003,~~rights ~~the~~consist ~~Company discovered that a portion~~ of avarious ~~seven-acre~~water ~~parcel of~~interests ~~its~~acquired ~~property~~directly inor ~~Northern~~through ~~California~~the ~~had historically been used as a domestic~~acquisition ~~disposal site. The site is located in a remote section~~ of ~~property~~land ~~which was deeded to the Company by its predecessor in 1990. Based on a recent inspection~~ and ~~preliminary~~are ~~inquiry,~~stated ~~use~~at ~~of the parcel as a domestic disposal site appears to have been abandoned for roughly 40 years~~cost. ItWater isrights ~~not~~held ~~known what materials were disposed~~ at ~~the~~September 30 ~~site. The Company has not been notified of any potential liability with respect to the abandoned disposal site,~~ and ~~no claims have been made against the Company regarding the site. As of September~~March 3031, ~~2003~~2004, ~~the Company~~consisted ~~is proceeding with an evaluation but is unable to reasonably determine~~of the ~~possible costs associated with cleanup of the site~~following.

Note 8. Subsequent Event:


	September 30, 2004		March 31, 2004
Colorado	$	10,753,095	$	10,754,206
California		291,642		291,642

Total	$	11,044,737	$	11,045,848

On November 3, 2003, the Company obtained a loan in the amount of $1 million from an unrelated third-party private investor. The loan matures on May 1, 2004, bears interest at 10% per annum, with interest and principal due on maturity, and is secured by the Company’s three rice farms in Yuba County, California. The terms of the loan additionally provide that, if payment is not made when scheduled at the due date, the interest rate on the outstanding balance will increase to 17% per annum until the time that the note is paid in full. Proceeds from the loan were first used by the Company to repay a long-term note payable in the total amount of $128,897 plus interest of $3,287, which had been secured by certain of the property, which is used to secure the new loan and to pay escrow and other closing costs associated with arranging the loan. The Company received net proceeds of $865,081 on November 3, 2003, which are expected to be used to fund a portion of its operating costs pending the sale of additional assets.

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

Forward-Looking Statements

In addition to historical information contained herein, this Quarterly Report contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof and based on information currently available to management. Western Water Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended March 31, 2003, any Current Reports on Form 8-K filed by the Company and any Registration Statements filed by the Company.

~~Critical~~Note ~~Accounting~~4. ~~Policy~~9% Convertible Subordinated Debentures:

In On ~~response to the SEC’s release No.~~September ~~33-8040~~22, ~~“Cautionary~~1995 ~~Advise Regarding Disclosure about Critical Accounting Policies,”~~ the Company ~~has~~issued ~~identified~~$15,000,000 ~~its most critical accounting policy as that related to the assessment~~ of ~~potential impairment of~~ the ~~carrying~~Subordinated ~~value of its water rights~~Debentures, ~~which~~due ~~are carried at~~in ~~cost~~September 2005. ~~Any~~The ~~event~~Subordinated orDebentures ~~circumstance~~are ~~that~~unsecured ~~indicates~~and tosubordinate ~~the Company that there is an impairment of the carrying value of any of its water rights triggers a two step analysis pursuant~~ to ~~FASB~~all ~~Statement~~secured Nodebt. ~~144. Under this two step analysis, the~~ ~~second~~Interest ~~step~~accrues ~~requires~~at ~~the~~9% ~~reduction~~per ofannum ~~the~~and ~~carrying value of the water rights to their fair value in the event that under step one, the undiscounted cash flows generated by the water rights~~ is ~~less~~payable ~~than~~semi-annually ~~their~~on ~~carrying value. During each of the periods in the three and six months ended~~ September 30, ~~2003~~ and ~~2002, no such event or circumstance occurred that would, in the opinion of management, signify the need for a material reduction in the carrying value of any of the Company’s water rights~~March 31.

The ~~critical~~Subordinated ~~estimates~~Debentures are ~~those~~convertible ~~made~~into byshares of the Company’s incommon ~~assessing~~stock ~~whether~~at ana ~~impairment~~conversion ~~exists~~price ~~that~~of is$15.86 ~~associated~~per ~~with~~share (after the ~~fair~~effect ~~value~~ of ~~its~~the ~~water~~March 28, ~~rights~~1996 stock dividend). ~~When~~Effective ~~considered~~October 1, ~~necessary~~1997, ~~management~~the ~~obtains~~Company ~~third-party~~may ~~valuations~~redeem tothe ~~assist~~Subordinated Debentures at a cash redemption ~~and~~price ~~support~~equal ~~its~~to ~~estimate~~100% of ~~fair~~the ~~value.~~principal Inamount ~~the~~redeemed ~~case~~(plus ofaccrued ~~the~~and ~~Cherry~~unpaid ~~Creek~~interest thereon) if ~~Project,~~the trading price of the Company’s ~~estimate~~common ofstock ~~fair~~was ~~value~~150% isof ~~based~~the ~~upon~~conversion ~~comparison~~price ~~with water~~for ~~rights~~the ~~sales~~20 preceding intrading ~~the~~days. ~~area,~~Based upon ~~various~~the ~~third-party~~market ~~valuations~~value ~~performed for~~of the Company’s ~~within~~common ~~the~~stock ~~preceding~~and ~~twelve~~the ~~months,~~Company’s financial ~~upon~~and ~~actual~~operating ~~sales~~condition toat ~~an unaffiliated~~September 30, ~~third~~2004, ~~party~~the ofCompany ~~water~~does ~~derived~~not ~~from~~expect ~~the~~to ~~Project,~~gain ~~and upon current~~the ~~negotiations~~right ~~for~~to redeem the ~~sale~~Subordinated ofDebentures ~~Water~~prior ~~Delivery~~to ~~Contract Units~~maturity.

~~Overview~~Note 5. Sale of Assets:

~~Until~~ On ~~the fiscal year ended March~~May 3120, ~~2000~~2004, the Company’s ~~principal~~sold ~~activity had~~Loma ~~been~~Rica toRanch, ~~acquire~~a ~~and~~rice ~~develop~~farm ~~water assets~~ in ~~California~~Yuba ~~and~~County, ~~in the Cherry~~California, ~~Creek basin in Colorado. The Company did so because it believed~~ that ~~there~~ was a ~~growing~~included ~~demand~~in ~~for~~Assets ~~water~~Held ~~resources~~for inSale ~~both~~as of ~~these areas, which demand is expected to exceed the water resources currently available to these areas. During the fiscal years ended~~ March 31, ~~2001 and 2000, the Company executed a variety of wholesale water supply contracts with a number of retail municipal water agencies~~2004. However, the Company encountered significant regulatory obstacles to its attempts to develop and transfer water for delivery to such customers. Accordingly, the Company reduced its overhead expenditures, has deferred development activities, and has concentrated its efforts in California on overcoming the regulatory obstacles to water transfers and on arranging water transfers that do not face such obstacles. However, based on continuing regulatory difficulties and administrative delays in completing water transfers and generating revenue from water sales, the Company suspended additional water acquisitions. The Company also faced significant financial problems brought on by the expenditure of funds for overhead and asset acquisitions in the face of constrained operating revenue. Therefore, the Company has been exploring various alternatives, including the sale ofprovided ~~the~~cash ~~Company~~proceeds, ~~the sale of some or~~ ~~all~~net of ~~its~~selling ~~assets~~costs, ~~the liquidation~~ of ~~the~~approximately ~~Company~~$599,000 and ~~various~~resulted ~~restructuring alternatives.~~in ~~While the Company has no formal plan to liquidate all or substantially all of its assets, it is continuing to pursue~~ a ~~strategy~~gain of ~~selling~~ ~~non-strategic~~approximately ~~assets to improve its cash position~~$85, ~~while concentrating its efforts on the development and monetization of its existing strategic water-related assets~~000. ~~Additionally, the Company has been exploring the sale of~~ ~~both its strategic and non-strategic assets in Northern California.~~

~~Results~~ On June 7, 2004, the Company sold Cardozo Ranch, a former dairy farm in San Bernardino County, California, that was included in Assets Held for Sale as of ~~Operations~~March 31, 2004. The sale provided cash proceeds, net of selling costs, of approximately $454,000, including payment of a $230,000 purchase money note receivable, and resulted in a gain of approximately $2,000.

~~The~~ On ~~following~~July 26, is2004, athe ~~summary~~Company sold Lewis Ranch, an unimproved 80-acre parcel of land in San Bernardino County, California, to an unaffiliated purchaser for the ~~Company’s~~purchase ~~results~~price of ~~operations~~$250,000 for which the ~~three~~ Company received $27,311 in cash net of selling costs and ~~six~~a ~~months~~long-term ~~ended~~amortizing ~~September~~purchase note receivable in the amount of $220,000. The property, with a book value of $101,015, was included in Assets Held for Sale as of March 3031, ~~2003~~2004, and ~~2002~~the transaction has been recorded as an installment sale. The deferred gain of $130,985 resulting from this installment sale is reported as Deferred Gain on Sale of Asset as of September 30, 2004.

~~CONSOLIDATED~~Note 6. Assets Held for Sale:

		Three months ended						Six months ended
		September 30:						September 30:
		2003			2002			2003			2002
Revenue		$	367,000		$	473,000		$	803,000		$	893,000
Loss before income taxes			(526,000	)		(682,000	)		(1,281,000	)		(1,485,000	)
Income taxes			—			—			(5,000	)		(3,000	)
	Net loss		(526,000	)		(682,000	)		(1,285,000	)		(1,488,000	)
Accretion of preferred stock to redemption value			(40,000	)		(31,000	)		(76,000	)		(62,000	)
Preferred stock dividends			(12,000	)		(291,000	)		(292,000	)		(291,000	)
	Net loss applicable to common stockholders		(578,000	)		(1,005,000	)		(1,654,000	)		(1,841,000	)
Basic and diluted net loss per share applicable to common stockholders			(0.07	)		(0.12	)		(0.20	)		(0.23	)

At September 30, 2004, the Company’s West Basin water rights in Los Angeles County, with a carrying value of $557,150, were classified as Assets Held for Sale. Management is actively marketing the West Basin water rights.

Note 7. Income Taxes:

Management does not expect the Company to have federal taxable income for the fiscal year ending March 31, 2005. In addition, the Company considers its net operating loss carryforwards unlikely to be realized as of September 30, 2004, and a valuation reserve has been established for the entire balance of the Company’s net operating loss carryforwards. Accordingly, the Company has not recorded a federal income tax provision but has recorded a provision for the minimum annual state income taxes during the six months ended September 30, 2004.

~~Management~~Note ~~does not expect that the Company will generate Federal taxable income for the fiscal year ending March 31, 2004~~8. ~~Accordingly,~~Supplemental ~~the~~Cash ~~Company~~Flow ~~has~~Information: ~~not recorded a federal income tax liability but has recorded a provision for~~ ~~state income taxes for the three and six months ended September 30, 2003.~~

CALIFORNIA OPERATIONS


Six months ended September 30:	2004		2003
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	374,300	$	388,299
Cash paid during the period for income taxes		3,200		4,800
Supplemental disclosure of non-cash investing and financing activities:
Acceptance of note receivable in consideration for the sale of property		230,000
Acceptance of note receivable in consideration for the sale of property		220,000		—
Accretion of preferred stock to redemption value		93,342		76,443
Issuance of in-kind Series F Preferred Stock dividend		13,039		12,291

	Three months ended						Six months ended
	September 30:						September 30:
	2003			2002			2003			2002
Revenue	$	346,000		$	467,000		$	781,000		$	885,000
Cost of revenue		(234,000	)		(340,000	)		(468,000	)		(572,000	)
Gross profit		112,000			127,000			313,000			313,000
Gain on disposition of assets		—			—		$	73,000			—

Note 9. Litigation and Subsequent Events:

~~Revenues~~ On ~~for~~August 24, ~~each~~2004, ofEmpire ~~the~~Insurance ~~three-~~Company ~~and six-month~~(“Empire”), ~~periods~~a ~~consisted~~holder ~~solely~~ of ~~revenues~~ ~~generated~~$3 million byof the Company’s ~~from~~Subordinated ~~its~~Debentures, ~~water~~filed ~~related~~suit ~~activities.~~in ~~Water revenue~~Delaware ~~for~~court against the ~~three-~~Company, its directors and ~~six-month~~the ~~periods~~holders ~~included~~of ~~revenues~~Series C ~~from~~Preferred ~~both~~Stock (the ~~sale~~ of“Defendants”). ~~water~~The ~~and~~suit ~~from~~challenged ~~water~~the ~~lease~~March 16, 2004 ~~agreements~~decisions ~~with~~of ~~municipal~~the ~~water~~Company’s ~~districts~~Board ~~in California. Cost~~ of ~~revenue~~Directors ~~for~~to ~~the~~declare ~~three-~~ and ~~six-month~~pay ~~periods~~a ~~includes~~dividend on the Series C ~~cost~~Preferred ofStock ~~water purchased for resale~~ and ~~amortization~~to oftake other ~~resource acquisition~~related ~~costs~~actions.

