Overview
Our objective is to provide water services in areas where the supply of potable water is scarce and where the use of reverse osmosis ("RO") technology to produce potable water is economically feasible.
We intend to increase revenues by developing new business opportunities both within our current service areas and in new areas. We expect to maintain operating efficiencies by continuing to focus on our successful business model and by properly executing our equipment maintenance and water loss mitigation programs. We believe that many Caribbean basin and adjacent countries, being water scarce, present opportunities for operation of our plants in favorable regulatory environments.
Our operations and activities are now conducted at fourteen plants in five countries: the Cayman Islands, The Bahamas, the British Virgin Islands, Belize and Bermuda and in three business segments: retail, bulk and services. The following table sets forth the comparative combined production capacity of our retail, bulk and affiliate operations as of December 31 of each year.

                                                    Comparative Operations
                       2008                                                                2007
Location              Plants          Capacity(1)                     Location                    Plants          Capacity(1)
Cayman Islands              6                  7.8          Cayman Islands                              6                  7.6
Bahamas                     3                 10.4          Bahamas                                     3                 10.4
Belize                      1                  0.6          Belize                                      1                  0.6
British Virgin
Islands                     3                  2.4 (2)      British Virgin Islands                      2                  1.7 (2)
Bermuda                     1                  0.6          Bermuda                                     -                    -

Total                      14                 21.8          Total                                      12                 20.3

(1) In millions of U.S. gallons per day.

(2) Owned and operated by our affiliate OC-BVI. The 2007 capacity does not include OC-BVI's 700,000 U.S. gallons per day plant at Bar Bay, Tortola that was operationally ready in December 2008 and began generating revenues in January 2009.

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. Our operations consist of six reverse osmosis seawater conversion plants which provide water to approximately 4,600 retail residential and commercial customers within a government licensed area and bulk water sales to the Water Authority-Cayman. Our pipeline system in the Cayman Islands covers the Seven Mile Beach and West Bay areas of Grand Cayman and consists of approximately 71 miles of polyvinyl chloride and high density polyethylene pipe. During 2008, we supplied approximately 772 million U.S. gallons (2007: 803 million U.S. gallons) of water to our retail water customers and 1,045 million U.S. gallons (2007: 993 million U.S. gallons) to our bulk customers in Grand Cayman.
Bahamas
CW-Bahamas produces potable water from three reverse osmosis seawater conversion plants. Two of these plants, the Windsor plant and the Blue Hills plant, are located in New Providence and have a total installed capacity of 9.8 million U.S. gallons per day. CW-Bahamas supplies water from these plants on a take or pay basis to the Water and Sewerage Corporation of The Bahamas under long-term build, own and operate supply agreements. During 2008, we supplied approximately 3.0 billion U.S. gallons (2007: 3.2 billion U.S. gallons) of water to the Water and Sewerage Corporation from these plants. CW-Bahamas' third plant is located in Bimini, has a capacity of 115,000 U.S. gallons per day, and provides potable water to the Bimini Sands Resort and to the Bimini Beach Hotel. During 2008, we supplied approximately 6.0 million U.S. gallons (2007: 4.0 million U.S. gallons) of water to these customers. We have also sold water intermittently to the WSC from our Bimini plant when their regular supply was unavailable. During 2008, we supplied the WSC with 2.5 million U.S. gallons of water from our Bimini plant. 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 capable of producing 550,000 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 2008, we supplied approximately 155 million U.S. gallons (2007: 149 million U.S. gallons) of water to our Bulk water customer in Belize.
British Virgin Islands
We hold an equity position in, and shared management of, OC-BVI. This affiliate produces potable water from two reverse osmosis seawater conversion plants in Tortola, British Virgin Islands. These plants have a total installed capacity of 2.4 million U.S. gallons per day and provide water to the Department of Water and Sewerage of the Ministry of Communications and Works of the Government of the British Virgin Islands. OC-BVI's third plant, located on the island of Jost van Dyke, has a capacity of 21,000 U.S. gallons per day and provides potable water to the Department of Water and Sewerage of the British Virgin Islands Government. During 2008, OC-BVI supplied approximately 531 million U.S. gallons (2007: 536 million U.S. gallons) of water to its customer. Bermuda
In June 2006, we formed a Bermuda-based affiliate, CW-Bermuda with two other shareholders. We own 40% of the equity interest and voting rights of CW-Bermuda. CW-Bermuda has entered into a contract with the Government of

