10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2005

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                          to

Commission file number: 0-8176

Southwest Water Company
(Exact name of registrant as specified in its charter)

Delaware	95-1840947
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
One Wilshire Building
624 South Grand Avenue, Suite 2900
Los Angeles, California	90017-3782
(Address of principal executive offices)	(Zip Code)
(213) 929-1800
(Registrant’s telephone number, including area code)

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  ý  No  o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On August 8, 2005, there were 19,730,082 common shares outstanding.

SOUTHWEST WATER COMPANY

INDEX

Part I.	Financial Information:
	Item 1.	Financial Statements:
		Condensed Consolidated Statements of Income (unaudited) – Three Months and Six Months Ended June 30, 2005 and 2004
		Condensed Consolidated Balance Sheets – June 30, 2005 (unaudited) and December 31, 2004 (audited)
		Condensed Consolidated Statements of Cash Flows (unaudited) – Six Months Ended June 30, 2005 and 2004
		Notes to Condensed Consolidated Financial Statements (unaudited)
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
Part II.	Other Information:
	Item 1.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 6.	Exhibits
Signatures

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(in thousands except per share data)
Revenues:
Utility group	$	20,295		$	16,575		$	35,754		$	29,639
Services group	30,987			26,858			60,759			51,802
	51,282			43,433			96,513			81,441
Expenses:
Operating expenses - utility group	10,678			8,623			20,657			16,269
Operating expenses - services group	26,689			24,162			52,573			47,834
Selling, general and administrative expenses	7,425			6,020			15,308			12,087
	44,792			38,805			88,538			76,190
Operating Income	6,490			4,628			7,975			5,251
Other Income (Expense):
Interest expense	(1,896		)	(957		)	(3,668		)	(1,925		)
Interest income	107			190			214			311
Other	71			(147		)	58			(136		)
	(1,718		)	(914		)	(3,396		)	(1,750		)
Income From Continuing Operations Before Income Taxes	4,772			3,714			4,579			3,501
Income Tax Provision	1,727			1,368			1,662			1,279
Income from Continuing Operations	3,045			2,346			2,917			2,222
Discontinued Operations:
Income (loss) from operations of discontinued subsidiary (net of income tax provisions (benefit) of $(677), $132, $(747), and $232 respectively, for the periods presented)	(1,105		)	208			(1,219		)	350
Loss on disposal of discontinued operations (net of income tax benefit of $345 for the quarter and six months ended June 30, 2005)	(3,683		)	—			(3,683		)	—
Net Income (Loss)	(1,743		)	2,554			(1,985		)	2,572
Dividends On Preferred Shares	6			6			12			13
Net Income (Loss) Applicable To Common Shareholders	$	(1,749	)	$	2,548		$	(1,997	)	$	2,559
Earnings (Loss) Per Common Share:
Basic
Income from continuing operations less dividends on preferred shares	$	0.16		$	0.14		$	0.15		$	0.14
Income (loss) from discontinued operations	$	(0.25	)	$	0.01		$	(0.25	)	$	0.02
Net Income (Loss) Applicable to Common Shareholders	$	(0.09	)	$	0.15		$	(0.10	)	$	0.16
Diluted
Income from continuing operations less dividends on preferred shares	$	0.15		$	0.13		$	0.14		$	0.13
Income (loss) from discontinued operations	$	(0.24	)	$	0.01		$	(0.24	)	$	0.02
Net Income (Loss) Applicable To Common Shareholders	$	(0.09	)	$	0.14		$	(0.10	)	$	0.15
Weighted Average Outstanding Common Shares:
Basic	19,514			17,371			19,463			16,460
Diluted	20,263			18,251			20,135			17,386

See accompanying notes to unaudited condensed consolidated financial statements.

1

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

	June 30, 2005		December 31, 2004
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	12,444	$	1,388
Restricted cash	9		221
Trade accounts receivable, less allowance for doubtful accounts	25,480		22,334
Assets held for sale	—		15,869
Other current assets	15,217		18,279
	53,150		58,091
Property, Plant and Equipment:
Utility property, plant and equipment—at cost	373,274		359,375
Non-regulated operations property, plant and equipment—at cost	18,148		17,118
	391,422		376,493
Less accumulated depreciation and amortization	78,864		74,658
	312,558		301,835
Other Assets:
Goodwill	27,722		26,806
Intangible assets, net	3,394		2,359
Other assets	16,547		15,718
	$	413,371	$	404,809
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt	$	1,304	$	2,733
Accounts payable	11,314		12,242
Liabilities related to assets held for sale	—		1,682
Other current liabilities	20,276		19,216
	32,894		35,873
Other Liabilities and Deferred Credits:
Long-term debt	78,620		92,792
Bank lines of credit	48,000		23,035
Advances for construction	8,995		9,196
Contributions in aid of construction	90,264		89,623
Deferred income taxes	17,063		15,528
Other liabilities and deferred credits	12,982		12,564
Total Liabilities and Deferred Credits	288,818		278,611
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock	461		461
Common stock	194		194
Paid-in capital	103,811		101,509
Retained earnings	20,087		24,034
Total Stockholders’ Equity	124,553		126,198
	$	413,371	$	404,809

See accompanying notes to unaudited condensed consolidated financial statements.

2

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended
	June 30,
	2005			2004
	(in thousands)
Cash Flows From Operating Activities:
Net income (loss)	$	(1,985	)	$	2,572
Income (loss) from operations of discontinued subsidiary	(1,219		)	350
Loss on disposal of discontinued operations	(3,683		)	—
Income from continuing operations	2,917			2,222
Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities:
Depreciation and amortization	5,044			3,471
Stock-based compensation expense	466			447
Deferred income taxes	1,535			181
Changes in assets and liabilities, net of effects of acquisitions:
Restricted cash	212			1,815
Trade accounts receivable	(2,510		)	(5,415		)
Other current assets	2,664			(764		)
Other assets	(956		)	610
Accounts payable	(2,597		)	(3,174		)
Other current liabilities	1,195			2,821
Other liabilities	(236		)	1,632
Other	(297		)	(4,823		)
Net cash provided (used) by continuing operating activities	7,437			(977		)
Cash Flows From Investing Activities:
Additions to property, plant and equipment	(14,284		)	(11,217		)
Purchase of minority interest in subsidiary	—			(2,900		)
Cash used to acquire customer units	—			(4,063		)
Acquisition of contract operations	(2,008		)	—
Net cash used in investing activities	(16,292		)	(18,180		)
Net proceeds from sale of discontinued operations	9,852			—
Cash Flows From Financing Activities:
Net proceeds from stock offering	—			20,573
Capital improvement reimbursements	139			169
Contributions in aid of construction	1,118			4,891
Borrowings (repayments) on bank notes payable	24,965			(9,600		)
Proceeds from dividend reinvestment, employee stock purchase and stock option plans	1,341			445
Dividends paid	(1,962		)	(1,576		)
Principal payments on long-term debt	(15,341		)	(572		)
Payments on advances for construction	(201		)	(157		)
Other financing activities, net	—			60
Net cash provided by financing activities	10,059			14,233
Net increase (decrease) in cash and cash equivalents	11,056			(4,924		)
Cash and cash equivalents at beginning of period	1,388			6,793
Cash and cash equivalents at end of period	$	12,444		$	1,869
Supplemental Disclosure of Cash Flow information
Cash paid (received) during the period for:
Interest	$	3,859		$	2,085
Income taxes	$	(1,360	)	$	125
Non-cash contributions in aid of construction and advances for construction from developers	$	1,110		$	2,349

See accompanying notes to unaudited condensed consolidated financial statements.

3

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1. – Basis of Presentation

Southwest Water Company and its subsidiaries (collectively referred to in this report as “Southwest,” the “Company,” “we,” “us” or “our” except where the context otherwise requires) provide a broad range of services including water production, treatment and distribution; wastewater collection and treatment; utility billing and collection; utility infrastructure construction management; and public works services. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and with Rule 10-01 of Regulation S-X; accordingly, they do not include all information and notes required by US GAAP for complete financial statements. Except as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Annual Report”). The unaudited condensed consolidated financial statements reflect all adjustments which, in our opinion, are necessary to present fairly the financial position of Southwest as of June 30, 2005, and our results of operations for the three and six months ended June 30, 2005 and 2004 and our cash flows for the six months ended June 30, 2005 and 2004.  Other than the adjustments described in Note 9 these adjustments are of a normal recurring nature.

The results of interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

Southwest Water Company was incorporated in California in 1954 and reincorporated in Delaware in 1988.

Certain reclassifications have been made to the prior period financial statement presentation to conform to the current period presentation.

Note 2. – Earnings Per Share

We report earnings per share (“EPS”) by computing “basic EPS” and “diluted EPS.”  Basic EPS measures our performance over the reporting period by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS measures our performance over the reporting period after giving effect to all potentially dilutive common shares that would have been outstanding if the dilutive common shares had been issued. Stock options, convertible debentures and warrants give rise to potentially dilutive common shares.  In July 2001, we issued $20.0 million of 6.85% fixed-rate convertible subordinate debentures. The debentures are convertible at any time prior to maturity in 2021, unless previously redeemed, at a conversion price of $11.569. At such time as the assumed conversion of the debentures has a dilutive effect on earnings per share, the debentures will be included in the calculation of diluted earnings per share, after adjusting net income for the after-tax effect of the debenture interest expense.

We declared a 5% stock dividend on January 3, 2005. All per share amounts and numbers of shares outstanding reflect this dividend.

4

The following table is a reconciliation of the numerators (income or loss) and denominators (shares) used in both basic and diluted EPS calculations:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(in thousands except per share data)
Earnings (loss) per share - basic
Income from continuing operations	$	3,045		$	2,346		$	2,917		$	2,222
Less: dividends on preferred shares	(6		)	(6		)	(12		)	(13		)
Income from continuing operations applicable to common shares	3,039			2,340			2,905			2,209
Income (loss) from discontinued operations	(4,788		)	208			(4,902		)	350
Net income (loss) applicable to common shares	(1,749		)	2,548			(1,997		)	2,559
Weighted average outstanding common shares	19,514			17,371			19,463			16,460
Earnings per common share from continuing operations	0.16			0.14			0.15			0.14
Earnings (loss) per common share from discontinued operations	(0.25		)	0.01			(0.25		)	0.02
Earnings (loss) per common share	$	(0.09	)	$	0.15		$	(0.10	)	$	0.16

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2005			2004		2005			2004
	(in thousands except per share data)
Earnings (loss) per share - diluted
Income from continuing operations applicable to common shares	$	3,039		$	2,340	$	2,905		$	2,209
Income (loss) from discontinued operations	(4,788		)	208		(4,902		)	350
Income (loss) applicable to common shares	(1,749		)	2,548		(1,997		)	2,559
Weighted average outstanding common shares	19,514			17,371		19,463			16,460
Plus: shares issued on assumed exercise of stock options and warrants	749			880		672			926
Weighted average outstanding common shares	20,263			18,251		20,135			17,386
Earnings per common share from continuing operations	0.15			0.13		0.14			0.13
Earnings (loss) per common share from discontinued operations	(0.24		)	1.00		(0.24		)	0.02
Earnings (loss) per common share	$	(0.09	)	$	0.14	$	(0.10	)	$	0.15

5

Note 3. –Stock-Based Plans

At June 30, 2005, Southwest had three stock-based compensation plans: a Stock Option Plan (“SOP”), a Director Stock Option Plan (“DOP”), and an Employee Stock Purchase Plan. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2005 and 2004:

	Six Months Ended
	June 30,
	2005		2004
Dividend yield	1.7	%	1.3	%
Expected volatility	24.3	%	24.4	%
Risk free interest rate	4.1	%	3.7	%
Expected life in years	5.7		6.0

Compensation expense arising from stock option grants as determined using the Black-Scholes fair value option model was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
	(in thousands)				(in thousands)
Stock-based compensation expense	$	214	$	169	$	466	$	447

A combined summary of shares authorized and available for issuance under the SOP and the DOP as of June 30, 2005, is as follows:

	SOP	DOP	Total
	(in thousands)
Shares authorized for issuance	3,386	666	4,052
Shares available for issuance	1,007	300	1,307

Following is a combined summary of changes in the status of the SOP, the DOP and warrants during the six months ended June 30, 2005:

			Weighted
			Average
	Stock Options		Exercise
	and Warrants		Price
	(in thousands)
Outstanding at December 31, 2004	2,776		$	8.03
Granted	287		11.75
Exercised	(105	)	8.04
Forfeited	(77	)	11.67
Outstanding at June 30, 2005	2,881		$	8.30
Exercisable at June 30, 2005	1,907		$	6.94

6

The following table summarizes information about stock options and warrants outstanding at June 30, 2005:

								Options and Warrants
				Options and Warrants Outstanding				Exercisable
					Weighted
				Number	Average			Number
				Outstanding	Remaining	Weighted		Exercisable	Weighted
				at	Contractual	Average		at	Average
Range of				June 30,	Life	Exercise		June 30,	Exercise
Exercise Prices				2005	in Years	Price		2005	Price
				(in thousands)				(in thousands)
$	1.50	$	3.75	211	1.0	$	2.84	211	$	2.84
3.76		7.50		869	3.2	5.75		811	5.64
7.51		11.25		1,226	4.4	8.94		792	8.65
11.26		15.00		575	6.0	12.78		93	13.02
$	1.50	$	15.00	2,881	4.0	$	8.30	1,907	$	6.94

Employee Stock Purchase Plan (“ESPP”): We have a stockholder-approved ESPP that allows eligible employees to purchase our common stock through payroll deductions of up to 10% of their salary (not to exceed $25,000 per year). The purchase price of the stock is 90% of the lower of the share price as calculated at the beginning and end of each three-month offering period. Under the ESPP, we issued 6,163 and 11,598 shares to employees during the three and six months ended June 30, 2005, respectively. At June 30, 2005, 1,197,000 shares had been authorized for issuance under the ESPP and approximately 882,000 shares remain available for issuance.

Note 4. – Post Retirement Benefits

The Company has a non-qualified supplemental executive retirement plan (“SERP”) for certain key executive officers.  The following table sets forth the components of the net periodic benefit costs for the SERP plan:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
	(in thousands)				(in thousands)
Service cost	$	16	$	15	$	32	$	30
Interest cost	20		19		40		38
Recognized actuarial loss	22		21		44		42
	$	58	$	55	$	116	$	110

Note 5. – Operating Segments

Southwest has two reportable segments: the Utility Group and the Services Group.  We have not changed the basis of presentation or measurement of segment profit or loss from that reported in our 2004 Annual Report.

The Utility Group owns a regulated water utility in California, and regulated water and wastewater utilities in New Mexico, Oklahoma and Texas.  Revenues result from the production and distribution of water and the collection and treatment of sewage for residential, business, industrial and public authority customers.  State, federal and local agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect these operations. The rates our regulated utility subsidiaries charge for water and wastewater services are established by state authorities.

The Services Group operates and manages water and wastewater treatment facilities owned by cities, public agencies, municipal utility districts, private entities and investor-owned utilities (including Utility Group affiliates). Revenues are earned by providing operations and maintenance services under contracts with these clients.  The Services Group also provides construction management and utility billing services. In June 2005, we sold our submetering subsidiary which provided utility billing and collection services for multi-family residential properties such as apartment buildings and which was previously recorded as a part of the Services Group (see Note 9).