~~Revenues~~On during each of the three- and six-month periods were primarily derived from the Company’s five-year water sale agreement with the City of Inglewood, California. The Company recognized revenue of $321,000 and $641,000, and $321,000 and $653,000 for the three- and six-month periods ended SeptemberDecember 303, ~~2003~~ ~~and 2002~~2004, ~~respectively, from~~ the ~~City~~Board of ~~Inglewood.~~Directors Noadopted ~~other~~a ~~customer accounted~~revised ~~for~~incentive ~~more~~compensation ~~than~~plan ~~10%~~based ~~of the Company’s revenue. Revenues and related cost~~on ~~of sales from~~ the ~~City~~recommendation of ~~Inglewood were relatively unchanged during~~ the ~~periods,~~ ~~and the Company concluded its five-year agreement with Inglewood during the quarter ended September 30, 2003. The Company and Inglewood have not renewed the agreement, and the Company~~Board’s ~~ability~~Compensation toCommittee. ~~generate~~If ~~future~~certain ~~revenues~~performance ~~in California~~milestones ~~will be dependent upon its ability to successfully complete future~~are ~~water and other sales and~~achieved, ~~therefore, is not currently predictable. Water revenues in each of~~ the ~~three-~~revised ~~and~~incentive ~~six-month~~compensation ~~periods~~plan ~~ended~~could ~~September 30,~~result ~~2002, are greater than~~ in ~~the~~increased ~~comparable~~levels ~~periods in 2003 because the Company sold agricultural water to the United States Bureau~~ of ~~Reclamation in the amount of~~employee ~~approximately $100,000 during the 2002 periods which did not recur in 2003~~compensation.

InOn ~~June~~December ~~2003~~7, 2004, the ~~Company~~Defendants ~~sold~~and ~~its~~Empire ~~shares~~entered into a Settlement Agreement, that provides for the dismissal of the suit and that includes mutual releases of all parties to the action. The Settlement Agreement further provides (i) elimination of the security interest in the ~~Bear~~Cherry ~~Valley~~Creek Project ~~Mutual~~provided ~~Water~~to the Series C Preferred Stock holders; (ii) substitution of unsecured Amended Promissory Notes to evidence the loans from the Series C Preferred Stock holders the proceeds of which were used by the Company to afund ~~local~~Series C ~~municipality~~Preferred inStock andividends ~~all~~declared and paid for the semi-~~cash~~annual ~~transaction~~periods ended July 15, 2003, January 15, 2004 and July 15, 2004; and (iii) that the Company’s Amended Promissory Notes will be subordinate to the Subordinated Debentures held by Empire. The ~~sale~~ ~~resulted~~Amended inPromissory aNotes ~~gain~~are ofdue ~~$73~~on October 1,~~000~~ 2005. The Settlement Agreement did not have a material impact on the Company’s financial position.

~~COLORADO~~Item ~~OPERATIONS~~ 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Three months ended					Six months ended
	September 30:					September 30:
	2003			2002		2003			2003
Revenue	$	21,000		$	6,000	$	22,000		$	8,000
Cost of revenue		(1,000	)		—		(1,000	)		—
Gross profit		20,000			6,000		21,000			8,000
Gain on disposition of assets	$	406,000			11,000	$	406,000			11,000

Forward-Looking Statements

~~All~~ In ofaddition ~~the~~to ~~Company’s~~historical ~~Colorado~~information, ~~operations~~this ~~involve~~Quarterly ~~the~~Report ~~Company’s~~contains ~~Cherry Creek~~forward-looking ~~Project.~~statements ~~Since~~within the ~~date~~meaning ~~that~~of ~~the~~Section 27A ~~Company~~of ~~first acquired water assets in~~ the ~~Cherry~~ ~~Creek~~Securities ~~basin~~Act inof ~~Colorado~~1933 inand ~~1992,~~Section 21E of the Securities ~~Company~~Exchange ~~has~~Act ~~been~~of ~~primarily~~1934 ~~engaged in~~that ~~acquiring~~are ~~and~~subject ~~developing~~to the ~~assets~~safe ~~that~~harbor ~~currently~~created ~~constitute~~by ~~the~~those ~~Company’s~~sections. The ~~Cherry~~forward-looking ~~Creek~~statements ~~Project.~~contained ~~Other~~herein ~~than~~are ~~the~~subject ~~sale~~to ofcertain ~~non-strategic~~risks ~~real~~and ~~estate~~uncertainties ~~owned by~~that ~~the~~could ~~Company~~cause inactual ~~the~~results ~~Cherry~~to ~~Creek~~differ ~~basin,~~materially ~~the~~from ~~Company~~those toreflected ~~date~~in ~~has~~the ~~not generated~~forward-looking ~~material~~statements. ~~revenues~~Factors ~~from~~that ~~its~~might ~~Colorado~~cause ~~operations.~~such ~~However,~~a ~~the~~difference ~~Company~~include, ~~has commenced~~but ~~implementing~~are anot ~~plan~~limited to, ~~market~~those discussed ~~and~~in ~~sell~~the ~~Water~~sections ~~Delivery~~entitled ~~Contract Units (~~“~~WDCUs”),~~Management’s ~~contractual~~Discussion ~~rights~~and toAnalysis ~~receive~~of aFinancial ~~specified~~Condition ~~portion~~and Results of ~~the~~Operations” ~~undivided water~~and ~~production~~“Risk ~~capacity~~Factors.” ofReaders ~~the~~are ~~Cherry~~cautioned ~~Creek~~not ~~Project,~~ to ~~Colorado~~place ~~water agencies.~~undue ~~The~~reliance ~~Company~~on these isforward-looking ~~currently~~statements, ~~engaged~~that inreflect ~~negotiations~~management’s ~~for~~analysis ~~the~~only ~~sale~~as of ~~initial~~ ~~WDCUs~~the ~~which,~~date inhereof based ~~aggregate,~~on ~~would~~information ~~account~~currently ~~for~~available ~~600~~to ~~acre-feet of annual production~~management. The Company ~~anticipates~~undertakes ~~that~~no ~~such~~obligation ~~sales,~~to publicly ifrevise ~~completed,~~these ~~will~~forward-looking bestatements ~~made as~~to ~~isolated,~~reflect ~~individually~~events ~~negotiated~~or ~~transactions,~~circumstances ~~the~~that ~~timing and terms of~~arise ~~which~~after ~~are~~the ~~unpredictable~~date hereof. ~~Thus,~~Readers ~~there~~should ~~can~~carefully bereview nothe ~~assurance~~risk ~~that~~factors ~~WDCUs~~described ~~will,~~herein and in ~~fact,~~other bedocuments ~~sold~~the onCompany ~~terms~~files ~~satisfactory~~from time to time with the ~~Company~~Securities and Exchange Commission.

12Critical Accounting Policy

~~Table~~ The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States. These accounting principles require management to make estimates and assumptions that affect the reported amounts of ~~Contents~~assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements. The Company’s management is also required to make certain judgments that affect the reported amounts of revenues and expense during the reporting periods.

~~During the three- and six-month periods ended September 30, 2003 and 2002, the~~12 Company delivered small amounts of water produced from nontributary resources of the Cherry Creek Project. Neither the amount of water nor the revenue derived from such sales are material. However, the Company believes that these initial sales of water, entailing perfection of the underlying water right, completion of physical infrastructure and acquisition of various permits required for the delivery, represent important milestones in the development of the Cherry Creek Project.

	Three months ended				Six months ended
	September 30:				September 30:
	2003		2002		2003		2002
General and administrative expense		850,000		621,000		1,601,000		1,349,000

The Company bases its estimates on past experience and various other assumptions that it believes to be reasonable based on specific circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

~~General~~ The ~~and~~Company ~~administrative~~has ~~expense~~identified ~~for~~its ~~the~~accounting ~~three~~policy ~~and~~relating ~~six~~to ~~months~~the ~~ended~~assessment ~~September~~of potential ~~30,~~impairment ~~2003~~of ~~was~~the ~~greater~~carrying byvalue ~~$229,000~~of ~~and~~its ~~$252,000,~~water orrights ~~37%~~as ~~and~~the ~~19%,~~Company’s ~~from~~most ~~the~~critical accounting ~~comparable~~policy. ~~periods~~Under inthis ~~2002~~policy, ~~primarily because~~ the Company’s ~~recorded~~water arights ~~($169,000) and~~are ~~($154,000)~~carried ~~reduction~~at tocost. ~~compensation~~Any ~~expense,~~event ~~according~~or circumstance tothat ~~variable~~indicates ~~plan accounting,~~ to ~~reverse~~the ~~expense~~Company ~~charges~~that ~~previously~~there ~~recorded~~is ~~for~~an ~~stock option-based~~impairment ~~compensation~~of ~~during~~ the ~~three~~carrying ~~and~~value ~~six~~of ~~months ended September 30,~~any ~~2002.~~of ~~General~~its ~~and~~water ~~administrative~~rights ~~expense~~triggers isa ~~also~~two-step ~~higher~~analysis inpursuant ~~2003~~to ~~because~~Statement of ~~greater~~ ~~expense~~Financial ~~for~~Accounting Standards ~~legal~~No. 144, ~~fees~~“Accounting ~~associated~~for ~~with~~ the ~~efforts~~Impairment ~~to evaluate alternatives to sell some~~ or ~~all~~Disposal of ~~the~~Long-Lived ~~Company’s~~Assets” ~~assets;~~issued ~~the~~by ~~increase in legal~~the ~~fees~~Financial ~~was~~Accounting ~~partially~~Standards ~~offset~~Board. byUnder ~~lower~~this ~~consulting~~two-step ~~expenses~~analysis, ~~and~~the ~~reduced~~second ~~operating expenses~~step ~~based~~requires on the reduction ~~closing~~ of the ~~Company’s~~carrying ~~office~~value inof ~~Fresno,~~the ~~California. Following~~water ~~the~~rights ~~quarter~~to ~~ended~~their ~~September 30,~~fair ~~2003,~~value in the ~~Company~~event ~~reduced~~that ~~its work~~under ~~force~~step byone ~~eliminating two positions and is planning for~~ the ~~elimination~~total of ~~three more~~the ~~positions.~~undiscounted ~~Because~~cash offlows the Company’s ~~severance~~estimates ~~obligations~~the towater ~~its~~rights ~~former~~will ~~employees,~~generate ~~the~~is ~~Company~~less ~~has~~than ~~not~~their ~~yet~~carrying ~~realized any expense savings from those actions~~value. ~~However,~~Such ~~the~~reduction ~~Company’s~~in ~~general~~carrying ~~and~~value ~~administrative~~would ~~expenses~~be inrecorded ~~the~~as ~~future~~an ~~will~~expense ~~reflect the reduction~~ in the ~~number of the~~ Company’s ~~employees. Such~~statement ~~reduction~~of inoperations ~~expenses~~during ~~will be partially offset to~~ the ~~extent~~period ~~that~~in ~~the Company~~which ~~retains~~such ~~independent consultants to provide some of the services~~impairment ~~provided~~might ~~by its former employees~~occur.

~~OTHER~~ The ~~INFORMATION~~critical estimates of future cash flows made by the Company in assessing whether there is an impairment of the carrying value of its water rights are based upon management’s assessment of a variety of factors. In the past, when considered necessary, management obtained third-party valuations to assist and support its estimate of fair value. In the case of the Cherry Creek Project, that comprises the Company’s water interests in Colorado and is the largest single asset on its condensed consolidated balance sheets, the Company’s estimate of fair value is based upon comparison with water rights sales in the area, with various third-party valuations performed for the Company in the context of a condemnation case concluded in 2003, actual sales of water derived from the Cherry Creek Project to unaffiliated third parties, and current negotiations for the sale of water delivery contract units associated with the Cherry Creek Project.

	Three months ended						Six months ended
	September 30:						September 30:
	2003			2002			2003			2002
Interest income		4,000			67,000			7,000			80,000
Interest expense		(189,000	)		(209,000	)		(379,000	)		(453,000	)
Gain on disposition of assets		406,000			11,000			479,000			11,000
Other expense		(29,000	)		(63,000	)		(120,000	)		(93,000	)

Because there is no quoted market for water rights, valuation of such rights is inherently subjective and uncertain. The value of water rights varies, sometimes dramatically, based on, among other factors:

~~Interest~~• ~~income~~regional isweather ~~comprised~~conditions of(that ~~interest~~affect ~~earned~~short-term onsupply); • significant increases/decreases in regional demand; • perceived regulatory certainty/uncertainty; • the ~~investment~~perceived value and defensibility of title; • changes in patterns of local use (for example, from agricultural to urban uses); • the ~~Company’s~~ ~~cash~~availability and ~~equivalents~~cost ~~and~~of ~~interest~~treatment, ~~earned~~storage, onconveyance and distribution; • the ~~secured~~cost ~~promissory notes~~of ~~received~~power by(consumed in the ~~Company~~production inand ~~connection~~management ~~with~~of ~~the~~water); ~~properties~~• ~~that~~the itperceived ~~has sold.~~value ~~The~~of ~~secured~~reserve ~~notes~~or ~~bear~~redundant ~~interest~~supplies atfor ~~rates~~urban ~~between~~uses; 8%• ~~and~~decisions ~~9.5%~~in ~~per~~court ~~annum. Interest~~cases ~~income~~that ~~decreased~~impact ~~for~~water ~~the~~rights ~~three-~~generally, ~~and~~types ~~six-month~~of ~~periods~~water ~~ended~~rights ~~September 30~~specifically, ~~2003~~or ~~from~~a ~~the~~specific ~~comparable~~water ~~periods~~right; ~~ended~~• ~~September 30~~changes in political, ~~2002~~regulatory, ~~due~~and ~~primarily~~environmental ~~to a~~requirements; ~~lower~~and, ~~level~~• the availability of ~~cash~~financial ~~and~~resources ~~equivalent~~to ~~balances~~urban ~~available~~water ~~for~~purveyors ~~investment~~(consumers).