Bermuda for the design, construction and sale of a desalination plant in two phases, to be located on Tynes Bay along the northern coast of Bermuda. The first phase of this plant was completed and began operating at the end of 2008 and we expect that the second phase will be completed during the first half of 2009. We expect to manage this plant on behalf of the Bermuda government for a period of not less than 12 months from completion of its construction. CW-Bermuda will receive approximately $10.7 million in revenues under the contract for the construction of the plant and its operation.
We have entered into a management services agreement with CW-Bermuda for the design, construction and operation of the Tynes Bay plant, under which we receive fees for direct services, purchasing activities and proprietary technology.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ significantly from such estimates and assumptions.
Certain of our accounting estimates or assumptions constitute "critical accounting estimates" for us due to the fact that:
• the nature of these estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

• the impact of the estimates and assumptions on financial condition and results of operations is material.

Our critical accounting estimates relate to (i) the valuation of our equity investment in our affiliate, OC-BVI; (ii) goodwill and intangible assets; and
(iii) plant construction revenues and costs. Valuation of Equity Investment in Affiliate. We account for our investment in OC-BVI in accordance with Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." This accounting pronouncement requires recognition of a loss on an equity investment that is other than temporary, and indicates that a current fair value of an equity investment that is less than its carrying amount may indicate a loss in the value of the investment. OC-BVI's on-going dispute with the BVI government over the ownership of its Baughers Bay plant may indicate that the current fair value of our investment in OC-BVI is less than our carrying value for this investment. As a quoted market price for OC-BVI's stock is not available, to test for possible impairment of our investment in OC-BVI we estimate its fair value by calculating the expected cash flows from our investment in OC-BVI using the guidance set forth under the FASB Statement of Financial Accounting Concepts No. 7, "Using Cash Flow Information and Present Value in Accounting Measurements." In accordance with this FASB statement we (i) identify various possible outcomes of the Baughers Bay dispute and negotiations for a definitive contract for OC-BVI's new Bar Bay plant; (ii) estimate the cash flows associated with each possible outcome, and (iii) assign a probability to each outcome based upon discussions held to date by OC-BVI's management with the BVI government and OC-BVI's legal counsel. The resulting probability weighted sum represents the expected cash flows, and our best estimate of future cash flows, to be derived from our investment in OC-BVI. The identification of the possible outcomes for the Baughers Bay dispute, the projections of cash flows for each outcome, and the assignment of relative probabilities to each outcome all represent significant estimates made by us. While we have used our best judgment to identify the possible outcomes and expected cash flows for these outcomes and assign relative probabilities to each outcome, these estimates are by their nature highly subjective and are also subject to material change by our management over time based upon additional information from OC-BVI's management and legal counsel, a change in the status of negotiations and/or OC-BVI's litigation with the BVI government. The ultimate resolutions of the Baughers Bay issue and the negotiations for a definitive contract for the Bar Bay plant may differ significantly from our estimates and may result in actual cash flows from OC-BVI that vary materially from the