7

The tables below present information about the operations of each reported segment for the three and six months ended June 30, 2005 and 2004:

				Services			Total						Total
				Group			Segments			Corporate and			Consolidated
	Utility Group			(1) (3)			Information			Other (2)			Information
	(in thousands)
For the Three Months Ended June 30, 2005
Total revenues (1)	$	20,295		$	30,987		$	51,282		$	—		$	51,282
Segment operating income	7,665			1,660			9,325			(2,835		)	6,490
Interest expense	(1,209		)	(483		)	(1,692		)	(204		)	(1,896		)
Interest income	11			96			107			—			107
Other income (expense)	34			37			71			—			71
Income (loss) from continuing operations before income taxes	6,501			1,310			7,811			(3,039		)	4,772
For the Three Months Ended June 30, 2004
Total revenues (1)	$	16,575		$	26,858		$	43,433		$	—		$	43,433
Segment operating income (loss)	6,884			215			7,099			(2,471		)	4,628
Interest expense	(635		)	(450		)	(1,085		)	128			(957		)
Interest income	88			94			182			8			190
Other income (expense)	(40		)	(99		)	(139		)	(8		)	(147		)
Income (loss) from continuing operations before income taxes	6,297			(240		)	6,057			(2,343		)	3,714

				Services			Total						Total
				Group			Segments			Corporate and			Consolidated
	Utility Group			(1) (3)			Information			Other (2)			Information
	(in thousands)
For the Six Months Ended June 30, 2005
Total revenues (1)	$	35,754		$	60,759		$	96,513		$	—		$	96,513
Segment operating income	11,673			2,877			14,550			(6,575		)	7,975
Interest expense	(2,403		)	(996		)	(3,399		)	(269		)	(3,668		)
Interest income	22			189			211			3			214
Other income (expense)	13			59			72			(14		)	58
Income (loss) from continuing operations before income taxes	9,305			2,129			11,434			(6,855		)	4,579
For the Six Months Ended June 30, 2004
Total revenues (1)	$	29,639		$	51,802		$	81,441		$	—		$	81,441
Segment operating income (loss)	10,676			(802		)	9,874			(4,623		)	5,251
Interest expense	(1,137		)	(883		)	(2,020		)	95			(1,925		)
Interest income	94			189			283			28			311
Other income (expense)	(54		)	(78		)	(132		)	(4		)	(136		)
Income (loss) from continuing operations before income taxes	9,579			(1,574		)	8,005			(4,504		)	3,501

8

(1) In addition to services provided to external customers, certain companies in our Services Group provide construction, operations, and maintenance services to companies in our Utility Group. In accordance with SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, the Company does not eliminate the intersegment profit on sales to affiliated utilities when the sales price is reasonable and it is probable that, through the rate making process, future revenue approximately equal to the sales price will result from the regulated affiliate’s use of the services.  Intersegment revenue was approximately $7.4 million and $3.3 million for the three months ended June 30, 2005 and 2004, respectively.  Intersegment revenue was approximately $14.5 million and $4.9 million for the six months ended June 30, 2005 and 2004, respectively.

(2)“Corporate and Other” consists primarily of costs that include headquarters expenses and any corporate functional departments whose costs are not allocated to reportable segments.

(3)Services Group amounts have been adjusted to reflect the discontinued operations from the sale of our submetering subsidiary as discussed in Note 9.

The following table presents information about the identifiable assets of each reported segment as of June 30, 2005 and December 31, 2004:

	June 30, 2005		December 31, 2004
	(in thousands)
Utility Group	$	331,874	$	322,521
Services Group	58,212		54,467
Corporate and Other	23,285		27,821
Consolidated	$	413,371	$	404,809

Note 6. – Seasonality and Weather

As our businesses are affected by weather, the results of operations for one quarter do not indicate results to be expected in another quarter.

Our Utility Group water operations are seasonal, as rainfall and weather conditions affect water consumption.  The second and third quarters of each year typically account for the highest volume of water consumption when weather tends to be hot and dry and a significant part of our water sales are for outside usage such as landscape and pools.  Drought conditions may result in lower revenue due to consumer conservation efforts and a shortage of water. Drought conditions may also result in increased water costs to us, which could adversely affect our profitability. Conversely, unusually wet conditions may result in decreased customer demand, lower revenues and lower profit.

While our Services Group operations are not as seasonal, they are subject to the effects of weather. Heavy rainfall or storm conditions may limit our ability to perform certain billable work such as pipeline maintenance, manhole rehabilitation, construction and other outdoor services. Severe weather conditions may also result in additional labor and material costs as we meet the terms of our operations and maintenance contracts. Depending on the specific contractual terms, this additional work may be billable to certain clients.  A significant portion of the revenues of our Texas subsidiaries is earned under time and materials contracts where revenues are affected by weather and rainfall.

Note 7. – Commitments, Contingencies and Restrictions

Commitments Under Acquisition Agreements

We own 90% of the outstanding common stock of Operations Technologies, Inc. (“OpTech”). We have the right to acquire the remaining 10% of OpTech beginning in August 2006 based on a formula relating to the profitability of OpTech. The minority owner has the option to sell the remaining 10% of OpTech to the Company using the same formula.  However, the selling price cannot be less than $1 million.

We have an 80% interest in Windermere Utility Company (“Windermere”) in Texas. We have the right to acquire the remaining 20% ownership in Windermere for a purchase price of $6 million payable in Southwest’s common stock at any time when the market value of our common stock increases to $12.96 per share (as adjusted for stock splits and dividends).  This right has not been exercised by SWWC.  The minority owner of Windermere has the right to put the remaining 20% to us beginning in October 2005 for up to 450,000 shares of Southwest’s common stock, but no less than 270,000 shares, depending on the prevailing stock price, with a value not to exceed $6 million.

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Commitments Under Divestiture Agreements

As part of the agreement to sell our submetering subsidiary (see Note 9), we are required to calculate a working capital adjustment, adjust for the net loss of customers and complete a transmitter replacement program.  Adjustments to the sales price arising from these items are to be paid or collected through an escrow account of approximately $1.2 million that was established at the close of the transaction in June 2005.   The escrow account will be closed in March 2006 and any amounts remaining on deposit at that time will be remitted to us.

Commitments Under Long-term Service Contracts

In September 2002, we won a bid to facilitate the engineering and construction of a reverse osmosis water treatment system in the City of San Juan Capistrano, California, for the Capistrano Valley Water District (“CVWD”). The project included the drilling of several new wells and the development of associated water lines. We entered into subcontractor agreements with an engineering firm and a large construction firm to fulfill significant obligations of this contract.

During construction of the CVWD plant, we received payments upon completion of construction. Construction of the plant commenced in December 2002 and was substantially complete as of December 31, 2004. The plant became operational in 2004 and the Company now operates and maintains the facility under a separate 20-year operations and maintenance contract.

In January 2003, we obtained an unsecured line of credit facility from a commercial bank that was used to issue a $3.4 million standby letter of credit as collateral for performance under a contract to design and construct a reverse osmosis water treatment facility. This standby letter of credit is in force for the construction period of the project.  On April 1, 2005, the standby letter of credit was transferred to the New Credit Facility (see Note 10) and the prior line of credit was cancelled.

As part of the financing of this project, the CVWD issued insured municipal bonds. We entered into an agreement with the bond insurer to guarantee our performance under the CVWD contract, subject to certain liability limits to the bond insurer in the event of a default. Such liability limits will not exceed an amount equal to $6.0 million during the construction period of the project, and afterwards, during the 20-year operation of the facility, the liability limits will not exceed an amount equal to $4.0 million plus an amount no greater than the replacement cost of the reverse osmosis filtration unit within the facility, estimated to be approximately $1.5 million.

Legal Proceedings

Southwest and a subsidiary were named as defendants in several lawsuits alleging various injuries as a result of water contamination in the San Gabriel Valley Main Basin. The California Supreme Court has ruled that the plaintiffs cannot challenge the adequacy of the water quality standards established by California Department of Health Services and the United States Environmental Protection Agency (“EPA”) but can sue us and the other CPUC-Regulated Water Companies if they can prove that the company served water that did not meet those standards. In August 2004 the trial court dismissed the case against us finding that there was no evidence that we violated any water quality standards.  The plaintiffs appealed the dismissal to the Court of Appeals for the State of California, Second Appellate District, where the matter is pending. To date, liability insurance carriers have absorbed the costs of defense of the lawsuits.

On May 5, 2005, one of the Company’s operating subsidiaries received a subpoena to provide records to a grand jury.  The requested records relate to the operations of the San Simeon wastewater treatment plant in California for the period January 2002 to present.  The facility was also served with search warrants executed by the EPA.  The Company’s subsidiary has operated this facility since June 2004.  The Company is cooperating with the investigation and is also performing its own internal investigation.

On May 18, 2005, the EPA executed a search warrant at one of the Company’s operating subsidiaries in Texas.  The search warrant sought information relating to the subsidiary’s laboratory operations.  The Company is cooperating with the investigation and is also performing its own internal investigation.

Southwest Water Company and its subsidiaries are subject to litigation arising in the ordinary course of operations. We believe the ultimate resolution of such matters will not materially adversely affect our consolidated financial position, results of operations or cash flows.

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Groundwater Settlement

One of the water sources for our California water utility has been affected by the presence of certain groundwater contaminants. These contaminants consist mainly of chemicals disposed of by various industrial companies in the 1940s and 1950s. In 2001 and 2002, this contamination necessitated the removal from service of a number of our wells, and we purchased replacement water at a cost substantially higher than the cost of water pumped from our own wells.

As a result of this contamination, under the terms of an agreement with the responsible parties, we have received payments from these parties, and we expect to continue to receive payments until completion of remediation or until our production capacities have been restored.  These payments represent the incremental cost of purchasing water over the cost that would have been incurred by us to pump water from our wells.  Our agreement with the responsible parties provided for ongoing reimbursement of our excess water costs and, as such, we bill and collect reimbursements monthly.  These monthly reimbursements are recorded as a reduction to operating expenses–utility group.  During the six months ended June 30, 2005 and 2004, these reimbursements were approximately $1.3 million and $1.6 million, respectively.

The settlement agreement also provides for contributions by the responsible parties to construct new wells and to develop additional interconnections with nearby water sources. Funds from the settlement agreement will also be used to develop long-term solutions that will potentially enable us to use our own less costly groundwater supplies in the future.  These contributions, recorded as contributions in aid of construction (“CIAC”), were approximately $0.1 million and approximately $0.2 million for the six months ended June 30, 2005 and 2004, respectively.

Note 8. – Acquisitions

In March 2005, we completed the acquisition of the assets of a Birmingham, Alabama contract operations company.  The aggregate purchase price was approximately $2.5 million, of which $0.7 million was deferred, plus liabilities we assumed in the amount of approximately $1.2 million.

Note 9. – Discontinued Operations

In June 2005, we completed the sale of our submetering subsidiary that provided utility billing and collection services for multi-family residential properties in our services segment for approximately $12.0 million.  We received approximately $10.8 million in cash and approximately $1.2 million of the sales price was placed into an escrow account.  We incurred transaction costs of approximately $1.0 million to complete the sale and our net proceeds on the sale of our submetering subsidiary was approximately $9.8 million.  The cash was used to subsequently paydown our bank lines of credit.

As part of the sale, we are required to calculate a working capital adjustment, participate in a reconciliation of billing accounts and complete a transmitter replacement program.  Adjustments arising from these items are to be paid or collected through the escrow account that was established at the close of the transaction.   The escrow account will be closed in March 2006 and any amounts remaining on deposit at that time will be remitted to us.

In the second quarter we recorded a loss from discontinued operations (net of income tax benefit of approximately $0.7 million) of approximately $1.1 million and a loss on sale of stock of approximately $3.7 million (net of income tax benefit of approximately $0.3 million).

Note 10. – Debt Obligations

In April 2005, we entered into the New Credit Facility.  The New Credit Facility provides for a $100 million revolving credit facility, which includes a $40 million letter of credit subfacility and a $10 million swingline subfacility.  The New Credit Facility contains customary covenants, as well as customary events of default.  Certain of our subsidiaries have guaranteed our obligation to repay borrowings under the New Credit Facility.

Loans under the New Credit Facility (other than swingline loans) will bear interest at a rate equal to (i) a Eurodollar rate plus the applicable margin (as defined in the New Credit Facility), or (ii) a base rate (as defined) minus the applicable margin.  At June 30, 2005, we had approximately $48 million of outstanding borrowings under our New Credit Facility and the adjusted average borrowing rate was approximately 4.3%.  The New Credit Facility replaced our lines of credit which had provided for up to $50 million of borrowings and we used the New Credit Facility to repay amounts outstanding under those lines of credit.  As of June 30, 2005, we were in compliance with all applicable covenants under the New Credit Facility.

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In January 2003, we received a $3.4 million line of credit with one of our commercial banks that we used to issue a standby letter of credit in that amount as collateral for performance under a contract to design and construct a reverse osmosis water treatment facility.  Upon final completion of the project, expected in 2005, the standby letter of credit will be terminated.  On April 1, 2005, the standby letter of credit was transferred to the New Credit Facility, and the separate line of credit was cancelled.

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

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the”34 Act”). Such statements are based upon current expectations that involve risks and uncertainties including those set forth under “Risk Factors” in this report and under “Business-Risk Factors” in our 2004 Annual Report.  Factors that could affect forward-looking statements relating to the resolution of the material weakness with respect to internal controls discussed in Item 9A of the 2004 Annual Report include, among other things: the Company’s ability to design and maintain policies and procedures which enable the Company to avoid any reoccurrence of the matters which gave rise to the material weakness and the Company’s ability to identify and retain qualified and experienced financial personnel.  Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as “may”, “will”, “should”, “estimates”, “predicts”, “potential”, “continue”, “strategy”, “believes”, “expects”, “anticipates”, “plans”, “intends”, and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances.

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto and the consolidated financial statements and the notes thereto contained in our 2004 Annual Report.

Overview

Southwest Water Company and subsidiaries (“Southwest,” “we,” “us,” “our” or the “Company,” unless the context otherwise requires) provide a broad range of water and wastewater services including water production, treatment and distribution; wastewater collection and treatment; utility billing and collection; utility infrastructure construction management; and public works services. We provide services to more than two million people. Our business is segmented into two operating groups: our Utility Group and our Services Group.

Our Utility Group owns and manages a rate-regulated public water utilities in California, water and wastewater facilities in New Mexico, Oklahoma and Texas.  State and federal agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect these operations, as well as establish the rates that we can charge for our water and wastewater services.

Our Services Group operates our contract service businesses in which we operate and maintain water supply and wastewater facilities owned by cities, public agencies, municipal utility districts, private entities and investor-owned utilities (including Utility Group affiliates) primarily in Alabama, California, Colorado, Georgia, Mississippi, New Jersey, New Mexico, South Dakota and Texas. While state and federal agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect these operations, our Services Group prices are not subject to regulation. We also provided utility billing and collection services.

In July 2004, we acquired a Texas water and wastewater utility consisting of a collection of approximately 87 rural regulated water systems and 13 wastewater systems serving approximately 21,000 water connections and 3,500 wastewater connections from Tecon Water Holdings, L.P. for approximately $66 million, and renamed the utility Monarch Utilities, Inc. (“Monarch”).

In June 2005, we completed the sale of our submetering subsidiary that provided utility billing and collection services for multi-family residential properties for approximately $12.0 million.  We received approximately $10.8 million in cash and approximately $1.2 million of the sales price was placed into an escrow account.  We incurred transaction costs of approximately $1.0 million to complete the sale and our net proceeds on the sale of our submetering subsidiary were approximately $9.8 million.

In the second quarter we recorded a loss from discontinued operations (net of income tax benefit of approximately $0.7 million) of approximately $1.1 million and a loss on sale of stock of approximately $3.7 million (net of income tax benefit of approximately $0.3 million) in connection with the sale of our submetering subsidiary.

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Results of Operations

A summary of our consolidated results for continuing operations for the three and six months ended June 30, 2005 and 2004 is as follows:

	Three Months Ended June 30,										Six Months Ended June 30,
				% of					% of					% of					% of
	2005			Revenue		2004			Revenue		2005			Revenue		2004			Revenue
	($ amounts in millions)
Revenues:
Utility group	$	20.3		40		$	16.6		38		$	35.8		37		$	29.6		36
Services group	31.0			60		26.8			62		60.8			63		51.8			64
	51.3			100		43.4			100		96.6			100		81.4			100
Expenses:
Operating expenses - utility group	10.7			21		8.6			20		20.7			21		16.3			20
Operating expenses - services group	26.7			52		24.2			55		52.6			54		47.8			59
Selling, general and administrative expenses	7.4			14		6.0			14		15.3			16		12.1			15
	44.8			87		38.8			89		88.6			91		76.2			94
Operating Income	6.5			13		4.6			11		8.0			9		5.2			6
Other Income (Expense):
Interest expense	(1.9		)	(4	)	(1.0		)	(2	)	(3.7		)	(4	)	(1.9		)	(2	)
Interest income	0.1			—		0.2			—		0.2			—		0.3			—
Other	0.1			—		(0.1		)	—		0.1			—		(0.1		)	—
	(1.7		)	(4	)	(0.9		)	(2	)	(3.4		)	(4	)	(1.7		)	(2	)
Income from Continuing Operations before Income Taxes	4.7			9		3.7			9		4.6			5		3.5			4
Income Tax Provision	1.7			3		1.4			3		1.7			2		1.3			2
Net Income from Continuing Operations	$	3.0		6		$	2.3		6		$	2.9		3		$	2.2		2

Discussion of Results of Operations for Three Months Ended June 30, 2005 and 2004

Revenues

Utility Group

Utility Group revenues are derived from the production and distribution of water and the collection and treatment of sewage for residential, industrial and commercial use. Our Utility Group water operations are seasonal, as rainfall and weather conditions affect water consumption.  In our service areas, the second and third quarters of each year typically account for the highest volume of water consumption when weather tends to be hot and dry. Drought conditions may result in lower revenue due to consumer conservation efforts and a shortage of water. Drought conditions may also result in increased water costs to us, which could adversely affect our profitability. Conversely, unusually wet conditions may result in decreased customer demand, lower revenues and lower profit in our Utility Group operations.