~~Interest~~ In ~~expense~~light ~~for~~of the ~~three-~~foregoing, ~~and six-month~~there ~~periods~~can ~~ended~~be ~~September 30,~~no ~~2003 was~~assurance ~~lower~~that ~~than~~the value of the ~~comparable~~Company’s ~~periods~~water rights inwill ~~2002~~not ~~due~~vary tofrom ~~$500,000~~current ~~lower~~estimates ~~balance~~as ~~on 9%~~a ~~convertible~~result ~~subordinated~~of ~~debentures~~potential future changes in circumstances or as a result of the ~~2003~~Company ~~periods.~~becoming ~~Interest~~aware ~~expense~~ of ~~$24~~new information,~~000~~ inand ~~2002~~such ~~represents~~changes could ~~interest~~be ~~incurred~~material. inAs ~~connection~~previously ~~with~~reported, the Colorado Office of the State Engineer unexpectedly denied the Company’s ~~then~~application ~~outstanding~~for ~~obligation~~a tosubstitute ~~purchase~~ water supply plan in April of 2004. In light of this denial, the ~~San~~Company ~~Joaquin~~undertook a thorough analysis of the valuation of the Cherry Creek ~~Valley~~Project. ~~under~~Based on that review, the ~~Norte-Sur~~Company ~~water~~has ~~purchase~~concluded ~~agreement~~that the carrying value of the Cherry Creek Project is appropriately stated.

~~The gain on disposition of assets of~~13 $406,000 and $479,000 in the three- and six-month periods ended September 30, 2003, is greater than in the comparable periods ended September 30, 2002, due to the settlement agreement the Company reached with PW&SD in September 2003. Under the final settlement, PW&SD made an additional payment of $406,000 to the Company. In June 2003, the Company also recorded a gain of $73,000 on the sale of its shares in the Bear Valley Mutual Water Company to a California municipality.

~~Table of Contents~~Overview

~~Other~~Business ~~expense for the six months ended September 30, 2003 was higher than the~~Condition ~~comparable period in 2002 due to an accrual for property taxes in the amount of~~ ~~$124,000 retroactively assessed by the County of San Bernardino in May 2003,~~ ~~relating to certain water rights which the Company sold in December 2002.~~ Because the Company contested the imposition of such taxes and failed to make payment by the due date, San Bernardino County has assessed a penalty of approximately $16,000, bringing the current amount of overdue taxes on the disposed water rights to $140,000. Other expense for the quarter ended September 30, 2003 was less than that for the comparable quarter in 2002, primarily because of the recording of a provision in the amount of $29,000 for uninsured expenses associated with a fire on the Company’s premises in 2002.

~~Liquidity~~ The Company’s principal activity had been to acquire and ~~Capital~~develop ~~Resources~~water assets in California and in the Cherry Creek basin in Colorado. The Company did so because it believed that there is a growing demand for water resources in both of these areas in which demand is expected to exceed the water resources currently available. However, the Company has encountered significant regulatory obstacles in its attempts to develop and transfer water for delivery to potential customers in California. These regulatory obstacles were compounded by the electric energy crisis in California, that rendered many transfers uneconomic because of the high and unrecoverable cost of pumping water over long distances, and by the Company’s weakened financial condition. The Company has also faced significant competition in arranging water transfers from governmental agencies. In addition, the process for developing the regulatory framework and physical infrastructure necessary to complete commercial deliveries in Colorado has taken longer than originally anticipated.

As Over ofthe ~~September 30,~~last ~~2003~~few years, the Company ~~had~~has ainvestigated ~~working~~and ~~capital~~actively ~~deficit~~pursued ~~and~~several apotential ~~current~~alternatives ~~ratio~~for achieving profitable operations in the emerging water market or a sale or merger of ~~($115,000)~~the ~~and~~Company (0that would recover fair value for its investors.~~92):~~ lIn that process, asthe ~~compared~~Company tohas evaluated ~~working~~numerous ~~capital~~asset development, asset sale, and abusiness combination strategies in concert ~~current~~with ~~ratio~~a variety of ~~$1,134,000~~counter-parties. The Company has entered into confidentiality agreements and ~~1.88:1~~due diligence atprocesses ~~March 31~~with several such counter-parties. However, ~~2003~~none of these proposed transactions was successfully concluded and none is currently under consideration.

~~For~~ Several of the ~~six~~transactions that were proposed to the Company, but not consummated, were predicated upon retiring obligations of the Company at deep discounts from their carrying values. Despite having made a number of debt and preferred stock purchases at discounts over the years, the Company has been unable to reduce its debt and dividend expenses sufficiently to maintain liquidity, except through the periodic sale of assets. In the three months ended September 30, ~~2003~~ 2004, the Company ~~had~~continued aits ~~net~~efforts ~~loss~~to ofcarefully restrict expenditures to those that are ~~$1,285,000~~essential for the management and adevelopment ~~net~~of ~~decrease~~the inCompany’s ~~cash~~assets or the continuation of ~~$935,000~~its operations.

~~The~~Liquidity ~~Company funded its working capital needs during the six months ended September 30, 2003 through its existing operating revenue, its existing capital resources,~~ and ~~cash~~Capital ~~generated by the sales of assets. On June 18, 2003 the~~Resources ~~Company sold the BVMWC shares and recognized a gain of $73,000. On October 3,~~ ~~2003, the Company received an additional payment of $406,000 from the Parker~~ Water & Sanitation District, as discussed under “Other Information,” above. The Company intends to continue to sell other non-strategic assets to generate operating cash and will attempt to further reduce its operating expenses while it continues to develop those principal water assets that it believes will provide the greatest return for the Company. For example, during the current fiscal year ending March 31, 2004, the Company plans to sell its remaining land in San Bernardino County. These assets have a book value of $553,000 as of September 30, 2003, which is less than their fair value. The Company will also consider selling or otherwise redeploying its West Basin groundwater pumping rights during the current fiscal year, because the Inglewood agreement to which those rights have been dedicated since 1998 expired on October 1, 2003. The Company is also considering the possible sale of some or all of its water rights and real estate assets in Northern California.

In During ~~order~~fiscal toyear ~~fund~~2004 ~~its~~and ~~working~~the ~~capital~~first ~~needs,~~six onmonths ~~November 3,~~of ~~2003~~fiscal 2005, the Company ~~obtained~~ aoperated ~~loan~~at ina ~~the~~net loss ~~amount~~ of $~~1 million~~(2,428,000) ~~from~~and an$(1,506,000), ~~unrelated third-party private investor~~respectively. ~~The~~During ~~loan~~the ~~matures~~year onended ~~May~~March 131, 2004, ~~bears~~the Company ~~interest~~generated atan ~~10%~~increase ~~per annum,~~in ~~with~~cash ~~interest~~ and ~~principal~~cash ~~due~~equivalents onof ~~maturity~~$272,000, ~~and~~primarily ~~is secured~~ by ~~the~~selling ~~Company’s~~certain ~~three~~of ~~rice~~its ~~farms~~real inestate ~~Yuba~~assets ~~County,~~in California. ~~The~~In ~~terms~~the ofsix ~~the~~months ~~loan additionally~~ended ~~provide~~September 30, ~~that~~2004, ~~if payment is not made when scheduled at~~ the ~~due~~ ~~date,~~Company ~~the~~used ~~interest~~$373,000 ~~rate~~of oncash ~~the~~and ~~outstanding~~cash ~~balance~~equivalents, ~~will~~primarily ~~increase~~for tooperations ~~17%~~that ~~per~~was partially ~~annum~~offset ~~until~~by ~~the~~selling ~~time~~certain ~~that~~real ~~the~~estate ~~note~~assets ~~is paid~~ in ~~full~~California. ~~Proceeds~~Because ~~from~~ the ~~loan~~Company ~~were first~~does ~~used~~not bygenerate operating ~~the~~revenues ~~Company~~sufficient to ~~repay~~meet aits ~~purchase~~operating ~~money~~expenses, ~~note~~the inCompany’s ~~the~~current ~~total~~strategy ~~amount~~is ofto ~~$128,897~~fund ~~plus~~its ~~interest~~current level of ~~$3,287,~~operations ~~which~~through ~~had~~the ~~been~~orderly ~~secured~~sale ~~by certain~~ of ~~the property.~~assets, ~~Repayment~~primarily ofin California, until the ~~prior~~Company ~~note~~is ~~was~~able ~~required in order~~ to ~~provide security~~realize ~~for~~ the ~~new~~full ~~loan.~~value ~~Proceeds~~ of ~~the~~its ~~new~~Cherry ~~loan~~Creek ~~were~~Project, ~~also~~if ~~used~~at ~~to pay escrow and other closing costs associated with arranging the loan~~all. The ~~Company~~ ~~received~~Company ~~the~~has ~~remaining~~monetized ~~net~~many ~~proceeds~~ of ~~$865,081~~its onphysical ~~November 3~~assets, ~~2003,~~and ~~which~~therefore ~~net proceeds~~retains ~~are~~fewer ~~expected~~and toless beliquid assets ~~used~~ to ~~fund~~either agenerate ~~portion~~cash offlow ~~its~~or ~~operating~~sales ~~costs pending~~proceeds in the ~~sale of additional assets~~future.

~~The~~ Moreover, the Company’s ~~recurring~~ability ~~revenues~~to ~~will~~develop beand ~~insufficient~~market tothe ~~cover~~Cherry ~~general~~Creek ~~and~~Project, through the ~~administrative~~sale ~~expenses~~of water delivery contract units, ~~interest~~the onsale ~~outstanding~~of ~~indebtedness~~the ~~and~~entire ~~dividends~~project, ~~when~~ ~~and~~or ifthe ~~declared,~~creation onof ~~outstanding~~a ~~preferred~~joint venture ~~stock.~~to ~~Therefore,~~develop the ~~Company currently~~project ~~plans~~ to ~~fund~~a ~~its~~higher ~~working~~long-term ~~capital~~value, ~~needs~~is ~~during~~uncertain ~~the~~after ~~fiscal~~its ~~year~~application ~~ending~~for ~~March 31,~~approval ~~2004~~of ~~from~~a ~~new~~substitute water ~~revenues~~supply ~~that~~plan itwas ~~may~~unexpectedly ~~generate~~denied ~~from~~by ~~its~~the ~~Water Delivery~~Colorado ~~Contract~~Office ~~Units,~~of ~~from~~the State ~~its~~Engineer ~~existing~~in ~~capital~~April 2004. ~~resources,~~Unless ~~from~~ the ~~sale~~Company ~~of assets,~~is ~~and~~able ~~from~~to ~~new~~provide ~~asset-secured~~its ~~loans.~~customers Astimely assurance of ~~September 30,~~reliable ~~2003,~~deliveries ~~the~~of ~~Company had~~water aproduced ~~working~~by ~~capital~~the ~~deficit~~Cherry Creek Project—through implementation of ~~$115,000.~~an approved Insubstitute ~~the~~water ~~event~~supply ~~that~~plan or other means—the Company ~~is unable~~may not be able to ~~generate~~sell ~~new~~the water delivery ~~revenues~~contract ~~from~~units associated with the ~~sale~~Cherry ofCreek ~~Water~~Project. ~~Delivery~~The ~~Contract~~Company can provide no ~~Units~~assurance orthat ~~the~~its ~~sale~~new ofapplication ~~assets,~~for orapproval ifof ~~any~~a orsubstitute ~~all~~water ofsupply ~~the~~plan ~~revenue~~(filed on September 22, ~~sales~~2004) ~~proceeds are~~includes ~~significantly~~revised ~~less~~terms ~~than~~and ~~anticipated,~~conditions ~~the~~acceptable ~~Company~~to ~~may~~the ~~not~~Colorado ~~have~~Office ~~sufficient~~of the ~~cash~~State ~~available~~Engineer toor ~~fund~~that ~~its~~such ~~estimated~~revised ~~expenses~~terms ~~for~~and ~~the~~conditions ~~next~~will ~~twelve~~be ~~months.~~economically ~~Such shortfall(s)~~viable ~~from~~for ~~anticipated~~the ~~proceeds~~Cherry Creek Project, if ~~material~~approved. Further, ~~could~~the ~~impair~~Company cannot predict (i) whether the ~~Company’s~~new substitute ~~ability~~water tosupply ~~continue~~plan asapplication awill ~~going~~be ~~concern.~~approved or (ii) the period of time required for the

~~The~~Colorado ~~Company~~Office ~~believes~~of ~~that~~the ~~its~~State ~~current~~Engineer ~~resources~~to ~~plus~~review the ~~funds~~new itapplication ~~expects~~and ~~to generate~~make ~~from~~a ~~the~~decision ~~sale~~thereon. ofAs a ~~non-strategic assets~~result, the ~~sale~~Company ofcan ~~Cherry~~provide ~~Creek Project~~no ~~WDCUs,~~assurance ~~and~~that ~~asset-secured~~it ~~loan proceeds~~ will besucceed ~~sufficient~~in torealizing ~~fund~~any ~~its~~meaningful ~~planned~~value ~~capital~~from ~~outlays and operating expenses for~~ the ~~fiscal~~Cherry ~~year~~Creek ~~ending March 31~~Project, ~~2004.~~particularly ~~Although~~in ~~the~~light ~~Company has attempted to reduce its future commitments, as~~ of ~~September 30, 2003,~~ the Company’s isdwindling ~~still committed to certain material~~financial ~~expenditures over the next several years, including the following:~~resources.