expected cash flows we use in determining OC-BVI's fair value. If OC-BVI and the BVI government are unable to agree on a new contract for Baughers Bay and this matter proceeds to resolution through the Courts, the BVI government's right of ownership under the 1990 Agreement could be found to be enforceable, in which case OC-BVI could lose its Baughers Bay water supply arrangement with the BVI government or may be forced to accept a water supply arrangement with the BVI government on terms less favorable to OC-BVI, and if the BVI government exercises its purported right, OC-BVI could lose ownership of the Baughers Bay plant. Even if OC-BVI is able to refute the BVI government's purported right of ownership, OC-BVI may elect to accept a new contract on less favorable terms. OC-BVI may be unsuccessful in negotiating a definitive contract for the Bar Bay plant on terms it finds acceptable. Any of these or other possible outcomes could result in actual cash flows from our investment in OC-BVI that are significantly lower than our estimate. In such case, we could be required to record an impairment charge to reduce the carrying value of our investment in OC-BVI. Such impairment charge would reduce our earnings and could have a material adverse impact on our results of operations and financial condition. Goodwill and other intangible assets. Goodwill represents the excess costs over fair value of the assets of an acquired business. Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." 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." We periodically evaluate the possible impairment of goodwill. Management identifies our reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. We determine the fair value of each reporting unit by calculating the expected cash flows from each reporting unit and compare the fair value to the carrying amount of the reporting unit. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, we are required to perform the second step of the impairment test, as this is an indication that the reporting unit goodwill may be impaired. In this step, we compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, "Business Combinations." The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the implied fair value is less than its carrying amount, the impairment loss is recorded. Based upon our annual tests to date, we have not experienced any impairment losses on our recorded amounts of goodwill. Plant construction revenue and cost of plant construction revenue. We recognize revenue and related costs as work progresses on fixed price contracts for the construction of desalination plants to be sold to third parties using the percentage-of-completion method, which relies on contract revenue and estimates of total expected costs. We follow this method since we can make reasonably dependable estimates of the revenue and costs applicable to various stages of a contract. Under the percentage-of-completion method, we record revenue and recognize profit or loss as work on the contract progresses. Our engineering personnel estimate total project costs and profit to be earned on each long term, fixed price contract prior to commencement of work on the contract and update these estimates as work on the contract progresses. The cumulative amount of revenue recorded on a contract at a specified point in time is that percentage of total estimated revenue that incurred costs to date comprise of estimated total contract costs. As work progresses, if the actual contract costs exceed estimates, the profit recognized on revenue from that contract decreases. We recognize the full amount of any estimated loss on a contract at the time the estimates indicate such a loss. To date we have not experienced a material adverse variation from our cost estimates for plants constructed for sale to third parties.
We assume the risk that the costs associated with constructing the plant may be greater than we anticipated in preparing our bid. However, the terms of each of the sales contracts with our customers require us to guarantee the sales price for the plant at the bid amount. Because we base our contracted sales price in part on our estimation of future construction costs, the profitability of our plant sales is dependent on our ability to estimate these costs accurately. The cost estimates we prepare in connection with the construction of plants to be sold to third parties are subject to inherent uncertainties. The cost of materials and construction may increase significantly after we submit our bid for a plant due to factors beyond our control, which could cause the gross margin for a plant to be less than we anticipated when the bid was made. The profit margin we initially expect to generate from a plant sale

could be further affected by other factors, such as hydro-geologic conditions at the plant site that differ materially from those we believed existed and relied upon when we submitted our bid.
Quarterly Results of Operations
The following table presents unaudited quarterly results of operations for the eight quarters ended December 31, 2008. We believe that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly such quarterly information.

