CONSOLIDATED WATER CO LTD - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

FOR THE TRANSACTION PERIOD FROM TO

COMMISSION FILE NUMBER: 0-25248

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CONSOLIDATED WATER CO. LTD.
(Exact name of Registrant as specified in its charter)

CAYMAN ISLANDS N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

TRAFALGAR PLACE, WEST BAY ROAD, N/A
P.O. BOX 1114GT, (Zip Code)
GRAND CAYMAN, B.W.I.
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(345) 945-4277

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

ORDINARY SHARES, PAR VALUE CI$1.00
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(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendments to this
Form 10-K. [NOT APPLICABLE]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes [ ] No [X]

The aggregate market value of common stock held by non-affiliates of the
registrant, based on the closing sales price for the registrant's ordinary
shares, as reported on the Nasdaq National Market on March 18, 2003, was
$63,260,188.

As at March 18, 2003, there were 4,239,959 shares of the registrant's
ordinary shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

NONE

EXCHANGE RATES

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

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

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

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

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

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

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TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

INTRODUCTION

Our company was incorporated in August 1973 in the Cayman Islands and
provides water services in the Cayman Islands, Belize, Barbados, the British
Virgin Islands and the Commonwealth of the Bahamas ("the Bahamas"). Our
principal executive offices are located at Trafalgar Place, West Bay Road, Grand
Cayman, Cayman Islands. Our objective is to provide water services in areas
where the supply of potable water is scarce. In addition, we have expertise in
providing wastewater services. We supply potable water, via pipeline, to
business, residential and tourist properties and government facilities,
including any new developments, in our licensed area in the Cayman Islands and
in bulk, pursuant to contracts in Belize, Barbados, the British Virgin Islands
and the Bahamas.

On February 7, 2003, we completed acquisitions of interests in five
companies for a total consideration of approximately $27.8 million, comprised of
$25.5 million in cash and the issue of 185,714 of our ordinary shares. This has
enabled us to increase our presence in the Cayman Islands and the Bahamas and
expand our geographic presence to Barbados and the British Virgin Islands. The
financial results of our company for the year ended December 31, 2002 and
discussion included herein in Parts II Item 6, Item 7, and Item 8 do not include
results from these five companies since they were acquired after the year's end.
In addition to these transactions, by April 30, 2003 or at a later date agreed
to by the parties, we expect to acquire an additional 78.2% interest in
Waterfields Company Limited, a company providing potable water services in
Nassau, the Bahamas for approximately $8.1 million, which would provide us with
a 90.9% interest in Waterfields Company Limited.

In 2000, we completed our acquisition of our wholly owned subsidiary
company, Belize Water Limited, in Belize, Central America and executed an
agreement with South Bimini International Ltd., a Bahamian company, and in 2001,
began to provide water in South Bimini Island, the Bahamas. The business group
structure is based on defined areas of management responsibility and the
geographical location of our operations. The business group segments are Cayman
Islands operations, Belize operations and Bahamas operations. In 2002, the
Cayman Islands operations, Belize operations and Bahamas operations accounted
for 86.9%, 12.1% and 1.0%, respectively, of our total income. In 2001, these
percentages were 88.8%, 11.0% and 0.2%, respectively.

FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS

The information contained in Note 12 Segmented Information to our
consolidated financial statements found on page 56, in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA for the year ended December 31, 2002, 2001 and
2000, is incorporated herein by reference.

BUSINESS COMBINATION

Consolidated financial statements have been presented which include our
wholly-owned subsidiary, Belize Water Limited. This acquisition was accounted
for by the purchase method. Our other two subsidiaries, Cayman Water Company
Limited and Hurricane Hide-A-Way Ltd., which are dormant companies, have been
consolidated. Our recently completed acquisitions of interest in five companies:
DesalCo Limited, its wholly-owned subsidiary DesalCo (Barbados) Ltd., Ocean
Conversion (Cayman) Limited, Ocean Conversion (BVI) Ltd. and Waterfields Company
Limited, which have not been consolidated as the acquisitions had not be
completed as at December 31, 2002.

CAYMAN ISLANDS OPERATIONS

The Cayman Islands comprise three islands, Grand Cayman, Little Cayman and
Cayman Brac, located approximately 460 miles south of Miami, Florida. The three
islands have a total area of approximately 100 square miles.

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Our existing Cayman Islands operations currently produce potable water at
three reverse osmosis seawater conversion plants in Grand Cayman, namely our
Governor's Harbour plant, West Bay plant and Britannia plant. We own the
properties where two of our three water plants are located and have entered into
a 25 year lease on the site where the third plant is located. The current
production capacity of our Governor's Harbour plant is 1.2 million U.S. gallons
per day. The current production capacity of our West Bay plant, which we
operate, is 710,000 U.S. gallons per day. The current production capacity of our
Britannia plant, which we also operate, is 440,000 U.S. gallons per day. Since
the plants began production of water, they have consistently been capable of
operating at or near their rated capacity.

As a result of our acquisition of Ocean Conversion (Cayman) Limited, we
operate, but do not own, three additional reverse osmosis seawater conversion
plants in Grand Cayman with a total installed capacity of 2.9 million U.S.
gallons per day: the Red Gate Road plant with a production capacity of 1.3
million U.S. gallons per day, the Lower Valley plant with a production capacity
of 792,000 U.S. gallons per day and the Red Gate II plant with a production
capacity of 792,000 U.S. gallons per day. The plants that we operate for Water
Authority-Cayman are located on land owned by the Cayman Islands government.
Ocean Conversion (Cayman) Limited provides water on a take or pay basis to the
Water Authority-Cayman, a government owned utility and regulatory agency, under
various licenses and agreements.

Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the properties. Wastewater is discharged into brine wells on
the properties below the level of the feed water intakes.

Electricity to our plants is supplied by Caribbean Utilities Co. Ltd., a
publicly traded utility company. At all three plant sites from which we supply
water to our distribution pipeline, we maintain diesel driven, standby
generators with sufficient capacity to operate our distribution pumps and other
essential equipment during any temporary interruptions in the electricity
supply.

In the event of an emergency, our distribution system is connected to the
George Town, Grand Cayman distribution system of Water Authority-Cayman. In
prior years in order to efficiently maintain our equipment, we have purchased
water from Water Authority-Cayman for brief periods of time. We have also sold
potable water to the Water Authority-Cayman from time to time.

Our pipeline system in the Cayman Islands covers the Seven Mile Beach and
West Bay areas of Grand Cayman and consists of approximately 66 miles of PVC
pipeline. We extend our distribution system periodically as property
developments are completed. We have a main pipe loop covering a major part of
the Seven Mile Beach area. We place extensions of smaller diameter pipe off our
main pipe to service new developments in our service area. This system of
building branches from the main pipe keeps our construction costs low and allows
us to provide service to new areas in a timely manner. During 2002, we completed
a number of small pipeline extensions into newly developed properties within our
franchise area.

Developers are responsible for laying the pipeline within their
developments at their own cost, but in accordance with our specifications. When
a development is completed, the developer then transfers operation and
maintenance of the pipeline to us.

We have a comprehensive layout of our pipeline system, which is maintained
in a computer aided design ("CAD") system. This system is integrated with
digital aerial photographs and a computer generated hydraulic model, which
allows us to accurately locate pipes and equipment in need of repair and
maintenance. It also helps us to plan extensions of and upgrades to our existing
pipeline system.

We rent approximately 3,200 square feet of space for our executive offices
at Trafalgar Place, West Bay Road, Grand Cayman under a lease which expires on
January 31, 2004, with an extension provision until January 31, 2005.

RESIDENTIAL AND COMMERCIAL OPERATIONS IN THE CAYMAN ISLANDS

We enter into standard contracts with hotels, condominiums and other
properties located in our existing licensed area to provide potable water to
such properties. We currently have agreements on differing terms and

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rates to supply potable water to the 309-room Marriott Hotel and the 343-room
Westin Hotel, the 357-room Hyatt Hotel and Britannia Golf Course, and to supply
non-potable water to the SafeHaven Golf Course.

In the Seven Mile Beach area, our primary customers are the hotels and
condominium complexes which serve the tourist industry. In the West Bay area,
our primary customers are residential homes. Occasionally, we also supply to, or
buy from, on an as-needed basis, the Water Authority-Cayman, which serves the
business district of George Town and other parts of Grand Cayman.

We sell bulk water, through our wholly-owned subsidiary Ocean Conversion
(Cayman) Limited, to the Water Authority-Cayman who in turn distribute that
water to properties in the parts of Grand Cayman that are outside of our
licensed area.

Although at a slower pace than in previous years, development is taking
place on Grand Cayman, and particularly in our licensed area to accommodate both
the growing local population and the tourism market. Because our license
requires us to supply water to developments in our licensed area, the planning
department of the Cayman Islands government routinely advises us of proposed
developments in our licensed area. This advance notice allows us to manage our
production capacity to meet anticipated demand. We believe that we have, or have
contracted for, a sufficient supply of water to meet the foreseeable future
demand.

We bill on a monthly basis based on metered consumption. Receivables are
typically collected within 30 to 35 days after the billing date and receivables
not collected within 45 days subject the customer to disconnection from our
water service. In 2002, bad debts represented less than 1% of our total sales
for the year. Customers who have had their service disconnected must pay
re-connection charges.

The following table shows, for each of the five years ended December 31,
2002, our total number of customer connections at the end of each year and
metered sales of water for that year:

The table above does not precisely represent the actual number of customers
we service. In hotels and condominiums, we may only have one customer, which is
the operator of the hotel or the condominium, but we actually supply water to
all of the units within that hotel or condominium development. Of the customers
indicated in the table above, as of 2002, 49.5% were residential, 49.8% were
hotels, condominiums and other commercial customers and 0.7% were government
facilities.

Our contractual range and average sales price per 1,000 U.S. gallons of
potable water sold to our customers for the three years ended December 31, 2002,
2001 and 2000 are as follows:

We have a two-year agreement expiring on December 31, 2004 with Safehaven
Ltd. to supply non-potable water on demand to irrigate an 18-hole golf course.
After December 31, 2004, the agreement may be terminated by either party upon
four months notice.

4

Before 1991, any owner of property within our licensed area could install
water-making equipment for its own use. Since 1991, that option is only
available to private residences, although water plants in existence prior to
1991 can be maintained but not replaced or expanded. When the Marriott Hotel was
built in 1990 in our licensed area, the developer installed its own reverse
osmosis seawater desalination equipment. The equipment proved unreliable, and on
February 4, 1994, we entered into an agreement with the owner of the Marriott
Hotel to supply between 60,000 and 180,000 U.S. gallons of water per month at
our standard tariff rates. If we are required to supply more than 180,000 U.S.
gallons in a month, we will provide the water at our standard tariff rates on a
best efforts basis. The Marriott Hotel continues to operate its own reverse
osmosis equipment to produce water for themselves, although generally in amounts
less than their total monthly requirements.

In 1995, we entered into a ten-year agreement with the owner of the Westin
Hotel. This agreement requires us to supply up to 1.86 million U.S. gallons per
month at a discount to our standard tariff rates, and to supply any additional
demand on a best efforts basis. The Westin Hotel maintains storage capacity
on-site, assists pressurization with on-site re-pumping facilities, and has
provided us with a letter of credit that covers the cost of water supply for 45
days.

In addition, in 2001, we entered into a twenty-five year agreement, which
took effect February 1, 2002, to acquire the Britannia plant and to supply a
minimum of 62 million U.S. gallons of potable water per year on a take or pay
basis to, Cayman Hotel and Golf, Inc., the owner of the Hyatt Grand Cayman
Resort and Britannia golf course. We are required by our government license to
meet any water demand from our customer above the 62 million U.S. gallons of
water supplied per year.

In April 1994, our wholly-owned subsidiary, Ocean Conversion (Cayman)
Limited, was granted a seven-year water supply license by the government of the
Cayman Islands and the Water Authority-Cayman to supply desalinated water from
the Red Gate Road plant. In January 2001, this agreement was extended for seven
years with effect from November 2001. Under the terms of this license Ocean
Conversion (Cayman) Limited is obligated to deliver to the Water
Authority-Cayman the amount of water it demands or 1.2 million U.S. gallons of
water per day on average each month, which ever is less.

In June 1997, our wholly-owned subsidiary, Ocean Conversion (Cayman)
Limited, was granted a seven-year water supply license by the government of the
Cayman Islands and the Water Authority-Cayman to supply desalinated water from
the Lower Valley plant. In August 1999, this agreement was extended with effect
from March 1999 until March 2006. Under the terms of this license Ocean
Conversion (Cayman) Limited is obligated to deliver to the Water
Authority-Cayman the amount of water it demands or 713,000 U.S. gallons of water
per day on average each month, which ever is less.

In December 2001, our wholly-owned subsidiary, Ocean Conversion (Cayman)
Limited, was granted a seven-year water supply license, with effect from
November 2002, by the government of the Cayman Islands and the Water
Authority-Cayman to supply desalinated water from the Red Gate II plant. Under
the terms of this license Ocean Conversion (Cayman) Limited is obligated to
deliver to the Water Authority-Cayman the amount of water it demands or 713,000
U.S. gallons of water per day on average each month, which ever is less.

WASTEWATER SERVICES IN THE CAYMAN ISLANDS

We began providing sewerage services on Grand Cayman in 1973. In 1987, the
Cayman Islands government, through Water Authority-Cayman, constructed a public
sewerage system in part of the Seven Mile Beach area where Governor's Harbour is
located. In 1988, Water Authority-Cayman began processing sewage delivered by
the pipelines and lift stations in that area and we stopped our processing of
sewage. Water Authority-Cayman currently directly bills our former sewerage
customers for its services. In October 2001, we reached an agreement with the
Water Authority-Cayman pursuant to which Water Authority-Cayman assumed, in
November 2002, the operation of two remaining sewage lift stations, which we had
operated. No revenue was earned for wastewater services during the three years
ended December 31, 2002.

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ENGINEERING SERVICES ACQUIRED

As a result of our acquisition of DesalCo Limited in February 2003, we
provide management, engineering and construction services for desalination
projects and are the exclusive agents for sales of DWEER(TM) energy recovery
systems for desalination plants in the Caribbean basin for the next seven years.
DesalCo Limited, which is recognized by suppliers as an original equipment
manufacturer, also acts as the purchasing agent for all companies affiliated
with our company. DesalCo Limited's revenues were $3.4 million for the year
ended December 31, 2002.

DesalCo Limited provides a Managing Director as well as other management,
purchasing and engineering services to Ocean Conversion (Cayman) Limited in the
form of accounting services, personnel management and plant management for a
monthly fee of $30,900. DesalCo Limited also receives a bonus of 4% of the
annual net operating income of Ocean Conversion (Cayman) Limited.

GOVERNMENT

The Cayman Islands are a British Overseas Territory of the United Kingdom
and have had a stable political climate since 1670, when the Cayman Islands were
ceded to England by the Treaty of Madrid. The Queen of England appoints the
Governor of the Cayman Islands to make laws with the advice and consent of the
legislative assembly. There are 15 elected members of the legislative assembly
and three members appointed by the Governor from the Civil Service. The
Executive Council is responsible for day-to-day government operations. The
Executive Council consists of five ministers who are chosen by the legislative
assembly from its 15 popularly elected members, and the three Civil Service
members. The Governor has reserved powers and the United Kingdom retains full
control over foreign affairs and defense. The Cayman Islands are a common law
jurisdiction and have adopted a legal system similar to that of the United
Kingdom.

CUSTOMS DUTIES AND TAXES

We have exemptions from, or receive concessionary rates of, customs duties
on capital expenditures on plant and major consumable spares and supplies
imported into the Cayman Islands as follows:

- there are no local taxes on profit, income, distributions, capital gains
or appreciations of our company in the Cayman Islands;

- we do not pay any import duty or taxes on permeator membranes, electric
pumps and motors and chemicals; and

- we pay duty at the rate of 10% of the cost, including insurance and
transportation to the Cayman Islands, of other plant and associated
materials and equipment to manufacture or supply water in Seven Mile
Beach or West Bay areas.

- Ocean Conversion (Cayman) Limited pays all customs duties up to 10% in
respect of materials and supplies imported for the Red Gate plant and is
reimbursed amounts in excess of this by Water Authority-Cayman.

A major source of revenue to the Cayman Islands government is a 7.5% or 9%
stamp tax, depending on location, on the transfer of ownership of land in the
Cayman Islands. During the period from November 14, 2001 to May 13, 2003 the
stamp tax rate is temporarily set at 5%. To prevent stamp tax avoidance by
transfer of ownership of the shares of a company, which owns land in the Cayman
Islands (as opposed to transfer of the land itself), The Land Holding Companies
(Share Transfer Tax) Law was passed in 1976. The effect of this law is to charge
a company, which owns land or an interest in land in the Cayman Islands, a tax
based on the value of its land or interest in land attributable to each share
transferred. The stamp tax calculation does not take into account the proportion
which the value of a company's Cayman land or interest bears to its total assets
and whether the intention of the transfer is to transfer ownership or part of a
company's entire business or a part of its Cayman land or interest.

Prior to our ordinary shares becoming quoted in the United States, we paid
this tax on private share transfers. We have never paid the tax on transfers of
our publicly traded shares. Since 1994, we have requested

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that the Cayman Islands government exempt us from the share transfer tax. An
exemption from taxation, which was requested to be granted to our company, was
granted to our wholly-owned subsidiary, Cayman Water Company Limited, on January
31, 2003. We have notified the Cayman Islands government that this exemption
from taxation was issued to the wrong company. Other local companies whose
businesses are not primarily related to ownership of land and whose shares are
publicly traded have either received an exemption from the tax or have not been
pursued by government for payment of the tax. We believe it is unlikely that
government will seek to collect this tax on transfers of our publicly traded
shares.

BELIZE OPERATIONS

On July 21, 2000, we acquired Seatec Belize Ltd. and subsequently changed
the name of the company to Belize Water Limited. Belize Water Limited, a wholly
owned subsidiary of Consolidated Water Co. Ltd., provides potable water from one
reverse osmosis seawater conversion plant in Ambergris Caye, Belize, Central
America, capable of producing 420,000 U.S. gallons per day, to Belize Water
Services Ltd. ("BWSL"), which acquired the operations of the Belize Water and
Sewerage Authority in February 2001. Belize Water Limited provides water to
BWSL, which distributes the water through its own distribution system to
residential, commercial and tourist properties in Ambergris Caye, Belize. During
2002, we supplied BWSL with 112.5 million U.S. gallons of water.

OUR OPERATIONS UNDER THE CONTRACT IN BELIZE

We have entered into a contract with Belize Water Services Limited to
supply a minimum of 135,000 U.S. gallons of water per day to Belize Water
Services Limited, which expires in 2011. While we own our production plant in
Belize, we lease the parcel of land on which our plant is located from the
Government of Belize at an annual rent of BZE$1.00. The lease commenced on April
27, 1994 and the term is for 18 years. While we own the plant, at the end of the
contract term, Belize Water Services Limited has the option to:

- purchase the plant at a mutually agreed upon price;

- extend the contract for a mutually agreed period of at least two years,
and upon expiration of such extension, Belize Water Services Limited may
either purchase the production plant at a price to be negotiated with us
or may again extend the agreement for another ten years in exchange for
the transfer of (50%) of the ownership of the production plant to Belize
Water Services Limited at the time of the extension with the transfer of
the remaining 50% of the production plant at the expiration of the ten-
year term; or

- extend the agreement for ten years in exchange for the transfer of 50% of
the ownership of the production plant to Belize Water Services Limited at
the time of the extension with the transfer of the remaining 50% of the
production plant at the expiration of the ten-year term.

When we originally acquired Belize Water Limited in July 2000, we were
contractually obligated to supply water to Belize Water and Sewerage Authority,
a Belize government organization. In early 2001, Belize Water Services Limited,
a private company, purchased Belize Water and Sewerage Authority and assumed our
contract with the Belize Water and Sewerage Authority.

The base price of water supplied, and adjustments thereto, are determined
by the terms of the contract, which provides for annual adjustments based upon
the movement in the government price indices specified in the contract, as well
as monthly adjustments for changes in the cost of diesel fuel and electricity.

We bill on a monthly basis based on metered consumption. Receivables are
due within 21 days after the billing date. Interest of 1.5% per month is charged
on any delayed payments.

In 2001, Belize Water Services Limited submitted claims for compensation
for damages that it believed resulted from our equipment failures during August
2001. They further claimed for the rectification of a minor mistake in the water
rate inflation adjustment formula in the water supply contract that was
negotiated by the previous management and dates back to November 1995. We fully
settled the claim for compensation that resulted from an equipment failure
during the first week of August 2001 and also fully settled Belize Water

7

Services Limited's claim for rectification of the inflation adjustment formula.
We believe that correcting this minor mistake in the agreement will not have a
significant impact on the profitability of our Belize operations going forward.

Belize Water Services Limited distributes our water primarily to
residential properties, small hotels, and businesses that serve the tourist
market.

DEMAND FOR WATER IN BELIZE

We have operated our plant in Belize since July 2000. We believe that water
sales in Belize are less cyclical, but on a similar cycle to sales in the Cayman
Islands. Although both operations cater to similar tourist markets, Belize has a
greater proportion of residents to tourists. Sales were limited before March
2000 because the production capacity of the water plant was lower than demand
and the 21% increase in the number of U.S. gallons supplied in 2001 over 2000
could be expected. Demand does, however, continue to grow as is evidenced by the
20% increase in the number of U.S. gallons supplied in 2002 over 2001.

Our sales in Belize were restricted in August and September 2001 because of
several equipment failures at our plant. We believe that we could have sold more
water during these months if our plant had been able to operate at full
capacity. We have taken action to ensure this does not occur again by increasing
our inventory of critical spare parts.

Our contractual range and average sales price per 1,000 U.S. gallons of
water sold to Belize Water Services Limited for the three years ended December
31, 2002, 2001 and 2000 are as follows:

Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the property. Wastewater is discharged into brine wells on
the property below the level of the feed water intakes.

Electricity to our plant is supplied by Belize Electricity Limited. At the
plant site, we maintain a diesel driven, standby generator with sufficient
capacity to operate our essential equipment during any temporary interruptions
in the electricity supply.

THE GOVERNMENT IN BELIZE, CUSTOMS DUTY, AND TAXES

Belize (formerly British Honduras) achieved full independence from the
United Kingdom in 1981. Today, Belize is a constitutional monarchy with the
adoption of a constitution in 1991. Based on the British model with three
independent branches, the Queen of England is the constitutional head of state,
represented by a Governor General in the government. A prime minister and
cabinet make up the executive branch, while a 29 member elected House of
Representatives and a nine member appointed Senate form a bicameral legislature.
The cabinet consists of a prime minister, other ministers and ministers of state
who are appointed by the Governor-General on the advice of the Prime Minister,
who has the support of the majority party in the House of Representatives.
Belize is an English common law jurisdiction with a Supreme Court, Court of
Appeals and local Magistrate Courts.