Scheduled payments on existing outstanding indebtedness	2004		2005		2006		2007		2008		Thereafter
Scheduled principal payments on existing indebtedness	$	—		28,000		31,000		33,000		37,000		—
Semi-annual interest payments on debentures		375,000		749,000		375,000		—		—		—
Principal redemption of debentures		—		—		8,318,000		—		—		—
Dividends on Series C Preferred Stock		559,000		559,000		559,000		280,000		280,000		—
Dividends on Series F Preferred Stock (1)		—		—		—		—		—		—
Redemption of Series C Preferred Stock (in FY 2007 and FY2008)		—		—		—		3,854,000		3,854,000		—
Redemption of Series F Preferred Stock (in FY 2011 and FY2012)		—		—		—		—		—		2,319,000

As of September 30, 2004, the Company had cash and cash equivalents of $1,044,000. Based on its current estimates, unless the Company is able to consummate sales of the water delivery contract units associated with the Cherry Creek Project prior to approximately September 2005, or otherwise generates additional cash, the Company will not be financially able to sustain business operations thereafter. In light of the uncertainties associated with the Company’s ability to continue as a going concern, the Company’s previous independent registered public accounting firm provided a going concern uncertainty explanatory paragraph in its unqualified opinion with respect to the Company’s consolidated financial statements for the year ended March 31, 2004. See the report of the independent registered public accounting firm in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004 for more details.

~~(1)~~Change ~~Dividends~~of ~~may~~Majority beControl ~~paid in additional shares~~ of ~~Series F Preferred Stock, or in cash, at~~ the Company’s ~~option.~~Board ~~Redemption~~and ~~value~~Declaration ~~assumes~~of ~~dividends~~Dividend ~~are~~on ~~paid~~the ~~in additional~~ Company’s Series C FPreferred ~~redeemable preferred stock, with the entire issue, including interim issuance of dividend shares, redeemed at maturity in 2011 and 2012.~~Stock

As The ~~discussed~~Certificate ~~above,~~of inDesignations ~~conjunction~~of ~~with~~ the ~~new~~Series C ~~asset-secured~~Convertible ~~loan~~Redeemable ~~obtained~~Preferred onStock (the ~~November~~“Series 3C Preferred Stock”) provides that the holders of the outstanding Series C Preferred Stock are entitled to receive, ~~2003~~if and when declared by the Board of Directors, dividends at the ~~Company~~annual rate isof ~~obligated~~7.25% ~~for~~of athe ~~principal~~stated ~~payment~~value ~~with~~per ~~accrued~~share of Series C Preferred Stock. The Certificate of ~~interest~~Designations of ~~$1,050,000~~the Series C Preferred Stock further provides that the dividends shall be payable semi-annually on ~~May~~January 115 and July 15. The dividends are non-cumulative. However, ~~2004~~in the event that two dividends are not declared and paid, the holders of the Series C Preferred Stock gain the right to elect a majority of the Company’s Board of Directors.

~~Management~~ In ~~believes~~order ~~that~~to preserve its liquidity, the ~~fair~~Company ~~value~~did ofnot declare the ~~Cherry~~dividend ~~Creek~~due ~~Project,~~in ifJuly 2003. In early January 2004, and ~~when~~ ~~fully~~in ~~developed~~the orcourse ~~sold,~~of ~~exceeds~~considering the ~~current~~declaration ~~carrying~~and ~~value~~payment of ~~that asset~~scheduled dividends on the ~~Company’s~~Series C ~~balance~~Preferred ~~sheet. Accordingly~~Stock, the Company isconducted ~~attempting~~a ~~to marshal~~thorough ~~its~~review ~~assets~~of inits afinancial position, ~~manner~~legal ~~that~~and ~~will~~contractual ~~provide~~obligations ~~the~~(including ~~Company~~those ~~the working capital required~~ to ~~finance~~investors in the ~~orderly~~Company), ~~development~~business environment, and ~~disposition of that asset~~staffing. ~~Based~~The onreview ~~its~~took ~~existing~~into ~~assets~~consideration ~~and~~the onprojected ~~its~~cost ~~projected~~of operating ~~income and~~the ~~expenses,~~Company during the ~~Company~~period ~~plans~~necessary to ~~fund~~monetize its ~~foreseeable~~assets ~~working~~and ~~capital~~the ~~needs~~inherent ~~for~~uncertainty related to atthe ~~least~~timing ~~one~~of ~~year~~and ~~from~~net ~~the~~proceeds ~~date~~that ofcould ~~this~~be ~~report~~achieved ~~from~~in ~~existing~~an ~~cash,~~orderly ~~proceeds~~process of developing and/or ~~derived~~selling ~~from~~such ~~on-going~~assets. ~~operations~~The ~~and~~review ~~proceeds~~also ~~from~~considered the ~~anticipated~~substantial ~~sale~~uncertainty ~~of certain~~with ~~existing~~respect ~~assets~~to ~~and~~whether orderly ~~the~~development and sale of ~~some~~the ~~Cherry~~Company’s ~~Creek~~assets ~~Project~~would ~~WDCUs~~result ~~and/or from~~in proceeds sufficient to meet the ~~proceeds~~Company’s ofobligations ~~asset-secured~~as ~~loans.~~those Noobligations ~~assurance~~come ~~can~~due. beAs ~~given~~a ~~that~~result ~~the Company~~of ~~will~~that bereview, ~~able~~the toCompany reached ~~sell~~the ~~its~~conclusion ~~assets~~that asit ~~planned~~is ~~or,~~unlikely ifthat the Company ~~elects~~can toprovide a meaningful financial doreturn ~~so,~~for its common stockholders. Since that itreview, ~~will~~there behave ~~able~~been tono ~~raise~~developments ~~additional~~that ~~funds~~change the foregoing conclusion.

~~The~~ In ~~Company~~light ~~has~~of ~~been~~that ~~engaged~~conclusion and in ~~negotiations~~order ~~with~~to ~~various~~preserve ~~parties regarding~~ the ~~sale~~ ~~of some or all of the~~ Company’s ~~Northern~~liquidity, ~~California~~the ~~real~~Board ~~estate and water assets. The Northern California water assets consist~~ of ~~certain riparian and~~ ~~appropriative~~Directors ~~water rights~~decided, ~~together~~in ~~with certain groundwater rights~~January 2004, ~~associated~~ ~~with~~not ~~the~~to ~~Goldfields~~declare ~~located~~either ~~along~~of the ~~Yuba~~then ~~River,~~pending ~~and~~cash ~~the real~~dividends ~~estate~~(scheduled ~~and~~for ~~water~~July 2003 ~~rights~~and ~~associated~~January 2004) ~~with~~on the Company’s ~~rice~~Series C ~~farms located~~Preferred inStock. ~~Yuba~~As ~~County.~~a ~~The~~result of ~~Company~~the ~~has~~decision ~~received~~to ~~various~~withhold ~~proposals~~payment ~~both~~of ~~for individual~~two ~~Northern~~consecutive ~~California~~cash ~~assets~~dividends, ~~and~~the ~~for~~Series C ~~all~~Preferred ofStock holders gained the ~~Northern~~right ~~California assets~~to asnominate a ~~whole.~~majority ~~While~~of the Company’s ~~has~~Board ~~not~~of ~~yet~~Directors. ~~entered~~In ~~into~~light ~~any binding~~of ~~agreements~~that toright, ~~sell any of~~ the ~~Northern~~Company ~~California~~initiated ~~assets,~~discussions ~~it believes that its negotiations~~ with ~~several~~representatives of the ~~parties~~Series C ~~have~~Preferred ~~reached a stage at which a sale~~Stock ~~may~~holders beto ~~consummated~~arrange atan ~~any~~orderly ~~time~~transition inof the ~~near~~Board ~~future.~~majority ~~The~~to ~~sale~~the nominees of ~~some~~the orholders ~~all~~ of the ~~Company’s~~Series C ~~Northern~~Preferred ~~California~~Stock. ~~assets~~On ~~would~~March 1, ~~provide~~2004 ~~the~~Directors ~~Company~~David ~~with additional~~A. ~~working~~Abel, ~~capital~~Robert A. ~~However~~Baker, noand ~~assurance~~Lee ~~can~~K. Harrington betendered ~~given~~their ~~that~~resignations from the Company’s ~~will~~Board beof ~~able~~Directors. toAlso ~~consummate~~on aMarch 1, 2004, ~~sale~~Reginald ofM. ~~any~~Norris, ofJr. ~~its~~was ~~Northern~~elected ~~California assets.~~to ~~While~~serve the ~~sale~~remainder of ~~some~~Mr. Abel’s orterm ~~all~~and ofDennis ~~the~~J. Kenny ~~Northern~~was ~~California~~elected ~~assets,~~to ~~if completed,~~serve ~~would~~the ~~increase~~remainder ~~the~~of ~~Company~~Mr. Baker’s ~~liquidity,~~term. ~~such~~Messrs. Norris aand ~~sale~~Kenny ~~may~~are ~~not generate~~nominees aof ~~profit~~the ~~for~~holders of the ~~Company~~Series C Preferred Stock.

In On ~~the~~March 16, ~~event~~2004, ~~that~~following the ~~Company~~sale ~~is unable to generate sufficient cash to fund its operations for the next twelve months from sales~~ of ~~assets,~~Magnolia ~~sales of Cherry Creek Project WDCUs~~Ranch, orand ~~other~~after ~~operating~~a ~~revenues, the Company would have to take~~ further ~~action~~review ~~that~~of ~~could adversely affect~~ the Company’s ~~ability~~asset ~~to continue~~development toprogram ~~operate~~and orcash toflow ~~recognize full value from its remaining assets. For example~~forecasts, if the Company isdetermined ~~unable~~that toit ~~generate sufficient operating cash from~~had ~~the~~both ~~foregoing sources,~~ the ~~Company could be forced to (i) further reduce its~~cash ~~general~~available and ~~administrative~~the ~~expenses~~statutory bysurplus ~~further~~required ~~reducing its work force, (ii) cease~~ to ~~make~~support ~~required payments on its outstanding debentures or its outstanding preferred stock, (iii) dissolve~~ the ~~Company,~~declaration orof ~~(iv) enter into~~ a ~~corporate~~ ~~transaction~~dividend ~~with~~on ~~a third party for~~ the ~~sale~~Series C ofPreferred ~~the Company or its assets~~Stock. ~~Should~~The ~~the~~Board ~~Company~~of beDirectors ~~prevented~~subsequently ~~from~~declared ~~developing its Cherry Creek Project~~ and~~/or~~ ~~selling~~paid ~~that Project in the ordinary course of operations because of~~ a ~~lack~~dividend ~~of working capital, the Company may be unable~~ to ~~realize~~ the ~~full value~~ holders of ~~the~~ ~~Cherry Creek Project.~~

~~The Company is not a party to off-balance sheet arrangements, does not engage~~15 ~~in trading activities involving non-exchange traded contracts, and is not a party to any transactions with persons or entities that derive benefits from their non-independent relationships~~

~~Table~~Series C Preferred Stock. The dividend that was declared on March 16, 2004, in the amount of approximately ~~Contents~~$559,000, represented the aggregate amount of the semi-annual dividends for July 15, 2003 and January 15, 2004. In connection with the declaration of the dividend, the Company and each of the holders of the Series C Preferred Stock entered into a Stockholder Loan and Security Agreement pursuant to which the holders of Series C Preferred Stock agreed to (i) lend to the Company the entire $559,000 proceeds of the dividend payment, and (ii) lend to the Company funds sufficient to pay any and all dividends that the Board of Directors of the Company may declare on the Series C Preferred Stock with respect to the semi-annual periods ending July 15, 2004, January 15, 2005 and July 15, 2005. The $559,000 loan was evidenced by a Secured Promissory Note, and the holders of the Series C Preferred Stock and the Company agreed that any future loans would be evidenced by additional promissory notes that would be substantially identical to the Secured Promissory Note. The notes bore interest at the rate of eight percent (8%) per annum from their inception, compounded semi-annually on July 15 and January 15, computed on a 360-day year of twelve 30-day months.