Revenues in the Utility Group increased approximately $3.7 million, or 22%, to $20.3 million during the three months ended June 30, 2005, from $16.6 million during the same period of the prior year. The increase in Utility Group revenue was primarily due to the following:

1.A $4.1 million increase in revenues attributable to Monarch, which we acquired in July 2004.

2.An increase of $0.2 million due to higher volume and increased number of connections served by our New Mexico and other Texas utilities.

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3.These increases were partially offset by a decrease in our California utility revenues of $0.7 million due primarily to significantly higher rainfall in southern California during the second quarter of 2005 versus the second quarter of 2004 which was a period of unseasonably low rainfall.

Services Group

Services Group revenues represent fees earned for water and wastewater facility operations and maintenance (O&M) services, equipment maintenance and repair, sewer pipeline cleaning, utility billing and collection services, construction management services, state-certified water and wastewater laboratory analysis and public works. Revenues for the three months ended June 30, 2005 increased approximately $4.2 million, or 16%, to $31.0 million from $26.8 million during the same period of the prior year.

The increase in Services Group revenues was primarily due to the following:

1.A$4.5 million increase in revenue associated with contract operations, primarily those performed for our Utility Group, as well as increased project work.  The increased project work is also a result of approximately 76% less rainfall in southern Texas versus the second quarter of 2004 which allowed work crews to complete projects.

2.A $1.2 million increase due to the recent acquisition of contract operations in Alabama and a $0.5 million increase from revenues generated by a laboratory we acquired in the latter part of 2004.

3.These revenue increases were partially offset by a decrease of approximately $2.0 million in construction work related to the reverse osmosis plant, which was under construction since 2003 and was substantially completed as of December 31, 2004.

Expenses

Operating expenses – utility group

Operating expenses–utility group represent the costs of purchasing and producing water, treating wastewater, salaries, wages and employee benefits, facilities costs, power and electricity, supplies and equipment, repairs and maintenance, professional fees and other costs. Operating expenses for our Utility Group increased $2.1 million, or 24%, to $10.7 million during the three months ended June 30, 2005, from $8.6 million during the comparable period of 2004.  The increase in operating expenses was primarily due to the following:

1.Operating costs of approximately $2.8 million attributable to Monarch.

2.This increase was offset in part by reduced operating expenses of $0.6 million at our California utility due primarily to lower production as a result of above average rainfall.

Operating expenses–utility group represented approximately 53% and 52% of revenues from utility operations for the three months ended June 30, 2005 and 2004, respectively.  The increase was primarily due to the July 2004 acquisition of Monarch which incurs higher operating expenses as a percentage of revenue, as we had anticipated.

Operating expenses – services group

Operating expenses–services group include salaries, wages and employee benefits, project costs, fleet expenses, facilities costs, supplies and equipment, repairs and maintenance and professional fees.  Operating expenses–services group increased approximately $2.5 million, or 10%, to $26.7 million during the three months ended June 30, 2005 from $24.2 million during the same period of 2004.  The increase in operating expense–services group was due primarily to the increased staffing, fleet and other related direct expense associated with the additional contract work stemming from the acquisition of contract operations in Alabama and work that was delayed from 2004.  The staffing increase resulted in higher salary and wage expenses as well as benefits and other related costs.

Operating expenses – services group, as a percentage of the revenues from the related operations decreased to 86% for the three months ended June 30, 2005 compared to 90% for the same period of 2004.   The decrease was due to the increase in revenues relative to expenses for additional construction, operating and maintenance work.

Selling, general and administrative expenses

Selling, general and administrative expenses consist mainly of personnel, facilities, insurance and professional services costs, which support our sales, marketing, human resources, finance and administration functions.  Selling, general and administrative expenses increased $1.4 million, or 23%, to $7.4 million for the three months ended June 30, 2005 compared to $6.0 million during the same period of 2004.  Selling, general and administrative expenses remained constant at 14% of revenues for the three months ended June 30, 2005 and the three months ended

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June 30, 2004.  The increase in selling, general and administrative expenses was primarily due to the following:

1.Compensation and benefits increased approximately $0.6 million due to increase in staff headcount to support our revenue trends.

2.An increase of $0.8 million attributable to acquisitions of Monarch, contract operations in Alabama and laboratory service in Texas.

Other Income (Expense)

Interest Expense

Interest expense increased approximately $0.9 million or 93%, during the three months ended June 30, 2005 compared to the same period in 2004.  The major components of interest expense are as follows:

	For the Three Months Ended
	June 30,
	2005			2004
	(in thousands)
Interest expense - convertible subordinate debentures	$	295		$	316
Interest expense - bank lines of credit	574			165
Interest expense - mortgage bonds and bank term loan	1,032			493
Interest expense - other	7			54
Total interest expense before capitalized interest	1,908			1,028
Capitalized interest	(12		)	(71		)
Total interest expense	$	1,896		$	957

The increase in total interest expense is primarily due to an increase in our long-term debt and borrowing on our bank lines of credit.  Our average balances of interest bearing debt outstanding were approximately $133 million and $63 million for the three months ended June 30, 2005 and 2004, respectively.  The increase in our average balances of long-term debt was driven primarily by debt assumed in our acquisition of Monarch in July 2004 and $27 million of first mortgage bonds issued by our California and New Mexico utilities in the fourth quarter of 2004.  In addition, our effective weighted average borrowing rate decreased to 6.2% during the three months ended June 30, 2005 from 6.9% during the three months ended June 30, 2004.

Provision for Income Taxes

Our effective consolidated income tax rates on combined continuing and discontinued operations for the three months ended June 30, 2005 and 2004 were approximately 35% and 37%, respectively.

During the quarter ended June 30, 2005 we recognized a capital loss of approximately $4.0 million for income tax purposes upon the sale of our submetering subsidiary.  We will be able to carry back the capital loss to the prior three years and partially offset it against capital gains of approximately $0.9 million realized during those years.  As a result, we have recognized an income tax benefit of approximately $0.3 million during the second quarter of 2005, resulting in a net loss of approximately $3.7 million on sale of this subsidiary.

The remaining capital loss of approximately $3.1 million may be carried forward for a period of up to 15 years and offset against future capital gains, if any, which may be realized during those years. No income tax benefit has been recorded for this capital loss carryforward.

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Discussion of Results of Operations for Six Months Ended June 30, 2005 and 2004

Revenues

Utility Group

Revenues in the Utility Group increased approximately $6.2 million, or 21%, to $35.8 million during the six months ended June 30, 2005, from $29.6 million during the same period of the prior year. The increase in Utility Group revenue was primarily due to the following:

1.A $7.6 million increase in revenues attributable to Monarch which we acquired in July 2004.

2.An increase in revenue from our New Mexico and Texas utilities of $0.5 million primarily due to increased connections.

3.The above increases were partially offset by a decrease in revenues of our California utility of $1.9 million due primarily to significantly higher rainfall in southern California during the first half of 2005 versus the first half of 2004 which was a period of unseasonably low rainfall.

Services Group

Revenues for the six months ended June 30, 2005 increased approximately $9.0 million, or 17%, to $60.8 million from $51.8 million during the same period of the prior year.

The increase in Services Group revenues was primarily due to the following:

1.A $10.6 million increase in revenue associated with contract operations, primarily those performed for our Utility Group, as well as increased construction work.  The increased project work is also a result of approximately 53% less rainfall in southern Texas versus the first half of 2004 which allowed work crews to complete projects.

2.A $1.1 million increase due to the acquisition of a laboratory and a $1.4 million due to acquisition of contract operations.

3.These revenue increases were partially offset by a decrease of $4.3 million increase in construction work related to the reverse osmosis plant which has been under construction since 2003 and was substantially completed as of December 31, 2004.

Expenses

Operating expenses – utility group

Operating expenses—utility group represent the costs of purchasing and producing water, treating wastewater, salaries, wages and employee benefits, facilities costs, power and electricity, supplies and equipment, repairs and maintenance, professional fees and other costs. Operating expenses for our Utility Group increased $4.4 million, or 27%, to $20.7 million during the six months ended June 30, 2005, from $16.3 million during the comparable period of 2004.  The increase in operating expenses was primarily due to the following:

1.Operating costs of approximately $5.5 million attributable to Monarch.

2.This increase was offset in part by reduced operating expenses of $1.2 million at our California utility due to lower production as a result of above average rainfall.

Operating expenses—utility group represented approximately 58% and 55% of revenues from utility operations for the six months ended June 30, 2005 and 2004, respectively.  The increase was primarily due to the July 2004 acquisition of Monarch which incurs higher operating expenses as a percentage of revenue, as we had anticipated.

Operating expenses – services group

Operating expenses–services group include salaries, wages and employee benefits, project costs, fleet expenses, facilities costs, supplies and equipment, repairs and maintenance and professional fees.  Operating expenses—services group increased approximately $4.8 million, or 10%, to $52.6 million during the six months ended June 30, 2005 from $47.8 million during the same period of 2004.  The increase in operating expense–services group was due to the increased staffing and fleet expense related to additional contract

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work, some of which was delayed from 2004.  The staffing increase resulted in higher salary and wage expenses as well as benefits and other related costs.

Operating expenses – services group, as a percentage of the related revenues decreased to 87% for the six months ended June 30, 2005 compared to 92% for the same period of 2004.   The decrease was due to the increase in revenues relative to expenses for additional construction, operating and maintenance work.

Selling, general and administrative expenses

Selling, general and administrative expenses consist mainly of personnel, facilities, insurance and professional services costs, which support our sales, marketing, human resources, finance and administration functions.  Selling, general and administrative expenses increased $3.2 million, or 26%, to $15.3 million for the six months ended June 30, 2005 compared to $12.1 million during the same period of 2004.  Selling, general and administrative expenses increased to 16% of revenues for the six months ended June 30, 2005 from 15% during the six months ended June 30, 2004.  The increase in selling, general and administrative expenses was primarily due to the following:

1.An increase in audit fees of $0.4 million as well as an increase of $0.4 million in outside services most of which is attributable to our efforts to prepare for and comply with the Sarbanes-Oxley Act of 2002.

2.An increase of $1.2 million attributable to acquisitions, most of which relates to the Monarch acquisition in July 2004.

3.A $1.2 million increase in costs compared to the prior period related to salaries and employee benefits due to increases in headcount to support our revenue trends.

Other Income (Expense)

Interest Expense

Interest expense increased approximately $1.7 million, or 95%, during the six months ended June 30, 2005 compared to the same period in 2004.  The major components of interest expense are as follows:

	For the Six Months Ended
	June 30,
	2005			2004
	(in thousands)
Interest expense - convertible subordinate debentures	$	591		$	642
Interest expense - bank lines of credit	876			412
Interest expense - mortgage bonds and bank term loan	2,146			985
Interest expense - other	137			99
Total interest expense before capitalized interest	3,750			2,138
Capitalized interest	(82		)	(213		)
Total interest expense	$	3,668		$	1,925

The increase in total interest expense is primarily due to an increase in our long-term debt and borrowings on our bank lines of credit.  Our average balances of interest bearing debt outstanding were approximately $129 million and $71 million for the six months ended June 30, 2005 and 2004, respectively.  The increase in our average balances of long-term debt was driven primarily by debt assumed in our acquisition of Monarch in July 2004 and $27 million of first mortgage bonds issued by our California and New Mexico utilities in the fourth quarter of 2004.  In addition, our effective weighted average borrowing rate decreased to 6.4% during the six months ended June 30, 2005 from 6.6% during the six months ended June 30, 2004.

Provision for Income Taxes

Our effective consolidated income tax rates on combined continuing and discontinued operations for the six months ended June 30, 2005 and 2004 were approximately 35% and 37%, respectively.

During the six months ended June 30, 2005 we recognized a capital loss of approximately $4.0 million for income tax purposes upon the sale of our submetering subsidiary in the amount of approximately $4.0 million.  We will be able to carry back the capital loss to the prior three years and partially offset it against capital gains of approximately $0.9 million realized during those years.  As a result,

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we have recognized an income tax benefit of approximately $0.3 million during the second quarter of 2005, resulting in a net loss of approximately $3.7 million on sale of this subsidiary.

The remaining capital loss of approximately $3.1 million may be carried forward for a period of up to 15 years and offset against future capital gains, if any, which may be realized during those years. No income tax benefit has been recorded in 2005 for this capital loss carryforward.

Liquidity and Capital Resources

Our corporate objectives with respect to liquidity and capital resources are to:  (i) generate sufficient operating cash to provide for dividends, principal and interest requirements on our indebtedness, capital improvements, and taxes; (ii) obtain external financing for long term capital improvements and acquisitions; (iii) use our credit facilities to manage seasonal cash needs; and (iv) maintain approximately equal levels of debt and equity.

Our statements of cash flows are summarized as follows:

	Six Months Ended
	June 30,
	2005			2004
	(in thousands)
Net cash provided (used) by continuing operating activities	$	7,437		$	(977	)
Net cash used in investing activities	(16,292		)	(18,180		)
Net proceeds from sale of discontinued operations	9,852			—
Net cash provided by financing activities	10,059			14,233
Net increase (decrease) in cash and cash equivalents	$	11,056		$	(4,924	)

Despite a net loss for the quarter, net cash flow increased by approximately $11.0 million for the six months ended June 30, 2005 as compared to a decrease of $4.9 million in 2004.  The increase in net cash flow was primarily the result of net proceeds received from the sale of our submetering subsidiary of approximately $9.8 million.  Other cash flow activity included net borrowings on our line of credit of $9.6 million and contributions in aid of construction of $1.1 million and proceeds from our dividend reinvestment, employee stock purchase and stock option plan of approximately $1.3 million which were offset by purchases of property plant and equipment of approximately $14.3 million and dividends of approximately $1.9 million.  (For further discussion on operating revenues and expenses see Results of Operations.)

Cash Flows From Operating Activities

Net cash provided by operating activities during the six months ended June 30, 2005 consisted of a net loss of approximately $2.0 million adjusted for certain non-cash items including loss on discontinued operations of approximately $1.2 million and loss on sale of our submetering subsidiary of approximately $3.7 million and approximately $5.0 million of depreciation and amortization expense, stock based compensation expense of approximately $0.5 million, an increase in deferred income taxes of approximately $1.5 million, and a decrease in other current assets of $4.3 million.  Cash flow declined due to a decrease of our accounts payable of approximately $2.6 million and an increase in accounts receivable of approximately $2.5 million.  The increase in our accounts receivable represents an increase in billings to our customers due to increased consumption of water.

Cash Flows from Investing Activities

Cash used in investing activities totaled $16.3 million in the first six months of 2005 and was the result of capital improvements in our utility business of approximately $14.3 million and acquisitions in our services business of approximately $2.0 million.  Capital expenditures of $14.3 million were primarily invested in regulated water utility assets for purposes of expansion, replacement or renovation.  The following table summarizes property, plant and equipment additions for each of the first six months in 2005 and 2004.

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	Six Months Ended
	June 30,
	2005		2004
	(in thousands)
Company-financed additions	$	13,027	$	6,179
Capital improvement reimbursements	139		169
Contributions paid for by developers	1,118		4,869
Net cash used in investing activities	14,284		11,217
Property contributed by developers	1,110		2,349
Total additions to property, plant and equipment	$	15,394	$	13,566

Cash payments for acquisitions during the first six months of 2005 and 2004 included:

•$2.0 million in 2005 in cash for the purchase of Alabama contract operations, and

•$6.9 million in 2004 to acquire the remaining minority interest and additional contracts for our submetering subsidiary which was sold in June 2005.

Cash Flows from the Sale of Discontinued Operations

In June 2005, we completed the sale of our submetering subsidiary in our services segment for approximately $12.0 million.  We received approximately $10.8 million in cash and approximately $1.2 million of the sales price was placed into an escrow account.  We incurred transaction costs of approximately $1.0 million to complete the sale and our net proceeds on the sale of submetering subsidiary were approximately $9.8 million.  The cash from the sale was subsequently used to paydown our bank lines of credit in our New Credit Facility.

Cash Flows from Financing Activities

Our financing activities involved the following events during the first six months ended in 2005 and 2004 as follows:

•Net borrowings on our revolving lines of credit in 2005 of approximately $25.0 million.  These borrowings were used primarily for principal payments on long-term debt of $15.3 million in conjunction with the establishment of our New Credit Facility.

•A public offering of approximately 1.7 million shares of our common stock in March 2004, which generated net proceeds of approximately $20.6 million.

Aggregate borrowings under our revolving lines of credit were approximately $48.0 million as of June 30, 2005, an increase of approximately $25.0 million since December 31, 2004 for increased capital expenditures and prepayments of long-term debt of approximately $15.3 million in conjunction with the establishment of our New Credit Facility (details are discussed below).  Our total borrowing availability under the New Credit Facility was approximately $48.1 million as of June 30, 2005.