The Government of Belize has exempted Belize Water Limited from all import
duties and stamp taxes until January 28, 2005, and company taxes until January
28, 2006. While the Government of Belize confirmed its commitment in a letter
dated June 29, 1992 from the Financial Secretary of Belize to support all future
applications for extensions or additional tax exemptions for the life of the
water supply contract, future exemptions must be approved by the Belizean
legislature and we cannot give any assurance that we will be granted any further
tax exemptions after January 28, 2006.

8

BAHAMAS OPERATIONS

In 2000, we entered into a water supply agreement with South Bimini
International Ltd., a company incorporated in the Commonwealth of Bahamas, and
on July 11, 2001 we began to provide potable water from one reverse osmosis
seawater conversion plant in Bimini, Bahamas capable of producing 115,000 U.S.
gallons per day. Potable water is supplied to the marina and condominium
development, Bimini Sands Resort and Bimini Beach Hotel, a 40 room hotel. The
developer of the Bimini Sands Resort has developed half of a 150-slip marina and
constructed 72 condominium units, and plans to construct a further 138
condominium units. We are not currently aware of any time schedule by the
developer for the completion of the additional 138 condominium units. Under our
agreement, South Bimini International Ltd. is committed to pay for a minimum of
3,000 U.S. gallons of water per customer per month (36,000 U.S. gallons per
customer per year) on a take or pay basis in relation to the Bimini Sands
Resort. The price of water supplied is adjusted for inflation annually based on
Bahamian and U.S. government indices, and adjusted monthly for changes in the
cost of electricity. During 2002, we supplied South Bimini International Ltd.
with 4.5 million U.S. gallons of water.

Our contractual range and average sales price per 1,000 U.S. gallons of
water sold to South Bimini International Ltd. for the two years ended December
31, 2002 and 2001 are as follows:

By April 30, 2003 or such later date as agreed to by the parties, we expect
to acquire a controlling interest in Waterfields Company Limited and continue
selling desalinated seawater on a take or pay basis to the Water & Sewerage
Corporation of the Bahamas under a long-term build, own and operate supply
agreement. The variable elements for direct and indirect costs are changed each
year based on a variety of local and internationally published cost and price
indices.

Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the property. Wastewater is discharged into brine wells on
the property below the level of the feed water intakes.

Electricity to our plants is supplied by Bahamas Electricity Corporation.
At the Bimini plant site, we maintain a diesel driven, standby generator with
sufficient capacity to operate our distribution pumps and other essential
equipment during any temporary interruptions in the electricity supply.

THE GOVERNMENT IN THE BAHAMAS, CUSTOMS DUTY, AND TAXES

The Bahamas gained independence from the United Kingdom in 1973 and since
that time has enjoyed a constitutional parliamentary democracy. The Bahamas are
a member of the Commonwealth of Nations, and as such the Queen of England is the
constitutional head of state. The Governor-General serves as the Queens formal
representative in the Bahamian government. The executive branch is made up of
the Prime Minister and cabinet appointees. The cabinet must be made up of nine
ministers inclusive of the Prime Minister and the Attorney General. The
legislator is a bicameral parliament consisting of the Senate (16 member body),
and a lower legislative House of Assembly (40 member body). The basis of
Bahamian law and legal system is the English common law tradition with a Supreme
Court, Court of Appeals, and a Magistrate court. Justices of the Supreme Court,
Justices of the Court of Appeals and Magistrates are all appointed by the
Governor-General upon the recommendation of the Prime Minister.

We have not been granted any tax exemptions for our Bahamian operations. We
believe that we may be subject to tax ranging from 1% to 2% of the gross
revenues generated by our Bahamian operations. We are currently reviewing the
matter with our Bahamian attorneys. We did not pay any tax to the Bahamian
government during 2002 or 2001, other than National Insurance Board tax on our
employee. We estimate our potential tax liability based on our 2002 and 2001
gross revenues to be less than $3,000.

9

BRITISH VIRGIN ISLANDS OPERATIONS

On February 7, 2003, we began operations in the British Virgin Islands when
we completed our transaction with Transcontinental Finance Corporation Ltd. and
North American Mortgage & Finance Corporation to purchase, 50% of the issued and
outstanding voting stock, certain profit sharing rights and all of the
non-voting shares of Ocean Conversion (BVI) Ltd. Ocean Conversion (BVI) Ltd.
supplies desalinated water produced from its Baughers Bay desalination plant in
Tortola, British Virgin Islands, to the British Virgin Islands Water and
Sewerage Department pursuant to the terms of a water supply agreement.

Ocean Conversion (BVI) Ltd.'s Baughers Bay plant currently has a capacity
of 1.2 million U.S. Gallons per day, although a current expansion project will
enable the plant to produce up to 1.6 million U.S. Gallons per day. The plant is
dual-train seawater reverse osmosis plant with an advanced energy recovery
system. Ocean-Conversion (BVI) Ltd. generates its own electrical power on site
using a large Caterpillar diesel driven generator unit. Ocean Conversion (BVI)
Ltd. also purchases electricity from the BVI Electric Co. to power ancillary
equipment and provide building lighting.

Ocean Conversion (BVI) Ltd. believes that the current water supply
agreement with the British Virgin Islands Water and Sewerage Department was
automatically extended on May 31, 1999 to May 31, 2006 when the British Virgin
Islands Water and Sewerage Department did not make a buyout payment to Ocean
Conversion (BVI) Ltd. as required under the water supply agreement. The British
Virgin Islands Water and Sewerage Department, however, has taken the position,
that the agreement is in force on a month-to-month basis as the parties are
currently negotiating to extend the contract for 15 years at a lower cost to the
British Virgin Islands Water and Sewerage Department.

DesalCo Limited provides a Vice President and Chief Executive Officer as
well as other management and engineering services to Ocean Conversion (BVI) Ltd.
in the form of accounting services, personnel management and plant management
for a monthly fee of $16,639. DesalCo Limited also receives a bonus of 4% of the
annual net operating income of Ocean Conversion (BVI) Ltd.

Under the Articles of Association of Ocean Conversion (BVI) Ltd., we are
able to appoint three of the six directors of the company. Sage Water Holdings
(BVI) Ltd., which owns the remaining 50% of the issued and outstanding voting
shares, is entitled to appoint the remaining three directors. If there is a tied
vote on any matter, the President of the Caribbean Water and Wastewater
Association will be entitled to appoint a junior director to break the tie.

THE GOVERNMENT IN THE BRITISH VIRGIN ISLANDS AND CUSTOMS, DUTIES AND TAXES

The British Virgin Islands is an Overseas Territory of the United Kingdom
that was first settled by the Dutch in 1648 and annexed by the British in 1672.
It adopted a constitution in 1977 and is now a constitutional democracy with
three branches of government: the Executive Council, the Judiciary and the
Legislative Council. Executive authority is vested in the Queen of England,
exercised through her representative, the Governor. The Governor has
responsibility for the courts, public service, police, and foreign affairs and
full policy-making authority. The Governor is not a member of the Executive
Council but receives assistance with the day-to-day operations of the
government. The Executive Council is made up of various members of the
legislature. The Parliament or Legislative Council is made up of (13) thirteen
seats with members elected by popular vote, serving five-year terms. The British
Virgin Islands are an English common law jurisdiction with a Supreme Court,
Court of Appeals and Magistrates Court.

The British Virgin Islands imposes a corporate income tax at a rate of 15%
of net income. However Ocean Conversion (BVI) Ltd. received an exemption, under
the water supply agreement with the British Virgin Islands government, from all
taxes, duties, levies and impositions on items which it imports for the Baugers
Bay plant.

BARBADOS OPERATIONS

On February 7, 2003, we acquired all of the issued and outstanding stock of
DesalCo Limited. DesalCo Limited owns all of the issued and outstanding stock of
DesalCo (Barbados) Ltd., a Barbados company,
10

which operates a desalination plant for Sandy Lane Properties Ltd. in St. James,
Barbados. As a result of our acquisition of DesalCo Limited, we acquired its
wholly owned subsidiary, DesalCo (Barbados) Ltd.

Under the terms of a supply agreement and operating agreement with Sandy
Lane Properties Ltd., DesalCo Limited constructed and operates a seawater
desalination plant, which provides irrigation water for several golf courses on
the Sandy Lane Resort in St. James, Barbados. The plant and property are owned
by Sandy Lane Properties Ltd. and DesalCo Limited operates the plant under the
terms of a five-year operating agreement, which expires in January 2006. Sandy
Lane Properties Ltd. has the option to cancel the operating agreement with three
months prior notice to DesalCo Limited, subject to certain penalties for early
termination of the operating agreement. The operating agreement was assigned to
DesalCo Limited's wholly owned subsidiary, DesalCo (Barbados) Ltd., in January
2001 and DesalCo (Barbados) Ltd. pays a monthly assignment fee to DesalCo
Limited equal to 8% of the gross revenue received under the operating agreement.
DesalCo Limited also provides certain engineering services and pays a portion of
the plant manager's salary in exchange for a management fee of approximately $
14,000 per month and reimbursement of expenses.

THE GOVERNMENT IN BARBADOS AND CUSTOMS, DUTIES AND TAXES

Barbados is an independent island nation that was initially occupied by the
British in 1627. It remained a British colony until 1961 when it was granted
internal autonomy. Barbados gained full independence in 1966 but remains a
member of the British Commonwealth that appoints the Governor General. The
Governor General appoints members of the cabinet with the advice of the prime
minister. The parliament consists of the senate whose 21 members are appointed
by the Governor General and the assembly whose 28 members are popularly elected.
Barbados is an English common law jurisdiction with a Supreme Court.

The net income of DesalCo (Barbados) Ltd. is subject to a 40% Barbados
corporate tax, and all dividend payments and supplier payments are subject to a
Barbados withholding tax of 15%. All customs duties due on parts and equipment
for the plant and value added taxes are paid by Sandy Lane Properties Ltd.

GOVERNMENT REGULATION

In the Cayman Islands, we are regulated by the Water Authority-Cayman on
behalf of the Cayman Islands Government and believe that our operations comply
with all local laws and regulations.

We have been advised by our attorney in Belize that we may require a
license from the Government of Belize under the Water Industry Act 2001 in
relation to our water sales agreement with Belize Water Services Ltd. We are
currently reviewing our obligations under this new legislation, which was
enacted to facilitate the privatization of the government Water and Sewerage
Authority in February 2001. Our Belize operations are regulated by the terms and
conditions of our water supply agreement with Belize Water Services Ltd.
However, the new Water Industry Act 2001 requires all water service providers to
obtain a license from the Public Utilities Commission, which was created under
the Water Industry Act 2001. The Public Utilities Commission has the power to
set the terms and conditions on which all water services in Belize are provided
to the public. The Water Industry Act 2001 also contains certain savings for
operations which were in existence before the new law was enacted, which we
believe may apply to our operations. To date we have not been advised by any
government entity that we require such a license, and do not foresee any
difficulty or significant additional costs in obtaining a license if necessary.
We believe that our operations in Belize comply with all other local laws and
regulations.

We believe that our operations in the Bahamas, the British Virgin Islands
and Barbados comply with all local laws and regulations, and we are currently
reviewing our Bahamian tax status as disclosed above.

MARKET AND SERVICE AREA

Although we are currently only operating in the Cayman Islands, Belize,
Barbados, the British Virgin Islands and the Bahamas, we believe that our
potential market consists of any location where there is a need for potable
water. The desalination of seawater, either through distillation or reverse
osmosis, is the most widely used process for producing fresh water in areas with
an insufficient natural supply. We believe our

11

experience in the development and operation of distillation and reverse osmosis
desalination plants as well as our exclusive rights in the Caribbean to the
DWEER(TM) energy recovery systems provides us with a significant opportunity to
successfully expand our operations beyond the markets in which we currently
operate.

Prior to our acquisition of Ocean Conversion (Cayman) Limited in February
2003, the market that we serviced under our exclusive license in the Cayman
Islands consisted of Seven Mile Beach and West Bay, Grand Cayman, two of the
three most populated areas in the Cayman Islands. The Cayman Islands Government,
through Water Authority-Cayman, supplies water to parts of Grand Cayman, which
are not within our licensed area, as well as to Little Cayman and Cayman Brac.
As a result of our acquisition of Ocean Conversion (Cayman) Limited, we operate
all the reverse osmosis desalination plants of Water Authority-Cayman on Grand
Cayman and supply water under licenses and supply agreements held by Ocean
Conversion (Cayman) Limited with Water-Authority Cayman.

According to the most recent figures published by the Economics and
Statistics Office of the Cayman Islands Government, the population of the Cayman
Islands was approximately 39,410 in 1999. The figures published by the Cayman
Islands Government Department of Tourism show that for the year ended December
31, 2002 the tourist air arrivals decreased 9.4% and tourists cruise ship
arrivals increased 29.63% from the prior year. Total visitors increased to 1.6
million persons for the year ended December 31, 2002 from 1.2 million during the
year ended December 31, 2001.

During 2002, construction continued slowly within our franchise area on the
360-room Ritz Carlton Hotel, condominiums and golf course development, but
construction activity has become more active with the award of a general
construction contract to a large construction company from the United States.
The developer of this project has announced an anticipated completion date of
late 2003. We are not currently aware of any similar large developments in the
final planning stages or under construction within our service area in the
Cayman Islands.

During 2002, the government of the Cayman Islands amended the Development
and Planning Law to permit construction of buildings up to seven stories in
certain zones within our franchise area, including commercial and hotel zones.
Previously, buildings in these zones were only permitted to be built to five
stories. We believe that this change in the law will facilitate the development
of certain properties within our franchise area that may have otherwise not
developed under the old height restrictions.

Our current operations in Belize are located on Ambergris Caye, which
consists of residential, commercial and tourist properties in the town of San
Pedro. This town is located on the southern end of Ambergris Caye. Ambergris
Caye is one of many islands located east of the Belize mainland and off the
southeastern tip of the Yucatan Peninsula. Ambergris Caye is approximately 25
miles long and, according to the Belize National Population Census 2000, has a
population of about 4,500 residents, which has increased approximately 144% over
the past ten years. We provide bulk potable water to Belize Water Services
Limited which distributes this water to this market. Belize Water Services
Limited currently has no other source of potable water on Ambergris Caye.

A 185 mile long barrier reef, which is the largest barrier reef in the
Western Hemisphere, is situated just offshore of Ambergris Caye. This natural
attraction is rapidly becoming a choice destination for scuba divers and
tourists. According to information published by the Belize Trade and Investment
Development Service, tourism is Belize's second largest source of foreign
income, next to agriculture.

Our current operations in the Bahamas are located on South Bimini Island
and in New Providence. The Bimini Islands consist of North Bimini and South
Bimini, and are two of 700 islands which comprise the Bahamas. The Bimini
Islands are located approximately 50 miles east of Ft. Lauderdale, Florida and
are a premier destination for sport fishing enthusiasts. The population of the
Bimini Islands is approximately 1,600 persons and the islands have about 200
hotel and guest rooms available for tourists. The total land area of the Bimini
Islands is approximately 9 square miles.

New Providence, Lyford Caye and Paradise Island, connected by several
bridges, are located approximately 150 miles east southeast of the Bimini
Islands. With an area of 151 square miles and a population of approximately
211,000, Nassau is the political capital and the commercial hub of the Bahamas.
As the largest

12

city with its famed Cable Beach, it accounts for more than two-thirds of the
four million tourists who visit the Bahamas annually.

The British Virgin Islands, like the Cayman Islands, are an Overseas
Territory of the United Kingdom and are situated east of Puerto Rico. They
consist of 16 inhabited and more than 20 uninhabited islands, of which Tortola
is the largest and most populated island. The islands are the center for many
large yacht-chartering businesses.

Barbados, located northeast of Venezuela between the Caribbean Sea and the
North Atlantic Ocean, is an independent sovereign nation member of the British
Commonwealth. It has a population of approximately 277,000 and was traditionally
known for its cultivation of sugar cane. More recently, the economy has
diversified to include tourism and light manufacturing.

We have historically focused on the English speaking Caribbean basin and
adjacent areas as our primary market because:

- many of these areas have little or no naturally occurring fresh water,

- limited local regulations and taxes in the Caribbean basin and adjacent
areas allow for higher returns than more highly regulated countries, and

- these areas contain a greater proportion of tourist properties, which
historically generate higher volume sales than residential properties.

GROWTH STRATEGY

Our strategy is to provide water services in areas where the supply of
potable water is scarce. We have focused on the Caribbean basin and adjacent
areas as our principal market because these areas have: little or no naturally
occurring fresh water; limited local regulations and taxes allow for higher
returns than most highly regulated countries; a large proportion of tourist
properties, which historically have generated higher volume sales than
residential properties.

To execute this strategy, we plan to grow our business by:

- continuing to develop our production and distribution infrastructure and
providing high quality potable water to our licensed area in the Cayman
Islands;

- expanding our existing operations in Belize, Barbados, the British Virgin
Islands and the Commonwealth of the Bahamas;

- extending our operations to other markets outside our current areas of
operation where there is a need for potable water; and

- broadening our existing and future operations into complimentary
services.

REVERSE OSMOSIS TECHNOLOGY

The conversion of saltwater to potable water is called desalination. There
are two primary forms of desalination: distillation and reverse osmosis. Both
methods are used throughout the world and technologies are improving to lower
the costs of production. Reverse osmosis is a separation process in which the
water from a pressurized saline solution is separated from the dissolved
material by passing it over a semi-permeable membrane. An energy source is
needed to pressurize the saline (or feed) water for pretreatment, which consists
of fine filtration and the addition of precipitation inhibitors. Pre-treatment
removes suspended solids, prevents salt precipitation and keeps the membranes
free of microorganisms. Next, a high-pressure pump enables the water actually to
pass through the membrane, while salts are rejected. The feed water is pumped
into a closed vessel where it is pressurized against the membrane. As a portion
of the feed water passes through the membrane, the remaining feed water
increases in salt content. This remaining feed water is discharged without
passing through the membrane. As the discharged feed water leaves the pressure
vessel, its energy is captured by an energy recovery device which is used to
pressurize incoming feed water. The final step

13

is post-treatment, which consists of stabilizing the water, removing hydrogen
sulfide and adjusting the pH and chlorination to prepare it for distribution.

We use reverse osmosis technology to convert seawater to potable water. We
believe that this technology is the most effective and efficient conversion
process for our market. However, we are always seeking ways to maximize
efficiencies in our current processes and to investigate new more efficient
processes to convert seawater to potable water. The equipment at our plants is
among the most energy efficient available and we monitor and maintain our
equipment in an efficient manner. As a result of our years of experience in
seawater desalination, we believe that we have an expertise in the development
and operation of desalination plants which is easily transferable to locations
outside the Cayman Islands.

In addition, DesalCo Limited, our recently acquired wholly-owned
subsidiary, is the exclusive distributor in the Caribbean basin for the
DWEER(TM) system produced by DWEER Technology Limited for use in reverse osmosis
seawater desalination plants. An advanced energy recovery system, the DWEER(TM)
system is utilized to efficiently recover energy from the high-pressure brine
that is the by-product of the reverse osmosis desalination process. Unlike
pump/turbine systems used in many desalination plants around the world, the
DWEER(TM) system recovers nearly 100% of the energy used to pressurize the
salinated (or feed) water after pretreatment. As a result, the DWEER(TM) energy
recovery system for reverse osmosis seawater desalination plants is one of the
most energy efficient systems of its kind. The DWEER(TM) system is used on all
desalination plants that DesalCo Limited has designed since 1990. As a result of
the completion of the DesalCo Limited acquisition in February 2003, our company
has the exclusive distribution rights for the DWEER(TM) system in the Caribbean
basin for seven years.

RAW MATERIALS AND SOURCES OF SUPPLY

All materials, parts and supplies essential to our business operations can
normally be obtained from multiple sources, except for the DWEER(TM) energy
recovery devices which are exclusively manufactured by DWEER Technology Ltd.,
and which we use at all of our plants with the exception of the Belize and
Britannia plants. We have obtained, through our subsidiary DesalCo Limited, a
seven-year exclusive distributorship agreement with DWEER Technology Ltd. for
the DWEER(TM) system. We do not manufacture any parts or components for
equipment essential to our business. Our access to seawater for processing into
potable water is granted through our licenses and contracts with governments of
the various jurisdictions in which we have our operations.

LICENSES, FRANCHISES AND CONCESSIONS

Our exclusive operational license was issued to us by the Cayman Islands
government under The Water (Production and Supply) Law of 1979. Unless renewed,
the license terminates on July 11, 2010.

Two years prior to the expiration of the license, we have the right to
negotiate with the government to extend the license for an additional term.
Unless we are in default under the license, the government may not grant a
license to any other party without first offering the license to us on terms
that are no less favorable than those which the government offers to a third
party.

We must provide, within our licensed area, any requested piped water
service that, in the opinion of the Executive Council of the Cayman Islands
government, is commercially feasible. Where supply is not considered
commercially feasible, we may require the potential customer to contribute
toward the capital costs of pipe-laying. We then repay these contributions to
the customer, without interest, by way of a 10% discount on future billings for
water sales until this advance in aid of construction has been repaid. We have
been installing additional pipeline when we consider it to be commercially
feasible, and the Cayman Islands government has never objected to our
determination regarding commercial feasibility.

Under our exclusive license, we pay a royalty to the government of 7.5% of
our gross water sales revenue. Other than the selling prices provided in our
agreements with the Westin Hotel, the Hyatt Hotel and Britannia Golf Course and
SafeHaven Golf Course, the selling price of water under the license varies
depending upon the type and location of the customer and the monthly volume of
water purchased. The license provides for an

14

automatic adjustment for inflation or deflation on an annual basis, subject to
temporary limited exceptions, and an automatic adjustment for the cost of
electricity on a monthly basis. The Water Authority-Cayman, on behalf of the
government, reviews and approves the calculations of the price adjustments for
inflation and electricity costs.

If we want to adjust our prices for any reason other than inflation or
electricity costs, we have to request prior approval of the Executive Council of
the Cayman Islands government. If the parties fail to agree, the matter is
referred to arbitration. The last such price increase that we requested was
granted in full in June 1985.

SEASONAL VARIATIONS IN OUR BUSINESS

Although, our water sales in the Cayman Islands, Belize and Bimini are
seasonal, the variations between the periods are not significant. We normally
sell more water during the first and second quarters when greater numbers of
tourists are present. Our sales are also affected to some extent by the weather.
We sell less water during the third and fourth quarters, which normally
experience higher rainfall amounts than other times of the year. We do not
believe that our operations in Nassau, Tortola and Barbados will be subject to
seasonal variations in demand.

COMPETITION

We do not compete with other utilities within our licensed area in the
Cayman Islands. Although we have been granted an exclusive franchise for our
present service area, our ability to expand our service area is limited at the
discretion of the government. At the present time, we are the only non-municipal
public water utility on Grand Cayman. The Cayman Islands government, through
Water Authority-Cayman, supplies water to parts of Grand Cayman which are not
within our licensed area.