~~with~~ On July 15, 2004, the ~~Company.~~Board ~~Other~~of ~~than~~Directors asdeclared ~~described~~a ~~herein~~dividend on the Series C Preferred Stock in the amount of $279,000. Simultaneously, the Company ~~has~~borrowed nothat ~~financial~~amount from the Series C ~~guarantees,~~Preferred ~~debt~~Stock orholders ~~lease~~and ~~agreements~~entered orinto ~~other~~an ~~arrangements~~additional ~~that~~Secured ~~could~~Promissory ~~trigger~~Note. aThe entire ~~requirement~~principal ~~for~~balance anplus ~~early~~all ~~payment~~accrued orand ~~that~~unpaid ~~could~~interest ~~change~~on the ~~value~~notes are due and payable on August 31, 2005. In order to secure the repayment of the notes and the performance of the Company’s obligations ~~assets~~under the Stockholder Loan and Security Agreement, the Company granted to the holders of the Secured Promissory Notes a security interest in the Cherry Creek Project.

~~The~~ On August 24, 2004, Empire Insurance Company ~~does~~(“Empire”), ~~not~~a ~~believe~~holder ~~that~~of ~~inflation~~$3 million ~~will~~of ~~have~~the Company’s aConvertible ~~material~~Subordinated ~~impact~~Debentures, ondue ~~its~~September 30, 2005 (the “Subordinated ~~results~~Debentures”), filed suit in Delaware against the Company, its directors and the holders of ~~operations~~Series C Preferred Stock (the “Defendants”). The suit challenged the March 16, 2004 decisions of the Company’s Board of Directors to declare and pay a dividend on the Series C Preferred Stock and to take other related actions.

~~Risk~~ On ~~Factors~~December 7, 2004, the Defendants and Empire entered into a Settlement Agreement (the “Agreement”), that provides for the dismissal of the suit and that includes mutual releases of all parties to the action. The Agreement further provides (i) elimination of the security interest in the Cherry Creek Project provided to the Series C Preferred Stock holders; (ii) substitution of unsecured Amended Promissory Notes to evidence the loans from the Series C Preferred Stock holders the proceeds of which were used by the Company to fund Series C Preferred Stock dividends declared and paid for the semi-annual periods ended July 15, 2003, January 15, 2004 and July 15, 2004; and (iii) that the Company’s Amended Promissory Notes will be subordinate to the Subordinated Debentures held by Empire. The Amended Promissory Notes are due on October 1, 2005. The Agreement did not have a material impact on the Company’s financial position.

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

~~History~~ The following is a summary of ~~Losses~~the inCompany’s ~~Principal~~results ~~Business~~of operations for the three and six months ended September 30, 2004 and 2003.

~~To date, the Company’s activities have primarily consisted of managing and~~CONSOLIDATED ~~developing its various water rights and related assets, attempting to market~~ and sell its water assets, and those of its clients. The Company has generated revenues of $1,529,000, 1,464,000, and $2,127,000 during the fiscal years ended March 31, 2003, 2002 and 2001, respectively, while incurring net losses of $2,146,000, $3,280,000 and $1,315,000 during such years, respectively. Until Fiscal 2001, the Company had believed that the regulatory obstacles that have prevented the development of a water market in California would be lowered and that the Company would be able to monetize its principal California water assets and to substantially increase its revenues and generate profits therefrom. During Fiscal 2002, those obstacles, along with the spike in electric prices, prevented the Company from completing any new water transfer transactions. Although electric prices receded in Fiscal 2003, conveyance capacity constraints, the trend toward direct transactions between water districts (which eliminate the opportunity for the Company to earn compensation for arranging such transactions) and the Company’s limited financial resources prevented the Company from completing significant new water sales. In light of the Company’s current financial condition, if the Company continues its operations, losses from operations may not be sustainable for the period of time required to develop a viable water market, and it is possible that governmental entities will continue to monopolize access to conveyance and storage facilities thus precluding profitable third-party water transfers, particularly across the Sacramento – San Joaquin River Delta (the “Delta’’). The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company is dependent on sales of Water Delivery Contract Units or non-strategic assets or on arranging asset-secured loans. Reliance on such uncertain sources of revenue or sales proceeds raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.

Uncertainty of Future Water Revenue


	Three months ended						Six months ended
	September 30:						September 30:
	2004			2003			2004			2003
Revenue	$	32,000		$	367,000		$	92,000		$	803,000
Loss before income taxes		(846,000	)		(526,000	)		(1,502,000	)		(1,281,000	)
Income taxes		—			—			3,000			5,000
Net loss		(846,000	)		(526,000	)		(1,506,000	)		(1,285,000	)

~~The Company has encountered significant regulatory obstacles in its attempts to~~16 develop and transfer water for delivery to customers in California. The Company has also faced significant competition in arranging water transfers from governmental agencies including the United States Bureau of Reclamation (“USBR”), the California Department of Water Resources (“DWR”) and the Metropolitan Water District of Southern California, each of which agencies has directly arranged water transfers from agricultural to urban users over the last few years. This competition is significant because these agencies also control, influence and/or price access to publicly-owned conveyance, storage and distribution facilities necessary to carry out California water transfers. As an example, during the quarter ended September 30, 2003, these entities (along with other contractors of USBR and DWR) announced that they plan to allocate virtually all water conveyance capacity across the Delta and virtually all water storage above the Delta among themselves. If implemented, that plan would further limit the potential for development of a price sensitive water market in California. Further, implementation of the plan would severely limit the potential purchasers of water arising from resources owned by the Company and located in areas north of the Delta (including Yuba County). As a result of these developments, the Company has suspended its attempts to arrange water transfers in California and has decided to sell some or all of its Northern California assets to potential purchasers who are positioned to put water arising from the Company’s assets and water rights to beneficial use in the water’s area of origin (north of the Delta).


	Three months ended						Six months ended
	September 30:						September 30:
	2004			2003			2004			2003
Accretion of preferred stock to redemption value		(48,000	)		(40,000	)		(93,000	)		(76,000	)
Preferred stock dividends		(292,000	)		(12,000	)		(292,000	)		(292,000	)
Net loss applicable to common stockholders	$	(1,186,000	)	$	(578,000	)	$	(1,891,000	)	$	(1,654,000	)
Basic and diluted net loss per share applicable to common stockholders	$	(0.15	)	$	(0.07	)	$	(0.23	)	$	(0.20	)

~~Table~~ Management ofdoes ~~Contents~~not expect that the Company will generate federal taxable income for the fiscal year ending March 31, 2005. Accordingly, during the six months ended September 30, 2004, the Company has not recorded a provision for federal income tax but has recorded a provision for the minimum annual state income taxes anticipated for the current fiscal year.

~~Limited~~CALIFORNIA ~~Financial Resources~~OPERATIONS

The Company believes that the Cherry Creek Project, has a value, when fully developed and/or marketed and sold in an orderly manner, in excess of the current book value. As a result of the operating losses sustained by the Company during the last several years, which have been partially offset by sales of certain assets, the Company may not have sufficient available cash to carry out its business plan to maximize the value of the Cherry Creek Project over the longer term. The time period in which a return could be realized on the investment represented by these assets is unknown. These uncertainties will make it difficult for the Company to obtain new financing, if necessary, to pursue its business plans.


	Three months ended					Six months ended
	September 30:					September 30:
	2004		2003			2004		2003
Revenue	$	25,000	$	346,000		$	71,000	$	781,000
Cost of revenue		—		(234,000	)		—		(468,000	)
Gross profit		25,000		112,000			71,000		313,000
Gain on sale of assets		14,000		—			103,000		73,000

~~Commitments~~ Revenues for ~~Purchase~~the three and ~~Sale~~six month periods ended September 30, 2004 consisted of ~~Water~~revenues earned by the Company from consulting services provided on behalf of an unaffiliated third party. Revenue for the three and six month periods ended September 30, 2003 included revenues from the sale of water and from water lease agreements with municipal water districts in California, and from consulting services. During the three and six months ended September 30, 2003, the Company recognized revenue of $321,000 and $641,000, respectively, from sales of water to the City of Inglewood. Such sales were completed, according to the terms of the contract with Inglewood, as of September 30, 2003; therefore, there were no such sales recorded during the three and six months ended September 30, 2004. Cost of revenue for the three and six-month periods in 2003 included the cost of water purchased for resale and amortization of other resource acquisition costs. Consulting services are periodically provided on a limited basis under negotiated fee-for-service contracts, when such services can be efficiently provided by employees of the Company consistent with their other regular duties and when the objectives of the client are compatible or consistent with the Company’s business objectives. Providing such consulting services is supplemental to the Company’s primary operations and is not a regular or recurring source of significant revenue for the Company. Accordingly, there is no cost of revenue recorded for the three and six months ended September 30, 2004, because the cost of providing such periodic services is not material and is not specifically identified.

In The ~~May 1999, the~~ Company’s ~~entered~~consulting ~~into~~services anwere ~~agreement~~substantially ~~for~~completed ~~the~~during ~~purchase of 14,000 acre-feet of water from an unaffiliated company. In accordance with~~ the ~~agreement,~~ ~~the~~three ~~Company~~month ~~paid the seller a deposit of 50% of the total purchase~~period ~~price and agreed to pay the remainder upon periodic delivery of the water or by no later than February 2003. During the year~~ ended ~~March~~September 3130, ~~2001 the Company took delivery of 2~~2004,~~000~~ ~~acre-feet of this water~~ and redelivered the water to an unaffiliated customer. In accordance with the terms of the purchase agreement, the Company paid the seller the remaining 50% of the purchase price for the 2,000 acre-feet delivered. During Fiscal 2003, the Company paid the seller for the remaining 12,000 acre-feet of water available under the purchase contract. In December 1999, the Company entered into an agreement to sell the aforementioned 14,000 acre-feet of water to a third-party buyer at a price that includes a profit to the Company. As noted above, during the year ended March 31, 2001 the Company delivered 2,000 acre-feet of water to this third-party buyer. The remaining 12,000 acre-feet of water cannot currently be delivered to the buyer due to a dispute between the buyer and certain other water agencies who control the means of conveying such ~~water~~services toare ~~the buyer. The buyer and the Company have mutually acknowledged that the dispute (which is~~ not ~~material~~expected to ~~the~~ ~~Company)~~generate ~~represents~~significant arevenue force majeure event preventing current delivery. Although the buyer has not been able to accept delivery of the water, the buyer has paid the Company the entire re-sale purchase price for the full 14,000 acre-feet, as required in ~~the re-sale contract. The balance of this prepayment~~ ~~against~~future ~~the Company’s delivery obligation is accounted for as current deferred revenue of $824,120~~periods. The Company ~~continues~~does tonot becurrently ~~willing~~anticipate tothat ~~deliver~~its ~~the remaining~~California ~~12,000~~operations ~~acre-feet of water to the contracted buyer if and when the~~will ~~force~~provide ~~majeure~~significant ~~issues~~revenue ~~are~~in ~~resolved. Because near-term resolution of these issues is doubtful,~~ the ~~Company~~foreseeable ~~and the buyer are exploring alternatives~~future. ~~Currently,~~ ~~there can be no assurance that viable and mutually attractive alternatives will~~ ~~be identified and/or implemented.~~

~~Item~~ During the three months ended September 330, 2004, the Company sold Lewis Ranch to an unaffiliated purchaser for the purchase price of $250,000 for which the company received $30,000 in cash and a long-term amortizing purchase note receivable in the amount of $220,000. ~~Quantitative~~The sale of Lewis Ranch has been recorded as an installment sale; a gain in the amount of $14,000 was recorded during the three months ended September 30, 2004 based upon the cash received at the time of the sale, and ~~Qualitative~~the ~~Market~~Company ~~Risk~~has ~~Disclosures~~recorded a deferred gain on the sale in the amount of $131,000 as of September 30, 2004, that will be recorded as income in the future, in proportion to cash receipts and the total sales price, as payments are received from the borrower. During the six months ended September 30, 2004, the Company recorded a

~~Prior to September 30, 2003, the Company was exposed to market risk primarily~~17 due to fluctuations in interest rates on its variable rate debt. The Company had utilized both fixed and variable rate debt. As of September 30, 2003, all variable rate debt had been retired. The Company does not enter into any financial transactions for speculative or trading purposes. The following table presents principal cash flows and related interest rates of the Company’s long-term fixed rate debt for the fiscal periods indicated:

Twelve-month
periods ending
September 30:	2004		2005			2006			2007			2008			Thereafter		Total
Fixed rate debt	$	—	$	28,000		$	8,349,000		$	33,000		$	37,000			—	$	8,447,000
Weighted average interest rate		—		9.0	%		9.0	%		9.0	%		9.0	%		—		9.0	%

~~The~~combined ~~carrying~~gain ~~amount~~ of ~~the~~$88,000 ~~asset-secured~~on ~~long-term~~the ~~debt~~sale of ~~$128,000~~Loma isRica Ranch, a rice farm in Yuba ~~reasonable~~County, ~~estimate~~California, and on the sale of ~~fair~~Cardozo ~~value~~Ranch, asa ~~management~~dairy ~~believes~~farm ~~the~~in ~~terms~~San Bernardino County, California. The combined sales of the ~~debt~~Loma Rica and Cardozo Ranches provided proceeds of ~~approximate~~$1,053,000, net of selling costs. During the ~~interest~~six ~~and~~months ~~other~~ended ~~terms~~September 30, ~~currently~~2003, ~~available~~the toCompany recorded a gain of $73,000 on the sale of its investment in the Bear Valley Mutual Water Company, for which the cash proceeds were $717,000.