As more fully discussed below, we entered into a new 5-year credit facility with a syndicate of banks in April 2005, which provides for a $100 million revolving credit facility.  In April 2005, we used a portion of our borrowings from the New Credit Facility to repay amounts outstanding, and to extinguish, our lines of credit and certain other indebtedness.

During 2005, we paid dividends totaling approximately $2.0 million. Our quarterly dividend rate is currently $0.05 per common share.  Common stockholders may elect to participate in our Amended and Restated Dividend Reinvestment and Stock Purchase Plan, which gives them the option of receiving their dividends in either cash or common stock at a 5% discount from current market value.  This plan also permits optional cash purchases of stock at current market values of up to $10,000 per stockholder each month. Proceeds from this plan were approximately $0.5 million.

Contributions in Aid of Construction (CIAC) represent contributions in the form of cash, services or property received from developers, governmental agencies, municipalities or individuals for the purpose of constructing utility plant.

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Our capital resources are used for debt service on our bonds and debentures and are also influenced by investments we make in new business ventures, including the acquisition of companies and acquisition of contract operations. We have historically generated reasonably stable operating cash flows.

We expect to expend approximately $10 million for cash capital expenditures for the remainder of 2005, primarily for utility property, plant and equipment.  We plan to fund those expenditures with cash flow from operations, borrowings under our New Credit Facility , long term debt financing and other sources.

We augmented our operating cash flow with borrowings under our lines of credit.  At June 30, 2005, we had a working capital of approximately $20.3 million including available cash and cash-equivalent balances of approximately $12.4 million (excluding restricted cash balances).  Effective April 1, 2005, we implemented the New Credit Facility and took the following actions to reduce interest expense.

1)Issued a redemption notice to holders of $4.0 million of our New Mexico bonds on April 4, 2005 with a redemption date of May 9, 2005,

2)Redeemed notes payable of approximately $2.5 million on April 29, 2005,

3)Extinguished a term loan for our Texas Utility in the amount of approximately $8.8 million on April 1, 2005, and

4)Repaid a revolving credit facility for our New Mexico Utility in the amount of approximately $3.8 million on April 1, 2005.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements other than leases that have been classified as operating leases in accordance with US GAAP for interim financial information.

Debt Obligations

Following is a summary of our debt obligations and commitments due in the remaining six months of 2005 and in the specified periods thereafter.  Amounts represent the expected cash principal payments related to our long-term debt.

			Years Ending December 31,
									2009 and
	2005		2006		2007		2008		thereafter		Total
	(in thousands)
Long-term debt
Bank lines of credit	$	—	$	—	$	—	$	—	$	48,000	$	48,000
Bank term loans	471		946		938		931		11,660		14,946
Economic development revenue bonds	95		100		105		115		1,810		2,225
Mortgage bonds	—		8,000		—		—		35,000		43,000
Convertible subordinate debentures	—		—		—		—		17,235		17,235
Notes payable	103		397		420		1,598		—		2,518
	$	669	$	9,443	$	1,463	$	2,644	$	113,705	$	127,924

In April 2005, we entered into the New Credit Facility.  The New Credit Facility provides for a $100 million revolving credit facility, which includes a $40 million letter of credit subfacility and a $10 million swingline subfacility.  The New Credit Facility contains customary covenants, as well as customary events of default.  Certain of our subsidiaries have guaranteed our obligation to repay borrowings under the New Credit Facility.

Loans under the New Credit Facility (other than swingline loans) bear interest at a rate equal to (i) LIBOR plus the applicable margin (as provided for in the New Credit Facility), or (ii) a base rate (as defined) minus the applicable margin.  At June 30, 2005, we had $48.0 million of outstanding borrowings under our New Credit Facility and the adjusted average borrowing rate was approximately 4.3%.  The New Credit Facility replaced our existing lines of credit which had provided for up to $50.0 million of borrowings and we used the New Credit Facility to repay amounts outstanding under those lines of credit.  As of June 30, 2005, we were in compliance with all applicable covenants under our then outstanding line of credit agreements.

In January 2003, we received a $3.4 million line of credit from one of our commercial banks that we used to issue a standby letter of credit in that amount as collateral for performance under a contract to design and construct a reverse osmosis water treatment facility.

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Upon final completion of the project, expected in 2005, the standby letter of credit will be terminated.  On April 1, 2005, the standby letter of credit was transferred to the New Credit Facility and the standby line of credit was cancelled.

In addition to the foregoing, the indentures governing the first mortgage bonds for our California and New Mexico utilities permitted the issuance of approximately $65.7 million of first mortgage bonds at these utilities as of June 30, 2005.

We anticipate that our available credit facility borrowing capacity, cash flows generated from operations, long term debt financing and other sources will be sufficient to fund our activities during the next 12 months, however we cannot guarantee that will be the case.  If we needed additional financing and were unable to obtain it, our capital spending and any future acquisitions would be delayed, reduced, or eliminated.

We have an effective registration statement on file with the Securities and Exchange Commission (“SEC”).  Approximately $6 million remains available for issuance as of June 30, 2005 under this registration statement. We may offer any of these securities for sale at any time and from time to time.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are important to fully understanding and evaluating our reported financial results include the following:

•Revenue recognition,

•Valuation of long-lived and intangible assets,

•Accounting for regulated businesses,

•Stock-based compensation, and

•Deferred costs.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas which require management’s judgment in selecting among available GAAP alternatives. Our senior management has reviewed these critical accounting policies and related disclosures with the audit committee of the Board of Directors.

Revenue recognition

Water utility revenues are recognized when water is delivered to customers. At the end of an accounting period, estimated amounts for unbilled revenues are accrued for water usage since the previous billing period.

Revenues for contract operations are recognized and billed at the end of the month based on a monthly fee to provide a specific level of service as outlined in each individual contract. We generally bill for additional services provided beyond the scope of the base contract on a time-and-materials basis as such services are rendered.

Revenues for construction projects are recorded using the percentage-of-completion method of accounting. The percentage-of-completion method recognizes revenue and income as work progresses on a project based on the expected total project costs and the expected total project revenues. This method is based on an estimate of the revenue and income earned to date, less the revenue and income recognized in earlier periods. If management anticipates we will ultimately suffer a loss on a construction project, the entire estimated loss is recorded in the period such a determination is made.

Revenues for multiple-family utility billing and collecting services are recognized and billed at the end of the month in which services are performed. Revenues for installation of multiple-family utility billing and collection equipment are accounted for using the percentage-of-completion method which is included in our discontinued operations.

If a contract involves the provision of a single product or service, revenue is generally recognized when the product or service is provided and the amount becomes billable. If services are provided evenly during the contract term but service billings are irregular,

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revenue is recognized on a straight-line basis over the contract term.

Certain non-refundable activation fees in our non-regulated wholesale water operations are accounted for on a completed contract basis and subsequently deferred and recognized over the expected period of performance.

If a contract involves the provision of multiple products or services (elements), total estimated contract revenue is allocated to each element based on the relative fair value of each service, provided the services qualify for separation under Emerging Issues Task Force (EITF) 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The amount of revenue allocated to each service is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is then recognized for each element as described above for single-element contracts, except revenue recognized on a straight-line basis for a non-construction service will not exceed amounts currently billable unless the excess revenue is recoverable from the client upon any contract termination event. If the amount of revenue allocated to a construction service is less than its relative fair value, costs to deliver such service, limited to the difference between allocated revenue and the relative fair value, are deferred and amortized over the contract term. If total construction service costs are estimated to exceed the relative fair value for the construction service contained in a multiple-element arrangement, then a provision for the estimated loss is made in the period in which the loss first becomes apparent.

Valuation of long-lived and intangible assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we assess intangible assets and other long-lived assets, excluding goodwill, for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable through the estimated undiscounted future cash flows resulting from the use of the assets. If we determine that the carrying value of intangible assets or other long-lived assets may not be recoverable, we measure impairment by using the projected discounted cash-flow method in accordance with Statement No. 144.

We have made acquisitions in the past that resulted in recording goodwill and intangible assets. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. For intangible assets with finite useful lives, SFAS No. 142 requires amortization over their estimated useful lives. SFAS No. 142 became effective for fiscal years beginning after December 15, 2001. We evaluate goodwill impairment, at least annually, using discounted cash flow methodologies, transaction values for comparable companies, and other valuation techniques for our reporting units with significant goodwill balances.  Our reporting units, generally subsidiaries one level below operating segments, constitute separate businesses for which we maintain discrete financial information that is regularly reviewed by segment and chief operating decision maker.  There were no impairment charges to goodwill as of June 30, 2005 and no events have occurred that indicated diminution in the value of recorded goodwill.

Under the provisions of SFAS No. 141, Business Combinations, we have identified intangible assets apart from goodwill such as contract costs and account lists.  These intangible assets are amortized over their estimated useful lives ranging from four to eight years.

Accounting for regulated businesses

Our regulated businesses, which include our utilities in California, New Mexico, and Texas, are required to be accounted for under the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, which specifies certain revenue, expense and balance sheet treatment as required by each state’s regulatory authority. Each state authority establishes rates which are intended to permit each utility to recover its costs and earn a reasonable rate of return.

Our Services Group has contracted with our utilities in Texas and New Mexico to perform operating services, maintenance, construction work, and to manage capital projects.  In accordance with SFAS No. 71, our Services Group recognizes profit on sales to regulated affiliates and does not eliminate the intercompany profit when the sales price is reasonable and it is probable that, through the rate making process, future revenue approximately equal to the sales price will result from the regulated affiliate’s use of the services.  However, all revenue in excess of profits is eliminated.  Accordingly, the intercompany profit for construction as well as operations and maintenance services provided to Utility Group affiliates has not been eliminated in the accompanying consolidated financial statements.  Based upon our Services Group’s experience of providing operations and maintenance services in more than 400 contracts with unaffiliated customers, and a history of regulator approval of the construction service fees charged by the Services Group to utility affiliates, we believe that the contract sales prices between our Services Group and our Texas and New Mexico utilities are reasonable and that it is probable that the price of these services will be recovered in the rate-making process.

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Stock-based compensation

In 2002, we adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which requires valuation of stock options issued based upon an option pricing model and recognition of this value as an expense over the period in which the options vest. In accordance with the provisions of SFAS No. 148, we elected to recognize stock-based compensation using the retroactive restatement method. Under this change in accounting method, we restated our accompanying consolidated financial statements for periods prior to 2002 to reflect stock-based compensation expense under a fair value based accounting method for all options granted, modified or settled in fiscal years beginning after December 15, 1994.

We use the Black-Scholes option valuation model to estimate the fair value of our stock options. This option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and that are fully transferable. Option valuation models require subjective assumptions such as the expected future volatility of the stock price. Because the stock options we grant have characteristics that are significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the calculated results, in management’s opinion, the stock option valuation models, including Black-Scholes, may not necessarily provide an exact measure of the fair value of employee stock options.

Deferred Costs

We defer and subsequently amortize certain direct contract acquisition costs related to activities that enable the provision of contracted services to our customers. Deferred contract acquisition costs are amortized on a straight-line basis over the remaining original contract term unless revenue patterns indicate a more accelerated method is appropriate. The recoverability of all long-lived assets associated with a particular contract, including deferred contract costs, is analyzed on a periodic basis. If we conclude that long-lived assets are impaired, an impairment loss is recognized for the amount by which the carrying value of the long-lived assets exceeds the fair value of those assets.

RISK FACTORS

The following factors, which are described more fully in our 2004 Annual Report, represent risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could affect forward-looking statements relating to the resolution of the material weakness with respect to internal controls discussed in Item 4 below and Item 9A of our 2004 Annual Report, include among other things: our ability to identify and retain qualified and experienced financial personnel and our ability to design and maintain policies and procedures which enable us to avoid any reoccurrence of the matters which gave rise to the material weakness.   See “Risk Factors” in our 2004 Annual Report for further disclosure related to risk factors.

Risks Related to Our Business

Risk Factors that affect our Utility Group operations

•Weather conditions can affect the financial results of our Utility Group.

•Changes in the regulatory environment, including restrictions on rates we are allowed to charge customers, may adversely affect our results of operations.  Changes in policies allowing our Services Group to provide services to our regulated utilities, at fair market values, may adversely impact our operating results.

•We may discover additional contamination of our water sources which may adversely affect our operations.  We may not recover costs incurred or revenues lost due to such contamination from responsible parties or from rate payers.

•We own assets in areas subject to natural disasters or that may be the target of terrorist activities.

•We are subject to regulatory and environmental risks and we may not be able to provide an adequate supply of water to our customers.

•We need access to capital to continue to invest in our utility assets.

•We may be limited in our ability to mitigate water costs related to non-paying customers due to environmental considerations.

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Risk factors that affect our Services Group operations

•We operate in a competitive market with low operating margins.

•Our revenue growth depends on our ability to enter into new, and maintain our existing, operating contracts with cities, agencies and municipal utility districts.

•Our business depends on trained, qualified employees.

•Events such as heavy rain, hurricanes, tornadoes and floods may adversely affect our results of operations.

•Our Services Group’s contracts have certain performance risks.

•Services Group contracts for the design and construction of water and wastewater facilities may expose us to certain completion and performance risks.

•We use third party equipment and subcontractors.

•Our Services Group is subject to environmental and water quality risks.

•We operate a large fleet of vehicles that could expose us to liabilities.

•Our operating costs may rise faster than our revenues.

•Our operating contracts may be canceled, reducing our revenues and backlog. Also we may not secure new construction and construction management projects on a consistent basis, leading to fluctuations in revenues and backlog.

Risks Related to Our Common Stock

•We are a holding company that depends on cash flow from our subsidiaries to meet our obligations.

•Our outstanding indebtedness may adversely affect our financial condition and the value of our common stock.

•The market price of our shares of common stock could be volatile.

•Our results could fall below the expectations of market analysts or investors.

•We may issue additional shares of our common stock.

Other Risk Factors

•Our capital resources may restrict our ability to operate and expand our business.

•If we continue to grow, we may fail to effectively manage our growth or we may fail to effectively manage the growth we have experienced.

•Our business may be affected by the general economic conditions of real estate development in the United States.

•We are subject to debt covenants.

•Rating agencies may downgrade our debt.

•We are subject to increasing costs of producing products and services.

•Our operations are subject to certain risks due to their locations.

•Internal control weaknesses could have an adverse effect on us.  We may not be able to remediate the material weakness noted in the 2004 10-K in a timely manner.

•The United States Environmental Protection Agency may investigate operations of our subsidiaries. We are unable to predict the outcome thereof.

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•We rely on a number of complex business systems that could malfunction.

•We retain certain risks not covered by our insurance policies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There are no material changes from our 2004 Annual Report.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As discussed in our 2004 Annual Report, filed with the SEC on March 31, 2005, accounting errors were identified during the fourth quarter of 2004 that were caused by lack of an effective review by appropriate accounting personnel of the accounting for certain non-routine transactions. The transactions involved a) purchase accounting for an acquisition, b) balance sheet classification of long-term debt, and c) accounting for a gain contingency.  As a result of this internal control deficiency, there was more than a remote likelihood that the Company’s interim or annual financial statements could have been materially misstated, and accordingly, such deficiency was considered a material weakness in internal control over financial reporting as of December 31, 2004.  A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected.  Because of the material weakness described above, management concluded that, as of December 31, 2004, our internal control over financial reporting was not effective.

We are in the process of implementing improvements to our internal controls to address the aforementioned material weakness.  We have implemented procedures in our accounting review and approval process over non-routine transactions.  These include implementation of additional checklists, more timely review and accounting for non-routine transactions and timely identification of non-routine issues with our independent auditors.  We have evaluated appropriate staffing and experience levels in our corporate controllership function and are actively searching for the additional personnel.  In addition, during the second quarter of 2005, we have (i) updated key controls and documentation since year end 2004, (ii) established a Steering Committee to monitor the progress of the effectiveness of the controls, (iii) further developed our 2005 internal control testing plan and (iv) started the documentation of Monarch.  While management believes it has made progress in improving controls, we believe that the material weakness identified above has not yet been rectified.

There were no other changes in the Company’s internal control over financial reporting during the second quarter of 2005 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

For the quarter ended June 30, 2005, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2005.