On Ambergris Caye in Belize, our water supply contract with Belize Water
Services Limited is non-exclusive, and Belize Water Services Limited may seek
contracts with other water suppliers to meet their future needs in San Pedro,
Ambergris Caye, Belize. There are many companies throughout the world which
provide desalination equipment and turnkey water supply contracts, including
Ionics Inc. and Vivendi. We expect to compete with these companies and others
for any future contracts in Belize.

On South Bimini Island in the Bahamas, we supply water to a private
developer and do not have competitors. AquaDesign, an Ionics Inc. company,
operates a seawater desalination plant on North Bimini Island. We can expect
that AquaDesign and Vivendi will compete with us for future water supply
agreements with the Bahamian government on New Providence, Bahamas following our
acquisition of Waterfields Company Limited.

AquaDesign operates seawater desalination plants in West End, Tortola and
on Virgin Gorda in the British Virgin Islands and generally bids against Ocean
Conversion (BVI) Ltd. for projects. There are currently water shortages in
certain areas of Tortola, particularly on the eastern end of the island, and we
believe that additional desalination plants will be required to alleviate these
shortages. Ocean Conversion (BVI) Ltd. is currently examining the feasibility of
constructing a seawater desalination plant in East End, Tortola and has
purchased a small plant for installation in Jost Van Dyke, a small island
northwest of Tortola.

DesalCo (Barbados) Ltd., the wholly-owned subsidiary of DesalCo Limited,
operates a seawater desalination plant which provides irrigation water for
several golf courses on the Sandy Lane Resort in St. James, Barbados. Ionics
Inc. competed with us for this operating agreement. We expect that Ionics and
other companies of comparable size and financial resources will compete with us
for future agreements with the Sandy Lane Resort as well as any other agreements
which we may seek in Barbados.

To implement our growth strategy outside our existing operating areas, we
will have to compete with companies such as Ionics Inc. and Vivendi. These
companies, among others, currently operate in areas in which we would like to
expand our operations. These companies already maintain world-wide operations
and have greater financial, managerial and other resources than our company. We
believe that our low overhead costs, knowledge of local markets and conditions,
exclusive rights in the Caribbean to the DWEER(TM) energy

15

recovery system and our efficient manner of operating desalinated water
production and distribution equipment will provide us competitive advantage on
projects, ranging in size up to 5 million U.S. gallons per day, in the Caribbean
basin and surrounding areas.

ENVIRONMENTAL MATTERS

With respect to our Cayman Islands operations, although not required by
local government regulations, we operate our water plants in accordance with
guidelines of the Cayman Islands Department of Environment. Under these
guidelines, our plants may not have emissions of hydrogen sulfide at levels
greater than 20 milligrams per liter at the exit of the air scrubbers. We are
licensed by the government to discharge concentrated seawater, which is a
by-product of our desalination process, into deep disposal wells.

Our Cayman Islands license requires that our potable water quality meet the
World Health Organization's Guidelines for Drinking Water Quality. On February
1, 2003, we entered into a license amendment with the government under which we
are required by October 1, 2003 to improve the aesthetic quality of our potable
water supply in our licensed area to the same quality as that supplied by Ocean
Conversion (Cayman) Limited to Water Authority-Cayman. We will improve our
water's aesthetic quality by reducing the total dissolved solids in the potable
water supply to less than 200 parts per million. We anticipate making capital
expenditures of approximately $500,000 on new plant and equipment and increasing
operating costs by approximately 1% in the first full year. In addition, noise
levels at our plants cannot exceed the standards established by the U.S.
Occupational Safety and Health Act. To date, we have not received any complaints
from any regulatory authorities concerning hydrogen sulfide emissions.

With respect to our Belize, Bahamas and British Virgin Islands operations,
we are required by our water supply contracts to take all reasonable measures to
prevent pollution of the environment. We are licensed by the Belize, Bahamian
and British Virgin Islands governments to discharge concentrated seawater, which
is a by-product of our desalination process, into deep disposal wells. We
operate our plants in a manner so as to minimize the emission of hydrogen
sulfide gas into the environment. We are not aware of any existing or pending
environmental legislation which may affect our operations in Belize, the Bahamas
and the British Virgin Islands. To date we have not received any complaints from
any regulatory authorities regarding hydrogen sulfide gas emission, nor any
other matter relating to operations.

In Barbados we provide potable water to Sandy Lane Properties Ltd. We are
not aware of any existing or pending environmental legislation which may affect
our operations in Barbados.

EMPLOYEES

Including employees from our acquisitions in February 2003, we employ 47
persons in the Cayman Islands and six persons in Bermuda, eight of whom are
executive and management personnel who have an average of 15 years experience
with our company or in a directly related position. Ten employees are engaged in
administrative and clerical positions. The remaining staff are engaged in
engineering, plant maintenance and operations, pipe laying and repair, leak
detection, new customer connections, meter reading and laboratory analysis of
water quality. Our staff has significant experience and on average has worked
with us for eight years, with three of the employees having worked over 20 years
with us. We presently employ six persons in Belize to manage and operate our
plant. Waterfields Company Limited presently employs eight persons to operate
the plant in New Providence, Bahamas. We directly employ one person in the
Bahamas to manage and operate our water plant and distribution system in South
Bimini. We presently employ five persons in Barbados to operate the water plant
for Sandy Lane Properties. Of the six persons employed in Bermuda, we will
relocate three of them to the Cayman Islands in May 2003 and the remaining three
employees in Bermuda will be made redundant. Currently, we manage the five
employees of Ocean Conversion (BVI) Ltd. in the British Virgin Islands. None of
our employees is party to a collective bargaining agreement. We consider our
relationship with our employees to be good.

16

ITEM 2. PROPERTIES

CAYMAN ISLAND PROPERTIES

GOVERNOR'S HARBOUR PLANT

We own our Governor's Harbour plant and the 8,745 square feet of buildings
which contain the water treatment facility. The plant is located on 3.2 acres,
including 485 feet of waterfront. The current capacity of our Governor's Harbour
plant is 1.2 million U.S. gallons per day. The property surrounding the facility
has yet to be fully developed, although these areas are being developed for
residential and tourist accommodations.

WEST BAY PLANT

We own, operate and maintain our West Bay plant in Grand Cayman, which is
located on 6.1 acres in West Bay. The plant began operating on June 1, 1995 and
was expanded in February 1998 and again in February 2000. On this site, we have
a 2,600 square foot building which houses our water production facilities, a
2,400 square foot building which houses the potable water distribution pumps, a
water quality testing laboratory, office space and water storage capacity
consisting of three 1.0 million U.S. gallon potable water tanks. The current
capacity of our West Bay plant is 710,000 U.S. gallons per day.

BRITANNIA PLANT

On February 1, 2002, we purchased the Britannia plant in Grand Cayman,
which consists of four seawater reverse osmosis production units with a combined
nominal production capacity of 440,000 U.S. gallons of water per day, an 840,000
U.S. gallon bolted steel water tank, potable water high service pumps, and
various ancillary equipment to support the operation. We have entered into a
lease of the 0.73 acre site and steel frame building which houses the plant,
from Cayman Hotel and Golf Inc., for a term of 25 years at an annual rent of
$1.00.

DISTRIBUTION SYSTEM

We own our Seven Mile Beach and West Bay potable water distribution systems
in Grand Cayman. The combined systems consist of approximately 66 miles of
polyvinyl chloride and polyethylene water pipes, valves, curb stops, meter
boxes, and water meters installed in accordance to accepted engineering
standards in the United States of America.

LEASED PROPERTIES

In addition to the properties where our water plants are located, we lease
approximately 3,200 square feet of space for our executive offices at Trafalgar
Place, West Bay Road, Grand Cayman, Cayman Islands. We have an annual lease
expiring on January 31, 2004, with a yearly extension provision until January
31, 2005, on this property.

OPERATIONS ACQUIRED AS A RESULT OF OUR RECENT ACQUISITION OF OCEAN CONVERSION
(CAYMAN) LIMITED

We recently completed a transaction with Transcontinental Finance
Corporation Ltd. and North American Mortgage & Finance Corporation in which we
purchased all of the voting stock and certain profit sharing rights relating to
Ocean Conversion (Cayman) Limited, a Cayman Islands company, and 50% of the
issued and outstanding voting stock and certain profit sharing rights relating
to Ocean Conversion (BVI) Ltd., a British Virgin Islands company. Simultaneously
with the completion of this transaction, we also purchased all of the issued and
outstanding stock of DesalCo Limited from William and Margaret Andrews. As a
result of these two transactions, we own 100% of the voting and non-voting stock
of Ocean Conversion (Cayman) Limited as well as all of the profit sharing rights
relating to Ocean Conversion (Cayman) Limited.

Following completion of our acquisition of all of the outstanding stock of
each of DesalCo Limited and Ocean Conversion (Cayman) Limited, we assumed
operational control over four water production plants in the Cayman Islands, one
of which we already owned, but had contracted with Ocean Conversion (Cayman)

17

Limited to operate until December 2004. The following table provides additional
information about each of these plants and their current operations:

RED GATE ROAD PLANT

Under the terms of the water production and supply license between Ocean
Conversion (Cayman) Limited and the government of the Cayman Islands, Ocean
Conversion (Cayman) Limited is allowed to use the property on which the plant is
located to produce approximately 1.3 million U.S. gallons of desalinated water
per day for sale to the Water Authority-Cayman. Ocean Conversion (Cayman)
Limited owns all of the buildings, equipment feed water wells and brine disposal
wells with the exception of the piping from the wells to the plant (including
feed water and brine disposal) and the main electrical service disconnect, both
of which are owned by Water Authority-Cayman. The property on which the plant is
located is also owned by Water Authority-Cayman. The plant was originally
powered only by electricity, but was upgraded in 1994 to include diesel driven
high-pressure pumps. The original electric driven pumps are still in place as
backups, although the electric pumps alone are not capable of powering the plant
at the full production rate. Upon expiration of the water production and supply
license, as extended, Water Authority-Cayman will take possession of the plant
for no consideration. This license was extended in November 2001 for a period of
seven years and no further extension options are included in the present
license.

GOVERNOR'S HARBOUR PLANT

Ocean Conversion (Cayman) Limited uses the Governor's Harbour Plant to
produce approximately 1.2 million U.S. gallons of desalinated water per day for
sale to us under the terms of a water purchase agreement. We own the property on
which the plant is located, the building, the desalination equipment, feed water
wells and brine disposal wells. The plant was originally powered by multi-stage
centrifugal high-pressure pumps, but was upgraded in 1995 to include positive
displacement high-pressure pumps. The original centrifugal pumps are still in
place as backups, although they are not capable of powering the plant at the
full production rate without the positive displacement high-pressure pumps. The
water purchase agreement was cancelled on completion of our acquisition of Ocean
Conversion (Cayman) Limited.

LOWER VALLEY PLANT

Ocean Conversion (Cayman) Limited provided the plant and equipment to Water
Authority-Cayman under a seven-year vendor-financed sale and operating
agreement. Ocean Conversion (Cayman) Limited operates the electrically-powered
850,000 U.S. gallons per day rated plant and supplies approximately 792,000

18

U.S. gallons of desalinated water per day to Water Authority-Cayman. Ocean
Conversion (Cayman) Limited leases the property on which the plant is located
from Water Authority-Cayman for a minimal annual rent for the duration for the
sale and operating agreement, which expires on March 9, 2006, but which contains
a provision to extend the operating portion of the agreement for an additional
period of seven years. Responsibility for operation of the plant passes to Water
Authority-Cayman upon expiration of the lease-purchase and operating agreement.
No further expansions of the plant are possible due to the restrictive size of
the site and special considerations related to the feed water and brine disposal
wells.

RED GATE II PLANT

Construction of this plant commenced in June 2002 and was completed in
November 2002. Ocean Conversion (Cayman) Limited provided the plant and
equipment to Water Authority-Cayman under a seven-year vendor-financed sale and
operating agreement. Ocean Conversion (Cayman) Limited operated the electrically
powered plant and supplied approximately 792,000 U.S. gallons of desalinated
water per day to Water Authority-Cayman. Ocean Conversion (Cayman) Limited
leases the property on which the plant is located from Water Authority-Cayman
for a minimal annual rent, for the duration of the sale and operating agreement.
Responsibility for operation of the plant passes to Water Authority-Cayman upon
expiration of the sale and operating agreement in November 2009.

MANAGEMENT SERVICES AGREEMENT

DesalCo Limited provides a managing director as well as management and
engineering services for each of the plants operated by Ocean Conversion
(Cayman) Limited for a monthly fee of $30,900. The services include high-level
management support, audit coordination, personnel management and plant
management and maintenance. DesalCo Limited also purchases various parts and
materials for Ocean Conversion (Cayman) Limited at a specified mark-up of 10%,
and provides design services for new plants at a rate of 13% of the project
costs. DesalCo Limited also receives a bonus of 4% of the annual net operating
income of Ocean Conversion (Cayman) Limited. We do not currently expect to
change the contractual arrangements between DesalCo Limited and Ocean Conversion
(Cayman) Limited as a result of the acquisition of these companies.

BELIZE PROPERTIES

We own our San Pedro water production facility in Ambergris Caye, Belize.
The plant consists of a one story concrete block building, which contains a
seawater RO water production plant with a production capacity of 420,000 US
gallons per day. We lease from the Government of Belize at an annual rent of
BZ$1.00, the parcel of land on which our plant is located. The lease commenced
on April 27, 1993 and the term is for 18 years.

BAHAMAS PROPERTIES

We own our Bahamas water production facility in South Bimini, Bahamas. The
plant consists of two 40 foot long standard refrigerated shipping containers,
which contain a seawater RO water production plant with a rated capacity of
115,000 US gallons per day, a 250,000 US gallon bolted steel potable water tank,
and a high service pump skid. The facility is located on a parcel of land owned
by South Bimini International Ltd., and we are allowed, under the terms of our
water supply agreement, to utilize the land for the term of the agreement,
without charge.

ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any ongoing or pending legal proceeding.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of the fiscal year
covered by this Annual Report to a vote of security holders, through the
solicitation of proxies or otherwise.

19

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Our ordinary shares of common stock ("ordinary shares") are listed on the
Nasdaq National Market and trade under the symbol "CWCO". Our ordinary shares
are not traded on any market other than the Nasdaq National Market. Listed
below, for each quarter of the last two fiscal years, are the high and low
closing bid prices for the ordinary shares on the Nasdaq National Market.

The high and low closing bid prices in the table reflect interdealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.

There is no trading market for our redeemable preferred shares, which are
only issued to, or purchased by, long-term employees of our company and which
must be held by these employees for a period of four years before they vest.

On December 31, 2002, we issued options to purchase an additional 97,678
ordinary shares having an exercise price of $11.93 to three directors and one
executive officer. These options are exercisable until March 18, 2006. The
options issued on December 31, 2002 were exempt from registration under
Regulation S promulgated under the Securities Act of 1933 because the options
were offered and sold outside of the United States to non-U.S. persons, as
defined in Regulation S. All of the options were issued as consideration for
services that the directors and the executive officer provided to us during
fiscal year 2002.

HOLDERS

On March 18, 2003, we had 577 holders of record of our ordinary shares.

DIVIDENDS

We have paid cash dividends on our ordinary shares since 1985. The board of
directors' policy is to pay cash dividends out of accumulated profits on a
quarterly basis, if funds are available. Our board of directors have established
a policy, although not a binding obligation, that, subject to annual review by
the board of directors, our company will maintain a dividend pay-out ratio in
the range of 50% to 60% of net income. Our payment of any future cash dividends,
however, will still depend upon our earnings, financial condition, capital
demand and other factors, including the condition in our loan agreement with
Scotiabank (Cayman Islands) Ltd. that dividends be paid from current cash flow.
The board of directors declares and approves all interim dividends. It is a
requirement of our Articles of Association for the board of directors to seek
shareholder approval of the final dividend, if any, at the annual meeting of our
shareholders.

20

Listed below, for each quarter of the last two fiscal years, is the amount
of interim dividends, in U.S. dollars, declared on our issued and outstanding
ordinary shares and redeemable preferred shares. No final dividend was declared
during the last two fiscal years.

First Quarter 2001.......................................... $ 0.10 Per Share
Second Quarter 2001......................................... 0.10 Per Share
Third Quarter 2001.......................................... 0.10 Per Share
Fourth Quarter 2001......................................... 0.10 Per Share

First Quarter 2002.......................................... 0.105 Per Share
Second Quarter 2002......................................... 0.105 Per Share
Third Quarter 2002.......................................... 0.105 Per Share
Fourth Quarter 2002......................................... 0.105 Per Share

EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS

Our company is not subject to any governmental laws, decrees or regulations
in the Cayman Islands which restrict the export or import of capital, or that
affect the remittance of dividends, interest or other payments to non-resident
holders of our securities. The Cayman Islands does not impose any limitations on
the right of non-resident owners to hold or vote our ordinary shares other than
stated below. There are no exchange control restrictions in the Cayman Islands.

TAXATION

The Cayman Islands presently impose no taxes on profit, income,
distribution, capital gains, or appreciations of our company and no taxes are
currently imposed in the Cayman Islands on profit, income, capital gains, or
appreciations of the holders of our securities or in the nature of estate duty,
inheritance, or capital transfer tax. There is no income tax treaty between the
United States and the Cayman Islands.

As discussed in Part I, Item 1, we were subject in the Cayman Islands to a
stamp tax when our shares are transferred. On January 31, 2003, Cayman Water
Company Limited, our wholly-owned subsidiary, obtained an exemption from this
tax from the government of the Cayman Islands. We have notified the Cayman
Islands government that this exemption from taxation was issued to the wrong
company. As of the date of this Annual Report, we have not received notice that
the Cayman Islands government has reissued the exemption to our company, but we
expect this to occur within the near future.

ITEM 6. SELECTED FINANCIAL DATA

As a result of a management decision we have voluntarily adopted accounting
principles generally accepted in the United States of America ("US-GAAP")
effective January 1, 2000. Previously, annual financial statements were prepared
in accordance with International Accounting Standards ("IAS"). As a result all
prior periods' financial information presented in the selected financial data
have been prepared in accordance with "US-GAAP".

The consolidated financial statements include the accounts of our
wholly-owned subsidiaries Belize Water Limited, Cayman Water Company Limited and
Hurricane Hide-A-Way Ltd. The operating results of Belize Water Limited have
been included in the financial statements since the date of the acquisition on
July 21, 2000. All inter-company balances and transactions have been eliminated.

Set forth below is selected financial data based upon our consolidated
financial statements, which does not reflect the acquisitions completed on
February 7, 2003. The table contains information, expressed in US dollars,
derived from our audited consolidated financial statements for the five-year
period ended December 31, 2002. This selected financial data should be read in
conjunction with the more detailed financial statements and related notes
thereto contained elsewhere in this Annual Report. The audited consolidated

21

financial statements for the years ended December 31, 1999 and 1998 and
accountant's reports thereon are not included in this Annual Report.

- ---------------

(1) Net Income represents income after a cumulative change in accounting
principle in 1999 of $117,576 as Statement of Position 98-5 "Reporting on
the Costs of Start-Up Activities" requires start up costs to be expensed as
incurred rather than deferred.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Our objective is to provide water services in areas where the supply of
potable water is scarce and where the use of RO technology to produce potable
water is economically feasible. By focusing on this market, we believe that we
can provide a superior financial return to our investors. To increase share
value and maintain dividend payouts in accordance with current company policy,
we need to expand our revenues by developing new business opportunities both
within our current service areas, and in new areas. We need to maintain our high
operating efficiencies by adhering to our strict equipment maintenance and water
loss mitigation programs in order to achieve gross profit margins between 40%
and 45%. We further believe that many Caribbean basin and adjacent countries,
while being water scarce, also present opportunities for operation of our plants
in limited regulatory settings which are less restrictive than the highly
regulated markets of North America, which promotes cost effective operation of
our equipment.

Our business operations and activities after our acquisitions in February
2003, are conducted in five countries: the Cayman Islands, Belize, Barbados, the
British Virgin Islands and the Bahamas. The recent acquisitions increase our
daily water production capacity in the Cayman Islands and the Bahamas and expand
our geographic presence to include Barbados and the British Virgin Islands.

OPERATIONS BEFORE AND AFTER RECENT ACQUISITIONS

- ---------------

* Million U.S. gallons of water per day.

22

CAYMAN ISLANDS

We have been operating our business on Grand Cayman Island since 1973 and
have been using RO technology to convert seawater to potable water since 1989.
There is a limited natural supply of fresh water on the Cayman Islands. We
currently have an exclusive license from the Cayman Islands government to
process potable water from seawater and then sell and distribute that water by
pipeline to Seven Mile Beach and West Bay, Grand Cayman. Prior to our
acquisition of Ocean Conversion (Cayman) Limited, our Cayman Islands operations
consisted of three reverse osmosis seawater conversion plants in Grand Cayman:
the Governor's Harbour plant, the West Bay plant and the Britannia plant. The
combined capacity of these plants is 2.4 million U.S. gallons per day. Our
pipeline system in the Cayman Islands covers the Seven Mile Beach and West Bay
areas of Grand Cayman and consists of approximately 65 miles of polyvinyl
chloride pipe. Sales in Grand Cayman are made within our licensed area to
approximately 3,100 customers. During 2002, we supplied approximately 523
million U.S. gallons of water in Grand Cayman.

As a result of our recent acquisition of Ocean Conversion (Cayman) Limited,
we now operate an additional three reverse osmosis seawater conversion plants in
Grand Cayman with a total installed capacity of 2.9 million U.S. gallons per
day. Ocean Conversion (Cayman) Limited provides water on a take or pay basis to
the Water Authority-Cayman, a government regulatory agency, and to us under
various licenses and agreements. Revenues of Ocean Conversion (Cayman) Limited
were $6.2 million for the year ended December 31, 2002.

DesalCo Limited provides management, engineering and construction services
for desalination projects and is the exclusive agent for sales of DWEER(TM)
energy recovery systems for desalination plants in the Caribbean basin for the
next seven years. DesalCo Limited, which is recognized by suppliers as an
original equipment manufacturer, also acts as the purchasing agent for all
companies affiliated with our company. DesalCo Limited's revenues were $3.4
million for the year ended December 31, 2002.

BELIZE

Our Belize operation, which was acquired on July 21, 2000, consists of one
reverse osmosis seawater conversion plant on Ambergris Caye, Belize, Central
America, which is capable of producing 420,000 U.S. gallons per day. We sell
water to one customer, Belize Water Services Limited, which then distributes the
water through its own distribution system to residential, commercial and tourist
properties on Ambergris Caye. During 2002, we supplied approximately 113 million
U.S. gallons of water in Belize. Revenues of our wholly owned subsidiary, Belize
Water Limited, were $1.5 million for the year ended December 31, 2002.

BAHAMAS

Prior to our acquisition of operational control of Waterfields Company
Limited, our Bahamas operations consisted of one reverse osmosis seawater
conversion plant in Bimini, Bahamas. Our Bimini plant is capable of producing
115,000 U.S. gallons per day and provides potable water to Bimini Sands Resort
and to the Bimini Beach Hotel. During 2002, we supplied approximately five
million U.S. gallons of water in the Bahamas and revenues were $0.1 million for
the year ended December 31, 2002. We expect the demand for water from our plant
in Bimini to increase as additional phases are completed at the Bimini Sands
development.