~~The~~COLORADO ~~carrying amount of the debentures is based upon the principal amount owed,~~OPERATIONS ~~and does not represent management’s opinion with respect to the interest rates~~ and terms of the debt as compared to those commercially available to the Company in the marketplace for similar instruments. Over the past three fiscal years the Company has repurchased debentures in a series of unrelated voluntary transactions between the Company and the individual debenture holders at 55 cents per dollar of the face amount. At the times consummated, each of these repurchase transactions represented the fair value of the debentures. During the fiscal year ended March 31, 2003, the Company repurchased debentures at the price of 55 cents per dollar, which is management’s best estimate of fair value. There were no repurchases during the three or six months ended September 30, 2003. Because there is no quoted market for the debentures, estimating fair value is uncertain, and the Company is uncertain as to whether the Company could repurchase further debentures at this price. Through voluntary, arm’s length, negotiated transactions, the Company has repurchased more than $6.6 million of its debentures over the last four fiscal years at prices which, in aggregate, represent 36% of the face value of the debentures so purchased.


	Three months ended						Six months ended
	September 30:						September 30:
	2004			2003			2004			2003
Revenue	$	7,000		$	21,000		$	21,000		$	22,000
Cost of revenue		(4,000	)		(1,000	)		(11,000	)		(1,000	)
Gross profit		3,000			20,000			10,000			21,000
Gain on sale of assets		—			406,000			—			406,000

~~Table~~ During the three-month and six month periods ended September 30, 2004 and 2003, the Company delivered water produced from nontributary resources of ~~Contents~~the Cherry Creek Project. The Company delivered 37.4 and 14.4 acre-feet of water during the three and six months, respectively, ended September 30, 2004 and 3.1 and 46.6 acre-feet of water during the three and six months, respectively, ended September 30, 2003. Cost of revenue recorded in the three and six months ended September 30, 2004, and 2003, included the energy-related expenses for delivering water and the depletion expenses associated with the sale and delivery of water from the Cherry Creek Project.

~~Item~~ During the six months ended September 430, 2003, the Company entered into a settlement agreement relating to condemnation proceedings concerning its Vessel Parcel of land at its Cheery Creek Project. ~~Controls~~According to the settlement agreement, the Company received a payment of $406,000 in addition to the initial deposit it had received in 2002, at the time of the condemnation. The cost of the condemned property was expensed at the time of the condemnation, and ~~Procedures~~the proceeds of $406,000 for the final settlement were recorded as a gain in 2003.

As The Company’s ability to generate a significant level of ~~September 30,~~revenue ~~2003~~from its Colorado operations, principally through the ~~Company’s~~development ~~President~~ and ~~Chief~~marketing ~~Executive~~of ~~Officer,~~the Cherry Creek Project through the sale of ~~along~~water ~~with~~delivery contract units, the ~~Company’s~~sale ~~Chief~~of ~~Financial~~the ~~Officer~~entire project, ~~evaluated~~or the ~~design~~creation of a joint venture to develop the project to a higher long-term value, is dependent upon certain regulatory and ~~operation~~administrative ofapprovals, that are beyond the Company’s ~~disclosure~~control. ~~controls~~The ~~and~~Company’s ~~procedures~~prospects ~~(as~~with respect ~~defined~~to inthe Cherry Creek Project are particularly uncertain after its application for approval ~~Rule~~of a substitute water supply plan was unexpectedly denied by the Colorado Office of the State Engineer in April ~~13a-15~~2004. ~~under~~Unless the ~~Securities~~Company ~~Exchange~~is ~~Act~~able to provide its customers timely assurance of reliable ~~1934).~~deliveries ~~Based~~of ~~upon~~water ~~this~~produced by the Cherry Creek Project—through implementation of an ~~evaluation,~~approved substitute water supply plan or other means—the Company’s ~~President~~may ~~and~~not ~~Chief~~be ~~Executive~~able ~~Officer,~~to ~~along~~sell the water delivery contract units associated with the Cherry Creek Project. The Company’s ~~Chief~~can ~~Financial~~provide ~~Officer~~no assurance that its new application for approval of a substitute water supply plan (filed on September 22, ~~concluded~~2004) ~~that~~includes revised terms and conditions acceptable to the ~~Company’s~~Colorado ~~disclosure~~Office of the ~~controls~~State Engineer or that such revised terms and ~~procedures~~conditions ~~are~~will ~~effective~~be ineconomically ~~ensuring~~viable ~~that~~for ~~material~~the ~~information~~Cherry ~~related~~Creek toProject, if approved. Further, the Company ~~required~~cannot topredict (i) whether the new substitute water supply plan application will be ~~disclosed~~approved isor ~~included~~(ii) the inperiod of time required for the ~~reports~~Colorado Office ~~that~~of the State Engineer to review the new application and make a decision thereon. As a result, the Company ~~files~~can ~~with~~provide no assurance that it will succeed in realizing any meaningful value from the ~~Securities~~Cherry ~~and~~Creek ~~Exchange~~Project, ~~Commission~~particularly in light of the Company’s dwindling financial resources.

~~There were no significant changes in the Company’s internal control over~~18 financial reporting that occurred during the quarter ended September 30, 2003, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Table~~GENERAL ofAND ~~Contents~~ADMINISTRATIVE EXPENSES

PART II — OTHER INFORMATION


	Three months ended				Six months ended
	September 30:				September 30:
	2004		2003		2004		2003
General and administrative expense	$	679,000	$	850,000	$	1,273,000	$	1,601,000

~~Item~~ General and administrative expenses of $679,000 and $1,273,000 for the three and six months ended September 430, 2004 were $171,000 and $328,000 less, respectively, than general and administrative expenses of $850,000 and $1,601,000 for the same periods of 2003. ~~Submission~~The reduction in expenses was due primarily to lower compensation expense, that included termination benefit payments, resulting from the Company’s elimination of ~~Matters~~two executive and two staff positions between the periods. There was also a reduction in professional legal fees compared to those incurred during the 2003 period as a ~~Vote~~result of ~~Security~~decreased ~~Holders~~activity in 2004 as compared to the earlier period in 2003 which experienced increased activity as a result of the Company’s consideration of potential transaction alternatives. This reduction was partially offset by legal fees associated with responding to the legal actions filed by Empire Insurance Company (see Note 9 to the Condensed Consolidated Financial Statements) and responding to requests for additional information from the Company’s previous independent registered public accounting firm in connection with its audit of the Company’s consolidated financial statements for the year ended March 31, 2004. General and administrative expenses in the three and six months ended September 30, 2003 were greater than that in the prior year primarily because the Company expenses in the prior year were reduced by the reversal of expense previously charged for stock-based compensation expense, in accordance with SFAS 123, and because professional legal fees were greater during 2003 related to the Company’s consideration of potential transaction alternatives.

~~None~~ The Company anticipates that the recent level of general administrative expenses may increase as the Company responds to and resolves the legal action filed by Empire Insurance Company (see Note 9 to the accompanying Notes to Condensed Consolidated Financial Statements), as the Company responds to the increased reporting requirements resulting from passage of the Sarbanes-Oxley Act of 2002, and as the Company utilizes the periodic services of independent consultants to provide some of the services previously provided by employees whose positions have been eliminated. Additionally, the Company has recently revised its compensation program which, if certain performance milestones are achieved, could result in increased levels of employee compensation.

~~Item 5.~~OTHER ~~Other Matters~~INFORMATION

Annual Meeting of Stockholders. The Company has historically held its annual meeting of stockholders in the second week of September following its fiscal year end. The Company has postponed the annual meeting of stockholders. The date has not yet been established by the Board of Directors.


	Three months ended						Six months ended
	September 30:						September 30:
	2004			2003			2004			2003
Interest income	$	7,000		$	4,000		$	13,000		$	7,000
Interest expense		(203,000	)		(189,000	)		(422,000	)		(379,000	)
Other expense		(14,000	)		(29,000	)		(3,000	)		(120,000	)

~~Item 6.~~ Interest ~~Exhibits~~income is comprised of interest earned on the investment of the Company’s cash and equivalents ~~Reports~~and interest earned on ~~Form~~the secured promissory notes received by the Company in connection with the properties that it has sold. The secured notes bear interest at rates between 7% and 9.5% per annum. Interest income for the three and six months ended September ~~8-K~~30, 2004 and 2003 reflected the respective levels of available cash for investment and the respective levels of interest rates earned on interest-bearing instruments during the two periods, respectively.

~~(a)~~ Interest ~~Exhibits:~~expense was incurred primarily upon the Subordinated Debentures during the three and six months ended September 30, 2004 and 2003, and upon long-term debt, that consisted of the Promissory Note to the Series C Preferred Stock holders, during the three and six months ended September 30, 2004.

~~31.1~~19 ~~and 31.2 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~

WESTERN WATER COMPANY

Date: November 13, 2003

/s/ JAMES E. SHERMAN

James E. Sherman

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

~~(b)~~ Other ~~Reports~~expense onfor ~~Form~~the 8three and six months ended September 30, 2004 results primarily from the refund of property taxes, partially offset by increases in expenses. The other expense for the comparable three-K: and six-month periods in 2003 was primarily due to the accrual for property tax expense in the amount of $124,000 retroactively assessed by the County of San Bernardino in May 2003, relating to certain water rights that the Company sold in December 2002. This tax expense is not a recurring expense item.

~~None~~Liquidity and Capital Resources

19Liquidity

~~Table~~ As of ~~Contents~~September 30, 2004, the Company had cash and cash equivalents of $1,044,000. As of September 30, 2004, the Company had working capital and a current ratio of $730,000 and 1.66:1, respectively, as compared to working capital and a current ratio of $2,111,000 and 2.98:1, respectively, at March 31, 2004. During the six months ended September 30, 2004, the Company operated at a net loss of $(1,506,000) and used cash and cash equivalents of $(373,000). The net use of cash and cash equivalents resulted from the net cash use of $(1,482,000) for operating activities, that was offset by net cash of $1,109,000 provided by investing activities. The principal uses of cash for operating purposes were general and administrative expenses, consisting mainly of compensation, professional fees relating to periodic reporting requirements, consulting fees for services provided to supplement the Company’s reduced staff, and insurance expenses. The net cash of $1,109,000 provided by investing activities resulted principally from the sale of certain of the Company’s real estate assets in California.

~~SIGNATURES~~ The Company faces acute pressure on its liquidity. During the six months ended September 30, 2004, the Company’s operating expenses have consumed cash while the sale of real estate assets has partially replenished cash. Because the Company does not generate operating revenues sufficient to meet its operating expenses, the Company is dependent on projected asset sales, that are not certain of completion, to replenish its cash and maintain operating liquidity until such time as the Company can derive meaningful returns from its Cherry Creek Project. However, (i) there is material uncertainty regarding the Company’s ability to negotiate and sell assets at fair value in a timely manner in order to fund operations; (ii) the Company has few assets left to sell; and (iii) while management believes that demand for the Company’s water resources in Colorado continues to increase, the schedule for monetizing the value of the Cherry Creek Project is uncertain in light of the Colorado Office of the State Engineer’s denial of the Company’s application for a substitute water supply plan.

~~Pursuant~~ In tolight of recent and planned property sales and the ~~requirements~~uncertainties surrounding the planned sales of water delivery contract units, the ~~Securities~~Company ~~Exchange~~has ~~Act~~revised its cash forecast and operating plans. Based on its current forecast of ~~1934~~operating expenses, further asset sales, the expectation ~~Registrant~~that ~~has~~it ~~duly~~will ~~caused~~be ~~this~~able ~~report~~to arrange interim financing on ~~Form~~a ~~10-Q~~secured basis, if necessary, and the amount of its cash, the Company believes that it has sufficient capital resources to befund ~~signed~~its operations until approximately September 2005. However, based on its ~~behalf~~current estimates, unless it is able to byconsummate sales of its water delivery contract units associated with the ~~undersigned~~Cherry ~~thereunto~~Creek ~~duly~~Project before ~~authorized~~approximately August 2005, the Company will not have sufficient funds to continue its operations thereafter, particularly in light of the scheduled maturity of its Subordinated Debentures due on September 30, 2005 in the amount of approximately $8,318,000. Therefore, the Company is exploring other strategies for monetizing the Cherry Creek Project or for selling or refinancing the Company.