While we continue to devote significant resources to meeting the internal control over financial reporting requirements of the rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we cannot assure you that the policies and procedures we have adopted and our continued efforts will successfully remediate the material weakness we have identified and any control deficiencies or material weaknesses that we or our outside auditors may identify before the end of our fiscal year.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Southwest and a subsidiary were named as defendants in several lawsuits alleging various injuries as a result of water contamination in the San Gabriel Valley Main Basin. The California Supreme Court has ruled that the plaintiffs cannot challenge the adequacy of the water quality standards established by California Department of Health Services and the United States Environmental Protection Agency (“EPA”) but can sue us and the other CPUC-Regulated Water Companies if they can prove that the company served water that did not meet those standards. In August 2004 the trial court dismissed the case against us finding that there was no evidence that we violated any water quality standards.  The plaintiffs appealed the dismissal to the Court of Appeals for the State of California, Second Appellate District, where the matter is pending. To date, liability insurance carriers have absorbed the costs of defense of the lawsuits.

On May 5, 2005, one of the Company’s operating subsidiaries received a subpoena to provide records to a grand jury.  The requested records relate to the operations of the San Simeon wastewater treatment plant in California for the period January 2002 to present.  The facility was also served with search warrants executed by the EPA. The Company’s subsidiary has operated this facility since June 2004.  The Company is cooperating with the investigation and is also performing its own internal investigation.

On May 18, 2005, the EPA executed a search warrant at one of the Company’s operating subsidiaries in Texas.  The search warrant sought information relating to the subsidiary’s laboratory operations.  The Company is cooperating with the investigation and is also performing its own internal investigation.

Southwest Water Company and its subsidiaries are subject to litigation arising in the ordinary course of operations. We believe the ultimate resolution of such matters will not materially adversely affect our consolidated financial position, results of operations or cash flows.

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

At the Annual Meeting of Stockholders held on May 12, 2005 the following proposals were submitted to stockholders with the following results:

Proposal 1.To elect three persons as Class I Directors to a three-year term and until their successors are duly elected and qualified.

	James C.	William D.	Maureen A.
	Castle	Jones	Kindel
Votes “For”	16,925,279	16,690,975	16,890,034
Votes to “Withhold Authority”	238,924	473,228	274,169

After the meeting, Linda Griego, Donovan D. Huennekens and Richard G. Newman continued to serve as Class II Directors of the Company for terms which expire in 2006 and until their successors are elected and qualified. H. Frederick Christie, Anton C. Garnier and Peter J. Moerbeek continued to serve as Class III Directors of the Company for terms which expire in 2007 and until their successors are elected and qualified.

Proposal 2.To approve an amendment to the Company’s Amended and Restated Certificate of Incorporation deleting all references to Series D Preferred Stock.

Votes “For”— 16,917,741 shares

Votes “Against”— 138,716 shares

Votes “Abstained”— 107,743 shares

Proposal 3.To approve an amendment to the Company’s Amended and Restated Certificate of Incorporation to provide that the authorized number of directors of the Board of Directors will be as set forth in the Company’s Bylaws.

Votes “For”— 14,847,623 shares

Votes “Against”— 2,188,955 shares

Votes “Abstained”— 127,621 shares

Broker “Non-Vote”— 4,645,230 shares

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Item 6. Exhibits

3.1	Restated Certificate of Incorporation of Southwest Water Company dated May 24, 2005 (filed herewith).
10.1	Amended and Restated Dividend Reinvestment and Stock Purchase Plan dated April 8, 2005 (incorporated by reference to Registrant’s S-3/A Registration Statement filed with the Commission on April 5, 2005).
10.2	Credit Agreement dated as of April 1, 2005 among the Registrant, as borrower, the several lenders parties thereto, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, Banc of America Securities LLC and Union Bank of California, N.A., as co-lead arrangers and co-book managers, and Union Bank of California, N.A., as syndication agent (incorporated by reference to Registrant’s Form 8-K filed with the Commission on April 6, 2005).
10.3	Stock Purchase Agreement by and between the Registrant and Minol L.P. dated June 27, 2005 (filed herewith)
31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	SOUTHWEST WATER COMPANY
	(Registrant)
Dated:  August 9, 2005	/s/ CHERYL L. CLARY
	Cheryl L. Clary
	Chief Financial Officer
	(Principal Financial Officer and duly authorized to sign this report on behalf
	of the Regisrtant)

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EX-3.1

Exhibit 3.1

RESTATED CERTIFICATE OF INCORPORATION OF

SOUTHWEST WATER COMPANY

A Delaware corporation

The undersigned, Peter J. Moerbeek, hereby certifies that:

1.  He is the duly elected and acting President of Southwest Water Company, a Delaware corporation (this “Corporation”).

2.  This Corporation was originally incorporated under the name “Southwest Water Company,” and the original Certificate of Incorporation of this Corporation was filed with the Secretary of State of Delaware on February 2, 1988 (the “Original Certificate of Incorporation”).

3.  This Restated Certificate of Incorporation (the “Restated Certificate of Incorporation”) has been duly adopted by this Corporation’s Board of Directors and stockholders in accordance with the applicable provisions of Section 242 and 245 of the General Corporation Law of the State of Delaware.  This Certificate of Incorporation restates, amends and supersedes the provisions of the Original Certificate of Incorporation and all prior amendments and restatements thereto.

4.  Upon filing with the Secretary of State of the State of Delaware, this Certificate of Incorporation shall be amended and restated to read in full as follows:

FIRST: The name of the corporation is SOUTHWEST WATER COMPANY (hereinafter referred to as the “Corporation”).

SECOND: The address of the registered office of the Corporation in the State of Delaware is 2711 Centerville Road, Suite 400, County of New Castle, Wilmington, Delaware 19808. The name of the registered agent at that address is Corporation Service Company.

THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware.

FOURTH:

A. The total number of shares of all classes of stock which the Corporation shall have authority to issue is seventy-five million two hundred fifty thousand (75,250,000), consisting of the following:

(1) two hundred fifty thousand (250,000) shares of preferred stock, with a par value of $.01 per share (the “Preferred Stock”); and

(2) seventy-five million (75,000,000) shares of common stock, with a par value of $.01 per share (the “Common Stock”).”

B. The shares of Preferred Stock may be issued from time to time in one or more series. Except for the Series A Preferred Stock and subject to the rights, preferences, privileges, and restrictions of the Series A Preferred Stock, the Board of Directors is authorized, by filing a certificate of designations pursuant to the General Corporation Law of the State of Delaware, to fix the number of shares of any series of Preferred Stock; to determine the designation of any series of Preferred Stock; to determine or alter the rights, preferences, privileges, and restrictions (including voting, dividend, registration, conversion, redemption, and liquidation rights, preferences, privileges, and restrictions) granted to or imposed upon any wholly unissued series of Preferred Stock, and, within the limits and restrictions stated in any resolution of the Board of Directors originally fixing the number of shares constituting any series of Preferred Stock, to increase or decrease (but not below the number of shares of such series of Preferred Stock then outstanding) the number of shares of any such series subsequent to the issuance of shares of Preferred Stock of that series. Each share of a series of Preferred Stock shall be identical in all respects to every other share of that series of Preferred Stock. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares of Preferred Stock then outstanding) by the affirmative vote of the holders of a majority of the shares of Common Stock, without a vote of the holders of the shares of Preferred Stock, or of any series thereof, unless a vote of any such holders of the shares of Preferred Stock is required pursuant to the certificate or certificates of designation establishing the series of Preferred Stock.

C. The rights, preferences, privileges, and restrictions relating to ten thousand three hundred seventy-three and one-fourth (10,373.25) shares of Preferred Stock are as follows:

(1) Designation and Number of Shares. Ten thousand three hundred seventy-three and one-fourth (10,373.25) shares of Preferred Stock shall be designated and known as the “Series A Preferred Stock.”

(2) Dividends. The holders of the Series A 5-1/4% $.01 par value Preferred Stock shall be entitled to receive out of any funds of the Corporation at the time legally available for the declaration of dividends, dividends at the rate of Two Dollars and Sixty Two and one-half cent ($2.625) per share per annum, and no more, payable in cash, annually, or at such intervals as the Board of Directors may from time to time determine, when and as declared by the Board of Directors.

All such dividends shall accrue from the respective dates of issuance of the shares of the Series A Preferred Stock (and shall include any accrued and unpaid dividends on the shares of Series A Preferred Stock of Southwest Water Company, a California

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corporation and predecessor in interest to the Corporation, converted into, or redeemed for, the Series A Preferred Stock of the Corporation) and shall accrue from day to day, whether or not earned or declared. Such dividends shall be payable before any dividends shall be declared or paid upon or set apart for the Common Stock, and shall be cumulative, so that if in any year or years dividends upon the issued and outstanding shares of the Series A Preferred Stock as herein provided shall not have been paid thereon or declared and set apart therefor, the amount of the deficiency shall be fully paid or declared and set apart for payment, but without interest, before any distribution, whether by way of dividend or otherwise, shall be declared or paid upon, or set apart for payment on, the Common Stock. Each share of the Series A Preferred Stock shall rank on a parity with each other share of the Series A Preferred Stock with respect to dividends.

(3) Liquidation. In the event of the liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, each holder of shares of the Series A Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets are capital or surplus of any nature, Fifty Dollars ($50.00) per share, and, in addition, a further amount equal to the dividends unpaid and accumulated thereon as provided in paragraph (2) of this Section C, respectively, to the date of distribution, whether or not earned or declared, and no more, before any payment shall be made or any assets distributed to the holders of shares of the Common Stock. If upon the liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed among the holders of shares of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amounts aforesaid, then the entire assets of the Corporation to be distributed shall be distributed ratably among the holders of shares of the Series A Preferred Stock.

For the purposes of this Section C, in the event of any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, subject to all of the preferential rights of the holders of shares of the Series A Preferred Stock on distribution or otherwise, the holders of shares of the Common Stock shall be entitled to receive, ratably, all remaining assets of the Corporation. A consolidation or merger of the Corporation with or into any other corporation or corporations shall be deemed not to be a liquidation, dissolution, or winding up of the Corporation, within the meaning of this paragraph (3).

(4) Redemption Provisions. The Corporation, at the option of the Board of Directors, may redeem the whole, or from time to time any part, of the shares of the Series A Preferred Stock on any dividend date by paying in cash therefor Fifty-two Dollars ($52.00) per share, and, in addition to the aforementioned amount, an amount in cash equal to all dividends on such shares of the Series A Preferred Stock unpaid and accumulated as provided in paragraph (2) of this Section C, whether or not earned or declared, to and including the date fixed for redemption, such respective sums being hereinafter sometimes referred to as the “Series A Preferred Stock redemption price.” In case of the redemption of only a part of the outstanding shares of the Series A Preferred Stock, the Corporation shall designate by lot, in such manner as the Board of Directors may determine, the shares of the Series A Preferred Stock to be redeemed, or shall effect such redemption pro rata. Less than all of the shares of the Series A Preferred Stock at any

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time outstanding may not be redeemed until all dividends accrued and in arrears upon all issued and outstanding shares of the Series A Preferred Stock shall have been paid for all past dividend periods, and until full dividends for the then current dividend period on all issued and outstanding shares of the Series A Preferred Stock, other than the shares of the Series A Preferred Stock to be redeemed, shall have been paid or declared and the full amount thereof set apart for payment. At least thirty (30) days previous notice by mail, postage prepaid, shall be given to the holders of record of shares of the Series A Preferred Stock to be redeemed, such notice to be addressed to each such stockholder at his last office address as shown on the records of the Corporation. On or after the date fixed for redemption and stated in such notice, each holder of shares of the Series A Preferred Stock called for redemption shall surrender his certificate evidencing such shares of the Series A Preferred Stock to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the Series A Preferred Stock redemption price. In case less than all of the shares of the Series A Preferred Stock represented by any such surrendered certificates are redeemed, a new certificate shall be issued representing the unredeemed shares of the Series A Preferred Stock. If such notice of redemption shall have been duly given and if on the date fixed for redemption funds necessary for the redemption shall be available therefor, then notwithstanding that the certificates evidencing any shares of the Series A Preferred Stock so called for redemption shall not have been surrendered, the dividends with respect to the shares of the Series A Preferred Stock so called for redemption shall forthwith after such date cease, except only the right of the holders to receive the Series A Preferred Stock redemption price, without interest, upon the surrender of the certificates therefor.

If, on or prior to any date fixed for redemption of shares of the Series A Preferred Stock, the Corporation deposits with any bank or trust company in the City of Los Angeles, State of California, as a trust fund, a sum sufficient to redeem, on the date fixed for redemption thereof, the shares of the Series A Preferred Stock called for redemption, with irrevocable instructions to give the notice of redemption thereof if such notice shall not previously have been given by the Corporation, or to complete the giving of such notice if theretofore commenced, and to pay, on and after the date fixed for redemption (or prior thereto), the Series A Preferred Stock redemption price to the holders thereof upon the surrender of the stock certificates therefor, then from and after the date of the deposit (although prior to the date fixed for redemption), the shares of the Series A Preferred Stock called for redemption shall be deemed to be redeemed and dividends on those shares shall cease to accrue after the date fixed for redemption. The deposit shall be deemed to constitute full payment for the shares of the Series A Preferred Stock to the holders thereof, and, from and after the date of such deposit, the shares of the Series A Preferred Stock shall be deemed to be redeemed and no longer outstanding, and the holders thereof shall cease to be stockholders with respect to the shares of the Series A Preferred Stock so redeemed and shall have no rights with respect thereto except the right to receive from the bank or trust company with which such deposit has been made payment of the Series A Preferred Stock redemption price, without interest, upon the surrender of the certificates therefor.

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(6) Voting Rights. Each issued and outstanding share of the Series A Preferred Stock shall have five (5) votes.

FIFTH: Each issued and outstanding share of the Common Stock shall have one (1) vote. Except as otherwise expressly provided by the Board of Directors pursuant to Section B of Article FOURTH or as expressly provided in this Certificate of Incorporation or by law, all classes of the capital stock of the Corporation with the right to vote shall vote together as a single class and not as separate classes.

SIXTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation, and regulation of the powers of the Corporation and of its directors and stockholders:

A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors (the “Board”). In addition to the powers and authority expressly conferred upon the Board by statute or by this Certificate of Incorporation or the bylaws of the Corporation, the Board is hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation.

B. The Board of Directors shall have the authorized number of Directors as provided in the Bylaws of this Corporation, as the Bylaws may be constituted from time to time.

The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. The number of directors in each class shall be determined by the Board of Directors and shall consist of as nearly equal a number of directors as practicable. The term of the Class I directors initially shall expire at the first annual meeting of stockholders ensuing after the 1998 Annual Meeting of Stockholders; the term of Class II directors initially shall expire at the second Annual Meeting of Stockholders ensuing after the 1998 Annual Meeting of Stockholders; and the term of Class III directors initially shall expire at the third Annual Meeting of Stockholders ensuing after the 1998 Annual Meeting of Stockholders. In the case of each class, the directors shall serve until their respective successors are duly elected and qualified. At each Annual Meeting of Stockholders, directors of the respective class whose term expires shall be elected, and the directors chosen to succeed those whose terms shall have expired shall be elected to hold office for a term to expire at the third ensuing Annual Meeting of Stockholders after their election, and until their respective successors are elected and qualified.

Any vacancy in the office of a director shall be filled by the vote of the majority of the remaining directors, regardless of any quorum requirements set forth in the Bylaws of the corporation. Any director appointed to fill a vacancy in the office of director shall serve until the next Annual Meeting of Stockholders at which directors of the class for which such director shall have been chosen are to be elected, and until his or her successor is elected and qualified. Newly created directorships shall be filled by the Board of Directors.

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C. Unless otherwise provided by the bylaws of the Corporation, the directors of the Corporation need not be elected by written ballot.

D. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by the stockholders of the Corporation.

E. Special meetings of stockholders of the Corporation may be called only by the Board pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) or by one or more holders of at least 20% of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote at any meeting of the stockholders, and not by any other person or persons.

SEVENTH: The Board is expressly empowered to adopt, amend, or repeal bylaws of the Corporation. Any adoption, amendment, or repeal of bylaws of the Corporation by the Board shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment, or repeal of bylaws of the Corporation is presented to the Board). In addition, the bylaws of the Corporation may be adopted, amended, or repealed by the affirmative vote of the holders of at least 66-2/3% of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (the “Voting Stock”), voting together as a single class (it being understood that, for purposes of this Certificate of Incorporation, each share of the Voting Stock shall have the number of votes granted to it pursuant to Articles FOURTH and FIFTH of this Certificate of Incorporation or any designation of the rights, privileges, preferences, and restrictions of any class or series of Preferred Stock made pursuant to Article FOURTH of this Certificate of Incorporation (a “Preferred Stock Designation”)).

EIGHTH: The stockholder vote required to approve any Business Combination (as hereinafter defined) shall be as set forth in this Article EIGHTH.