As a result of our acquisition of Waterfields Company Limited, we acquired
an additional reverse osmosis seawater conversion plant in the Bahamas.
Waterfields produces potable water from one reverse osmosis seawater conversion
plant in New Providence and has a total installed capacity of 2.64 million U.S.
gallons per day. Waterfields Company Limited provides water on a take or pay
basis to the Water and Sewerage Corporation of the Bahamas under a long-term
build, own and operate supply agreement. Revenues for Waterfields Company
Limited were $4 million for the year ended December 31, 2002.

BARBADOS

The recently acquired Barbados operation consists of one reverse osmosis
seawater conversion plant with a capacity of 1.3 million U.S. gallons per day
which is operated by DesalCo (Barbados) Ltd., the wholly

23

owned subsidiary of DesalCo Limited. The plant provides water to the Sandy Lane
Resort, and during 2002, supplied approximately 393 million U.S. gallons.
DesalCo (Barbados) Ltd. had revenues of $0.7 million for the year ended December
31, 2002.

BRITISH VIRGIN ISLANDS

We recently entered the market in the British Virgin Islands when our
wholly-owned subsidiary, DesalCo Limited acquired operational control and shared
management control of Ocean Conversion (BVI) Ltd., which produces potable water
from one reverse osmosis seawater conversion plant in Tortola, British Virgin
Islands. The plant has a total installed capacity of 1.2 million U.S. gallons
per day. Ocean Conversion (BVI) Ltd. provides water on a take or pay basis to
the Department of Water and Sewerage of the Ministry of Communications and Works
under an agreement with the Government of the British Virgin Islands. Ocean
Conversion (BVI) Ltd.'s revenues were $5.4 million for the year ended December
31, 2002.

OUR OPERATIONS UNDER THE LICENSE IN THE CAYMAN ISLANDS

Our exclusive operational license was issued to us by the Cayman Islands
government under The Water (Production and Supply) Law of 1979. The license
terminates, unless further renewed, on July 11, 2010.

Two years prior to the expiration of the license, we have the right to
negotiate with the government to extend the license for an additional term.
Unless we are in default under the license, the government may not grant a
license to any other party without first offering the license to us on terms
that are no less favorable than those which the government offers to a third
party.

We must provide, within our licensed area, any requested piped water
service which, in the opinion of the Executive Council of the Cayman Islands
government, is commercially feasible. Where supply is not considered
commercially feasible, we may require the potential customer to contribute
toward the capital costs of pipe laying (Advances in Aid of Construction). We
then repay these advances to the customer, without interest, by way of a
discount of 10% on future billings for water sales until this advance in aid of
construction has been repaid. We have been installing additional pipeline when
we consider it to be commercially feasible, and the Cayman Islands government
has never objected to our determination regarding commercial feasibility.

Under the license, we pay a royalty to the government of 7.5% of our gross
US gallon potable water sales revenue. The base selling price of water under the
license presently varies between $8.50 and $22.74 per 1,000 U.S. gallons,
depending upon the type and location of the customer and the monthly volume of
water purchased. The license provides for an automatic adjustment for
inflation/deflation on an annual basis, subject to temporary limited exceptions,
and an automatic adjustment for the cost of electricity on a monthly basis. The
Water Authority (Cayman), on behalf of government, reviews and approves the
calculations of the price adjustments for inflation and electricity costs.

If we want to increase our prices for any reason other than inflation, we
have to request prior approval of the Executive Council of the Cayman Islands
government. If the parties fail to agree, the matter is referred to arbitration.
The last price increase that we requested, other than automatic inflation
adjustments since 1990, was granted in full in June 1985.

DEMAND FOR WATER IN THE CAYMAN ISLANDS

In the past, demand on our pipeline distribution has varied throughout the
year. However, an increase in year-round tourism in recent years has created
more uniform demand for water throughout the year. Demand depends upon the
number of tourists visiting the Cayman Islands and the amount of rainfall during
any particular time of the year. In general, 75% of tourists come from the
United States. Our operating results in any particular quarter are not
indicative of the results to be expected for the full year. The table below
lists the

24

total volume of water we supplied on a quarterly basis for the five years ended
December 31, 2002 to all of our customers:

OUR OPERATIONS UNDER THE CONTRACT IN BELIZE

We have entered into a contract with BWSL to supply a minimum of 135,000 US
gallons of water per day to BWSL expiring in 2011. At the expiry of the
contract, BWSL may at its option extend the term of the agreement or purchase
the plant outright.

The base price of water supplied, and adjustments thereto, are determined
by the terms of the contract, which provides for adjustments based upon the
movement in the government price indices specified in the contract, as well as,
monthly adjustments for changes in the cost of diesel fuel and electricity.

We bill on a monthly basis based on metered consumption. Receivables are
due within 21 days after the billing date. Interest of 1.5% per year is charged
on any delayed payments. As at the date of this Annual Report, BWSL is current
on its outstanding balance. We had no bad debts for our Belize sales for the
year ended December 31, 2002.

BWSL distributes our water primarily to residential properties, small
hotels, and businesses which serve the tourist market.

DEMAND FOR WATER IN BELIZE

We believe that water sales in Belize are cyclical, and on a similar cycle
to sales in the Cayman Islands, since both operations cater to similar tourist
markets. We also believe that water sales will be higher in the future since
sales were limited before March 2000 because the production capacity of the
water plant was lower than demand.

Our sales in Belize were restricted in August, September and October 2001
because of several major component failures at our San Pedro plant. We believe
that we could have sold more water during these months if our plant had been
able to operate at full capacity. We have taken action to ensure this does not
occur again by increasing our inventory of critical spare parts.

The table below lists the total volume of water we supplied to BWSL on a
quarterly basis for the three years ended December 31, 2002:

- ---------------

* Sales made pre-acquisition by Seatec Belize Ltd. Used only for comparison
purposes.

25

OUR OPERATIONS UNDER CONTRACT IN BAHAMAS

In 2000, we entered into a water supply agreement with South Bimini
International Ltd. and began supplying water under this contract on July 11,
2001. Under our agreement South Bimini International Ltd. is committed to pay
for a minimum of 3,000 US gallons of water per customer per month (36,000 US
gallons per customer per year) on a take or pay basis in relation to the Bimini
Sands Resort property in South Bimini Island, Bahamas. The price of water
supplied is adjusted for inflation annually based on Bahamas government indices,
and adjusted monthly for changes in the cost of electricity.

DEMAND FOR WATER IN BAHAMAS

We have only been supplying water in Bimini for approximately twenty-one
months, to a resort property, which is partially completed and a small 40-room
hotel. Currently the resort is comprised of 72 condominiums, and a developing
150-slip marina. By the end of 2003, we anticipate that we will be providing
water to an additional 42 condominiums. The resort property is ultimately
expected to include over 300 condominium units, a large hotel casino, and a
marina that can accommodate twice as many boats as the existing facility. We
believe that water sales in Bimini will be cyclical. We expect that our sales
will be higher during the summer months when tourists and fisherman arrive from
the United States by boat, and when several large angling tournaments are
traditionally held in Bimini. We expect that our sales will be lower during
winter months when the weather is not conducive to pleasure boat travel from the
United States.

The table below lists the total volume of water we supplied to South Bimini
International Ltd. on a quarterly basis for the year ended December 31, 2002 and
the six month period ended December 31, 2001:

CRITICAL ACCOUNTING POLICIES

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

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

Deferred expenditures: These costs were incurred in connection with the
recent acquisitions and pending financing transactions. Costs relating to the
acquisition will be included as part of the purchase price allocation and our
company will seek to repay our existing debt with either new debt, equity or a
hybrid financing. If we

26

do not proceed with new financing, we may be required to expense the amounts
relating to the financing transaction.

Property, plant and equipment: Management makes estimates for the useful
life of assets and reviews its policies from time to time. In 2001, we carried
out an extensive engineering analysis of our potable water production and
distribution equipment in Grand Cayman. As a result of the analysis, management
reassessed the useful economic lives of certain assets. The reassessment
resulted in reduced depreciation of $197,472, or $0.05 per share on a basic and
fully diluted basis for the year ended December 31, 2001.

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

TOTAL INCOME

Our total income includes water sales and other income from all of our
business segments. Water sales income is comprised of retail water sales, via
pipeline, to our individual Cayman Islands customers, and bulk water sales to
Belize Water Services Limited and South Bimini International Ltd. Other income
consists of monthly meter rental charges, sales to companies that deliver water
by truck, connection and re-connection charges and interest income. Until
February 1, 2002, other income also included settlement fee payments for the
supply of water to the Britannia development by the operators of the Hyatt
Hotel, which had its own water production facility.

EXPENSES

Expenses include the cost of water sales ("direct expenses") and our
indirect, or general and administrative expenses. Direct expenses include
royalty payments to the Cayman Islands government; electricity and chemical
expenses; payments to Ocean Conversion (Cayman) Limited relating to the
operation of the Governor's Harbour plant; production equipment and facility
depreciation costs; equipment maintenance and expenses and operational staff
costs. Indirect, or general and administrative, expenses consist primarily of
salaries and employee benefits for administrative personnel, stock compensation
expenses, office lease payments, depreciation on fixed assets used for
administrative purposes, legal and professional fees and financing costs. There
are no income taxes in the Cayman Islands and we are currently exempt from taxes
in Belize. We may be liable for gross revenue tax in the Bahamas as disclosed in
Part I, Item 1, under our discussion of our Bahamas operations.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Total Income

Total income increased by 6.4% from $11,473,706 to $12,206,477 for the
years ended December 31, 2001 and 2002, respectively. Total income is comprised
of water sales and other income.

The Cayman operations increased total income by $420,901 for the year ended
December 31, 2002, which is an increase of 4.1% over the prior year and
represents 57.4% of the increase in total income.

The Belize operations increased total income by $220,618 for the year ended
December 31, 2002, which is an increase of 17.5% over the prior year and
represents 30.1% of the increase in total income.

The addition of the Bahamas operations as of July 11, 2001 increased total
income by $91,252 for the year ended December 31, 2002, which is an increase of
340.8% over the prior year and represents 12.5% of the increase in total income.

27

Water Sales

Total water sales increased by 8.0% from $11,026,923 to $11,910,720 for the
years ended December 31, 2001 and 2002, respectively. Total water sales
increased as a result of several factors detailed below.

Our Cayman operation added $551,783 to water sales for the year ended
December 31, 2002, which is an increase of 5.6% over the prior year and
represents 62.4% of the total increase in water sales. The number of U.S.
gallons we sold during the year ended December 31, 2002 increased by 10.3% over
the prior year. This is the result of supplying water to the Hyatt Hotel and the
Britannia golf course. Our water sales to customers other than the Hyatt Hotel
and the Britannia golf course were essentially flat when compared to the prior
year, despite a 9.4% reduction in tourist air arrivals to the Cayman Islands due
to continued air travel concerns and the downturn of the U.S. economy during the
year ended December 31, 2002.

Our Belize operation added $240,323 to water sales for the year ended
December 31, 2002, which is an increase of 19.5% over the prior year and
represents 27.2% of the total increase in water sales. In June 2002, the
automatic inflation adjustment decreased our Belize water rates by an average of
0.08%. This was more than offset by a 20.0% increase in the number of U.S.
gallons sold for the year ended December 31, 2002 over the prior year. This
increase occurred because during the year ended December 31, 2001, we
experienced equipment malfunctions which temporarily reduced the production
capacity of our plant by 50%.

The addition of the Bahamas operations as of July 11, 2001 increased water
sales by $91,691 for the year ended December 31, 2002, which is an increase of
348.2% over the prior year and represents 10.4% of the total increase in water
sales. This was the result of a 348.4% increase in the number of U.S. gallons
sold for the year ended December 31, 2002 over the prior year.

Other Income

Other income decreased by 33.8% from $446,783 to $295,757 for the years
ended December 31, 2001 and 2002, respectively. This decrease was a result of
the February 1, 2002 termination of the dispute settlement agreement with Cayman
Hotel and Golf Inc., the owner of the Hyatt Grand Cayman Resort and Britannia
golf course. These decreases were partially offset by small increases in meter
rental fees, reconnection fees and interest income from excess cash balances and
on overdue receivables in our Belize operations.

Cost of Water Sales

Cost of water sales increased by 12.7% from $6,109,117 to $6,882,177 for
the years ended December 31, 2001 and 2002, respectively, while water sales
revenues increased by 8.0% for the year ended December 31, 2002.

Our Cayman operations increased cost of water sales by $526,748 for the
year ended December 31, 2002, which is an increase of 9.9%, compared to an
increase of 5.6% in water sales revenue, over the prior year and represents
68.1% of the total increase in cost of water sales. The cost of water sales
increased as a result of direct costs incurred to operate the Britannia plant,
which was acquired on February 1, 2002. These costs included salaries and
benefits for additional staff, equipment maintenance costs, electricity,
chemicals and insurance, which will continue now that we operate the Britannia
plant. Higher insurance costs also increased cost of water sales due to higher
premium rates from our insurance provider, and additional insured values
following the purchase of the Britannia plant and the insurance for the full
replacement value of all our reverse osmosis desalination plants. Some of this
increase was offset, after the Britannia plant was purchased, by a decrease in
water purchase costs resulting from lower volume purchases from Ocean Conversion
(Cayman) Limited. We were unable to take full advantage of the lower per gallon
production costs of the Britannia plant as it only operated at 47.6% capacity in
the eleven months that we owned the Britannia plant due to contractual minimum
purchase requirements from Ocean Conversion (Cayman) Limited.

Our Belize operation increased cost of water sales by $144,334 for the year
ended December 31, 2002, which is an increase of 20.1%, compared to a 19.5%
increase in water sales revenue over the prior year and represents 18.7% of the
total increase in cost of water sales. During the year ended December 31, 2002,
we

28

completed rebuilding the second diesel engine, in accordance with the engine
manufacturer's preventive maintenance recommendations, which increased our cost
of water sales. Also increasing our cost of water sales in 2002 were additional
repairs and maintenance on the existing reverse osmosis equipment. During the
year ended December 31, 2002, we also settled various claims for compensation
made by our customer in Belize in March 2002. These claims were the result of
our equipment failures that occurred in August and September 2001 and a minor
miscalculation in the annual inflation adjustment formula in our contract. The
miscalculation dated back to November 1995, which was prior to our acquisition
of Belize Water Limited, and upon correction, reduced our unit rate for water to
our customer by $0.09 per 1,000 U.S. gallons.

The addition of the Bahamas operations as of July 11, 2001 increased cost
of water sales by $101,978 for the year ended December 31, 2002, which is an
increase of 218.7%, compared to an increase of 348.2% in water sales revenue,
over the prior year and represents 13.2% of the total increase in cost of water
sales. Although this plant still only operated at 17.3% of capacity in 2002, the
2002 improved gross margin illustrates the economies of scale that have been and
will continue to be achieved.

Gross Profit

Gross profit margins decreased from 44.6% to 42.2% for the years ended
December 31, 2001 and 2002, respectively.

Gross profit margins for our Cayman operations decreased from 45.3% to
43.1% for the years ended December 31, 2001 and 2002, respectively. The primary
reasons for this decrease are (i) approximately two thirds of the water produced
by our Britannia plant was sold to the Hyatt Hotel and Britannia golf course at
a lower rate than our standard commercial water rate, (ii) due to flat water
sales to other customers, we were only able to utilize approximately 47.6% of
the production capacity of the Britannia plant and (iii) we were not able to
acquire water from our lowest priced source as a result of the minimum water
purchase obligation we have with Ocean Conversion (Cayman) Limited.

Gross profit margins for our Belize operations decreased from 41.7% to
41.4% for the years ended December 31, 2001 and 2002, respectively. The reason
for the decrease in the gross profit margin is increased cost of water sales
over prior year periods due to the settlement costs with Belize Water Services
Ltd. as discussed above and additional repairs and maintenance on the reverse
osmosis equipment in Belize.

Gross profit margin for our Bahamas operations increased from a negative
77.1% to a negative 25.9% for the year ended December 31, 2002. The negative
gross profit margins were due to lower than expected water sales resulting from
a reduction in tourism and a relatively higher proportion of fixed costs such as
depreciation, which we expected in the early phases of the Bimini Sands Resort
development project. Both of these are temporary factors and are not expected to
continue in the future. Our Bahamas operation has generated positive cash flow
since January 2002.

Indirect Expenses

Indirect expenses increased by 5.7% from $2,600,016 to $2,747,990 for the
years ended December 31, 2001 and 2002, respectively. Indirect expenses were at
22.7% and 22.5% of total income for the year ended December 31, 2001 and 2002,
respectively.

Our Cayman operations increased indirect expenses by $107,890 for the year
ended December 31, 2002, which is an increase of 4.5% over the prior year and
represents 72.9% of the total increase in indirect expenses. We attribute this
increase to our accounting for stock compensation costs, unanticipated
professional fees relating to our December 31, 2001 audit and Form 10-K review
together with increased insurance premiums on our commercial and directors and
officers insurance. Stock compensation costs increased $266,773 for the year
ended December 31, 2002 as a result of an increase in our shares price during
the last fiscal quarter. Unanticipated professional fees relating to our
December 31, 2001 audit and 10-K review were $59,311 and our commercial and
directors and officers insurance increased by $78,503. We also had additional
reporting costs in 2002 due to increased demand for our annual report and proxy
statements. These increases were

29

mostly offset by a reduction in bonus costs and subscription costs for the year
ended December 31, 2002 compared to the prior year.

Our Belize operations increased indirect expenses by $35,273 for the year
ended December 31, 2002, which is an increase of 18.5% over the prior year and
represents 23.8% of the total increase in indirect expenses. During the year
ended December 31, 2002, we had additional costs as a result of higher insurance
premiums and increased costs to repatriate funds.

The addition of the Bahamas operations as of July 11, 2001 increased
indirect expenses by $4,811 for the year ended December 31, 2002 which is an
increase of 116.6% over the prior year and represents 3.3% of the total increase
in indirect expenses. These costs relate to the administration of the Bahamas
operations for a full year.

Net Income

Net income decreased by 6.8% from $2,764,573 to $2,576,310 for the years
ended December 31, 2001 and 2002, respectively, as a result of the factors
indicated above.

Dividends

In December 2001, we increased our per share dividend from $0.10 to $0.105
per quarter and have paid dividends in this amount during the year ended
December 31, 2002

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

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Total Income

Total income increased by 14.4% from $10,025,686 to $11,473,706 for the
years ended December 31, 2000 and 2001, respectively. Total income is comprised
of water sales and other income.

Our Cayman operations increased total income by $626,843 for the year ended
December 31, 2001, which is an increase of 6.6% over the prior year and
represents 43.3% of the increase in total income.

The addition of the operations of Belize Water Limited as of July 21, 2000
increased total income by $794,401 for the year ended December 31, 2001, which
is an increase of 170.9% over the prior year and represents 54.9% of the
increase in total income.

The addition of the Bahamas operations as of July 11, 2001 increased total
income by $26,776 for the year ended December 31, 2001, which represents 1.8% of
the increase in total income.

Water Sales

Total water sales increased by 15.1% from $9,576,959 to $11,026,923 for the
years ended December 31, 2000 and 2001, respectively. Total water sales
increased as a result of several factors detailed below.

Our Cayman operation added $657,784 to water sales for the year ended
December 31, 2001, which is an increase of 7.2% over the prior year and
represents 45.4% of the total increase in water sales. Of this increase, 70.1%
was due to a 5.1% increase in the number of U.S. gallons sold. This increase was
due to a larger customer base and increased usage by commercial, residential and
government customers, primarily Water Authority-Cayman, which experienced
temporary shortfalls in its production capacity. The remaining 29.9%

30

of the increase was due to an increase in water rates of approximately 2.5% in
accordance with our license agreement.

Our Cayman Island average water rate for the first nine months of 2001 was
$20.54 per thousand U.S. gallons. For the final three months of 2001, our rates
were reduced by 1.2% using the Cayman Islands Consumer Price Index automatic
adjustment formula contained in our license. Our rates were automatically
reduced by 0.39% in January 2002.

Our Belize operation added $765,847 to water sales for the year ended
December 31, 2001, which is an increase of 164.7% over the prior year and
represents 52.8% of the total increase in water sales. Virtually all of the
increase was due to an additional six months of operations over the prior
period. The number of U.S. gallons sold in 2001 was however 21% higher than the
annual figures of the prior year due to increased demand from an expansion of
the plant completed in March 2000.

The addition of the Bahamas operations as of July 11, 2001 increased water
sales by $26,333 for the year ended December 31, 2001, which represents 1.8% of
the total increase in water sales.

Other Income

Other income decreased by 0.4% from $448,727 to $446,783 for the years
ended December 31, 2000 and 2001, respectively, as a result of a slight decrease
in interest income on available cash balances.

Cost of Water Sales

Cost of water sales increased by 12.6%, compared to an increase of 15.1% in
water sales revenue, from $5,423,297 to $6,109,117 for the years ended December
31, 2000 and 2001, respectively, while our water sales revenue increased by
15.1% for the year ended December 31, 2001.

Our Cayman operations increased cost of water sales by $171,425 for the
year ended December 31, 2001, which is an increase of 3.3%, compared to an
increase of 7.2% in water sales revenue, over the prior year and represents
25.0% of the total increase in cost of water sales.

The addition of the operations of Belize Water Limited as of July 21, 2000
increased the cost of water sales by $467,769 for the year ended December 31,
2001, which is an increase of 186.8%, compared to an increase of 164.7% in water
sales revenue, over the prior year and represents 68.2% of the total increase in
cost of water sales. This increase in cost of water sales was due to increased
water production to meet increased sales and machinery repairs related to the
August and September 2001 equipment malfunctions, all of which were remedied in
2002.

The addition of the Bahamas operations as of July 11, 2001 increased cost
of water sales by $46,626 for the year ended December 31, 2001, which represents
6.8% of the total increase in cost of water sales.

Gross Profit

Gross profit margins increased from 43.4% to 44.6% for the years ended
December 31, 2000 and 2001, respectively.

Gross profit margins for our Cayman operations increased from 43.2% to
45.3% for the years ended December 31, 2000 and 2001, respectively, as a result
of decreased depreciation expense of approximately $197,000 from our
reassessment of the useful economic lives of certain assets and increased plant
efficiencies. These lower expenses were offset by additional labor costs
associated with plant maintenance, increased insurance premiums and an
additional six months of intangible amortization of the purchase price of the
Belize water supply contract.

Gross profit margins for our Belize operations decreased from 46.2% to
41.7% for the years ended December 31, 2000 and 2001, respectively, as a result
of diesel engine repair costs and higher electricity costs resulting from the
temporary utilization of a less efficient electric motor during the repair
period.

31

Gross profit margin for our Bahamas operations for the year ended December
31, 2001 was a negative 77.1%. This was due to low water sales and a relatively
higher proportion of fixed costs such as depreciation, which we expected in the
early phases of the Bimini Sands Resort development project. Both of these are
temporary factors and are not expected to continue in the future.