                                               Year Ended December 31, 2008
                                 First            Second           Third            Fourth
                                Quarter          Quarter          Quarter          Quarter
 Total revenues (1)           $ 14,291,562     $ 17,842,585     $ 17,204,593     $ 16,340,219
 Gross profit                    4,536,058        4,907,175        4,625,261        4,565,349
 Net income                      1,673,867        1,979,623        1,780,017        1,776,209
 Diluted earnings per share           0.12             0.14             0.12             0.12



                                               Year Ended December 31, 2007
                                 First            Second           Third            Fourth
                                Quarter          Quarter          Quarter          Quarter
 Total revenues (1)           $ 13,991,106     $ 13,105,877     $ 13,145,719     $ 13,834,163
 Gross profit                    5,303,355        4,484,296        4,320,275        4,576,300
 Net income                      3,587,478        2,621,537        2,509,164        2,669,472
 Diluted earnings per share           0.25             0.18             0.17             0.18

(1) During the fourth quarter of 2008 we reclassified to revenues certain amounts charged to our customers for increases in energy costs. Such amounts had previously been reflected in our consolidated results of operations as a reduction of the energy component of our cost of revenues (see Note 2 of Notes to Consolidated Financial Statements). The impact of these reclassifications on the amounts of revenue previously reported in our Quarterly Reports on Form 10-Q is as follows:

                                                Year Ended December 31, 2008
                                          First            Second           Third
                                         Quarter          Quarter          Quarter
 Revenues, as reported                 $ 12,735,729     $ 16,037,848     $ 15,221,783
 Reclassification of energy recovery      1,555,833        1,804,737        1,982,810

 Revenues, as adjusted                 $ 14,291,562     $ 17,842,585     $ 17,204,593




                                                                    Year Ended December 31, 2007
                                                 First               Second              Third               Fourth
                                                Quarter             Quarter             Quarter             Quarter
Revenues, as reported                         $ 12,734,610        $ 11,964,380        $ 11,919,463        $ 12,531,394
Reclassification of energy recovery              1,256,496           1,141,497           1,226,256           1,302,769

Revenues, as adjusted                         $ 13,991,106        $ 13,105,877        $ 13,145,719        $ 13,834,163

These reclassifications had no effect upon previously reported gross profit or net income.

Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and accompanying notes included under Part II, Item 8 of this Annual Report.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 Consolidated Results
Net income for the year ended December 31, 2008 was $7,209,716 ($0.50 per share on a fully-diluted basis) as compared to $11,387,651 ($0.79 per share on a fully-diluted basis) for the year ended December 31, 2007. The variation in the amount we recognized in our results of operations relating to our equity investment in our affiliate OC-BVI is the primary factor for our decline in net income from 2007 to 2008.
Total revenues for the year ended December 31, 2008 increased to $65,678,959 from $54,076,865 for the year ended December 31, 2007 due to an increase in bulk water revenues and revenues from plant construction contracts. Gross profit for the year ended December 31, 2008 was $18,633,843, or 28% of total revenues, as compared to $18,684,226, or 35%, for the previous year. For further discussion of revenues and gross profit for the year ended December 31, 2008, see the "Results by Segment" analysis that follows.
General and administrative ("G&A") expenses were $8,789,185 and $9,478,308 on a consolidated basis for 2008 and 2007, respectively. During 2008, we changed the bonus arrangements for our executive management. Consequently, consolidated compensation expense declined from 2007 to 2008 by approximately $376,000 due to a reduction of approximately $911,000 in bonuses paid to our Chairman and our Chief Executive Officer. We also lowered professional fees by approximately $399,000 from 2007 to 2008 by reducing our use of consultants. Offsetting these cost reductions was an increase of approximately $166,000 in insurance expense, reflecting an increase in premiums.
Interest income for 2008 was $1,393,691, down $518,000 from 2007 due to a decrease in both the average balance of funds invested and the rates earned on such balances.
Due to OC-BVI's inability to resolve its on-going contractual dispute with the BVI government relating to its Baughers Bay plant, we changed our policy for recognizing the results of this affiliate effective January 1, 2008. Consequently, we reported a loss from our investment in OC-BVI for the year ended December 31, 2008 of approximately $2,346,000. For the year ended December 31, 2007, our equity in the earnings of OC-BVI was approximately $1,663,000 and we earned approximately $652,000 on our profit sharing agreement for OC-BVI. See further discussion of the OC-BVI situation at "Liquidity and Capital Resources - Material Commitments, Contingencies and Expenditures - OC-BVI Contract Dispute."
Results by Segment
Retail Segment:
The retail segment contributed $4,652,610 to our income from operations in 2008 as compared to $4,472,237 in 2007.
Revenues generated by our retail water operations were $22,369,806 and $22,225,765 for 2008 and 2007, respectively. Total U.S. gallons sold by retail operations decreased by approximately 4% from 2007 to 2008. The increase in retail revenues for 2008, despite the decrease in volume of water sold, is attributable to energy cost increases billed to customers which in 2008 exceeded by approximately $939,000 the comparable amounts billed to customers in 2007.