A. (1) Except as otherwise expressly provided in Section B of this Article EIGHTH:

(a) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (x) any Interested Stockholder (as hereinafter defined) or (y) any other corporation (whether or not it is itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or

(b) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of ten percent (10%) of

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the total value of the assets of the Corporation and its consolidated subsidiaries as reflected in the most recent balance sheet of the Corporation; or

(c) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities, or other property (or a combination thereof) having an aggregate Fair Market Value of $5,000,000 or more; or

(d) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Stockholder or any Affiliate of any Interested Stockholder; or

(e) any reclassification of securities (including any reverse stock split) or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving any Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder shall require (x) the affirmative vote of the holders of at least 66-2/3% of the voting power of all of the then outstanding shares of Voting Stock, voting together as a single class and (y) the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of Voting Stock other than the Voting Stock of which an Interested Stockholder or an Affiliate is the beneficial owner, voting together as a single class. Such affirmative votes shall be required notwithstanding any other provisions of this Certificate of Incorporation, any Preferred Stock Designation, any provision of law or of any agreement with any national securities exchange which might otherwise permit a lesser vote or no vote, but such affirmative vote shall be required in addition to and not in lieu of any affirmative vote of the holders of any particular class or series of the Voting Stock required by this Certificate of Incorporation, any Preferred Stock Designation, or any provision of law.

(2) The term “Business Combination,” as used in this Article EIGHTH, shall mean any transaction which is referred to in any one or more of subparagraphs (a) through (e) of paragraph (1) of this Section A.

B. The provisions of Section A of this Article EIGHTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law, any other provision of this Certificate of Incorporation, any Preferred Stock Designation, or any agreement with any national securities exchange, if, in the case of a Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation, solely in their respective capacities as stockholders of the Corporation, the condition specified in the following paragraph (1) is met, or, in the case of any other Business Combination, the conditions specified in either of the following paragraphs (1) or (2) are met:

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(1) The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined), it being understood that this condition shall not be capable of satisfaction unless at the time of consideration of such matter by the Board there is at least one Continuing Director.

(2) All of the following conditions shall have been met:

(a) the consideration to be received by holders of shares of a particular class of outstanding Voting Stock shall be in cash or in the same form as the Interested Stockholder has paid for shares of such class of Voting Stock within the two-year period ending on and including the date on which the Interested Stockholder became an Interested Stockholder (the “Determination Date”). If, within such two-year period, the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration to be received per share by holders of shares of such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock acquired by the Interested Stockholder within such two-year period.

(b) the aggregate amount of (x) the cash and (y) the Fair Market Value, as of the date of the consummation of the Business Combination (the “Consummation Date”), of the consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following (it being intended that the requirements of this subparagraph (b) shall be required to be met with respect to all shares of Common Stock outstanding whether or not the Interested Stockholder has previously acquired any shares of Common Stock):

(i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes, and soliciting dealers’ fees) paid by the Interested Stockholder for any shares of Common Stock acquired by it within the two-year period immediately prior to the date of the first public announcement of the proposal of the Business Combination (the “Announcement Date”) or in the transaction in which it became an Interested Stockholder, whichever is higher, plus interest compounded annually from the Determination Date through the Consummation Date at the prime rate of interest of Security Pacific National Bank (or such other major bank headquartered in the State of California as may be selected by a majority of the Continuing Directors) from time to time in effect in the City of Los Angeles, less the aggregate amount of any cash dividends paid, and the Fair Market Value of any dividends paid in other than cash, on each share of Common Stock from the Determination Date through the Consummation Date in an amount up to but not exceeding the amount of interest so payable per share of Common Stock; or

(ii) the Fair Market Value per share of Common Stock on the Announcement date.

(c) the aggregate amount of (x) the cash and (y) the Fair Market Value, as of the Consummation Date, of the consideration other than cash to be received per share by

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holders of shares of any class, other than Common Stock, of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (c) shall be required to be met with respect to every such class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock):

(i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes, and soliciting dealers’ fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it within the two-year period immediately prior to the Announcement Date or in the transaction in which it became an Interested Stockholder, whichever is higher, plus interest compounded annually from the Determination Date through the Consummation Date at the prime rate of interest of Security Pacific National Bank (or such other major bank headquartered in the State of California as may be selected by a majority of the Continuing Directors) from time to time in effect in the City of Los Angeles, less the aggregate amount of any cash dividends paid and the Fair Market Value of any dividends paid in other than cash, on each share of such class of Voting Stock from the Determination Date through the Consummation Date in an amount up to but not exceeding the amount of interest so payable per share of such class of Voting Stock; or

(ii) the Fair Market Value per share of such class of Voting Stock on the Announcement Date; or

(iii) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation.

(d) after such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination, all of the following conditions shall have been satisfied:

(i) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Preferred Stock;

(ii) there shall have been (x) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors; and (y) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization, or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure to so increase such annual rate is approved by a majority of the Continuing Directors;

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(iii) such Interested Stockholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder; and

(iv) none of the Continuing Directors shall have been removed from office, except by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of Voting Stock other than the Voting Stock of which an Interested Stockholder or an Affiliate is the beneficial owner, voting together as a single class.

(e) after such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately, solely in such Interested Stockholder’s capacity as a stockholder of the Corporation), of any loans, advances, guarantees, pledges, or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of, or in connection with, such Business Combination, or otherwise.

(f) a proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 (the “1934 Act”) and the rules and regulations thereunder (or any subsequent provisions replacing the 1934 Act, rules, or regulations) and setting forth, as an exhibit thereto, the opinion of an investment banking firm selected by a majority of the Continuing Directors, or, if there are no Continuing Directors, an opinion of the investment banking firm most recently retained by the Corporation before the Interested Stockholder became an Interested Stockholder, or any successor in interest to such investment banking firm, that the proposed Business Combination is fair from a financial point of view to the stockholders of the Corporation other than the Interested Stockholder, shall be mailed to all stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to the 1934 Act or subsequent replacement provisions).

C. For the purposes of this Article EIGHTH:

(1) “Person” shall mean any individual, partnership, joint venture, firm, corporation, association, or other entity, and shall include any group of persons or entities required to file or deliver to the Corporation any statement pursuant to Section 13(d) of the 1934 Act.

(2) “Interested Stockholder” shall mean any person (other than the Corporation or any Subsidiary) who or which:

(a) is the beneficial owner, directly or indirectly, of more than 20% of the voting power of the outstanding Voting Stock; or

(b) is an Affiliate of the Corporation and, at any time within the two-year period immediately prior to the date in question, was the beneficial owner, directly or indirectly, of 20% or more of the voting power of the then outstanding Voting Stock; or

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(c) is an assignee of, or has otherwise succeeded, to any shares of Voting Stock which were, at any time within the two-year period immediately prior to the date in question, beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933.

(3) A person shall be a “beneficial owner” of any Voting Stock:

(a) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or

(b) which such person or any of its Affiliates or Associates has (x) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, exchange rights, warrants, or options, or otherwise; or (y) the right to vote pursuant to any agreement, arrangement, or understanding; or

(c) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting, or disposing of any shares of Voting Stock.

(4) For the purposes of determining whether a person is an Interested Stockholder pursuant to paragraph (2) of this Section C, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph (3) of this Section C but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement, or understanding, or upon exercise of conversion rights, warrants, options, or otherwise.

(5) “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the 1934 Act, as in effect on February 1, 1988.

(6) “Subsidiary” means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph (2) of this Section C, the term “Subsidiary” shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation.

(7) “Continuing Director” means any member of the Board who is not an Affiliate or Associate of the Interested Stockholder and who was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director who is not an Affiliate or Associate of the Interested Stockholder and who is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board. For the purposes of this Article EIGHTH, the act of a majority of the Continuing Directors shall be the act of the Board.

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(8) “Fair Market Value” means:

(a) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for the New York Stock Exchange - Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on the New York Stock Exchange, on the principal United States securities exchange registered under the 1934 Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc., Automated Quotations System or any system then in use, or, if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith; and

(b) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Continuing Directors in good faith.

(9) In the event of any Business Combination in which the Corporation survives, the phrase “consideration other than cash to be received” as used in subparagraphs (b) and (c) of paragraph (2) of Section B of this Article EIGHTH shall include the shares of Common Stock and the shares of any other class of outstanding Voting Stock retained by the holders of such shares.

D. A majority of the Continuing Directors shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article EIGHTH, including, without limitation, (u) whether a person is an Interested Stockholder; (v) the number of shares of Voting Stock beneficially owned by any person; (w) whether a person is an Affiliate or Associate of another; (x) whether the applicable conditions set forth in paragraph (2) of Section B of this Article EIGHTH have been met with respect to any Business Combination; (y) whether the assets which are the subject of any Business Combination referred to in subparagraph (b) of paragraph (1) of Section A of this Article EIGHTH have an aggregate Fair Market Value of 10% or more of the assets of the Corporation and its consolidated subsidiaries as reflected in the most recent balance sheet of the Corporation; and (z) whether the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination referred to in subparagraph (b) of paragraph (1) of Section A of this Article EIGHTH has an aggregate Fair Market Value of $5,000,000 or more.

E. Nothing contained in this Article EIGHTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law.

F. The provisions of this Article EIGHTH shall not be altered, amended, or replaced except by (x) the affirmative vote of a majority of the Continuing Directors and (y) the

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affirmative vote of the holders of at least 66-2/3% of the voting power of all of the then outstanding shares of the Voting Stock, voting together as a single class.

NINTH: Except as expressly set forth in Section E of this Article NINTH, the stockholder vote required to approve any Reorganization (as hereinafter defined) shall be the affirmative vote of the holders of at least 66-2/3% of the voting power of all the then outstanding shares of the Voting Stock, voting together as a single class.

A. As used in this Article NINTH, the following terms shall have the following meanings:

(1) A “Reorganization” shall mean each of the following:

(a) any merger as to which the Corporation is a constituent corporation (as defined below) and as to which the holders of the outstanding Voting Stock of the Corporation immediately prior to such merger do not hold a majority of the voting power of the outstanding Voting Stock of the surviving corporation immediately subsequent to such merger.

(b) any acquisition by any person in exchange in whole or in part for its equity securities (or the equity securities of any other person) or its debt securities (or the debt securities of any other person) for all or any portion of the outstanding Voting Stock of the Corporation if, immediately following such exchange, the person effecting such exchange has control (as defined below) of the Corporation.

(c) any acquisition by any person in exchange in whole or in part for its equity securities (or the equity securities of any other person) or for its debt securities (or the debt securities of any other person) of assets of the Corporation having a Fair Market Value (as defined below) immediately prior to such acquisition equal to or in excess of 50% of the Fair Market Value of all assets of the Corporation immediately prior to such acquisition.

(d) any liquidation, dissolution, or winding up of the Corporation involving assets of the Corporation having a Fair Market Value (as defined below) immediately prior to such event equal to or in excess of 50% of the Fair Market Value of all assets of the Corporation immediately prior to such event.

(2) A “constituent corporation” means a corporation which is merged with one or more other corporations, and includes the surviving corporation.

(3) “[C]ontrol” means the ownership, directly or indirectly, of outstanding shares of the Voting Stock of the Corporation possessing, in the aggregate, more than 50% of the voting power of all outstanding Voting Stock of the Corporation.

(4) “[E]quity security” means any share of stock, any security convertible (with or without consideration) into any share of stock, and any warrant or other right to acquire,

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subscribe to, or purchase any share of stock or any security convertible into any share of stock.

(5) “[P]erson” shall have the same meaning ascribed to such term in Article EIGHTH of this Certificate of Incorporation.

(6) “Fair Market Value” means, in the case of property other than cash, the fair market value of such property on the date in question as determined by a majority of the Disinterested Directors in good faith.

(7) “Disinterested Director” means any member of the Board who, at the time the proposed Reorganization is considered by the Board or at the time alteration, amendment, or repeal of this Article NINTH is considered by the Board, (x) is not, in the case of a Reorganization of the type specified in subparagraph (a) of paragraph (1) of this Section A, an Affiliate of, or an officer of, director of, or the record or beneficial owner of one percent (1%) or more of any equity security of, any constituent corporation to the proposed Reorganization (other than the Corporation or any wholly-owned subsidiary of the Corporation); (y) is not, in the case of a Reorganization of the types specified in subparagraphs (b) and (c) of paragraph (1) of this Section A, an Affiliate of, or an officer of, director of, or the record or beneficial owner of one percent (1%) or more of any equity security of, either the person making the acquisition or of any person whose equity or debt securities are to be exchanged for the Voting Stock or assets of the Corporation; or (z) in the case of a Reorganization of the type specified in subparagraph (d) of paragraph (1) of this Section A or in the case of an alteration, amendment, or repeal of this Article NINTH, does not have any relationship described in clauses (x) or (y) of this paragraph (7) to any person who has announced or presented for consideration by the Board or who within six months after consideration of an alteration, amendment, or repeal of this Article NINTH announces or presents for consideration by the Board, any Reorganization. For the purposes of this Article NINTH, the act of a majority of the Disinterested Directors shall be the act of the Board.

(8) “Affiliate” shall have the same meaning ascribed to such term in Article EIGHTH of this Certificate of Incorporation.

B. For the purposes of subparagraph (a) of paragraph (1) of Section A of this Article NINTH, in determining whether the holders of the outstanding Voting Stock of the Corporation immediately prior to such merger (the “Original Holders”) hold a majority of the voting power of the outstanding Voting Stock of the surviving corporation after the merger:

(1) All equity securities held by the Original Holders convertible into Voting Stock of the surviving corporation, all warrants, all rights to subscribe to, and all rights to purchase Voting Stock of the surviving corporation held by the Original Holders shall be ignored;

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(2) All equity securities held by persons other than the Original Holders convertible into Voting Stock of the surviving corporation shall be deemed to have been converted on the effective date of the merger; and

(3) All warrants, all rights to subscribe to, and all rights to purchase Voting Stock of the surviving corporation held by persons other than the Original Holders shall be deemed to have been exercised on the effective date of the merger.

C. For the purposes of subparagraph (b) of paragraph (1) of Section A of this Article NINTH, in determining whether the acquiring person has control of the Corporation immediately following such exchange:

(1) All equity securities held by the Original Holders convertible into Voting Stock of the Corporation, all warrants, all rights to subscribe to, and all rights to purchase Voting Stock of the Corporation held by the Original Holders shall be ignored;

(2) All equity securities held by persons other than the Original Holders convertible into Voting Stock of the Corporation shall be deemed held by the acquiring person and shall be deemed to have been converted on the effective date of the exchange; and

(3) All warrants, all rights to subscribe to, and all rights to purchase Voting Stock of the Corporation held by persons other than the Original Holders shall be deemed to be held by the acquiring person and shall be deemed to have been exercised on the effective date of the exchange.

D. Any series of transactions or proposed transactions which are designed to achieve the result specified in either subparagraphs (b), (c), or (d) of paragraph (1) of Section A of this Article NINTH or which have the effect of achieving the result specified in either subparagraphs (b), (c), or (d) of paragraph (1) of Section A of this Article NINTH shall be subject to all of the provisions of this Article NINTH.

E. The provisions of this Article NINTH, other than the provisions of Sections F and G of this Article NINTH, shall not be applicable to any particular Reorganization, and such Reorganization shall require only such affirmative vote as is required by law, any other provision of this Certificate of Incorporation, any Preferred Stock Designation, or any agreement with any national securities exchange, if the Reorganization shall have been approved by a majority of the Disinterested Directors, it being understood that this condition shall not be capable of satisfaction unless at the time of consideration of such matter by the Board there is at least one Disinterested Director.

F. The affirmative vote of the holders of the Voting Stock shall be required (unless the condition set forth in Section E is satisfied) notwithstanding any other provisions of this Certificate of Incorporation, Preferred Stock Designation, any provision of law, or of any agreement with any national securities exchange which might otherwise permit a lesser vote or no vote, but such affirmative vote shall be required in addition to and not in lieu of any affirmative vote of the holders of any particular class or series of the Voting Stock

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required by law, this Certificate of Incorporation, or any Preferred Stock Designation. Nothing herein shall relieve any other constituent corporation or any acquiring person referred to in subparagraphs (b) and (c) of paragraph (1) of Section A of this Article NINTH from any fiduciary or other obligation imposed upon such constituent corporation or acquiring person by law, by any charter document of, or agreement or other instrument governing or regulating the actions of, such constituent corporation or other person.