Indirect Expenses

Indirect expenses increased by 18.3% from $2,197,569 to $2,600,016 for the
years ended December 31, 2000 and 2001, respectively. Indirect expenses were at
21.9% and 22.7% of total income for the years ended December 31, 2000 and 2001,
respectively.

Our Cayman operations increased indirect expenses by $240,830 for the year
ended December 31, 2001, which is an increase of 11.1% over the prior year and
represents 59.9% of the total increase in indirect expenses. Of this increase,
49.0% is due to the creation of a new executive position, Director of Special
Projects.

Our acquisition of Belize Water Limited as of July 21, 2000 increased
indirect expenses by $157,491 for the year ended December 31, 2001, which is an
increase of 471.2% over the prior year and represents 39.1% of the total
increase in indirect expenses. This increase was primarily due to an additional
six months of indirect expenses over the previous period and the reallocation of
certain employee duties.

The addition of the Bahamas operations as of July 11, 2001 increased
indirect expenses by $4,126 for the year ended December 31, 2001, which
represents 1.0% of the total increase in indirect expenses. These costs related
to the administration of the Bahamas operations.

Net Income

Net income increased by 15.0% from $2,404,820 to $2,764,573 for the years
ended December 31, 2000 and 2001, respectively as a result of the movements
indicated above.

Dividends

In December 2000, we increased our per share dividend to ordinary
shareholders from $0.08 to $0.10 per quarter and have paid dividends in the
amount during the year ended December 31, 2001.

Reassessment of Useful Economic Lives of Property, Plant and Equipment

During the year ended December 31, 2001, we carried out an extensive
engineering analysis of our potable water production and distribution equipment
in Grand Cayman. As a result of the analysis, management reassessed the useful
economic lives of certain assets. The reassessment resulted in reduced
depreciation of $197,472, or $0.05 per share on a basic and fully diluted basis
for the year ended December 31, 2001. The assets affected and the basis for
management's decisions are described below:

Seven Mile Beach Distribution System

During 2001, we revised our master distribution plan that was originally
set out in 1997. In doing so, we determined that a previously planned relocation
of our Governor's Harbour reverse osmosis plant was no longer advantageous.
Therefore, the removal and relaying of pipeline to the service area in
conjunction with this relocation was no longer needed. Furthermore, we
determined that certain planned pipeline replacements were not necessary.
Finally, the government revised its plans for significant road improvements in
the service area, therefore, alleviating anticipated major changes to our Seven
Mile Beach distribution system.

As a result of the above plan reassessments, we concluded that a pipeline
with the characteristics of our Seven Mile Beach Distribution System would have
a useful economic life of 40 years. We, therefore, extended the useful economic
life of this system from 20 to 40 years. Fourteen years have elapsed to date.

32

Governor's Harbour Vapor Compression ("VC") Building

As discussed above, we previously planned to relocate our Governor's
Harbour plant, which would have resulted in the removal of the VC building in
which it was housed. When we determined that the plant should remain in its
current location in 2001, we reassessed the building's useful life. Giving
consideration to our plans to use the building in the future, the high-quality
construction and foundation of the building, as well as the fact that it
accommodates large high-pressure pumps for the plant, we concluded that the
building had a remaining useful economic life of 20 years from 2001. Two years
have elapsed since this useful economic life was determined.

Distribution System Meters

Our policy is to replace customer water meters according to manufacturer
recommendations, which suggest replacement based on service years or water
volume. The manufacturer of our water meters advised us that they were extending
the guarantee for a certain model to cover higher volumes and a longer period of
time. Based on the revised guarantee, we reassessed the useful economic lives of
all such models in service, to 10 years being the mid-point of a guaranteed
time-frame of 6 to 15 years.

Vermeer Trencher

We own a Vermeer trencher to construct water distribution pipelines within
our franchise area. As discussed above, we originally planned to make major
changes to our distribution system as a result of a proposed relocation of our
Governor's Harbour plant and significant road improvements planned by the
government. These projects would have required heavy utilization of this asset.
Given the changes in plans identified above and the minor projects for which the
trencher will be required, we reassessed the useful economic life to be 20
years. Four years have elapsed to date.

West Bay Reverse Osmosis Plant

Our West Bay reverse osmosis plant was manufactured and installed in 1995
and expanded in 1998 with state-of-the-art technology. At the time, we had
concerns about potential accelerated obsolescence of the equipment because of
continuing research and development in the reverse osmosis field, and as such,
the original useful economic life was determined to be 10 years. In 2001, we
concluded with management that there were no indicators that significant changes
were pending in the industry. Given the like-new condition of the plant, its
three year history of meeting operational requirements and expected future use,
management reassessed the remaining useful economic life of the West Bay Plant
to be 12 years. Two years have elapsed to date.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

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

33

OPERATING ACTIVITIES

Cash generated from operating activities for the years ended December 31,
2001 and 2002 was $4,193,921 and $4,329,607, respectively. We generate cash
through the utilization of our existing plants, equipment and resources in all
segments of the business, minimization of water losses and operating
efficiencies created by our management team. Through our recent acquisitions, we
expect our water sales to approximately double. In addition, we believe that our
administrative staff will be able to manage all our combined operations so that
our indirect costs will not increase in proportion to water sales. In our
Bahamas operations, we experienced positive operating cash flow of $14,397 for
the year ended December 31, 2002.

Cash generated from operating activities for the years ended December 31,
2000 and 2001 was $3,922,712 and $4,193,921, respectively. The negative
operating cash flow in the Bahamas operation for the year ended December 31,
2001 was $24,590.

WORKING CAPITAL

At December 31, 2002, we had a working capital surplus of $138,401. This
surplus relates mainly to the cash we generated from our operating activities
and management of our accounts payable and other liabilities. At December 31,
2002, 69.7% of our cash was denominated in Belize dollars. We must obtain
approval from the Central Bank of Belize in order to purchase United States
dollars for repatriation to the Cayman Islands. Since we commenced operations in
Belize, the Central Bank of Belize has never denied our repatriation requests.

At December 31, 2001, we had a working capital surplus of $325,996. This
surplus related to the cash generated from our operating activities. At December
31, 2001, 72.2% of our cash was denominated in Belize dollars.

INVESTING ACTIVITIES

Cash used in investing activities during the years ended December 31, 2001
and 2002 was $1,904,237 and $3,568,723, respectively. Cash was used in investing
activities for expenditures for new property, plant and equipment, including
$1,500,000 on the purchase of the Britannia reverse osmosis plant in 2002. We
also continued to expand our water distribution system in the Cayman Islands by
constructing additional pipelines to service new developments within our
exclusive licensed area. During the same period in 2001, our investing
activities consisted of construction costs relating to our new water production
and distribution system in Bimini, the Bahamas, as well as expansion costs
relating to our water distribution system in the Cayman Islands.

Cash used in investing activities during the years ended December 31, 2000
and 2001 was $6,268,738 and $1,904,237, respectively. Cash was used in investing
activities for expenditures for new property, plant and equipment with the
majority associated with the construction of our new water production and
distribution system in Bimini, the Bahamas. The investment in the Bahamas
operation totaled $1,085,759 in 2001 of which $307,395 relates to costs from
2000. We also continued to expand our water distribution system in the Cayman
Islands by constructing pipelines to service several new developments within our
franchise area. During the similar period in 2000, investing activities
consisted of the purchase of our Belize subsidiary for $3,966,979, the
installation of a new energy recovery system and the expansion of our water
production plant in West Bay, Cayman Islands, and the completion of a major
pipeline extension within our franchise area in the Cayman Islands.

FINANCING ACTIVITIES

On February 7, 2003, we utilized a credit facility with Scotiabank (Cayman
Islands) Ltd. in order to complete our recent acquisitions and refinance our
existing debt. Cash used in financing activities for the years ended December
31, 2001 and 2002 was $2,024,075 and $709,026, respectively. During the year
ended December 31, 2002, our primary financing activity was a draw down of our
Royal Bank of Canada credit facility for an additional $1,500,000 in order to
finance the investment in the Britannia reverse osmosis plant,

34

plus an increase in our short-term bank indebtedness. We also had proceeds from
an issuance of ordinary shares to certain directors and officers who exercised
stock options. These were offset by the payment of our quarterly dividends and
principal payments on our term loans.

Cash generated from financing activities for the year ended December 31,
2000 was $2,574,717, compared to cash used of $2,024,075 for the year ended
December 31, 2001. During 2001, the primary financing activity was the payment
of four interim quarterly dividends totaling $0.40 per share. This was offset by
proceeds from a draw down on our credit facility, in order to fund the Bahamas
development and the exercise of stock options. During the same period in 2000,
we received $4,962,731, net of share issue costs, from a public issuance of
ordinary shares, which was primarily used for the purchase of the Belize
subsidiary. These cash amounts were offset by the payment of four interim
quarterly dividends in 2000 totaling $0.34 per share and the repayment of both
short-term and long-term debt, including the balance due on the Governor's
Harbour plant purchase pursuant to our agreement with Ocean Conversion (Cayman)
Limited.

During the year ended December 31, 2002, we repurchased 2,184 ordinary
shares from a long-term employee at an average price of $15.05 and 702
redeemable preference shares from a former employee at an average price of
$5.47. During the year ended December 31, 2001, we repurchased 25,000 ordinary
shares under a stock repurchase program at an average price of $10.86. During
the year ended December 31, 2000, we repurchased 79,100 ordinary shares at $6.25
per share from a shareholder whose assets were being liquidated. All of the
shares repurchased were cancelled in accordance with Cayman Islands' law.

MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES AND CONTINGENCIES

At December 31, 2002, we had committed approximately $1,080,000 for capital
expenditures for the purchase, construction and site preparation of two water
storage tanks at our Governors Harbour plant. We intend to finance these
projects using cash from operations.

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

- $2 million revolving line of credit bearing interest at the floating base
rate as established by Cayman Island Class A licensed banks from time to
time. The present interest rate is 5.25%

- $20 million seven-year term loan bearing interest at an annually adjusted
floating rate of LIBOR plus 1.5% to 3%, depending on the ratio of our
consolidated debt to our consolidated earnings before interest, taxes and
depreciation. The present interest rate is 4.08%.

- $17.1 million six-month term loan bearing interest on the same basis as
the seven-year term loan. The present interest rate is 4.08%.

We have used the proceeds from these facilities to refinance our existing
debt, for working capital and to finance our recent acquisitions.

As of February 7, 2003, we have drawn down $28,056,126 from our Scotiabank
facilities. We anticipate drawing down approximately $8,113,020 in additional
funds to complete our acquisitions of Waterfields Company Limited. We intend to
replace a portion of this debt with other debt, equity or hybrid financing.

We will be required to make monthly payments of interest for all borrowings
under the revolving line of credit and quarterly payments of interest for all
amounts drawn down under the two term loans. We will be obligated to make 28
equal quarterly payments of principal under the seven-year term loan and all
amounts borrowed under the six-month term loan must be repaid at the maturity
date for this facility.

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

The loan agreement for the three facilities contains standard terms and
conditions for similar bank loans made in the Cayman Islands, including
acceleration of the repayment of all borrowings either upon the demand of
Scotiabank (Cayman Islands) Ltd. or in the event of default under the loan
agreement.

35

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

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

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

As a result of our pending acquisition of a controlling interest in
Waterfields Company Limited, we will be required to provide a performance
guarantee to the Water and Sewerage Corporation of the Bahamas in relation to
the water supply contract between Waterfields Company Limited and the Water and
Sewerage Corporation.

IMPACT OF INFLATION

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

EXCHANGE RATES

The official exchange rate for conversion of United States dollars into
Cayman Islands dollars, as determined by the Cayman Islands Monetary Authority,
has been fixed since 1974 at U.S. $ 1.00 = CI$ 0.83.

The official exchange rate for conversion of United States dollars into
Belizean dollars, as determined by the Central Bank of Belize, has been fixed
since 1976 at U.S.$ 1.00 = BZE$ 2.00.

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

The official fixed exchange rate for conversation of United States dollars
into Barbadian dollars as determined by the Central Bank of Barbados has been
fixed since 1975 at U.S.$ 1.00 = BDS$ 2.00.

The British Virgin Islands' currency is United States dollars.

FORWARD-LOOKING STATEMENTS

We discuss in this Annual Report matters which are not historical facts,
but which are "forward-looking statements." We intend these forward looking
statements to qualify for safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, but are not limited to, our future plans, objectives, expectations and
events, assumptions and estimates about our company and our industry in general.

The forward-looking statements in this Annual Report reflect what we
currently anticipate will happen. What actually happens could differ materially
from what we currently anticipate will happen. We are not promising to make any
public announcement when we think forward looking statements in this Annual
Report are no longer accurate whether as a result of new information, what
actually happens in the future or for any other reason.

Important matters that may affect what will actually happen include, but
are not limited to: tourism and weather conditions in the areas we service; our
ability to manage, integrate and realize the benefits from our

36

recent acquisitions; scheduled new construction within our operating areas; the
economies of the U.S. and the areas we service; regulatory matters; availability
of capital to repay a substantial portion of our bank debt and for expansion of
our operations; and other factors described in the "Risk Factors" section below
as well as elsewhere in this Annual Report.

RISK FACTORS

We have described for you below some risks which may materially and
adversely affect our business, financial condition or results of operations.

Our exclusive license for our service area in the Cayman Islands may not be
renewed in the future and requires that we obtain prior approval for any rate
increase for reasons other than inflation. In the Cayman Islands, we presently
operate as a public water utility under an exclusive license originally issued
to us in December 1979 by the government of the Cayman Islands. Our existing
license expires on July 11, 2010. If we are not in default of any terms of the
license, we have a right of first refusal to renew the license on terms that are
no less favorable than those which the government offers to a third party.
Nevertheless, we cannot assure you that the government will renew our license or
that we will be able to negotiate a new license on satisfactory terms. We would
retain ownership of our production infrastructure and substantially all of our
distribution infrastructure if our license were not renewed.

Under our existing license, we must obtain prior approval from the Cayman
Islands government to increase our rates for any reason other than inflation.
Our ability to raise our rates is limited by this requirement, including
potential delays and costs involved in obtaining government approval for a rate
increase. Failure to obtain adequate rate increases could have an adverse effect
on our results of operations.

We rely on water supply agreements with our customers in Belize, the
Bahamas, the British Virgin Islands and Barbados which, upon their expiration,
may not be renewed or may be renegotiated on less favorable terms to us. We
presently operate as bulk water suppliers under water sales agreements in Belize
with our customer, the Belize Water Services Limited, in the Bahamas with our
customers, the Water & Sewerage Corporation and South Bimini International Ltd.,
in Barbados with our customer Sandy Lane Properties Ltd. and in the British
Virgin Islands with our customer, the Department of Water & Sewerage of the
Ministry of Communications & Works of the British Virgin Islands government.
Upon expiration, these agreements may not be renewed or may be renewed on less
favorable terms. For example, while we own our production plant in Belize,
Belize Water Services has certain options upon the expiration of our agreement
to:

- purchase the plant at a mutually agreed upon price;

- extend the agreement for a mutually agreed period of no less than two
years, and upon expiration of such extension, Belize Water Services may
either purchase the production plant at a price to be negotiated with us
or may again extend the agreement for another ten years in exchange for
our transfer of 50% of the ownership of the production plant to Belize
Water Services at the time of the extension, with the remaining 50% to be
transferred at the expiration of the ten-year term; or

- extend the agreement for ten years in exchange for our transfer of 50% of
the ownership of the production plant to Belize Water Services at the
time of the extension with the remaining 50% to be transferred at the
expiration of the ten-year term.

We own our production and distribution plant in Bimini in the Bahamas,
which, in the absence of any new agreement, must be removed from the property of
South Bimini International Ltd. at the expiration of our water supply agreement.

Waterfields owns its production and distribution plant in Nassau in the
Bahamas which under the terms of the contract is located on property owned by
the Water & Sewerage Corporation of the Government of the Bahamas. At the
conclusion of the initial term of the contract with the Water & Sewerage
Corporation, which

37

occurs on the later of December 4, 2012 or when the Company has delivered 10,950
million imperial gallons of water to the Water & Sewerage Corporation, the Water
& Sewerage Corporation has the following options:

- The Water & Sewerage Corporation may extend the term of the contract for
an additional five years at a price to be negotiated;

- the Water & Sewerage Corporation may purchase the plant at a price to be
negotiated with us; or

- it may require our company to remove the plant from the site.

Termination of our exclusive distributorship agreement with DWEER
Technology Ltd. would eliminate any competitive advantage that we presently have
over our competition in obtaining new plants in the Caribbean basin. Our
wholly-owned subsidiary, DesalCo Limited, is currently the exclusive distributor
in the Caribbean basin for the DWEER(TM) system produced by DWEER Technology
Ltd. for use in reverse osmosis seawater desalination plants. As a result, none
of our competitors is able to offer this technology when bidding for new reverse
osmosis seawater desalination plants in the Caribbean basin. As the DWEER (TM)
system is one of the most energy efficient recovery systems of its kind, the
distributorship agreement with DWEER Technology Ltd. gives us a unique
competitive advantage when bidding for new reverse osmosis seawater desalination
plants. If the distributorship agreement were terminated or not renewed on
equally favorable terms, however, we would lose this competitive advantage, and
it could be more difficult for us to obtain new contracts for plants in the
Caribbean basin. Failure to obtain new contracts for reverse osmosis seawater
desalination plants in the Caribbean basin could have an adverse effect on our
results of operations.

As a result of our recent acquisitions, we are now subject to additional
water supply licenses and/or agreements which may not be renewed or may be
renegotiated on less favorable terms to us. As a result of our recent
acquisition of Ocean Conversion (Cayman) Limited, it now operates as our
subsidiary under three water supply licenses with the Water Authority-Cayman
expiring in March 2006, November 2008 and November 2009. While we intend to
re-negotiate these licenses prior to expiration, we cannot provide any
assurances that the government will renew these licenses or that we will be able
to negotiate new licenses on satisfactory terms. Failure to renegotiate the
licenses on terms favorable to us could have an adverse effect on our results of
operations.

The British Virgin Islands Water and Sewerage Department has taken the
position that our water supply agreement is operating on a month-to month
basis. The term of Ocean Conversion (BVI) Ltd.'s existing water supply
agreement in the British Virgin Islands is uncertain. Ocean Conversion (BVI)
Ltd. believes that the existing water supply agreement with the British Virgin
Islands Water and Sewerage Department was automatically extended to May 2006
when the British Virgin Islands government did not make a required buyout
payment in May 1999. The British Virgin Islands government, however, has taken
the position that the water supply agreement continues on a month-to-month
basis. Thus, it is possible that the government could attempt to terminate the
agreement at any time. While Ocean Conversion (BVI) Ltd. is currently attempting
to negotiate a further extension of this agreement, there is no guarantee that
an extension will be granted, or that if granted, such extension would be on
terms favorable to Ocean Conversion (BVI) Ltd. Failure to negotiate this
agreement on terms favorable to us could have an adverse effect on our results
of operations.

We may not be able to successfully integrate the new assets that we
acquired in the recent acquisitions. Increasing the size of our company in a
relatively short period of time has placed a significant strain on our
management resources. Management may be required to spend additional time and
money on integration that would otherwise be spent developing our business and
services and may not be successful in integrating the acquired assets into our
current operations. For example, integrating our new assets requires us to
expand our management information systems and control our operating expenses. As
a result, we cannot assure you that the acquisitions will provide us with the
expected benefits. In addition, we cannot assure you that the acquisitions will
not have a negative impact on our business and results of operation.

The costs of integrating our new assets may affect our ability to pay
dividends. We have traditionally sought to pay cash dividends to our
shareholders out of our net income on a quarterly basis if funds are available.
The costs associated with integrating the new assets into our company, however,
may reduce our net income. If our net income is reduced, we will have fewer
funds available to pay dividends. In addition, our

38

bank loan agreement with Scotiabank (Cayman Islands) Ltd. requires that we pay
dividends from current cash flows.

Our business is affected by tourism, weather conditions, the economies of
the locations where we provide service and the U.S. and European
economies. Tourist arrivals and weather conditions within our operating areas
affect the demand for our water to a greater extent in the Cayman Islands and in
Belize than in the Bahamas, the British Virgin Islands and Barbados. In the
Cayman Islands and Belize, the highest demand is normally in the first two
quarters of each calendar year. The lowest demand for water occurs in the third
quarter of each calendar year. A significant percentage of tourists visiting the
Cayman Islands and Belize come from the U.S. and Europe. In addition,
development activity in our service areas in the Cayman Islands is significantly
impacted by the U.S. economy. Accordingly, a significant downturn in tourist
arrivals to the Cayman Islands or in the U.S. or European economies for any
reason would be detrimental to our revenues and operating results. After the
events of September 11, 2001, tourism decreased in the Cayman Islands and is
only gradually returning to historical levels.

We may have difficulty accomplishing our growth strategy within and outside
of our current operating areas. Even though we have an exclusive license for
our present operating area in the Cayman Islands and supply agreements in the
Cayman Islands, the Bahamas, the British Virgin Islands, Barbados and Belize,
our ability to expand our operating areas is often subject to the approval of
the respective governments in each location.

Further, part of our long-term growth strategy is to expand our water
supply and distribution operations to other locations outside of the Cayman
Islands, the Bahamas, Barbados, the British Virgin Islands and Belize. Our
expansion into new locations depends on our ability to obtain necessary permits,
licenses and approvals to operate in new territories. We may not obtain these
necessary permits, licenses and approvals in a timely and cost efficient manner,
or at all.

Our expansion to territories outside of our current operating areas
includes significant risks, including, but not limited to, the following:

- regulatory risks, including government relations difficulties, local
regulations and currency controls;

- risks related to operating in foreign countries, including political
instability, reliance on local economies, environmental or geographical
problems, shortages of materials, immigration restrictions and skilled
labor;

- risks related to development of new operations, including assessing the
demand for water, engineering difficulties and inability to begin
operations as scheduled; and

- risks relating to greater competition in these new territories, including
the ability of our competitors to gain or retain market share by reducing
prices.

Even if our expansion plans are successful, we may have difficulty managing
our growth. We cannot assure you that any new operations outside of our current
operating areas will attain or maintain profitability or that the results from
these new operations will not negatively affect our overall profitability.

We do not own a majority interest in Ocean Conversion (BVI) Ltd. We
recently acquired 50% of the issued and outstanding voting shares of Ocean
Conversion (BVI) Ltd. through our wholly-owned subsidiary, DesalCo Limited.
Under the Articles of Association of Ocean Conversion (BVI) Ltd., we are able to
appoint three of the six directors of that company. Sage Water Holdings (BVI)
Ltd., which owns the remaining 50% of the issued and outstanding voting shares,
is entitled to appoint the remaining three directors. If there is a tied vote of
the directors on any matter, the president of the Caribbean Water and Wastewater
Association is entitled to appoint a junior director to break the tie. As a
result, we will have to share the management of Ocean Conversion (BVI) Ltd. with
Sage Water Holdings (BVI). Although we will provide management and engineering
services to Ocean Conversion (BVI) Ltd. through DesalCo Limited, this
arrangement may not permit us to fully control the operations of the company.