The retail segment generated gross profit of $11,803,059 (53% of revenues) in 2008 as compared to $12,294,829 (55% of revenues) in 2007. The slightly lower gross profit in 2008 results from the decrease in plant utilization. Consistent with prior periods, we record all non-direct G&A expenses in our retail business segment and do not allocate any of these non-direct costs to our other two business segments. Retail G&A expenses for 2008 were $7,150,449, down $672,143 from 2007. During 2008 we changed the bonus arrangements for our executive management. Consequently, consolidated compensation expense declined from 2007 to 2008 by approximately $419,000 due to a reduction of approximately $911,000 in bonuses paid to our Chairman and our Chief Executive Officer. We also lowered professional fees by approximately $191,000 from 2007 to 2008 by reducing our use of consultants.
Bulk Segment:
The bulk segment contributed $3,184,107 to our income from operations in 2008, as compared to $2,803,738 in 2007.
Revenues from our bulk segment for the year ended December 31, 2008 and 2007 were $30,121,536 and $24,320,392, respectively. Revenues from the bulk segment grew from 2007 to 2008 due to increased revenues for our operations in the Bahamas and Grand Cayman of approximately $3,999,000 and $1,527,000, respectively. The additional revenues in 2008 for our Bahamas operations result from water produced and invoiced by our Blue Hills plant and from an increase in diesel and electricity pass-through charges. In 2007, we provided a comparable amount of water from our Blue Hills plant but did not invoice for the equivalent of 1.2 million U.S. gallons per day for the first six months of 2007 due to our commitment under our non-revenue water ("NRW") agreement with the WSC. The additional revenues in 2008 for our Grand Cayman operations result primarily from an increase in diesel and electricity pass-through charges. Gross profit for our bulk segment was $4,563,704 and $4,241,634 for the year ended December 31, 2008 and 2007, respectively. Gross profit as a percentage of bulk revenues was 15% for the year ended December 31, 2008 and 17% for the year ended December 31, 2007. In 2007, we incurred approximately $427,000 in variable production costs for NRW we supplied from our Blue Hills plant which were not incurred in 2008. Our gross profit in 2008 for our bulk segment was adversely impacted by our Bahamas operations due to additional diesel costs for our Windsor plant. Our contracts with the WSC allow us to invoice increases in diesel costs to the WSC if our plants are operating at or better than the efficiency specified in the contracts. In early 2006, we reconfigured the Windsor plant in order to mitigate membrane fouling. However, this reconfiguration resulted in a decrease in the fuel efficiency of the Windsor plant to a level below that required under our contract with the WSC and as a result, we could not charge a portion of the Windsor plant's diesel costs to the WSC. The impact of this inefficiency was exacerbated by a 70.2% rise in diesel fuel prices over the first nine months of 2008 as compared to same period of 2007. Consequently, our diesel costs for the Windsor plant for the nine months ended September 30, 2008 exceeded the amount that could be billed to the WSC by approximately $638,000. We constructed and commissioned new feed water wells and replaced the reverse osmosis membranes on two of four of our production trains effective September 2008. These improvements have allowed us to reverse the plant reconfiguration, and the results for the fourth quarter of 2008 indicate that the Windsor plant's fuel efficiency has improved. However, the gross profit . . .