G. A majority of the Disinterested Directors shall have the power and the duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article NINTH, including, without limitation, (t) whether a particular transaction or proposed transaction constitutes a Reorganization, as defined in Section A of this Article NINTH; (u) the number of shares of Voting Stock of the Corporation or any surviving corporation beneficially owned or deemed to be owned by any person pursuant to subparagraphs (a) or (b) of paragraph 1 of Section A of this Article NINTH or pursuant to Sections B or C of this Article NINTH; (v) whether an acquiring person will, in any transaction described in subparagraph (b) of paragraph 1 of Section A of this Article NINTH, obtain control of the Corporation as defined in paragraph 3 of Section A of this Article NINTH; (w) the Fair Market Value of any or all assets of the Corporation for the purposes of subparagraph (c) of paragraph 1 of Section A and paragraph (6) of Section A of this Article NINTH; (x) whether any series of transactions and/or proposed transactions are within the scope of Section D of this Article NINTH; (y) whether the affirmative vote of the Disinterested Directors provided for in Section E has in fact been obtained with respect to any proposed Reorganization pursuant to paragraph (1) of Section A of this Article NINTH; and (z) whether the affirmative vote of holders of Voting Stock required by this Article NINTH has in fact been obtained with respect to any proposed Reorganization pursuant to paragraph 1 of Section A of this Article NINTH.

H. The provisions of this Article NINTH shall not be altered, amended, or repealed except by (x) the affirmative vote of a majority of the Disinterested Directors and (y) the affirmative vote of the holders of at least 66-2/3% of the voting power of all of the then outstanding shares of the Voting Stock, voting together as a single class.

TENTH: The Board, when evaluating any offer of another party, (x) to make a tender or exchange offer for any shares of the Voting Stock; (y) to effect a Business Combination (as defined in Article EIGHTH); or (z) to effect a Reorganization (as defined in Article NINTH), shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation as a whole, be authorized to consider such factors as the Board determines in its sole discretion to be relevant. In connection with any such evaluation, the Board is authorized to conduct such investigations and to engage in such legal proceedings as the Board may determine to be appropriate.

ELEVENTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for (w) any breach of the director’s duty of loyalty to the Corporation or

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its stockholders; (x) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (y) liability under Section 174 of the General Corporation Law of the State of Delaware; or (z) any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Any repeal or modification of the foregoing provisions of this Article ELEVENTH by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification for or with respect to any acts or omissions of a director occurring prior to such repeal or modification.

TWELFTH: The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware, and all rights conferred upon stockholders are granted subject to this reservation; provided, however, that, notwithstanding any other provision of this Certificate of Incorporation, any Preferred Stock Designation, or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to and not in lieu of any affirmative vote of the holders of any particular class or series of the then outstanding shares of the Voting Stock required by this Certificate of Incorporation, any Preferred Stock Designation, or any provision of law, (x) the affirmative vote of the holders of at least 66-2/3% of the voting power of all of the then outstanding shares of the Voting Stock, voting together as a single class, shall be required to amend or repeal this Article TWELFTH, Article SIXTH, Article SEVENTH, Article EIGHTH, Article NINTH, Article TENTH, and Article ELEVENTH of this Certificate of Incorporation; and (y) in addition to the vote specified in clause (x) of this Article TWELFTH, the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of the Voting Stock, other than the Voting Stock of which an Interested Stockholder (as defined in Article EIGHTH of this Certificate of Incorporation) is the beneficial owner, voting together as a single class, shall be required in order to amend or repeal this Article TWELFTH, Article EIGHTH, or Article TENTH of this Certificate of Incorporation.

IN WITNESS WHEREOF, the undersigned has executed this Restated Certificate of Incorporation this 12th day of May, 2005.

SOUTHWEST WATER COMPANY,
a Delaware corporation

/s/ Peter J. Moerbeek

Peter J. Moerbeek, President

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EX-10.3

Exhibit 10.3

STOCK PURCHASE AGREEMENT

BY AND BETWEEN

MINOL, L.P.

AND

SOUTHWEST WATER COMPANY

Dated as of June 27, 2005

Table of Contents

ARTICLE I - SALE OF SHARES; CLOSING
	Section 1.1	Purchase of Shares
	Section 1.2	Share Purchase Price
	Section 1.3	Closing; Effective Time
	Section 1.4	Deliveries at Closing
	Section 1.5	Purchase Price Adjustments at Closing
	Section 1.6	Purchase Price Adjustments After Closing
	Section 1.7	Establishment of Holdback Fund
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SELLER
	Section 2.1	Company’s Organization and Qualification
	Section 2.2	Company’s Capitalization
	Section 2.3	Seller’s Organization and Good Standing
	Section 2.4	Authority Relative to the Agreement
	Section 2.5	No Violation
	Section 2.6	Consents and Approvals
	Section 2.7	Company Financial Statements
	Section 2.8	Absence of Changes
	Section 2.9	Litigation
	Section 2.10	Compliance with Applicable Laws
	Section 2.11	Tax Matters
	Section 2.12	Bankruptcy
	Section 2.13	Employment Matters
	Section 2.14	Intellectual Property
	Section 2.15	Environmental Compliance
	Section 2.16	Title to Properties; Encumbrances
	Section 2.17	Insurance
	Section 2.18	Permits and Licenses
	Section 2.19	Agreements, Contracts and Commitments
	Section 2.20	Warranties
	Section 2.21	Books and Records
	Section 2.22	Material Assets
	Section 2.23	Condition of Personal Property
	Section 2.24	Accounts Receivable
	Section 2.25	Inventories
	Section 2.26	No Undisclosed Liabilities
	Section 2.27	Employee Benefit Plans; ERISA
	Section 2.28	Certain Business Practices
	Section 2.29	Customers and Suppliers
	Section 2.30	Brokers
	Section 2.31	Bank Accounts

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	Section 2.32	Disclaimer of Additional and Implied Warranties
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PURCHASER
	Section 3.1	Organization and Authority
	Section 3.2	Authority Relative to Agreement
	Section 3.3	No Violation
	Section 3.4	Consents and Approvals
	Section 3.5	Investment Intent
	Section 3.6	Financing
	Section 3.7	Disclaimer of Additional and Implied Warranties
ARTICLE IV - CERTAIN TAX MATTERS
	Section 4.1	Preparation and Filing of Returns
	Section 4.2	Tax Indemnification by Seller
	Section 4.3	Tax Indemnification by Purchaser
	Section 4.4	Allocation of Certain Taxes
	Section 4.5	Refunds and Carrybacks
	Section 4.6	Cooperation on Tax Matters; Tax Audits
	Section 4.7	Termination of Tax-Sharing Agreements
	Section 4.8	Tax Claims
ARTICLE V - ADDITIONAL COVENANTS
	Section 5.1	Access To, and Information Concerning, Properties and Records
	Section 5.2	Public Announcements
	Section 5.3	Good Faith Efforts to Consummate Transactions
	Section 5.4	Company’s Employees
	Section 5.5	Resignations
	Section 5.6	Further Assurances
	Section 5.7	Restrictive Covenants
	Section 5.8	Certain Employee Matters
	Section 5.9	Intercompany Debt
	Section 5.10	Collection of Accounts Receivable; Repurchase of Accounts Receivable
	Section 5.11	MTI Transmitter System Replacement
	Section 5.12	Employee and Independent Contractor Matters
ARTICLE VI - CONDITIONS TO CLOSING
	Section 6.1	Conditions to Each Party’s Obligation Under this Agreement
	Section 6.2	Conditions to the Obligations of Purchaser Under this Agreement
	Section 6.3	Conditions to the Obligations of Seller Under this Agreement

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ARTICLE VII - TERMINATION; AMENDMENT; WAIVER
	Section 7.1	Termination
	Section 7.2	Effect of Termination
	Section 7.3	Amendment and Modification
	Section 7.4	Extension; Waiver
ARTICLE VIII - REMEDIES
	Section 8.1	Remedies for Breach of Representations, Warranties and Covenants of Seller Before the Closing Date
	Section 8.2	Indemnification by Seller
	Section 8.3	Indemnification by Purchaser
	Section 8.4	Notice and Defense of Third-Party Claims
	Section 8.5	Limitations of Liability
	Section 8.6	Exclusive Remedies
	Section 8.7	Mediation
	Section 8.8	Holdback Fund
ARTICLE IX - SURVIVAL OF REPRESENTATIONS, WARRANTIES AND INDEMNITIES
	Section 9.1	Survival of Representations, Warranties and Indemnities
ARTICLE X - FORCE MAJEURE
	Section 10.1	Force Majeure
	Section 10.2	Termination Upon Extended Force Majeure
ARTICLE XI - MISCELLANEOUS
	Section 11.1	Expenses
	Section 11.2	Brokers and Finders
	Section 11.3	Entire Agreement; Assignment
	Section 11.4	Waiver; Consents
	Section 11.5	Severability
	Section 11.6	Notices
	Section 11.7	Governing Law
	Section 11.8	Jurisdiction and Venue
	Section 11.9	Waiver of Jury Trial
	Section 11.10	Descriptive Headings
	Section 11.11	Parties in Interest; No Third-Party Beneficiary
	Section 11.12	Counterparts
	Section 11.13	Incorporation by Reference
	Section 11.14	Certain Definitions

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STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (this “Agreement”) is entered into as of June 27, 2005 (the “Effective Date”), by and between Southwest Water Company, a Delaware corporation (“Seller”), and Minol, L.P., a Delaware limited partnership (“Purchaser”).  Seller and Purchaser are sometimes referred to herein individually as a “Party” and collectively as the “Parties”.

RECITALS

WHEREAS, Seller is the owner of 25,000 shares of the issued and outstanding common stock, without par value (the “Common Stock”), of Master Tek International, Inc., a Colorado corporation (the “Company”), and the Common Stock constitutes all of the issued and outstanding capital stock of the Company;

WHEREAS, Purchaser desires to purchase from Seller, and Seller desires to sell to Purchaser, all such shares of the Common Stock (the “Shares”), upon the terms and conditions set forth herein;

WHEREAS, Seller is making certain representations, warranties, agreements, covenants and indemnities herein as an inducement to Purchaser to enter into this Agreement, and Purchaser is making certain representations, warranties, agreements, covenants and indemnities herein as an inducement to Seller to enter into this Agreement; and

WHEREAS, capitalized terms used but not otherwise defined in this Agreement shall have the meanings ascribed to them in Section 11.14.

NOW, THEREFORE, in consideration of the recitals and the respective representations, warranties, covenants and indemnities contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and intending to be legally bound hereby, the Parties hereby agree as follows:

ARTICLE I
SALE OF SHARES; CLOSING

Section 1.1Purchase of Shares.  Subject to the terms and conditions of this Agreement, on the Closing Date (as defined in Section 1.3(a) below), Seller will sell and deliver to Purchaser, and Purchaser will purchase from Seller, the Shares.

Section 1.2Share Purchase Price.  The purchase price for the Shares is $12,150,000.00 USD, plus or minus any adjustments to such sum required by Section 1.5 or Section 1.6 (the ”Purchase Price”).  Except for the amount withheld in escrow pursuant to Section 1.7, Purchaser shall pay to Seller on the next Business Day following the Closing (as defined in
Section 1.3(a) below) the Purchase Price, as adjusted to the Closing Date, by wire transfer of immediately available funds to the account designated by Seller.

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Section 1.3Closing; Effective Time.

(a)Closing.  The purchase and sale of the Shares (the “Closing”) provided for in this Agreement shall take place in the offices of Jenkens & Gilchrist, LLP, 12100 Wilshire Boulevard, 15th Floor, Los Angeles, California 90025, at 10:00 A.M. (Los Angeles, California time) on June 27, 2005, or at such other time and place as may be agreed in writing by the Parties.  For purposes of this Agreement, the date on which the Closing actually occurs is the “Closing Date”.

(b)Effective Time.  The purchase and sale of the Shares provided for in this Agreement shall be effective for Tax, accounting and all other purposes as of 12:01 A.M. (Westminster, Colorado time) on the Closing Date (the “Effective Time”), except as provided otherwise in this Agreement or otherwise agreed in writing by the Parties.

(c)Closing by Fax/FedEx.  Notwithstanding the foregoing, the Parties may agree for the Closing to occur by facsimile or other electronic transmission of the Transaction Documents (as defined in Section 1.4 below) on the Closing Date, with executed original Transaction Documents to be sent to the appropriate Party (or its legal counsel) by Federal Express (or other nationally recognized guaranteed and receipted overnight delivery service) or local courier service.

Section 1.4Deliveries at Closing.  Each of Purchaser and Seller will deliver, or cause to be delivered, at the Closing the following documents and instruments (collectively, the “Transaction Documents”) to which it or any of its Affiliates is a party:

(a)Seller Deliveries.  Seller shall deliver, or cause its appropriate Affiliates to deliver, to Purchaser:

(i)Closing Statement.  The Closing Statement (as defined in Section 1.5(a) below), duly executed by Seller;

(ii)Stock Certificates.  The original certificate or certificates evidencing 25,000 of the Shares, together with endorsements or stock powers duly executed in blank by Seller;

(iii)Officer’s Certificate of Seller.  A certificate, upon which Purchaser may rely, duly executed by a duly authorized officer of Seller certifying as true, accurate and complete, as of the Closing Date:  (A) a copy of the resolutions of Seller’s board of directors (or equivalent governing body) authorizing the execution, delivery and performance of this Agreement and the Transaction Documents to which Seller is a party and the consummation of the transactions contemplated by this Agreement by Seller; and (B) the incumbency of the officer or officers authorized to execute on behalf of Seller this Agreement and the Transaction Documents to which it is a party;

(iv)Officer’s Certificate of the Company.  A certificate, upon which Purchaser may rely, duly executed by a duly authorized officer of the Company certifying as

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true, accurate and complete, as of the Closing Date:  (A) a certified copy of the Articles of Incorporation (or equivalent Organizational Document) of the Company issued by the Colorado Secretary of State; (B) a copy of the Bylaws (or equivalent Organizational Document) of the Company; (C) a certified copy of the Certificate of Foreign Qualification (or equivalent Organizational Document) of the Company issued by the Secretary of State of Texas and California; and (D) the incumbency of the officer or officers authorized to execute on behalf of the Company the Transaction Documents to which it is a party;

(v)Closing Certificate of Seller.  A certificate from a duly authorized officer of Seller, dated as of the Closing Date, certifying that the conditions set forth in Sections 6.2(a) and (c) have been satisfied;

(vi)Consents. Copies or other satisfactory evidence of the Consent of the Person listed or referred to in Schedule 2.6 as the Person whose Consent will be obtained at or prior to the Closing Date;

(vii)Governmental Certificates.  Certificates of existence and good standing, if applicable, issued by the Secretary of State (or other appropriate officer) of the state of the Company’s organization and the states of Texas and California, as of a date reasonably close to the Closing Date;

(viii)UCC, Judgment and Tax Lien Search Reports.  Uniform Commercial Code, judgment and tax lien search reports of the Company for the names “Master Tek International, Inc.” and “Southwest Water Billing Solutions, Inc.” and “RCI Utilities, Inc.” and “Intelli-Billing” issued by the Colorado Secretary of State, the County Clerk of Jefferson County, Colorado, the Texas Secretary of State and the County Clerk of Dallas County, Texas, dated as of a date reasonably close to the Closing Date;

(ix)Minute Books.  The minute book or books of the Company and all of the contents thereof;

(x)Resignations.  Duly executed written resignations from each director and officer of the Company as required by Section 5.5, in a form and content acceptable to Purchaser;

(xi)Escrow Agreement.  The Escrow Agreement (as defined in Section 8.8(a) below), duly executed by all parties thereto other than Purchaser;

(xii)Armstrong Release.  A duly executed Separation Agreement and General Release of Claims between the Company and Scott Armstrong, dated effective prior to the Closing Date, in a form and content acceptable to Purchaser (the “Armstrong Release”);

(xiii)Leased Vehicles.  A pay-off letter from EMKAY, Inc. stating the full amount required to be paid for Seller to own the Leased Vehicles (as defined in Section 1.5(c) below), free and clear of all Liens;

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(xiv)Leased Computer Equipment.  A pay-off letter from CSI Leasing, Inc. stating the full amount required to be paid for Seller to own the Leased Computer Equipment (as defined in Section 1.5(d) below), free and clear of all Liens;

(xv)Work-in Progress Certificate.  The Work-in Progress Certificate (as defined in Section 1.6(a)(ii) below), duly executed by Seller; and

(xvi)Other Transaction Documents.  All such other certificates of title, deeds and instruments of sale, assignment, conveyance and transfer as may be reasonably necessary or as Purchaser may reasonably request to effect the sale, transfer, assignment, conveyance and delivery of the Shares to Purchaser in accordance with this Agreement and any other Transaction Documents, and where necessary or desirable, in recordable form, in each case, as is necessary to effect the purchase and sale of the Shares and other transactions contemplated by this Agreement.