39

Our operations in the Caribbean could be harmed by hurricanes. Our
operations are susceptible to damage from hurricanes. A significant hurricane
could cause major damage to our equipment and properties and the properties of
our customers, including the large tourist properties in these areas. This would
result in decreased revenues and profits from water sales until our damaged
equipment and properties are repaired and our customers and the tourism industry
returned to the status quo before the hurricane. We do not insure our
underground water distribution system on the Cayman Islands, nor the Governor's
Harbour reservoirs which are constructed from earthen berms.

Contamination to our processed water may cause disruption in our services
and adversely affect our revenues. Our processed water may become contaminated
by naturally-occurring or man-made compounds and events. In the event that a
portion of our processed water is contaminated, we may have to interrupt the
supply of that water until we are able to install treatment equipment or
substitute the flow of water from an uncontaminated water production source. In
addition, we may incur significant costs in order to treat a contaminated source
of plant feed water through expansion of our current treatment facilities, or
development of new treatment methods. Our inability to substitute processed
water from an uncontaminated water source, or to adequately treat the
contaminated plant feed water in a cost-effective manner may have an adverse
effect on our revenues.

In addition, in the wake of the September 11, 2001 terrorist attacks in New
York, Washington, D.C. and Pennsylvania, we have taken steps to heighten
employee awareness of threats to our water supply. While we are not aware of any
specific threats to our facilities, operations or supplies, we have and will
continue to take security precautions to protect our facilities, operations and
supplies. It is possible, however, that we would not be in a position to control
the outcome or the costs of such events should they occur, which could have an
adverse effect on the results of our operations.

We could be negatively affected by potential government actions and
regulations. Any government that regulates our operations may issue legislation
or adopt new regulations, including but not limited to:

- restricting foreign ownership of our company;

- providing for the expropriation of our assets by the government;

- providing for nationalization of public utilities by the government;

- providing for different water quality standards;

- resulting in unilateral changes to or renegotiation of our exclusive
licenses; or

- causing currency exchange fluctuations or devaluations or changes in tax
laws.

Service of process and enforcement of legal proceedings commenced against
us in the United States may be difficult to obtain. Service of process on our
company and our directors and officers, fourteen out of seventeen of whom reside
outside the United States, may be difficult to obtain within the United States.
Also, since substantially all of our assets are currently located outside the
United States, any judgment obtained in the United States against us may not be
collectible.

There is no reciprocal statutory enforcement of foreign judgments between
the United States and the Cayman Islands, so foreign judgments originating from
the United States are not directly enforceable in the Cayman Islands. A
prevailing party in a United States proceeding against us or our officers or
directors would have to initiate a new proceeding in the Cayman Islands using
the United States judgment as evidence of the party's claim. A prevailing party
could rely on the summary judgment procedures available in the Cayman Islands,
subject to available defenses in the Cayman Islands courts, including, but not
limited to, the lack of competent jurisdiction in the United States courts, lack
of due service of process in the United States proceeding, and the possibility
that enforcement or recognition of the United States judgment would be contrary
to the public policy of the Cayman Islands.

Depending on the nature of damages awarded, civil liabilities under the
Securities Act of 1933 or the Securities Exchange Act of 1934 for original
actions instituted outside the Cayman Islands may or may not be enforceable. For
example, a United States judgment awarding remedies unobtainable in any legal
action in the

40

courts of the Cayman Islands (for example, treble damages, which would probably
be regarded as penalties), would not likely be enforceable under any
circumstances.

We rely heavily on the efforts of several key employees. Our success
depends upon the abilities of our executive officers. In particular, the loss of
the services of Jeffrey Parker, our Chairman and Chief Executive Officer, or
Fredrick McTaggart, our President, Chief Operating Officer and Chief Financial
Officer, could be detrimental to our operations and our continued success.
Although Messrs. Parker and McTaggart have entered into three-year employment
agreements which automatically extend every year for an additional one-year
term, we cannot guarantee that Mr. Parker or Mr. McTaggart will continue to work
for us during the term of their agreements. Also, none of our employees have
entered into non-compete agreements with us.

Provisions in our articles of association and an option deed adopted by our
board of directors may discourage a change in control of our company and may
make it more difficult for you to sell your ordinary shares. Our articles of
association include provisions which may discourage or prevent a change in
control of our company. For instance, our board of directors consists of three
groups. Each group serves a staggered term of three years before the directors
in the group are up for re-election. Also, our board of directors may refuse to
register any transfer of shares on our books for any reason.

We have also adopted an option deed, which is similar to a poison pill. The
option deed will discourage a change in control of our company by causing
substantial dilution to a person or group who attempts to acquire our company on
terms not approved by the board of directors. The option deed will expire on
July 31, 2007.

As a result of these provisions, which discourage or prevent an unfriendly
or unapproved change in control of our company, you may not have an opportunity
to sell your ordinary shares at a higher market price, which, at least
temporarily, typically accompanies attempts to acquire control of a company
through a tender offer, open market purchase or otherwise.

There may be a risk of variation in currency exchange rates. Although we
report our results in United States dollars, the majority of our revenue is
earned in Cayman Islands dollars and Belizean dollars. Prior to our acquisition
of control of Waterfields Company Limited, our Bahamas revenue was earned in
United States dollars. As a result of our acquisition of control of Waterfields
Limited, we now earn revenue in Bahamian dollars. The Cayman Islands dollar is
presently fixed at U.S.$ 1.00 = CI$ 0.83. The rate of exchange has been fixed
since 1974. The Belizean dollar has been fixed at U.S.$ 1.00 = BZE$2.00 since
1976 and the Bahamian dollar has been fixed at U.S.$ 1.00 = BAH$ 1.00 since
1973. In addition, as a result of our recent acquisitions, we also earn revenue
in the British Virgin Islands whose currency is in United States dollars and
Barbados whose currency is in Barbadian dollars. The Barbadian dollar has been
fixed at U.S.$ 1.00 = BDS$ 2.00 since 1975. As a result, we do not intend to
hedge against any exchange rate risk associated with our reporting in United
States dollars. If any of these fixed exchange rates becomes a floating exchange
rate, however, our results of operations could be adversely affected.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

CREDIT RISK

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

INTEREST RATE RISK

As of December 31, 2002, we had loans outstanding of $905,384 from the
European Investment Bank at fixed interest rate of 3.36% and $1,687,500 from the
Royal Bank of Canada, bearing interest at LIBOR plus 1.5%. On February 7, 2003,
we borrowed $28,056,126.09 from Scotiabank (Cayman Islands) Ltd., at an annually
adjusted floating rate of LIBOR plus 1.5% to 3%, depending on the ratio of our
consolidated debt to our consolidated earnings before interest, taxes and
depreciation, from which our debt to the Royal Bank of

41

Canada has been repaid. We are subject to interest rate risk to the extent that
LIBO or Scotiabank (Cayman Islands) Ltd.'s prime lending rate changes.

FOREIGN EXCHANGE RISK

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

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED WATER CO. LTD.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

43

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Consolidated Water Co. Ltd

We have audited the accompanying consolidated balance sheets of
Consolidated Water Co. Ltd. and subsidiaries (the "Company") as of December 31,
2002 and 2001, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material aspects, the financial position of Consolidated
Water Co. Ltd. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and cash flows for each of the three years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.

/s/ KPMG Chartered Accountants

Cayman Islands
March 18, 2003

44

CONSOLIDATED WATER CO. LTD.

CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)

The accompanying notes are an integral part of these financial statements.

45

CONSOLIDATED WATER CO. LTD.

CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN UNITED STATES DOLLARS)

The accompanying notes are an integral part of these financial statements.

46

CONSOLIDATED WATER CO. LTD.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
(EXPRESSED IN UNITED STATES DOLLARS)

The accompanying notes are an integral part of these financial statements.

47

CONSOLIDATED WATER CO. LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)

The accompanying notes are an integral part of these financial statements.

48

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. PRINCIPAL ACTIVITY

Consolidated Water Co. Ltd. and its wholly-owned subsidiaries (together the
"Company") use reverse osmosis technology to produce fresh water from seawater.
The Company processes and supplies water to its customers in Grand Cayman,
Cayman Islands; Ambergris Caye, Belize; and South Bimini, Bahamas. The Company's
exclusive license in Grand Cayman allows it to process and supply water to
certain areas of Grand Cayman for a period of twenty years from July 11, 1990 in
addition to having a right of first refusal on the extension or renewal thereof.
The Company has a contract with Belize Water Services Ltd. ("BWSL") of Belize,
formally known as Water and Sewerage Authority of Belize, to supply water to
BWSL in Ambergris Caye expiring in 2011. At the expiry of the contract, BWSL may
at its option extend the term of the agreement or purchase the plant outright.
In addition, on July 11, 2001 the Company commenced supplying water under a ten
year agreement to South Bimini International Ltd., a Bahamian company that owns
and operates resort properties on South Bimini Island, Bahamas. The base price
of water supplied by the Company, and adjustments thereto, are generally
determined by the terms of the license and contracts, which provide for
adjustments based upon the movement in the government price indices specified in
the license and contracts respectively, as well as monthly adjustments for
changes in the cost of energy.

2. ACCOUNTING POLICIES

Basis of preparation: The financial statements presented are prepared in
accordance with the accounting principles generally accepted in the United
States of America.

Use of estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

The Company's significant accounting policies are:

Basis of consolidation: The consolidated financial statements include the
accounts of the Company's wholly-owned subsidiaries Belize Water Limited,
Hurricane Hide-A-Way Ltd. and Cayman Water Company Limited. The operating
results of Belize Water Limited have been included in the financial statements
since the date of the acquisition being July 21, 2000. All inter-company
balances and transactions have been eliminated. There are no operating results
for Hurricane Hide-A-Way Ltd. and Cayman Water Company Limited as these
companies have been dormant since inception and have no assets and liabilities.

Foreign currency: The functional currency of the Company and its foreign
subsidiaries are their respective local currencies. The consolidated operations
are reported in United States dollars. The exchange rates between the Cayman
Islands dollar, the Belize dollar and the Bahamian dollar have been fixed to the
United States dollar during all periods presented.

Monetary assets and liabilities denominated in foreign currencies are
translated at the rates of exchange ruling at the balance sheet date. Foreign
currency transactions are translated at the rate ruling on the date of the
transaction. Net exchange gains and losses are included in other income in the
consolidated statements of income.

Cash and cash equivalents: Cash and cash equivalents comprise cash at bank
on call and highly liquid deposits with an original maturity of three months or
less.

Trade accounts receivable: Trade accounts receivable are recorded at
invoiced amounts based on meter readings. The allowance for doubtful accounts is
the Company's best estimate of the amount of probable credit losses in the
Company's existing accounts receivable balance. The Company determines the
allowance for doubtful accounts based on historical write-off experience and
monthly review of delinquent accounts. Past

49

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. ACCOUNTING POLICIES -- (CONTINUED)

due balances are reviewed individually for collectibility and disconnection.
Account balances are charged off against the allowance for doubtful accounts
after all means of collection have been exhausted and the potential for recovery
is considered by management to be remote.

Inventory: Inventory primarily includes replacement spares and parts that
are valued at the lower of cost and net realizable value on a first-in,
first-out basis. Inventory also includes potable water held in the Company's
reservoirs. The value of the water inventory is the lower of the average cost of
producing and purchasing water during the year and net realizable value.

Deferred expenditures: Deferred expenditures represent direct costs
incurred in connection with planned business combinations and financing
transactions.

Property, plant and equipment: Property, plant and equipment are stated at
cost less accumulated depreciation. Depreciation is calculated using a straight
line method with an allowance for estimated residual values. Rates are
determined based on the estimated useful lives of the assets as follows:

Buildings................................. 5 to 40 years
Plant and equipment....................... 4 to 25 years
Distribution system....................... 3 to 40 years
Office furniture, fixtures and 3 to 10 years
equipment...............................
Vehicles.................................. 3 to 10 years
Leasehold improvements.................... Shorter of 5 years and operating lease
term outstanding
Lab Equipment............................. 3 to 10 years

Additions to property, plant and equipment are comprised of the cost of the
contracted services, direct labour and materials. Assets under construction are
recorded as additions to property, plant and equipment upon completion of the
projects. Depreciation commences in the month of addition.

During the year ended December 31, 2001, the Company carried out an
extensive engineering analysis of its potable water production and distribution
equipment in Grand Cayman. The Company's analysis concluded that certain assets
would not need to be replaced or relocated as early as previously planned. As a
result of these circumstances, management considered it appropriate to reassess
the estimated useful economic life of these assets. The reassessment of the
useful economic lives of these assets resulted in decreased depreciation expense
on an annual basis in the amount of $197,472, which increased basic and fully
diluted earnings per share by $0.05 for the year ended December 31, 2001.

Intangible asset: The Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets", as of January 1, 2002. Goodwill and
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets". The adoption of
SFAS No. 142 had no impact on the Company's consolidated financial statements.

Prior to the adoption of SFAS No. 142, the intangible asset recorded by the
Company was amortized on a straight-line over the remaining period of the
contract. The impairment of the intangible asset, if any, was measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.

50

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. ACCOUNTING POLICIES -- (CONTINUED)

Investment: Investments are recorded at cost. The Company recognizes an
impairment loss on declines in value that are other than temporary.

Advances in aid of construction: The Company recognizes a liability when
advances are received from condominium developers in the licensed area to help
defray the capital expenditure costs of the Company. These advances do not
represent loans to the Company and are interest free. However, the Company
allows a discount of ten percent on future supplies of water to these
developments until the aggregate discounts allowed are equivalent to advances
received. Discounts are charged against advances received.

Shares repurchased: Under Cayman Islands law, ordinary shares repurchased
must be cancelled upon redemption. The Company's issued share capital is reduced
by the par value of those shares, with the difference being adjusted to
additional paid in capital.

Stock and stock option incentive plans: The Company issues stock under
incentive plans that form part of employees and non-executive Directors'
remuneration and grants options to purchase ordinary shares as part of
remuneration for certain long-serving employees and the executive officers.

The Company applies the intrinsic-value-based method of accounting
prescribed by APB Opinion No. 25 "Accounting for Stock Issued to Employees", and
related interpretations to account for its fixed-plan stock options. Under this
method, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. SFAS
No. 123 "Accounting for Stock-Based Compensation" established accounting and
disclosure requirements using a fair-valued-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the Company
continues to apply the intrinsic-value method of accounting described above and
has adopted the disclosure requirements of SFAS No. 123. The following table
illustrates the effect on net income if the fair-value-based method has been
applied to all outstanding and unvested awards in each period.

The cost of stock options granted to employees is recorded as a liability
and is expensed to the consolidated statements of income over the vesting period
of the options. On exercise of options, proceeds up to the par value of the
stock issued are credited to ordinary share capital; any proceeds in excess of
the par value of the stock issued are credited to additional paid in capital in
the period in which the options are exercised. Options that expire without
exercise are also credited to additional paid in capital in the period in which
the option expired.

51

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. ACCOUNTING POLICIES -- (CONTINUED)

Water sales and cost of water sales: Customers are billed monthly based on
meter readings performed at or near each month end and in accordance with
agreements which stipulate minimum monthly charges for water service. An
accrual, where necessary, is made for water delivered but unbilled at year end
when readings are not performed at the year end date. The accrual is matched
with the direct costs of producing, purchasing and delivering water.

Repairs and maintenance: All repair and maintenance costs are expensed as
incurred.

Comparative figures: Certain of prior year's figures have been reclassed
to conform to the current year's presentation.

3. CASH AND CASH EQUIVALENTS

Cash and cash equivalents are not restricted as to withdrawal or use. At
December 31, 2002, the equivalent of $395,897 (2001: $372,688) is denominated in
Belize dollars. The Company has a guarantee from the Government of Belize to
repatriate any and all of the Belize Water Limited earnings in United States
dollars.

4. ACCOUNTS RECEIVABLE

Accounts receivable comprise receivables from customers and are shown net
of an allowance for doubtful accounts of $12,000 (2001: $12,000). Significant
concentrations of credit risk are disclosed in Note 18.

5. PROPERTY, PLANT AND EQUIPMENT

At December 31, 2002, the Company had outstanding capital commitments of
$1,080,000 (2001: $1,620,000). It is the Company's policy to maintain adequate
insurance for loss or damage to all fixed assets that in management's assessment
may be susceptible to loss. The Company does not insure the costs of its
underground distribution system which total $9,806,663 (2001: $9,471,931) or
plant and equipment insured by third parties with a total cost of $3,633,997
(2001: $3,633,997).

52

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. INTANGIBLE ASSET

On July 21, 2000, the Company acquired all of the issued and outstanding
capital stock of Seatec Belize Ltd., a company organized under the laws of
Belize, for a total purchase price, less cash and cash equivalents acquired, of
$3,966,979. Of this amount, $2,073,462 was attributed to the water purveyor
contract (the "contract") that the acquired company had with Belize Water
Services Ltd. Seatec Belize Ltd., now renamed Belize Water Limited, owns and
operates a reverse osmosis plant in Ambergris Caye, Belize. This acquisition was
accounted for by the purchase method and the intangible asset is being amortized
on a straight line basis over the remaining period of the contract, which
expires in April 2011.

Amortization for each of the next five years is estimated to be $195,000
per year.

7. DIVIDENDS

Quarterly interim dividends were declared in respect of Class A common
stock and preference shares as follows:

Interim dividends for the first three quarters were paid during each
respective year. The interim dividend for the fourth quarter was declared by the
Board of Directors in October of each respective year. These quarterly interim
dividends are subject to no further ratification and consequently the fourth
quarter interim dividends have been recorded as a liability in each respective
year. Included in dividends payable at December 31, 2002 are unclaimed dividends
of $85,671 (2001: $100,160).

8. LONG TERM DEBT

53

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. LONG TERM DEBT -- (CONTINUED)

At December 31, 2002, the total lending facility made available by the
Royal Bank of Canada comprised: a) a revolving line of credit with a limit of
$1,000,000, bearing interest at New York Prime plus 1%, which is convertible in
$100,000 increments into a monthly revolving LIBOR note, bearing interest at
LIBOR plus 1.5%, and b) term loans with a limit of $3,500,000, bearing interest
at LIBOR plus 1.5%. Any amounts drawn down under the line of credit and any term
loans are collateralised by a fixed and floating charge of $3,000,000. The fixed
charge covers land owned by the Company and the floating charge covers all other
assets of the Company, except a reverse osmosis plant charged in connection with
the water purchase agreement.

The European Investment Bank loan is guaranteed by the Overseas Development
Administration ("ODA") of the Foreign and Commonwealth Office of the Government
of the United Kingdom. The Government of the Cayman Islands has, for a fee of 1%
per annum, provided a counter guarantee to the ODA. The Company, with the
approval of the Royal Bank of Canada has agreed to secure the counter guarantee
by a second charge over all assets of the Company.

The Company is subject to certain restrictive covenants associated with its
long term debt and is in compliance with all such covenants at December 31,
2002.

THE AGGREGATE CAPITAL REPAYMENT OBLIGATIONS OVER THE NEXT FIVE YEARS ARE AS
FOLLOWS:

2003........................................................ $ 518,276
2004........................................................ 530,286
2005........................................................ 480,564
2006........................................................ 288,758
2007........................................................ 150,000
----------
$1,967,884
==========

9. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL

Redeemable preferred stock ("preference shares") is issued under the
Company's Employee Share Incentive Plan as discussed in Note 15 and carries the
same voting and dividend rights as ordinary shares of common stock ("ordinary
share"). Preference shares vest over four years and convert to common stock on a
share for share basis on the fourth anniversary of each grant date. Preference
shares are only redeemable with the Company's agreement. Upon liquidation
preference shares rank in preference to the ordinary shares to the extent of the
par value of the preference shares and any related additional paid in capital.

The Company has a Class 'B' stock option plan designed to deter coercive
takeover tactics. Pursuant to this plan, holders of ordinary shares and
preference shares were granted options which entitle them to purchase 1/100 of a
share of Class 'B' stock at an exercise price of $37.50 if a person or group
acquires or commences a tender offer for 20% or more of the Company's ordinary
shares. Option holders (other than the acquiring person or group) will also be
entitled to buy, for the $37.50 exercise price, ordinary shares with a then
market value of $75.00 in the event a person or group actually acquires 20% or
more of the Company's ordinary shares. Options may be redeemed at $0.01 under
certain circumstances. 30,000 of the Company's authorized but unissued ordinary
shares have been reserved for issue as Class 'B' stock. The Class 'B' stock
ranks pari passu with ordinary shares for dividend and voting rights. No Class
'B' stock options have been exercised or redeemed up to December 31, 2002.

54

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. EXPENSES

55

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the net profit
attributable to common stockholders by the weighted average number of ordinary
shares in issue during the year.

The net income, weighted average number of ordinary shares and potential
ordinary shares figures used in the determination of the basic and diluted
earnings per ordinary share are summarized as follows:

12. SEGMENTED INFORMATION

The supply of water to the Cayman Islands, Belize and Bahamas are
considered by management as separate business segments. The basis of measurement
of segment information is similar to that adopted for the financial statements.

Water sales from Belize Water Limited for the three years ending December
31, 2002 were earned from one customer.

56

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. SEGMENTED INFORMATION -- (CONTINUED)

- ---------------

(*) The Company acquired 100% of the outstanding shares in Belize Water Limited
and began operations on July 21, 2000.

(**) On December 18, 2000, the Company entered into a water supply agreement
with South Bimini International Ltd. Operations began on July 11, 2001.

57

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. RELATED PARTY TRANSACTIONS

A professional service firm, of which a Director is a partner, provided
professional services during the year ended December 31, 2002 for which it
charged $225,400 (2001: $275; 2000: $12,916).

14. COMMITMENTS

The Company has committed to purchase a 13.5% equity interest in
Waterfields Company Limited, a Bahamian company, from Bacardi and Company Ltd.
for approximately BAH$1.4 million. Completion of this purchase is subject to the
fulfillment of certain conditions, including the receipt of government approvals
and the commitment of at least 51% of Waterfields' shareholders to sell their
shares to the Company. In furtherance of this purchase agreement, on December
20, 2002, the Company made a tender offer of BAH$690 per share to the remaining
shareholders of Waterfields. This tender offer, which is contingent on
completion of the share purchase agreement with Bacardi and Company Ltd., closed
on January 31, 2003, by which time the Company had received acceptances from
another 64.7% of Waterfields' shareholders.

The Company has committed to sell 165,000 Class C shares in Ocean
Conversion (BVI) Ltd., a British Virgin Islands company, to Sage Water Holdings
(BVI) Ltd. for approximately US$2.1 million. The Company acquired these shares
on February 7, 2003 as disclosed in Note 21.

The Company is party to a water purchase agreement with Ocean Conversion
(Cayman) Limited ("OCL") under which an annual minimum amount of water is
required to be purchased. At December 31, 2002, accounts payable includes
$208,556 (2001: $192,340) outstanding under the agreement. Water purchases for
the three years ended December 31, 2002 are disclosed in Note 10.