In light of uncertainty as to whether the Company can meet its operating expenses and financial obligations once current cash balances are depleted, the Company’s previous independent registered public accounting firm concluded that there was substantial doubt that the Company can continue as a going concern as of March 31, 2004. As a result of the uncertainties associated with the Company’s ability to continue as a going concern, the Company’s previous independent registered public accounting firm provided a going concern uncertainty explanatory paragraph in its unqualified opinion with respect to the Company’s consolidated financial statements for the year ended March 31, 2004. See the report of the previous independent registered public accounting firm included as a part of the Company’s Annual Report on Form 10-K for the year ended March 31, 2004 for more details.

Capital Resources

Although the Company has attempted to reduce its future commitments, as of September 30, 2004, the Company was still committed to pay interest on existing indebtedness and estimates it will expend substantial payments for operations through at least September 30, 2005, that is the current planning horizon to develop and monetize the Cherry Creek Project. The Company’s estimates of expenses and cash expenditures to support its operations through September 30, 2005 are based on the assumption that the Company will maintain current staffing levels, asset sale strategies, and activities associated with the development of the Cherry Creek Project.

The Company is currently obligated to make semi-annual interest payments of $375,000 on its Subordinated Debentures through their maturity, payment of $8,318,000 upon maturity of the Subordinated Debentures on September 30, 2005, and mandatory redemption payments on the Series C Preferred Stock in fiscal 2007 and 2008. If and when declared by the Company’s Board of Directors, holders of Series C Preferred Stock have the right to receive semi-annual dividend payments of $279,000 on January 15 and July 15 of each year until the Series C Preferred Stock is redeemed.

The following table summarizes the Company’s committed disbursements for debt and preferred stock instruments outstanding as of September 30, 2004. The table assumes the declaration of Series C Preferred Stock dividends by the Company’s Board of Directors and provides an estimate of anticipated operating expenditures through September 30, 2005.


	Fiscal Years
	2005		2006		2007		2008		2009		Thereafter
Scheduled payments on existing outstanding indebtedness and preferred stock — as of September 30, 2004
Semi-annual interest payments on debentures	$	375,000	$	375,000	$	—	$	—	$	—	$	—
Principal redemption of debentures		—		8,318,000		—		—		—		—
Principal and interest repayment on Series C Loan (1)		—		867,000		—		—		—		—
Dividends on Series C Preferred Stock (1)		280,000		559,000		350,000		70,000		—		—
Dividends on Series F Preferred Stock (2)				—		—		—		—		—
Redemption of Series C Preferred Stock in FY2007 and FY2008				—		3,854,000		3,854,000		—		—
Redemption of Series F Preferred Stock in FY2010 and FY 2011 (2)				—		—		—		—		3,306,000

Total — Scheduled payments on existing outstanding indebtedness and preferred stock	$	655,000		10,119,000	$	4,204,000	$	3,924,000		—		3,306,000

Estimated expenditures for operations during the period through September 30, 2005 (3)	$	2,571,000	$	626,000		—		—		—		(3	)

(1)		The Series C Preferred Stock holders have committed to lend to the Company an amount equal to any and all dividends that the Company may declare on the Series C Preferred Stock with respect to the semi-annual periods ended July 15, 2004, and ending January 15, 2005 and July 15, 2005. On July 15, 2004, the Company declared the semi-annual dividend of approximately $279,000 on the outstanding Series C Preferred Stock. Simultaneously, the Company borrowed the amount of the dividend from the Series C Preferred Stock holders. As a result, the principal balance of the Note, together with accrued interest that is compounded semi-annually on January 15 and July 15, increased, and at September 30, 2004, the balance of the Note and accrued interest was approximately $867,000. As a result of the Settlement Agreement related to the law suit filed by Empire Insurance Company, the $867,000 obligation to the Series C Preferred Stock holders is now evidenced by unsecured Amended Promissory Notes.

(2)		Dividends may be paid in additional shares of Series F Redeemable Preferred Stock, or in cash, at the Company’s option. Interim dividends and redemption value are illustrated assuming that dividends are paid in additional Series F Redeemable Preferred Stock, with the entire issue, including interim issuance of dividend shares, aggregating to $3,306,000, through mandatory redemption in 2010 and 2011.

(3)

The expenditures for operations in periods beyond September 30, 2005, are subject to an even greater range of variability and uncertainty from estimates shown above. As a result, the Company is unable to estimate reasonably the likely amounts of payments for operations throughout fiscal 2006. In addition, the Company’s ability to continue operations or meet its obligations beyond approximately September 2005 is subject to substantial uncertainty because the Company’s plan to generate the cash required for such purposes is dependent upon the sale of water delivery contract units in the Cherry Creek Project.

Contractual Obligations

The following table aggregates the Company’s material expected obligations and commitments as of September 30, 2004:


	Payment Due By Period
Contractual Obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Long-Term Debt (1)	$	20,202,000	$	—	$	16,896,000	$	—	$	3,306,000
Operating Lease Commitments (2)		455,000		73,000		179,000		68,000		135,000

Total Contractual Obligations	$	20,657,000	$	73,000	$	17,075,000	$	68,000	$	3,441,000

(1)

Represents the following long-term commitments:

	(a)		Principal redemption at maturity of the Subordinated Debentures due on September 30, 2005;

	(b)		Notes payable to Series C Preferred Stock holders due at maturity on October 1, 2005;

	(c)		Redemption of Series C Preferred Stock, at the option of the holders, at the rate of one-half of the outstanding shares on April 1, 2006 and redemption, at the option of the holders, of the remaining outstanding shares on April 1, 2007; and,

	(d)		Redemption, at the option of the holders, of the Series F Preferred Stock in 2010 and 2011.

(2)

Represents the following operating lease commitments:

	(a)		Monthly rent for office and related facilities in California and Colorado; and,

	(b)		Annual rental payments for pumping rights of groundwater in California through 2012

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements, as such term is defined in rules enacted by the Securities and Exchange Commission, that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

New Accounting Pronouncements Issued But Not Yet Adopted

In March 2004, the FASB issued an exposure draft of a proposed Statement, “Share-Based Payment, an Amendment of FASB Statements Nos. 123 and 95” that, if adopted, will significantly change the accounting for employee stock options and other equity-based compensation. In October 2004, the FASB voted to delay the initially proposed effective date for six months rather than making it effective on January 2, 2005, as originally proposed. The proposed standard would require companies to expense the fair value of stock options on the grant date and, if adopted, is currently anticipated to be effective for interim or annual periods beginning after June 15, 2005. The Company will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company’s consolidated financial statements. However, it appears that the expense attributable to stock options granted or vested subsequent to July 1, 2005 will be required to be recognized by the Company.

Risk Factors

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

The Company’s history of losses and failure to generate sufficient operating revenue to meet its operating expenses cause substantial doubt about the Company’s ability to continue operations, and the report of the Company’s previous independent registered public accounting firm with respect to the Company’s financial statements as of March 31, 2004, includes a “going concern” explanatory paragraph.

The Company has incurred net losses of $(2,428,000), $(2,146,000), and $(3,280,000) during the fiscal years ended March 31, 2004, 2003 and 2002, respectively. In the six months ended September 30, 2004, the Company incurred additional net loss of $(1,505,600). The Company does not generate sufficient operating revenues to meet its operating expenses. As of September 30, 2004, the Company had cash and cash equivalents of $1,044,000. The Company is currently obligated to make semi-annual interest payments of $375,000 on its Subordinated Debentures through their maturity on September 30, 2005, semi-annual dividend payments of $279,000 on its Series C Preferred Stock if and when declared by the Company’s Board of Directors, payment of $8,318,000 upon maturity of the Subordinated Debentures, repayment of an unsecured loan with a balance as of September 30, 2004 of approximately $867,000, plus all future accrued and unpaid interest, on October 1, 2005, mandatory redemption payments on the Series C Preferred Stock in fiscal 2007 and 2008, and mandatory redemption payments on the Series F Preferred Stock in fiscal 2010 and 2011.

Based on its current forecast of operating expenses and additional asset sales, the expectation that it will be able to arrange interim financing on a secured basis, if necessary, and its cash balances, the Company believes that it has sufficient capital resources to fund its operations until approximately September 2005, even if the Company is unable to sell Cherry Creek Project water delivery contract units within that period. The Company currently funds its operations through the sale of assets, primarily in California. However, the Company has sold many of its physical assets, and therefore retains fewer and less liquid assets to either generate cash or sales proceeds in the future. The Company can provide no assurance that it will, in fact, be able to sell its remaining assets or obtain interim financing sufficient to meet its costs of operations beyond the period that can be funded from its current cash.

In light of the uncertainties associated with the Company’s ability to continue as a going concern, the Company’s previous independent registered public accounting firm provided a going concern uncertainty explanatory paragraph in its unqualified opinion with respect to the Company’s consolidated financial statements for the year ended March 31, 2004. See the report of the previous independent registered public accounting firm in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004 for more details

The Company’s ability to continue operations is dependent on its ability to generate meaningful revenue from the Cherry Creek Project, but there are many obstacles to the Company’s ability to realize value on this project.

The Cherry Creek Project is the largest single asset remaining on the Company’s consolidated balance sheet. The Company is seeking to operate in order to have sufficient time and financial resources to properly develop and monetize the Cherry Creek Project. The timing and amount of revenue generated by the Cherry Creek Project will depend significantly on the development of its service area, on regulatory, judicial and administrative decisions, and on the financial capabilities and resource planning decisions of the project’s potential customers—all of which factors are beyond the Company’s control. The Company is not able to determine the timing of water sales. Given the Company’s current financial condition, it does not have the financial resources to devote to the establishment of incremental infrastructure necessary to support the sale of incremental water delivery contract units beyond those units that are already subject to non-binding letters of intent for purchase. Before the Company can consummate significant water deliveries from the Cherry Creek Project beyond the deliveries called for under the initial water delivery

contract units already proposed, the Company, its prospective customers or a prospective joint venture partner will have to build additional infrastructure to fully develop the project. The need for such additional infrastructure adversely affects the Company’s ability to sell water from the Cherry Creek Project and the prices at which the Company can make such sales.

Moreover, during the six months ended September 30, 2004, the Company’s application for a substitute water supply plan to effect reliable, all-season deliveries from the Cherry Creek Project to downstream customers was denied by the Colorado Office of the State Engineer. Unless the Company is able to provide its customers timely assurance of reliable deliveries of water produced by the Cherry Creek Project—through implementation of an approved substitute water supply plan or other means—the Company may not be able to generate meaningful revenue from the project. Although the Company is pursuing a judicial appeal from the denial of its application, the setback represented by the denial from the Office of the State Engineer will further delay monetization of the Cherry Creek Project. The Company cannot predict the outcome of the appeal or when a decision will be forthcoming from the Water Court. On September 22, 2004, the Company filed a new substitute water supply plan application with limiting terms and conditions aimed at gaining approval. However, the Company can give no assurance that the new application includes revised terms and conditions acceptable to the Office of the State Engineer or that such revised terms and conditions will be economically viable for the Cherry Creek Project, if approved. As a result, the Company cannot provide any assurance that the Cherry Creek Project will generate meaningful revenue in time to meet the Company’s financial obligations or to sustain the Company’s operations beyond approximately September 2005.

The Company cannot provide any assurance that further development of the Cherry Creek Project will occur, or that water sales will occur on acceptable terms or in the amounts or time required to support continued operations or payment of the Company’s financial obligations as they come due. Based on the Company’s current estimates, unless it is able to generate meaningful revenue from the Cherry Creek Project before approximately September 2005, the Company will not have sufficient funds to continue to operate.

Based on its estimates of the costs that will be incurred in the orderly development and sale of the Company’s assets and its estimates of the net proceeds from asset sales in relation to the Company’s obligations, the Company has reached the conclusion that it is unlikely that the Company can provide a meaningful financial return for its common stockholders.

The Company does not generate sufficient revenue to cover operating expenses and its ability to generate meaningful revenue in the foreseeable future is uncertain.

The Company is not currently generating revenue from operations of its remaining California assets and does not anticipate being able to generate revenue from developing them. The Company has encountered significant regulatory obstacles in its attempts to develop and transfer water for delivery to customers in California. The Company has also faced significant competition in arranging water transfers from governmental agencies. This competition is significant because these agencies also control, influence and/or price access to publicly-owned conveyance, storage and distribution facilities necessary to carry out California water transfers. As an example, during the year ended March 31, 2004, these entities announced that they plan to allocate virtually all water conveyance capacity across the Sacramento/San Joaquin River Delta and virtually all water storage above the Delta among themselves. The implementation of the plan would severely limit the potential purchasers of water arising from resources owned by the Company and located in areas north of the Delta (including Yuba County). As a result of these developments, the Company has suspended attempts to arrange water transfers in California and has decided to sell many of its California assets.