From the acquisition date of Belize Water Limited in the year ended
December 31, 2000, the Company has been under contract to supply a minimum of
135,000 US Gallons of water per day to BWSL of Belize. The price of water is
adjusted annually based on government indices. Water sales under this contract
for the three years ended December 31, 2002 comprise total sales as disclosed in
Note 12.

The Company is obligated to supply water, where feasible, to customers in
the Cayman Islands within its licence area in accordance with the terms of the
licence. Royalties are paid to the Government of the Cayman Islands at the rate
of 7.5% of gross water sales.

The Company has committed to lease premises in the Cayman Islands for a
period of one year from February 1, 2003 to January 31, 2004 at approximately
$82,000 per annum.

15. STOCK COMPENSATION

The Company operates various stock compensation plans that form part of
employees' remuneration. Stock compensation expense of $442,497 (2001: $169,599;
2000: $124,772) is recorded in accordance with APB Opinion No. 25 and included
within employee costs. Had compensation cost for the Company's stock based
compensation plans been determined based on the fair value at the grant dates
for awards under those

58

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. STOCK COMPENSATION -- (CONTINUED)

plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts below:

In calculating the fair value for these options under SFAS 123 the
Black-Scholes model was used with the following weighted average assumptions:

Options granted with an exercise price below market price on the date of
grant:

Options granted with an exercise price above market price on the date of
grant:

EMPLOYEE SHARE INCENTIVE PLAN (PREFERENCE SHARES)

The Company awards preference shares for $nil consideration under the
Employee Share Incentive Plan as part of compensation for eligible employee
services, excluding Directors and Executive Officers, that require future
services as a condition to the delivery of the ordinary shares. In addition
options are granted to purchase preference shares at a fixed price, determined
annually, which will typically represent a discount to the market value of the
ordinary shares. In consideration for preference shares, the Company issues
ordinary shares on a share for share basis. Under the plan the conversion is
conditional on the grantee's satisfying requirements outlined in the award
agreements. Preference shares are only redeemable with the Company's agreement.

59

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. STOCK COMPENSATION -- (CONTINUED)

The details of preferred shares and preferred share options granted and
exercised under the Employee Share Incentive Plan is as follows:

Each employee's option to purchase preferred shares must be exercised
within 40 days of the annual general meeting of the Company following the date
of grant.

EMPLOYEE SHARE OPTION PLAN (ORDINARY STOCK OPTIONS)

In 2001, the Company introduced an employee stock option plan for certain
long-serving employees of the Company. Under the plan these employees are
granted in each calendar year, as long as the employee is a participant in the
Employee Share Incentive Plan, options to purchase ordinary shares. The price at
which the option may be exercised will be the closing market price on the grant
date, which is 40 days after the date of the Company's annual general meeting.
The number of options each employee is granted is equal to five times the sum of
(i) the number of preference shares which that employee receives for $nil
consideration and (ii) the number of preference share options which that
employee exercises in that given year. Options may be exercised during the
period commencing on the fourth anniversary of the grant date and ending on the
thirtieth day after the fourth anniversary of the grant date.

NON-EXECUTIVE DIRECTORS' SHARE PLAN

In 1999, the Company introduced a stock grant plan, which forms part of
Directors' remuneration. Under the plan Directors receive a combination of cash
and ordinary shares in consideration of remuneration for their participation in
Board meetings. All Directors are eligible except Executive Officers, who are
covered by individual employment contracts and the Government elected board
member. Ordinary shares granted are calculated with reference to a strike price
that is set by the Board of Directors on October 1 of the year preceding the
grant. Stock granted during the year ended December 31, 2002 totaled 6,305
shares (2001: 7,860) at a strike price of $10.70 (2001: $7.25).

DIRECTORS AND SENIOR MANAGEMENT STOCK COMPENSATION

Certain members of senior management are entitled to receive, as part of
the compensation for their services to the Company, options to purchase ordinary
shares. One other director was granted options as remuneration for services
rendered to the Company during the year ended December 31, 2001. In addition,
another member of senior management is entitled to receive, as part of
compensation for services to the Company, ordinary shares of the Company. As at
December 31, 2002, 2,405 shares (2001: 3,172) were due to this employee.

NON-EMPLOYEE

As part of an agreement for market representation, the Company issued
options to purchase ordinary shares to an investment company for $nil
consideration. These options had an expiry date of one year

60

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. STOCK COMPENSATION -- (CONTINUED)

commencing on the termination of the agreement, which management formally
terminated on April 3, 2002. The fair value of these options was determined by
management to be $30,000, based on the fair value of the services to be
received. The Company also issued warrants in conjunction with a private
placement in 1995. These warrants were exercised in full in January and February
2000.

The following table summarizes information about the Company's stock option
plans as of December 31, 2002, 2001 and 2000, and changes during the years ended
on those dates.

The following summarizes the weighted average grant-date fair value of
options granted during the year:

SUMMARY OF OPTIONS OUTSTANDING AT DECEMBER 31, 2002

At December 31, 2002, the range of exercise prices on outstanding options
was $6.75 - $14.69. Accordingly the following information is presented on
options outstanding, which are all exercisable, at December 31, 2002:

61

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. STOCK COMPENSATION -- (CONTINUED)

The weighted average fair value per share under SFAS 123 for shares issued
during the year below market price on the date of grant follows:

16. TAXATION

Under current laws of the Cayman Islands, there are no income, estate,
corporation, capital gains or other taxes payable by the Company. The Company
has received a tax exemption with respect to its Belize operations. The
exemption expires in 2006 and is renewable in accordance with the provisions of
the BWSL contract. Services to the customer in the Bahamas are provided by the
Company, which is a Cayman Islands company that is not subject to taxation in
the Commonwealth of the Bahamas.

17. PENSION BENEFITS

A staff pension plan is offered to all employees. The plan is administered
by the Cayman Islands Chamber of Commerce and is a defined contribution plan
whereby the Company matches the contribution of the first 5% of each
participating employee's salary. The total amount recognized as an expense under
the plan during the year ended December 31, 2002 was $70,210 (2001: $63,740;
2000: $67,760).

18. FINANCIAL INSTRUMENTS

CREDIT RISK:

The Company is not exposed to significant credit risk on the vast majority
of customer accounts as the policy is to cease supply of water to customers'
accounts that are more than 45 days overdue. The Company's exposure to credit
risk is concentrated on receivables from one customer in Belize. The balance
from this customer is current as at December 31, 2002 and management does not
anticipate any losses on this concentration.

INTEREST RATE RISK:

The interest rates and terms of the Company's loans are presented in Note 8
of these financial statements. The Company is subject to interest rate risk to
the extent that LIBOR changes.

FOREIGN EXCHANGE RISK:

All relevant foreign currencies have fixed exchange rates to the United
States dollar as detailed under the foreign currency accounting policy note. If
any of these fixed exchange rates become floating exchange rates, the Company's
results of operations could be adversely affected.

62

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. FINANCIAL INSTRUMENTS -- (CONTINUED)

FAIR VALUES:

At December 31, 2002 and 2001, the carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and other liabilities and
dividends payable approximate fair values due to the short term maturities of
these assets and liabilities. The Directors consider that the carrying amount
for long term debt due to Royal Bank of Canada approximates fair value. The fair
value for long term debt due to European Investment Bank is approximately
$840,720 (2001: $1,041,000) although this does not necessarily indicate that the
Company could extinguish this debt for an amount lower than the carrying value.
Fair value of this long term debt for which no market value is readily available
is determined by the Company using predetermined future cash flows discounted at
an estimated current incremental rate of borrowing for a similar liability. In
establishing an estimated incremental rate, the Company has evaluated the
existing transactions, as well as comparable industry and economic data and
other relevant factors such as pending transactions, subsequent events and the
amount the Company would have to pay a credit worthy third party to assume the
liability, with the creditors legal consent.

19. NON-CASH TRANSACTIONS

The Company made the following non-cash transactions:

20. IMPACT OF RECENT ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board issued four standards and one
interpretation that affect the Company. A summary of these standards and
interpretation is given below:

In June 2001, the FASB issued SFAS No. 143, "Accounting for Assets
Retirement Obligations". SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and/or normal
use of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The

63

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. IMPACT OF RECENT ISSUED ACCOUNTING STANDARDS -- (CONTINUED)

Company is required to adopt SFAS No. 143 on January 1, 2003. The Company
adopted SFAS No. 143 early during the year ended December 31, 2001. The adoption
did not have a material effect on the Company's financial statements.

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

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

In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, as interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34". This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognized, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
initial recognitions and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statements No.
123". This Statement amends FASB Statement No. 123 "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition the Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.

21. SUBSEQUENT EVENTS

The following events occurred subsequent to December 31, 2002:

On February 7, 2003, the Company purchased interests in the following
companies: DesalCo Limited, its wholly owned subsidiary DesalCo (Barbados)
Limited, Ocean Conversion (Cayman) Limited, Ocean Conversion (BVI) Ltd. and
Waterfields Company Limited. The purchase has provided the Company with a
desalination facility management and engineering services firm, as well as
facilities and contracts to supply

64

CONSOLIDATED WATER CO. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

21. SUBSEQUENT EVENTS -- (CONTINUED)

additional potable water services in the Cayman Islands, the Bahamas, Barbados
and the British Virgin Islands. The total consideration under the purchase
agreements was $27,800,000, comprised of $25,500,000 in cash and 185,714
ordinary shares of the Company.

The following table summarizes the unaudited condensed balance sheets of
the acquired entities as of December 31, 2002:

In order to finance the purchase, the Company entered into a credit
facility with Scotiabank (Cayman Islands) Ltd. for a term loan of $20,000,000,
an operating line of credit of $2,000,000 and a bridge financing loan of
$17,100,000. Scotiabank was given a fixed and floating charge on all assets for
$22,000,000. In conjunction with the receipt of this financing, the Royal Bank
of Canada credit facilities were extinguished, the loans were fully repaid and
the fixed and floating charges held by the bank were released. The second charge
held by the Government of the Cayman Islands, as described in Note 8, was
cancelled and replaced with a $1,000,000 letter of credit from Scotiabank.

The Company also cancelled the remaining term of the water purchase
agreement with Ocean Conversion (Cayman) Limited as a result of the purchase.

The Government of the Cayman Islands amended the Company's license to
remove a five percent restriction on share ownership and transfer. As part of
the amended license, the Company is required to comply with certain aesthetic
quality improvements in the water supplied to the customers in the Cayman
Islands. Management estimates that the capital cost of complying with the new
water quality requirements in accordance with the amended license will amount to
approximately $500,000.

65

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On June 27, 2002, we dismissed our independent auditors,
PricewaterhouseCoopers. The decision to dismiss PricewaterhouseCoopers was
recommended and approved by the audit committee of our board of directors.
During the fiscal years ended December 31, 2000 and 2001,
PricewaterhouseCoopers' report on our financial statements did not contain an
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principles. In addition, during each of
our fiscal years ended December 31, 2000 and 2001 and the interim period through
June 27, 2002, we did not have any disagreements with PricewaterhouseCoopers on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which, if not resolved to the satisfaction of
PricewaterhouseCoopers, would have caused PricewaterhouseCoopers to make
reference to the subject matter of the disagreements in connection with its
reports on our financial statements for the year or period in question. We
engaged KPMG to replace PricewaterhouseCoopers on July 9, 2002. We have
authorized PricewaterhouseCoopers to respond fully to the inquiries, if any, of
KPMG, our present independent accountants, regarding any accounting or financial
matters relating to us. KPMG has re-audited the financial statements for the
years ended December 31, 2000 and 2001 and there have been no re-statements of
the prior audited financial statements resulting from the re-audits.

66

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

OUR DIRECTORS AND EXECUTIVE OFFICERS

This table lists information concerning our executive officers and
directors:

- ---------------

* We have appointed these persons to the indicated positions without obtaining
the prior approval of the Cayman Islands government, as required under our
license. As a consequence, we are in technical breach of the terms of our
license. Our license requires the Cayman Islands government to give us
notice of and an opportunity to cure this breach. We believe we could remedy
this breach by transferring our license to our wholly-owned subsidiary,
Cayman Water Company Limited. The transfer of our license has been approved
by the Cayman Islands government.

Jeffrey M. Parker has been a director of our company since 1980, the
Chairman of the Board since 1982 and Chief Executive Officer since 1994. In
addition to serving as our Chief Executive Officer and Chairman of the Board,
Mr. Parker is a Chartered Accountant and practices at Moore Stephens in the
Cayman Islands, a member of Moore Stephens International Ltd. From 1993 to 1995,
Mr. Parker served as a director of The International Desalination Association
representing the Caribbean & Latin America. Mr. Parker received his ACA
designation as a chartered accountant in England and Wales in 1967, and his FCA
designation in 1977.

Frederick W. McTaggart has been a director of our company since 1998, and
the President and Chief Operating Officer since October 2000 and Chief Financial
Officer since February 2001. From April 1994 to October 2000, Mr. McTaggart was
the Managing Director of the Water Authority-Cayman, the government-owned water
utility serving certain areas of the Cayman Islands. He received his B.S. degree
in Building Construction from the Georgia Institute of Technology in 1985. Mr.
McTaggart is the brother of Mr. Gregory S. McTaggart, the Vice
President -- Operations.

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Kenneth R. Crowley holds a Bachelor of Science degree in Mechanical
Engineering from the University of Maryland. In 1989, he joined Reliable Water
Co. Ltd, the predecessor of Ocean Conversion (Cayman) Limited, as Operations
Engineer in the Canary Islands and the Cayman Islands. He was promoted to
Operations Manager of Ocean Conversion (Cayman) Limited in 1991. In 1998, Mr.
Crowley transferred to DesalCo Limited to work on the design, construction and
operation of reverse osmosis water plants including high efficiency work
exchanger energy recovery systems in the Cayman Islands, the Bahamas, Barbados
and the British Virgin Islands with a combined capacity in excess of 9 million
U.S. gallons per day.

Gregory S. McTaggart is our Vice President-Operations. Mr. McTaggart joined
our company in January 1991 as our resident engineer and has served in his
current capacity since 1994. For three years before joining us, Mr. McTaggart
worked for the Caribbean Utilities Company as a mechanical engineer. Mr.
McTaggart obtained his B.S. degree in Mechanical Engineering from the Georgia
Institute of Technology in 1986. Mr. McTaggart is the brother of Frederick W.
McTaggart, the President, Chief Operating Officer, Chief Financial Officer and
director.

Robert B. Morrison was appointed Vice President of Purchasing & Information
Technology in March 2003. Mr. Morrison holds the designation Certified
Professional Purchaser and has over twenty five years experience in the
purchasing and logistics field. He joined DesalCo Limited as Purchasing Manager
in June of 1996 in which position he also employed his more than 20 years I.T.
experience as software and systems developer, network administrator and end user
support resource for PC and mainframe environments. Prior to joining DesalCo
Limited, Mr. Morrison was Principal Purchasing Officer for the Ministry of Works
& Engineering of the Bermuda government and Purchasing Manager for
American-Standard in Toronto, Canada.

Gerard J. Pereira was appointed Vice President of Engineering in March
2003. Mr. Pereira obtained his BS and MS in Chemical Engineering from the
University of Waterloo, Ontario, Canada and joined Ocean Conversion (Cayman)
Limited as Operations Engineer in 1995. He was promoted to Operations Manager of
Ocean Conversion (Cayman) Limited in 1998, which post he held until our
acquisition of the company.

Peter D. Ribbins is our Director -- Special Projects and Company Secretary
and has served as a director since 1989. Mr. Ribbins joined our company in 1983
as its General Manager, a position he held until 1989, when he was appointed
Managing Director. He was appointed President and Chief Operating Officer in
1994 and resigned from that position in October 2000 for personal reasons. Mr.
Ribbins obtained his B.S. degree in Kinanthropology from the University of
Ottawa, Canada in 1971.

Brent J. Santha joined our Company as Management Accountant in January 2001
and was appointed Vice President of Finance and Assistant Company Secretary in
March 2003. Mr. Santha is a member of the Canadian Institute of Chartered
Accountants having received his Chartered Accountant designation in 1997.
Previously, he was employed, for six years, by Johnsen Archer Chartered
Accountants leaving as Manager of Audit & Business Services.

William T. Andrews became a director of our company upon completion of our
acquisition of DesalCo Limited in February 2003. Since 2002, he has been
Managing Director of DWEER Technology Ltd., which designs and manufactures
patented high efficiency energy reduction pumping equipment for seawater reverse
osmosis desalination. From 1991 to 2003, Dr. Andrews has been Managing Director
of DesalCo Limited. He was formerly President of Reliable Water Inc., and Vice
President of Polymetrics Inc., focusing on seawater reverse osmosis desalination
in both cases. Dr. Andrews attended universities in England, receiving a
bachelor's degree in Physics from the University of Newcastle-upon-Tyne, and a
doctorate in Atomic Physics at Oxford University, as a Rhodes Scholar. He is a
registered Mechanical Engineer in California and Bermuda. Since 1976, Dr.
Andrews has continuously been a member of the International Desalination
Association (IDA). He has been a director of IDA since 1995, and is currently
President. He is a member of the European Desalination Society and the Caribbean
Water & Wastewater Association.

J. Bruce Bugg, Jr. has been a director and our Vice-Chairman of the Board
since 1998. Mr. Bugg is also, and has been since 1997, the Chairman of the board
of directors and Chief Executive Officer of Argyle Investment Co., the general
partner of Argyle Partners Ltd., the sole general partner of Argyle/Cay-

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Water, Ltd. From 1996 to 1997, Mr. Bugg served as Vice Chairman of First
Southwest Company and Chairman of its Investment Banking Group.

Brian E. Butler has been a director of our company since 1983. Since 1977,
Mr. Butler has been the principal of Butler Property Development Group, a
property development company specializing in luxury resort projects in the
Cayman Islands.

Steven A. Carr has served as a director of our company since May 2000.
Since 1994, Mr. Carr has been the President of Carr & Associates, a private
investment firm located in Bryan, Texas. Before joining Carr & Associates, Mr.
Carr held a variety of executive positions and participated in the ownership and
management of a number of telecommunications ventures throughout the United
States. Mr. Carr has served as an alternate director on our board of directors
for his father, Hal N. Carr, since 1998. Mr. Carr is also currently a director
of the First National Bank of Bryan. In addition to his business interests, Mr.
Carr is a senior lecturer at the Mays College and Graduate School of Business at
Texas A&M University and a councilor of the Texas A&M Research Foundation.

Carson K. Ebanks became the government nominated Director of our company in
May of 2001. Mr. Ebanks was the Director of Planning for the Cayman Islands from
1991 -- 1997. Since 1997, he has served the Cayman Islands Government as a
Permanent Secretary currently for the Ministry of Community Services, Women's
Affairs, Youth and Sports. Mr. Ebanks is a Justice of the Peace, a Fellow of the
Royal Geographic Society and a member of the American Planning Association. He
holds a Bachelor of Environmental Studies (Hons. Urban and Regional
Planning -- Peace and Conflict Studies Minor) from the University of Waterloo
and a Master of Arts -- Planning in Community and Regional Planning from the
University of British Columbia. He is a Director of the Water Authority -Cayman
and a trustee of the National Gallery of the Cayman Islands. Mr. Ebanks has
served on the Boards of the Trustees for the Cayman Islands Museum, the Cayman
Islands Civil Service Co-operative Credit Union, the Housing Development
Corporation and the Vice President of the Cayman Islands Olympic Committee.

Richard L. Finlay has served as a director of our company since 1995. Mr.
Finlay is an attorney and partner with the Cayman Islands law firm of Charles
Adams, Ritchie and Duckworth. Before joining this firm in 1993, he served as
Director of Legal Studies of the Cayman Islands Government from 1989 to 1992.
From 1983 to 1989, Mr. Finlay was a partner with the Canadian law firm of Olive,
Waller, Zinkhan and Waller. Mr. Finlay has served as the Cayman Islands'
representative to the International Company and Commercial Law Review and is a
former editor of the Cayman Islands Law Bulletin.

Clarence B. Flowers, Jr. has been a director of our company since 1991. Mr.
Flowers is, and has been since 1985, the principal of Orchid Development
Company, a real estate developer in the Cayman Islands. Mr. Flowers also serves
as a director of C.L. Flowers & Son, which is the largest manufacturer of wall
systems in the Cayman Islands, and Cayman National Bank, a retail bank.

Wilmer Pergande has been a director of our company since 1978. Mr. Pergande
is the Director New Business Development, Process Water of GE Osmonics, Inc., a
new company as a result of a recent merger. Mr. Pergande previously held the
position of Vice-President of Special Projects of Osmonics, Inc. of Minnetonka,
Minnesota. Before joining Osmonics, Mr. Pergande was the Chief Executive Officer
of Licon International, Inc., a publicly traded manufacturer of liquid
processing equipment. Previously, Mr. Pergande held several executive positions
with Mechanical Equipment Company, Inc., a manufacturer of seawater conversion
equipment.

Raymond Whittaker has served as a director of our company since 1988. Mr.
Whittaker was the Managing Director of TransOcean Bank & Trust, Ltd., a bank and
trust company located in the Cayman Islands and a subsidiary of Johnson
International, Inc., a bank holding company located in Racine, Wisconsin from
1984 to December 2000. He is now the principal of his own company and management
firm.

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COMPOSITION OF THE BOARD OF DIRECTORS

The board of directors is organized into three groups. Each group holds
office for a three year period and re-election of the board members is staggered
so that two-thirds of the board members are not subject to re-election in any
given year. The groups are organized alphabetically as follows:

The directors of Group 2 were re-elected at our annual shareholders'
meeting in May 2002. The directors in Group 3 will be proposed for re-election
in 2003, Group 1 in 2004 and then Group 2 again in 2005.

Under our license, the Cayman Islands government may nominate three persons
to serve on our board of directors. We must cause one of the persons nominated
by the government to be elected as a director. In May 2001, Carson K. Ebanks, JP
was elected as the government's nominee.

Under the terms of the Share Sale Agreement between DesalCo Limited and our
company under which we acquired all of the issued and outstanding stock of
DesalCo Limited on February 7, 2003, we appointed William T. Andrews to our
board of directors as a director in Group 1.

On April 17, 1997, Argyle/Cay-Water, Ltd. filed an application with the
Cayman Islands government for permission to acquire up to 50% of our issued and
outstanding shares. We did not support Argyle's attempt to gain control of our
company. On July 22, 1997, the Cayman Islands government approved Argyle's
application. J. Bruce Bugg, Jr. is the sole shareholder and Chairman and Chief
Executive Officer of Argyle Investment Co., the general partner of Argyle
Partners Ltd., the sole general partner of Argyle/Cay-Water, Ltd.

On March 31, 1998, we entered into a five year agreement with
Argyle/Cay-Water, Ltd. During the term of this agreement, which has now expired,
we agreed to appoint Mr. Bugg as Vice Chairman of our board of directors in
exchange for which Mr. Bugg and Argyle/Cay-Water, Ltd. agreed not to acquire
more than 19.9% of the ordinary shares. Our main obligations under the agreement
were to recommend to our shareholders the appointment of Mr. Bugg (or his
successor) to the board of directors and, with several exceptions, to obtain
Argyle/Cay-Water, Ltd.'s consent before issuing any of our securities.

During the term of the agreement, Argyle/Cay-Water, Ltd. and Mr. Bugg could
not participate in proxy solicitation, seek to control or influence our
management, except in accordance with Mr. Bugg's duties as a director, or
challenge the validity of the option deed.

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ITEM 11. EXECUTIVE COMPENSATION

The following table provides summary information concerning the annual and
long-term compensation earned by the company's chief executive officer and each
of the three other most highly compensated executive officers of the company
during the fiscal years ended December 31, 2002, 2001 and 2000:

SUMMARY COMPENSATION TABLE

The salary shown in 2000 for Mr. Frederick McTaggart, who joined the
company in October 2000, is annualized based upon a full year of employment for
comparative purposes. Mr. Frederick McTaggart's actual salary for 2000 was
$24,772.

All options granted to Messrs. Parker, Frederick McTaggart, Ribbins and
Gregory McTaggart in 2000, 2001 and 2002 have an exercise price of $7.10, $10.84
and $11.93 per share, respectively.

The other annual compensation granted to Gregory McTaggart in 2000 is
comprised of redeemable preferred shares issued to him under our share incentive
plan. Under our share incentive plan, half of the redeemable preferred shares
are issued at no cost to the employee and the employee may purchase, for cash,
an equal number of redeemable preferred shares at an exercise price of
approximately 75% of the market price of the ordinary shares at the time of
issuance. These shares issued to Mr. Gregory McTaggart in 2000 had a market
price of $5.47 per share on the date of grant. As a result of entering into an
employment agreement in 2000, Gregory McTaggart is no longer eligible to
participate in our share incentive plan.

STOCK OPTION GRANTS

The following table provides information, with respect to the chief
executive officer and the other named executive officers listed in the Summary
Compensation Table, concerning stock options granted on ordinary shares in
fiscal year 2002:

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STOCK OPTION HOLDINGS

The following table provides information, with respect to the chief
executive officer and the other named executive officers listed in the Summary
Compensation Table, concerning the holding of unexercised options at the end of,
fiscal year 2002:

INCENTIVE COMPENSATION

EMPLOYEE SHARE INCENTIVE PLAN

Since April 8, 1987, we have maintained an employee share incentive plan
for our long-term employees who are not directors. To become eligible for the
employee share incentive plan, an employee must complete four years of service
with us and then retain the shares for an additional four years before he can
transfer or sell the shares. We may, at our option, offer to exchange the
redeemable preferred shares issued to the employee for an equal number of freely
tradable ordinary shares at any time during the four year holding period. Within
the four year holding period, if an employee ceases to be employed by our
company, our company, at the sole discretion of the board of directors, may
redeem the redeemable shares held by that employee for less than four years at
the price which the employee originally paid for the shares.

Under the plan, employees are issued redeemable preferred shares on an
annual basis at no cost based on a formula which takes into consideration the
employee's salary and the total dividend paid to ordinary shareholders as a
percentage of the total shareholder's equity in each year. If an employee
remains employed by us for at least four years, or a person or affiliated group
of persons acquires 30% or more of our ordinary shares, we are obligated to
exchange the redeemable preferred shares (whether or not the redeemable
preferred shares have been held for four years) for the same number of ordinary
shares. We are also obligated to exchange the redeemable preferred shares for an
equal number of ordinary shares if an employee's employment with us or any of
our affiliates terminates by reason of the employee's death, permanent
disability or the employee reaches the age of 65 years. However, if an
employee's employment with us or any of our affiliates terminates for any other
reason, we may at any time up to and including the first anniversary of such
termination, redeem the employee's redeemable preferred shares for cash equal to
75% of the average of the closing market price for our ordinary shares on each
of the first seven trading days in the month of October of the year in which the
redeemable preferred shares were issued to the employee.

Under the plan, when an employee is issued redeemable preferred shares, the
employee is also granted an option to purchase an equal number of redeemable
preferred shares at approximately 75% of the average market price of the
ordinary shares. The exercise price is determined during the ten days after our
annual shareholder's meeting. This option expires, unless exercised by the
employee, within forty (40) days after the date of our annual shareholders'
meeting. Since we adopted the employee share incentive plan, our employees have
acquired 124,360 redeemable preferred shares, of which 104,620 have been
redeemed for an equal number of ordinary shares.

EMPLOYEE SHARE OPTION PLAN

In 2001, we established an employee share option plan for certain long-term
employees who participate in the share incentive plan. This plan was introduced
in order to compensate these employees for adjustments in the employee share
incentive plan. Under the share option plan, these employees are granted in each
calendar year, as long as the employee is a participant in the employee share
incentive plan, options to purchase

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ordinary shares of common stock. The price at which the option may be exercised
will be the closing market price on the grant date, which is 40 days after the
date of the Company's annual shareholder meeting. The number of options each
employee is granted is equal to five times the sum of (i) the number of
redeemable preferred stock which that employee receives for $nil consideration
and (ii) the number of redeemable preferred stock options which that employee
exercises in that given year. The option may be exercised during the period
commencing on the fourth anniversary of the grant date and ending on the
thirtieth day after the fourth anniversary of the grant date.

Since we adopted the employee share option plan, we have granted 22,605
options to purchase ordinary shares at an exercise price of $9.20 with an
expiration date of August 4, 2005 and 13,695 options to purchase ordinary shares
at an exercise price of $14.69 with an expiration date of July 30, 2006.

NON-EXECUTIVE DIRECTORS' SHARE PLAN

In 1999, we implemented a share grant plan for our directors who are not
executive officers or serving as the Cayman Islands' government representative
on our board. Under this plan, a director receives ordinary shares based upon
the number of board and committee meetings that the director attends during the
year. Each board meeting is worth the share equivalent of a $1,200 fee and each
committee meeting is worth the share equivalent of a $600 fee. Attendance fees
are accumulated throughout the year and then divided by the prevailing market
price on October 1st, or the next trading day if October 1st falls on a
non-trading day, of the preceding year to determine the number of shares to be
granted for the current year.

As a result of the non-executive directors' share plan, the directors, as a
group, as of December 31, 2002, are entitled to receive 2,748 ordinary shares,
based upon the prevailing market price for the ordinary shares on October 1,
2002 of $11.79.

PENSION PLAN

As with every employer in the Cayman Islands, we are required by the
National Pension Law to provide a pension plan for our employees. We belong to
the Cayman Islands Chamber Pension Plan, which is the largest pension plan in
the Cayman Islands and is open to employers and their employees in the Cayman
Islands. As of December 31, 2002, the Chamber Pension Plan had approximately
$65.28 million in assets. The Chamber Pension Plan is a non-profit entity which
is administered by the Bank of Butterfield.

Under the National Pensions Law, all employees between the ages of 18 and
60 must contribute a specified minimum percentage of their earnings to the
Chamber Pension Plan. Until recently, the exact percentage of contributions
varied according to the age of each employee. Since June 1, 2002, however, all
employees must contribute 5% of their earnings to the Chamber Pension Plan. An
employee also has the option of contributing more than the prescribed minimum.
Our company is required to match the contribution of the first 5% of each
participating employee's salary to a maximum of $72,000. Employees earning more
than $72,000 are not required to make contributions on amounts over $72,000. All
contributions by our employees are collected by us and paid into the Chamber
Pension Plan on a monthly basis.

As a defined benefit plan, the amount that an employee receives upon
retirement is directly related to the amount contributed to the plan by the
employee while working. Once an employee retires (employees become eligible for
retirement at age 60 in the Cayman Islands), an employee has the following
options for receiving benefits:

- Receive a cash payout if the employee's retirement savings is less than
$6,000;

- Transfer the retirement savings to a life annuity for investment by a
life insurance company and payment of a regular income stream to the
employee for the remainder of the employee's life (and the employee's
spouse's life if the employee is married at the time of retirement); or

- Transfer the retirement savings to a Retirement Savings Arrangement
account with an approved provider or bank and receive regular income
payments until the account is depleted.

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EMPLOYMENT AGREEMENTS AND RELATED TRANSACTIONS

We entered into a three-year employment agreement with Jeffrey M. Parker,
our Chairman of the board of directors and Chief Executive Officer. Mr. Parker
devotes at least 75% of his working time to us and the remainder of his working
time to his accountancy practice. This agreement, as amended, was originally
scheduled to expire on December 31, 2001, although it extends automatically each
year for an additional one year term. If we terminate Mr. Parker without cause,
he is entitled to all financial benefits under the agreement for a period of two
years and any unvested stock options for the year in which Mr. Parker is
terminated automatically vest and become fully exercisable. Under the terms of
his employment agreement, Mr. Parker is granted an option to purchase that
number of ordinary shares which equals 1% of our net profit for the year in
which the grant occurs. The exercise price of the options to be granted is equal
to the average of the closing market price of the ordinary shares on each of the
first seven trading days in the month of October of that financial year. For the
year ended December 31, 2002, Mr. Parker was granted an option to purchase
26,159 ordinary shares at an exercise price of $11.93 per share. All options
granted to Mr. Parker after March 1999 expire on the third anniversary of the
date of the auditor's report on the financial statements for the year of the
grant.

Under the terms of his employment agreement, Mr. Parker is entitled to
receive an annual bonus for each completed financial year during which he serves
in the capacities of Chairman and Chief Executive Officer. The amount of the
bonus consists of the following two amounts: (a) 1.5% of our net profits for
that financial year, before charging this bonus, dividends, or crediting any
amounts arising from the re-valuation of our assets and (b) 15% of the amount by
which our net profits for that financial year (calculated in the same manner as
in (a) above) exceed the highest annual net profits earned by us in any prior
financial year.

We entered into a three-year employment agreement with Frederick W.
McTaggart, our President, Chief Operating Officer and Chief Financial Officer.
This agreement, as amended, was originally scheduled to expire on October 16,
2003, although it extends automatically each year for an additional one year
term. If we terminate Mr. Frederick McTaggart without cause, he is entitled to
all financial benefits under the agreement for a period of two years and any
unvested stock options for the year in which Mr. Frederick McTaggart is
terminated automatically vest and become fully exercisable. Pursuant to his
agreement, Mr. Frederick McTaggart is granted an option to purchase that number
of ordinary shares which equals 1% of our net profit for each year. The exercise
price of the options to be granted will be equal to the average of the closing
market price of the ordinary shares on each of the first seven trading days in
the month of October of that financial year. For the year ended December 31,
2002, Mr. Frederick McTaggart was granted an option to purchase 26,427 ordinary
shares at an exercise price of $11.93 per share. All options granted to Mr.
Frederick McTaggart expire on the third anniversary of the date of the auditor's
report on the financial statements for the year of the grant.

Under the terms of his employment agreement, Mr. Frederick McTaggart is
entitled to receive an annual bonus for each completed financial year during
which he serves in the capacities of President and Chief Operating Officer. The
bonus consists of the following two amounts: (a) 2.5% of our net profits for
that financial year, before charging this bonus, dividends or crediting any
amounts arising from the re-valuation of our assets and (b) 5% of the amount by
which our net profits for that financial year (calculated in the same manner as
in (a) above) exceed the highest annual net profits earned by us in any prior
financial year.

We entered into an employment agreement with Peter D. Ribbins, our former
President and Chief Operating Officer and currently Director -- Special
Projects. The agreement fixes the salary of Mr. Ribbins until October 31, 2003
and thereafter it will be determined by mutual consent. Until October 31, 2003,
Mr. Ribbins will be granted an option to purchase that number of ordinary shares
which equals 1% of our net profit for each year. The exercise price of the
options to be granted will be equal to the average of the closing market price
of the ordinary shares on each of the first seven trading days in the month of
October of that financial year. For the year ended December 31, 2002, Mr.
Ribbins was granted an option to purchase 25,767 ordinary shares at an exercise
price of $11.93 per share. All options granted to Mr. Ribbins expire on the
third anniversary of the date of the auditor's report on the financial
statements for the year of grant. Mr. Ribbins' employment agreement will be
terminated if he dies, becomes bankrupt, gives the Company six months

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written notice or conducts himself in a manner that would justify his dismissal
under the Cayman Islands Labour Law. If his employment agreement is terminated,
any unvested options will automatically vest on a pro rata basis based upon the
number of months remaining in the year from the date of termination. In
addition, if the employment agreement is terminated, Mr. Ribbins will be allowed
to purchase the medical insurance provided by us to our employees for the rest
of his life.

We entered into a three-year employment agreement with Gregory McTaggart,
our Vice President of Operations. This agreement was originally scheduled to
expire on August 19, 2001, although it extends automatically each year for an
additional one year term. Under the agreement, if we terminate Mr. Gregory
McTaggart without cause, he is entitled to all financial benefits under the
agreement for a period of one year. Under the terms of his employment agreement,
Mr. Gregory McTaggart is granted an option to purchase that number of ordinary
shares which equals 0.75% of our net profit for that year. The exercise price of
the options to be granted to Mr. Gregory McTaggart will be equal to the average
of the closing market price of the ordinary shares on each of the first seven
trading days in the month of October of the year in which the options are
granted. For the year ended December 31, 2002, Mr. Gregory McTaggart was granted
an option to purchase 19,325 ordinary shares at an exercise price of $11.93 per
share. All options granted to Mr. Gregory McTaggart expire on the third
anniversary of the date of the auditor's report on the financial statements for
the year of grant. As a result of the option grant described above, Mr. Gregory
McTaggart was no longer eligible to participate in the employee share incentive
plan for fiscal years after 1999.

Under the terms of his employment agreement, Mr. Gregory McTaggart is
entitled to receive an annual bonus for each completed financial year during
which he serves in the capacity of Vice President of Operations. The bonus
consists of 2.5% of the amount by which our net profits for that financial year
(before charging this bonus, dividends or crediting any amounts arising from the
re-valuation of our assets) exceed the highest annual net profits earned by us
in any prior financial year.

As a result of our recent acquisitions, we entered into employment
agreements with Gerard Pereira, our new Vice President of Engineering, Kenneth
Crowley, our new Vice President of Overseas Operations and Robert Morrison, our
new Vice President of Purchasing and Information Technology. Each employment
agreement provides that the agreements shall remain in force unless terminated
by either party upon 90 days written notice (except in cases of gross negligence
or misconduct). Under the terms of Mr. Pereira's employment agreement, he is
entitled to receive an annual bonus equal to 0.6% of the sum of the net profits
as at the end of each fiscal year of Ocean Conversion (BVI) Ltd. and DesalCo
(Barbados) Ltd. (before charging this bonus, dividends or crediting any amounts
arising from the re-valuation of our assets). Under the terms of Mr. Crowley's
employment agreement, he is entitled to an annual bonus of 1.5% of the sum of
net profits as at the end of each fiscal year of Waterfields Company Limited and
Belize Water Limited (before charging this bonus, dividends or crediting any
amounts arising from the re-valuation of our assets).

We have also entered into a two-year employment agreement with Brent
Santha, our new Vice President of Finance and Assistant Secretary. This
agreement will expire on January 1, 2005, unless extended by agreement of the
parties. In addition to his salary, Mr. Santha is entitled to an annual bonus as
determined in the discretion of the President of our company and an option to
purchase that number of ordinary shares which equals 0.25% of our net profit for
that year. The exercise price of the options to be granted to Mr. Santha shall
be equal to the average of the closing market price of our ordinary shares on
the last trading day of that year. All options granted to Mr. Santha expire on
the day before the third anniversary of the date of the auditor's report on the
financial statement for the year of the grant. Mr. Santha may terminate this
employment agreement upon three months written notice prior to the anniversary
of this agreement. We may terminate this employment agreement without reason if
we pay Mr. Santha 25% of his annual salary at the time the termination takes
place.

INDEMNIFICATION PROVISION

We have indemnified our directors and officers from and against all
actions, proceedings, costs, charges, losses, damages and expenses incurred in
connection with their service as a director or officer. We have not

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indemnified our officers or directors for actions, proceedings, costs, charges,
losses, damages and expenses incurred by these officers or directors as a result
of their willful neglect or default of their obligations to us.

To the extent that indemnification for liabilities arising under the
Securities Act of 1933 may be available under the above provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission this indemnification is against public policy as expressed
in the Securities Act of 1933 and is unenforceable in the United States.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS

The table below sets forth the beneficial ownership of our ordinary shares,
par value CI$1.00 per share, of which 4,239,959 are outstanding as of March 18,
2003, and our redeemable preferred shares, par value CI$1.00 per share, of which
18,914 are outstanding as of March 18, 2003 by:

- each person or entity that we know beneficially owns more than 5% of our
ordinary shares or redeemable preferred shares;

- each of our executive officers and directors; and

- all of our officers and directors as a group.

An asterisk (*) in the above table indicates less than one percent

The address for Jeffrey Parker, Frederick McTaggart, Peter Ribbins, Gregory
McTaggart, Kenneth Crowley, Robert Morrison, Gerard Pereira, Brent Santha Abel
Castillo, Margaret Julier, William Banker, Chet Ritch, Rudy Ritch, Helbert
Rodriquez, Ivan Tabora and Elizabeth Triana is as follows: c/o Consolidated
Water Co. Ltd., Trafalgar Place, West Bay Road, P.O. Box 1114GT, Grand Cayman,
B.W.I. The address for each of J. Bruce Bugg Jr. and Argyle/Cay-Water, Ltd. is
c/o Argyle Investment Corp., 1500 Nations Bank Plaza, 300 Convent Street, San
Antonio, Texas 78205. The address for William Andrews is 48 Par-la-Ville

77

Road, Suite 381, Hamilton HM11, Bermuda. The address for Brian Butler is P.O.
Box 2581GT, Grand Cayman, B.W.I. The address for Steven A. Carr c/o Carr &
Associates, 4103 South Texas Avenue, Suite 209, Bryan, Texas 77802. The address
for Caron Ebanks is Government Administration Building, Georgetown, Grand
Cayman, B.W.I. The address for Richard Finlay is P.O. Box 709GT, Grand Cayman,
B.W.I. The address for Clarence Flowers, Jr. is P.O. Box 2581GT, Grand Cayman,
B.W.I. The address for Wilmer Pergande is 3724 Bengal Road, Gulf Breeze, Florida
32561. The address for Raymond Whittaker is P.O. Box 1982GT, Grand Cayman,
B.W.I.

Unless otherwise indicated, to our knowledge, the persons named in the
table above have sole voting and investment power with respect to the shares
listed. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares issuable under stock options
exercisable within 60 days after March 18, 2003 are deemed outstanding for that
person but are not deemed outstanding for computing the percentage of ownership
of any other person. Of the 236,591 ordinary shares owned by Mr. Parker, 81,590
of these shares are ordinary shares underlying options granted to Mr. Parker,
which may be exercised within 60 days after March 18, 2003. Of the 60,669
ordinary shares owned by Mr. Frederick McTaggart, 60,569 are ordinary shares
underlying options granted to Mr. Frederick McTaggart, which may be exercised
within 60 days after March 18, 2003. Of the 158,622 ordinary shares owned by Mr.
Ribbins, 59,022 are ordinary shares underlying options granted to Mr. Ribbins,
which may be exercised within 60 days after March 18, 2003. Mr. Bugg is deemed
the beneficial owner of the 567,662 ordinary shares held by Argyle/Cay-Water,
Ltd. Of the 71,131 ordinary shares owned by Mr. Gregory McTaggart, 40,125 are
ordinary shares underlying options granted to Mr. Gregory McTaggart, which may
be exercised within 60 days after March 18, 2003 and 297 are redeemable
preferred shares, which may be exercised or converted within 60 days after March
19, 2003.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information as of December 31, 2002,
with respect to compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance
under:

- all compensation plans previously approved by our security holders; and

- all compensation plans not previously approved by our security holders.

- ---------------

* Our equity compensation plans do not have any limits on the amount of shares
reserved for issuance under the plans.
** Of these 66,300 shares, 33,300 are issuable pursuant to our employee stock
option plan and 30,000 are issuable to a non-employee. See Note 15, to the
Notes to Consolidated Financial Statements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For a discussion of the employment agreements we have with our executive
officers, see Part III, Item 11 of this Annual Report.

78

ITEM 14. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for us. Based upon such officers' evaluation
of these controls and procedures as of a date within 90 days of the filing of
this Annual Report, and subject to the limitations noted hereinafter, the
Certifying Officers have concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
Annual Report is accumulated and communicated to management, including our
principal executive officers as appropriate, to allow timely decisions regarding
required disclosure.

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

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

79

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

The financial statements found in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA for the year ended December 31, 2002 is incorporated herein
by reference.

2. Financial Statement Schedules

None

3. EXHIBITS

(b) Reports on Form 8-K

None.

84

SIGNATURES

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

CONSOLIDATED WATER CO. LTD.

By: /s/ JEFFREY M. PARKER
------------------------------------
Jeffrey M. Parker
Chairman of the board of directors
and
Chief Executive Officer

Dated: March 31, 2003

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

86

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Consolidated Water Co. Ltd. (the
"Company") on Form 10-K for the year ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof, I, Jeffrey M. Parker, the
Chief Executive Officer of the Company, certify, pursuant to and for purposes of
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, that:

1. I have reviewed this annual report on Form 10-K of the Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

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

By: /s/ JEFFREY M. PARKER
------------------------------------
Name: Jeffrey M. Parker
Title: Chief Executive Officer

Date: March 31, 2003

87

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Consolidated Water Co. Ltd. (the
"Company") on Form 10-K for the year ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof, I, Frederick McTaggart,
the Chief Financial Officer of the Company, certify, pursuant to and for
purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, that:

1. I have reviewed this annual report on Form 10-K of the Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

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

By: /s/ FREDERICK MCTAGGART
------------------------------------
Name: Frederick McTaggart
Title: Chief Financial Officer

Date: March 31, 2003

88

CONSOLIDATED WATER CO. LTD.

INDEX TO EXHIBITS FILED WITH 10-K

10.5 Fourth Amendment to a License to Produce Potable Water,
dated February 1, 2003 between Consolidated Water Co. Ltd.
by the Government of the Cayman Islands
10.6 Agreement, dated December 19, 2002, between Consolidated
Water Co. Ltd. (formerly Cayman Water Company Limited) and
Safe Haven Ltd.
10.54 Employment Contract dated February 10, 2003 between Gerard
Pereira and Consolidated Water Co. Ltd.
10.55 Employment Contract dated February 21, 2003 between Kenneth
Crowley and Consolidated Water Co. Ltd.
10.56 Employment Contract dated March 7, 2003 between Robert
Morrison and Consolidated Water Co. Ltd.
10.57 Employment Contract dated December 31, 2002 between Brent
Joseph Santha and Consolidated Water Co. Ltd.
10.58 Distributorship Agreement dated September 24, 2002 between
DWEER Technology Ltd. and DesalCo Limited
21 Subsidiaries of the Registrant.
23 Consent of KPMG Chartered Accountants.
99.1 Chief Executive Officer Certification under Section 906 of
the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification under Section 906 of
the Sarbanes-Oxley Act of 2002