The Company’s ability to generate material revenue in the future is dependent on its ability to (i) sell its few remaining California assets, and (ii) develop and market the Cherry Creek Project. As noted above, the recent denial of the Company’s application for a substitute water supply plan has delayed the Company’s schedule for monetizing the Cherry Creek Project. Furthermore, the Company cannot provide any

assurances that it will be able to sell the remaining California assets on favorable terms, if at all. As noted above, if the Company is unable to generate meaningful revenue from the Cherry Creek Project before approximately September 2005, the Company may not have sufficient funds to continue to operate thereafter.

Because the Company may be deemed to have no “independent” directors, actions taken and expenses incurred by its officers and directors on the Company’s behalf may not be deemed to have received “independent” review.

The Company’s Board of Directors is comprised of three directors, two of whom were nominated by holders of the Series C Preferred Stock and one of whom is also the Company’s President and Chief Executive Officer. Because of their relationship to the Company or their relationship to the holders of the Series C Preferred Stock, the Company’s directors may not be deemed “independent.” If the Company has no independent directors, the Company’s ability to take certain actions could be restricted, and actions of the directors taken on behalf of the Company could be challenged.

The Company is subject to various restrictions and must comply with various covenants under its outstanding indebtedness that restricts the manner in which the Company can operate its business and the violation of any covenant could adversely affect the Company’s financial condition.

As of September 30, 2004, the Company had approximately $9.2 million of debt, consisting of (i) $8,318,000 in principal amount of Subordinated Debentures that carry an interest rate of 9% per annum, payable semi-annually, and that mature on September 30, 2005, and (ii) $867,000 of principal and accrued interest payable to holders of its Series C Preferred Stock at maturity on October 1, 2005. This level of indebtedness may adversely affect the Company’s stockholders by:

	•		requiring the dedication of a substantial portion of the Company’s available cash and cash equivalents to the payment of interest on such indebtedness, thereby further reducing the availability of cash to fund the development of the Cherry Creek Project, working capital, capital expenditures and other general corporate purposes;

	•		making it more difficult for the Company to satisfy its obligations with respect to such indebtedness;

	•		limiting the Company’s ability to obtain additional financing;

	•		limiting the Company’s flexibility in planning for, or reacting to, changes in its business and the industry; and

	•		placing the Company at a competitive disadvantage relative to its competitors with less debt or more resources.

Covenants contained in the Subordinated Debentures require the Company to fulfill various obligations, including using its best efforts to file its reports under the Securities Exchange Act of 1934, as amended, on a timely basis. While management of the Company believes that it continues to exercise its best efforts in meeting these obligations, the Company’s annual report on Form 10-K for the year ended March 31, 2004, was filed late as a result of the time needed to develop additional information requested by the Company’s previous independent registered public accounting firm. The Company was not able to satisfy the request without incurring unreasonable effort and expense and, as a result, the Form 10-K was not filed until October 15, 2004. Given the Company’s limited management time and financial resources, the effort required to satisfy unanticipated requests of this type necessarily diverts management time from efforts to monetize assets of the Company and detracts from the Company’s flexibility in planning for, and reacting to, changes in its business.

As a result of the delay in filing the Company’s Form 10-K and as a result of the Company’s change of registered independent public accounting firm on October 15, 2004, the Company’s quarterly report on Form 10-Q for the three months ended June 30, 2004 was also filed late (on November 12, 2004). Despite

its best efforts, this quarterly report on Form 10-Q for the period ending September 30, 2004 is also being filed late.

The Company only has seven employees and may not be able to manage the demands of its operations.

As a result of its current financial condition, the Company has implemented a number of staff reductions, including the most recent in the second quarter of fiscal 2004, that resulted in the termination of employment of the Chief Operating Officer and Chief Financial Officer. The Company depends significantly on the services of Michael Patrick George, the Chairman of the Board of Directors, President, Chief Executive Officer and Chief Financial Officer. Loss of the services of Mr. George would cause a significant interruption of corporate operations. Due to limited manpower, the Company may not be able to maximize the value of its water assets or properly manage the operation of its business. The Company cannot assure investors that its reduced staff can successfully manage the Company’s assets, including the development of the Cherry Creek Project.

Furthermore, the staff reductions could erode morale and affect the focus and productivity of the Company’s remaining employees, including those directly responsible for development, management and monetization of the Company’s assets, that in turn may affect the Company’s revenue in the future. In order to deter the resignation of the Vice President-Engineering, the Company paid him a retention bonus of $50,000 in August 2004, for which he agreed to remain in the employment of the Company until at least September 30, 2005.

The Company recognizes the need to retain an adequate level of competent staffing in order to effectively develop and monetize its Cherry Creek Project. The staff reductions discussed immediately above, together with the continued uncertainty of the Company’s ability to operate as a going concern, may make it increasingly difficult for the Company to retain an adequate level of competent staffing. Although, the Compensation Committee of the Board of Directors recently proposed and the Board of Directors adopted, a compensation program to provide performance incentives for key employees, the receipt of additional compensation by the key employees is dependent upon the Company meeting various milestones and therefore this plan may not provide the necessary incentives for employee retention purposes.

The Company’s common stock qualifies as a “penny stock” under SEC rules that may make it more difficult for stockholders to resell their shares of the Company’s common stock.

Because the Company has net tangible assets of less than $5,000,000 and because the Company’s common stock has a market price per share of less than $5.00, transactions in the Company’s common stock are subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must, among other things:

	•		make a special written suitability determination for the purchaser;

	•		receive the purchaser’s written agreement to a transaction prior to sale;

	•		provide the purchaser with risk disclosure documents that identify certain risks associated with investing in “penny stocks” and that describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and

	•		obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.

Because the Company’s common stock is subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in the Company’s securities. As a result, the market price of the Company’s securities may be depressed, and investors may find it more difficult to sell the Company’s securities.

Because the Company’s securities are quoted on the OTC Bulletin Board, investors experience limitations on the liquidity and price of such securities more than if such securities were quoted or listed on the NASDAQ Stock Market or a national exchange.

The Company’s common stock is quoted on the OTC Bulletin Board, an NASD-sponsored and operated inter-dealer automated quotation system for equity securities not included on the NASDAQ Stock Market. As a result, the holders of the Company’s common stock may find it more difficult to obtain accurate quotations concerning the market value of the stock. Quotation of the Company’s common stock on the OTC Bulletin Board limits the liquidity and price of such securities more than if the securities were quoted or listed on the NASDAQ Stock Market or a national exchange.

New laws and regulations affecting corporate governance impede the Company’s ability to retain and attract board members and executive officers, and increase the costs associated with being a public company.

The Sarbanes-Oxley Act of 2002 is designed to enhance corporate responsibility through new corporate governance and disclosure obligations, increased auditor independence, and the imposition of tougher penalties for securities fraud. In addition, the Securities and Exchange Commission and NASDAQ have adopted rules in furtherance of the Sarbanes-Oxley Act. This act and the related new rules and regulations have increased the complexity and cost of the Company’s corporate governance and the time the Company’s executive officer spends on such issues, and may increase the risk of personal liability for the Company’s directors and executive officer. As a result, it has become more difficult for the Company to attract and retain board members and executive officers involved in the corporate governance process. In addition, the Company has experienced, and will continue to experience, increased costs associated with being a public company, including additional professional and independent registered public accounting firm fees.

In the event the Company is unable to satisfy regulatory requirements relating to internal controls, or if these internal controls over financial reporting are not effective, the Company’s business could suffer.

Section 404 of the Sarbanes-Oxley Act requires companies to do a comprehensive and costly evaluation of their internal controls. As a result, during it’s fiscal year ending March 31, 2006, the Company will be required to perform an evaluation of its internal controls over financial reporting and have its auditors publicly attest to such evaluation. While the Company intends to be able to fully implement the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion, the Company cannot be certain as to the timing of completion of its evaluation, testing and remediation actions or the impact of the same on its operations because there is no precedent available by which to measure compliance adequacy. If the Company fails to timely complete this evaluation, or if its auditors cannot timely attest to its evaluation, the Company could be subject to regulatory investigations or sanctions, costly litigation or a loss of public confidence in its internal controls, that could have an adverse effect on its business.

Circumstances relating to the Company’s commitments for purchase and sale of water to a customer may result in the Company not being able to recognize a substantial amount of deferred revenue recorded on its books.

In May 1999, the Company entered into an agreement for the purchase of 14,000 acre-feet of water from an unaffiliated company. In accordance with the agreement, the Company paid the seller a deposit of 50% of the total purchase price and agreed to pay the remainder upon periodic delivery of the water or by no later than February 2003. In December 1999, the Company entered into an agreement to sell the aforementioned 14,000 acre-feet of water to a third-party buyer at a price that includes a profit to the Company. During the year ended March 31, 2001 the Company took delivery of 2,000 acre-feet of this water and redelivered the water to its customer. In accordance with the terms of the May 1999 purchase agreement, the Company paid the seller the remaining 50% of the purchase price for the 2,000 acre-feet

delivered to the Company and redelivered to the Company’s customer. During fiscal 2003, the Company paid the seller for the remaining 12,000 acre-feet of water available under the May 1999 purchase agreement. However, the remaining 12,000 acre-feet of water cannot currently be delivered to the Company’s customer due to a dispute between that customer and certain other water agencies who control the means of conveying such water to the customer. The customer and the Company have mutually acknowledged that the dispute (that does not involve the Company) represents a force majeure event preventing current delivery. Although the customer has not been able to accept delivery of the water, the customer has paid the Company the entire re-sale purchase price for the full 14,000 acre-feet, as required in the December 1999 re-sale contract. The balance of this prepayment against the Company’s delivery obligation is accounted for as current deferred revenue of $824,120. The Company continues to be willing to deliver the remaining 12,000 acre-feet of water to the contracted customer if and when the force majeure issues are resolved. The Company and the customer continue to explore alternatives. Currently, the Company cannot provide any assurance that viable and mutually attractive alternatives will be identified and/or implemented.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Prior to December 31, 2003, the Company was exposed to market risk primarily due to fluctuations in interest rates on its variable rate debt. The Company had utilized both fixed and variable rate debt. As of December 31, 2003, all variable rate debt had been retired. The Company does not enter into any financial transactions for speculative or trading purposes. The only remaining debt consists of the Subordinated Debentures that bear interest at 9% per annum and a loan with a balance as of September 30, 2004 of approximately $867,000 bearing interest at 8% per annum compounding semi-annually. The Subordinated Debentures with an outstanding balance of $8,318,000 as of September 30, 2004, mature on September 30, 2005.


Twelve-month
periods ending
March 31:	2005		2006			2007		2008		2009		Thereafter		Total
Fixed rate Subordinated		—	$	8,318,000			—		—		—		—	$	8,318,000
Debentures
Fixed rate Amended
Promissory Notes			$	867,000			—		—		—		—	$	867,000
Weighted Average interest rate				8.9	%		—		—		—		—		8.9	%

The carrying amount of the Subordinated Debentures is based upon the principal amount owed, and does not represent management’s opinion with respect to the interest rates and terms of the debt as compared to those commercially available to the Company in the marketplace for similar instruments. In the past, the Company has repurchased Subordinated Debentures in a series of unrelated voluntary transactions between the Company and the individual Subordinated Debenture holders at negotiated discounts from their face amounts. At the times consummated, each of these repurchase transactions represented the fair value of the Subordinated Debentures. During the fiscal year ended March 31, 2003, the Company repurchased Subordinated Debentures at the price of 55 cents per dollar, that is management’s best estimate of fair value. There have been no repurchases of Subordinated Debentures since March of 2003. Because there is no quoted market for the Subordinated Debentures, estimating fair value is uncertain. Through voluntary, arm’s length, negotiated transactions, the Company has repurchased more than $6.6 million of its Subordinated Debentures at prices that, in aggregate, represent 36% of the face value of the Subordinated Debentures so purchased.

The carrying amount of the loan from the Series C Preferred Stock holders is a reasonable estimate of fair value based on management’s belief that the terms of the debt reflect terms that are at least as attractive as terms currently available to the Company in the capital markets, assuming the Company could actually arrange such debt in its current circumstances.

Item 4. Controls and Procedures

The Company currently has seven employees, and conducts only limited financial transactions. The positions of Chief Executive Officer, President and Chief Financial Officer are currently all held by the same person. As of September 30, 2004, the Company’s President, Chief Executive Officer, and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934). Based upon this evaluation, the Company’s President, Chief Executive Officer, and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2004 were effective in timely alerting him to material information required to be included in this report.

There were no significant changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2004, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 5. Other Information

Annual Meeting of Stockholders.

No matters have been submitted for stockholders’ vote since the annual meeting held in September 2002. The Company does not currently expect to call an annual meeting of stockholders during 2004, unless there are proposed actions requiring approval of stockholders, unless requested to do so by a substantial number of stockholders, or unless compelled to do so by the Delaware Court of Chancery.

Item 6. Exhibits

	31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.


	WESTERN WATER COMPANY
Date: December 16, 2004	By:	/s/ Michael Patrick George
		Michael Patrick George
		President, Chief Executive Officer, and Chief Financial Officer

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