(b)Purchaser Deliveries.  Purchaser shall deliver, or cause its appropriate Affiliates to deliver, to Seller:

(i)Closing Statement.  The Closing Statement, duly executed by Purchaser;

(ii)Purchase Price.  On the next Business Day following the Closing, the Purchase Price, as adjusted to the Closing Date;

(iii)Manager’s Certificate of Purchaser.  A certificate, upon which Seller may rely, duly executed by a manager of Minol,  LLC, a Delaware limited liability company and the general partner of Purchaser (“Minol GP”), certifying as true, accurate and complete, as of the Closing Date:  (A) a copy of the resolutions of Minol GP’s managers (or equivalent governing body) authorizing the execution, delivery and performance of this Agreement and the Transaction Documents to which Purchaser is a party and the consummation of the transactions contemplated by this Agreement by Purchaser; (B) a certified copy of the Certificate of Limited Partnership (or equivalent Organizational Document) of Purchaser issued by the Delaware Secretary of State; (C) a copy of select pages of the Agreement of Limited Partnership (or equivalent Organizational Document) of Purchaser; (D) a certified copy of the Certificate of Formation (or equivalent Organizational Document) of Minol GP; (E) a copy of select pages of the Limited Liability Company Agreement of Minol GP; and (F) the incumbency of the officer or officers authorized to execute on behalf of Purchaser this Agreement and the Transaction Documents to which it is a party;

(iv)Closing Certificate of Purchaser.  A certificate from a duly authorized officer of Purchaser, dated as of the Closing Date, certifying that the conditions set forth in Section 6.3(a) and (b) have been satisfied;

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(v)Governmental Certificates.  Certificates of existence and good standing, if applicable, issued by the Secretary of State (or other appropriate officer) of the state of its organization, as of a date reasonably close to the Closing Date, for Purchaser;

(vi)Escrow Agreement.  The Escrow Agreement, duly executed by all parties thereto other than Seller and Escrow Agent (as defined in Section 8.8(a) below); and

(vii)Other Transaction Documents.  All such other deeds and instruments of sale, assignment, conveyance and transfer as may be reasonably necessary to effect the sale, transfer, assignment, conveyance and delivery of the Shares to Purchaser in accordance with this Agreement and any other Transaction Documents, and where necessary or desirable, in recordable form, in each case, as is necessary to effect the purchase and sale of the Shares and other transactions contemplated by this Agreement.

Section 1.5Purchase Price Adjustments at Closing.

(a)Closing Statement.  At the Closing, Seller and Purchaser will execute and deliver a closing statement in the form attached hereto as Exhibit A (the “Closing Statement”) setting forth any increase, decrease or other adjustment to the Purchase Price required by this Agreement at the time of Closing, along with the resulting amount of the Purchase Price to be paid at Closing, and any other matters the Parties agree to set forth therein.  In connection with preparing the Closing Statement, Seller shall cause the Company to provide the information necessary for Seller and Purchaser to jointly verify the accuracy of the number of Billing Units at the Cut-Off Time.

(b)Billing Units; Closing Date True-up.

(i)To the extent the aggregate number of Billing Units at the Cut-Off Time is greater than or less than 208,000, the Purchase Price will be adjusted on a dollar-for-dollar basis on the Closing Date as follows:

(A)Increased.  The Purchase Price will be increased, in the event the number of Billing Units is greater than 208,000, by the product of (A) $58.41, multiplied by (B) the difference between 208,000 and the actual number of Billing Units; or

(B)Reduced.  Subject to Section 1.5(b)(ii), the Purchase Price will be reduced, in the event the number of Billing Units is less than 208,000, by the product of (A) $58.41 per unit, multiplied by (B) the difference between 208,000 and the actual number of Billing Units.

(ii)The Purchase Price shall not be reduced at the time of the Closing to an amount less than $12,000,000.00 pursuant to Section 1.5(b)(i)(B).

(c)Pay-off of Leased Vehicles.  Schedule 1.5(c) sets forth a true, accurate and complete list (including year, make, model and vehicle identification number) of all the vehicles leased by Seller (for use by the Company) from EMKAY, Inc. under the Material

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Leases (as defined in Section 2.19(a)(iv) below) that are vehicle leases (the “Leased Vehicles”).  On or before the Closing Date, Seller will fully pay-off the Material Leases covering the Leased Vehicles and have good and valid title to them.  On the Closing Date, the Leased Vehicles will be in the possession of the Company at either its offices in Westminster, Colorado or Dallas, Texas, or in the possession of a Company employee in Virginia Beach, Virginia.  In consideration for the payment of the Purchase Price, Seller hereby sells the Leased Vehicles to the Company and the Company acquires the Leased Vehicles from Seller.  Within fifteen (15) days following the Closing, Seller will deliver to the Company the original certificates of title (or other equivalent documentation of ownership of the Leased Vehicles), duly endorsed for transfer to the Company and filing with the applicable Governmental Body.  The Leased Vehicles must be free and clear of all Liens within fifteen (15) days following the Closing Date.

(d)Pay-off of Leased Computer Equipment.  Schedule 1.5(d) sets forth a true, accurate and complete list of all the computer equipment leased by Seller (for use by the Company) from CSI Leasing, Inc. under the Material Leases that are computer server, computer equipment or computer monitor leases (the “Leased Computer Equipment”).  On or before the Closing Date, Seller will fully pay-off the Leased Computer Equipment and have good and valid title to it.  On the Closing Date, the Leased Computer Equipment will be in the possession of the Company at either its offices in Westminster, Colorado or Dallas, Texas.  In consideration for the payment of the Purchase Price, Seller hereby sells the Leased Computer Equipment to the Company and the Company acquires the Leased Computer Equipment from Seller.  The Leased Computer Equipment must be free and clear of all Liens within fifteen (15) days following the Closing Date.

Section 1.6Purchase Price Adjustments After Closing.

(a)Inventory and Work in Progress Estimate.

(i)On the last Business Day prior to the Closing Date, Seller and Purchaser shall jointly update, using the books and records of the Company, the inventory and physical count jointly conducted by Seller and Purchaser on June 16, 2005, of all items of inventory of the Company (the “Pre-closing Inventory”), wherever located, including all finished goods, raw materials, spare parts and all other materials and supplies to be used or consumed by the Company and to be reflected on, and used to determine, the Closing Date Balance Sheet and Closing Date Net Working Capital (as such terms are defined in Section 1.6(b)(ii) below); provided, that Company’s inventory of MTI Transmitter Systems, and Inovonics Transmitter Systems, although counted, will not be used in determining the Closing Date Balance Sheet and Closing Date Net Working Capital.  A list setting forth the results of the Pre-closing Inventory, as updated through the last Business Day prior to the Closing Date, shall be included in the Closing Statement.  This joint determination of the Pre-closing Inventory is prepared for purposes of the Net Working Capital Adjustment (as defined in Section 1.6(b) below) and shall be final and binding on the Parties, absent fraud.

(ii)On the last Business Day prior to the Closing Date, Seller shall estimate, in good faith, the percentage completion, as of the Effective Time, of all work-in-

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progress under Construction Contracts (as defined in Section 2.19(a)(iii) below) of the Company (the ”Work-in Progress”).  A certificate setting forth the results of the Work-in Progress estimation shall be delivered to Purchaser at the Closing (the “Work-in Progress Certificate”).  This certification of the Work-in Progress is prepared for purposes of the Net Working Capital Adjustment.  The results of the Work-in Progress estimation and the results set forth in the Work-in Progress Certificate shall be final and binding on the Parties, absent material error.

(b)Net Working Capital Adjustment.

(i)The Adjustment.  Following the Closing, the Purchase Price shall be adjusted in the amount equal to the Net Working Capital Adjustment.  If the Net Working Capital Adjustment is positive (i.e., Closing Date Net Working Capital is greater than the Base Net Working Capital), the Purchase Price shall be increased by the amount of the Net Working Capital Adjustment.  If the Net Working Capital Adjustment is negative (i.e., Closing Date Net Working Capital is less than the Base Net Working Capital), the Purchase Price shall be reduced by the amount of the Net Working Capital Adjustment.

(ii)Certain Defined Terms.  As used in this Agreement, the following terms mean:

“Net Working Capital Adjustment” (which may be a positive or negative amount) means the algebraic sum of (A) the Closing Date Net Working Capital, minus (B) the Base Net Working Capital.

“Closing Date Net Working Capital” (which may be a positive or negative number) means the difference between (A) the current assets of the Company at the Effective Time, and (B) the current liabilities of the Company at the Effective Time, all determined in accordance with GAAP on a basis consistent with the Company Financial Statements, but with the adjustments thereto set forth on Schedule 1.6(b)-A applied in making the calculation.  An example of the calculation of the Closing Date Net Working Capital at March 31, 2005, based on the unaudited balance sheet of the Company at March 31, 2005, is set forth on Schedule 1.6(b)-B.

“Base Net Working Capital” means $1,305,343.00 USD.

(iii)True-up Calculation.  Within thirty (30) days after the Closing Date, Seller and Purchaser will use their respective reasonable best efforts jointly to prepare (A) the unaudited balance sheet of the Company at the Effective Time (the “Closing Date Balance Sheet”) and (B) a schedule (the “Adjustment Schedule”) setting forth a reasonably detailed calculation of the Closing Date Net Working Capital and the Net Working Capital Adjustment, if any, along with the resulting Purchase Price (the “True-Up Calculation”).  The Closing Date Balance Sheet and Adjustment Schedule shall be prepared on the same basis as the Company Financial Statements, but with the adjustments thereto set forth on Schedule 1.6(b)-C.  Seller and Purchaser, respectively, shall each bear their own costs to prepare the Closing Date Balance Sheet and Adjustment Schedule.  Seller and Purchaser shall cooperate in all reasonable respects

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with each other in connection with the preparation of the Closing Date Balance Sheet and Adjustment Schedule.  The True-Up Calculation shall be deemed to be final and conclusive and agreed to by Purchaser and Seller, and shall be the basis for the true-up payment of the Net Working Capital Adjustment required by Section 1.6(b)(i).  If the Parties cannot within such thirty (30) day period (or such longer period as the Parties may mutually agree upon in writing) agree upon and prepare the Closing Date Balance Sheet, the Adjustment Schedule and the True-Up Calculation, then either Party may deliver written notice (the “Dispute Notice”) to the other Party of such dispute.

(iv)Dispute Resolution.

(A)Upon receipt of a Dispute Notice, Purchaser and Seller shall resolve the dispute in accordance with the procedure set forth in Section 1.6(b)(iv)(B).

(B)Upon receipt of the Dispute Notice, the Parties shall engage a mutually agreeable nationally- or regionally-recognized independent public accounting firm, with which none of the Parties or any of their respective Affiliates has any prior or ongoing relationship (“Accountant”), for the limited purpose of resolving only the disagreements of the Parties with respect to the True-Up Calculation, provided that all determinations made by the Accountant shall be made in accordance with this Section 1.6(b) (including the Schedules referenced therein).  The determinations of the Accountant shall be conclusive and binding on the Parties, except in the event of manifest error in such determinations, and the fees and expenses of the Accountant shall be divided equally between Seller and Purchaser.  Each Party shall be responsible for any other fees and expenses it incurs in connection with the resolution of such dispute.  For purposes hereof, the “Net Working Capital Adjustment Determination Date” means the date on which the final determination of the Net Working Capital Adjustment is made in accordance with either Section 1.6(b)(iii) or Section 1.6(b)(iv).

(v)Payment.

(A)Purchaser shall pay to Seller any positive Net Working Capital Adjustment, in cash, plus interest thereon at a rate of six percent (6.0%) per annum (“Borrowing Rate”) from the Closing Date, within five (5) Business Days after the Net Working Capital Adjustment Determination Date.

(B)In the event of a negative Net Working Capital Adjustment, Seller shall pay to Purchaser, one-half (1/2) of the amount owed through a claim against and deduction from the Holdback Fund, and the other one-half (1/2) in cash, in both cases plus interest thereon at the Borrowing Rate from the Closing Date.  The Holdback Fund claim must be paid to Purchaser within sixteen (16) Business Days after the Net Working Capital Adjustment Determination Date.  The cash payment must be paid to Purchaser within five (5) Business Days after the Net Working Capital Adjustment Determination Date.  To the extent the amount in the Holdback Fund is insufficient, the entire Net Working Capital Adjustment shall be paid by Seller in cash.

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(c)Billing Units; Post-Closing True-up.

(i)On the 65^th day following the Closing Date, the Purchase Price shall be decreased in the amount equal to the negative Net Set-Off Amount, if any.  If the Net Set-Off Amount is a positive number, the Purchase Price shall not be increased or otherwise adjusted.  The “Net Set-Off Amount” is equal to the sum of:

(A)The product of (A) $58.41, multiplied by (B) the number of Non-Billing Units, if any, that start billingwithin the sixty (60) days following the Closing Date.  Schedule 1.6(c)(i) lists the 8,064 individual apartment, suite or similar units that at the Cut-Off Time are covered by a Submetering Contract, but under which billing has not started as of that date (the “Non-Billing Units”); minus

(B)The product of (A) $58.41, multiplied by (B) the number of Unnoticed Cancelled Units, if any.  “Unnoticed Cancelled Units” are Billing Units that were included in determining the Billing Units at the Cut-Off Time under Section 1.5(b), but for which a notice of termination (the “Notice of Termination”) of the applicable Submetering Contract was sent by the client or customer by electronic mail prior to the Effective Time or by U.S. mail (or other reputable courier) with a postmark prior to the Effective Time, but it was not received by the Company or an Affiliate until sometime during the sixty (60) days following the Closing Date.  The Company or such Affiliate will use commercially reasonable efforts to deliver a copy of the Notice of Termination to Seller together with a statement reflecting the number of Billing Units to which the Notice of Termination relates within twenty-four (24) hours following receipt.

(ii)In the event of a negative Net Set-Off Amount, Seller shall pay to Purchaser, one-half (1/2) of the amount owed through a claim against and deduction from the Holdback Fund, and the other one-half (1/2) in cash, in both cases plus interest thereon at the Borrowing Rate from the Closing Date.  The Holdback Fund claim must be paid to Purchaser within sixteen (16) Business Days after the 65^th day following the Closing Date.  The cash payment must be paid to Purchaser within five (5) Business Days after the 65^th day following the Closing Date.  To the extent the amount in the Holdback Fund is insufficient, the entire Net-Set Off Amount shall be paid by Seller in cash.

(iii)Purchaser shall use all commercially reasonable efforts, and shall cause the Company to use all commercially reasonable efforts, to start billing each and all of the Non-Billing Units within the sixty (60) day period referred to in Section 1.6(c)(i)(A).

Section 1.7Establishment of Holdback Fund.  Notwithstanding any other provision of this Agreement to the contrary, at the Closing, an amount equal to the Purchase Price, as adjusted to the Closing Date, multiplied by ten percent (10%) (the “Holdback Fund”), shall not be paid to Seller, but instead shall be withheld by Purchaser from the Purchase Price, and be subject to and paid pursuant to the provisions of Section 8.8.  At the Effective Time, Seller shall have the contingent and deferred right to receive the portion of the Holdback Fund payable to

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Seller pursuant to Section 8.8, if any.  The Holdback Fund shall include any interest or other income earned thereon during the period such funds are held in escrow.

ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER

Seller makes the representations and warranties set forth in this ARTICLE II to Purchaser.  Seller has delivered to Purchaser the schedules to this Agreement (the “Seller Schedules”), including those referred to in this ARTICLE II, on the Effective Date and such Seller Schedules have been reviewed and accepted by Purchaser.  All matters set forth in the Seller Schedules shall be deemed to be disclosed not only in connection with the representation and warranty specifically referenced on a given Seller Schedule, but for all purposes relating to the representations and warranties of Seller set forth in this ARTICLE II.

Section 2.1Company’s Organization and Qualification.

(a)Schedule 2.1(a) sets forth the Company’s jurisdiction of incorporation and each other jurisdiction in which it is authorized to do business.  The Company is duly incorporated, validly existing and in good standing under the Laws of the jurisdiction of its incorporation.  The Company has all requisite corporate power and corporate authority to carry on its business as it is now being conducted, and to own, lease and operate its properties and assets, and to perform all its obligations under the Contracts to which it is a party or by which it is bound.  Except as set forth on Schedule 2.1(a), the Company is duly qualified to do business as a foreign corporation and is in good standing under the Laws of each state or other jurisdiction in which the properties and assets owned, leased or operated by it or the nature of the business conducted by it make such qualification necessary, except in such jurisdictions where the failure to be duly qualified or in good standing would not have or be a Material Adverse Effect on the Company.

(b)The Company has no Subsidiaries.

(c)True, accurate and complete copies of the Organizational Documents of the Company, with all amendments thereto through the Closing Date, have been made available to Purchaser.

(d)The only names under the Company has conducted any business since April 3, 2000, are:  “Master Tek International, Inc.” and “Southwest Water Billing Solutions, Inc.” and “RCI Utilities, Inc.” and “Intelli-Billing”.

(e)The names and titles of the officers and directors of the Company are listed on Schedule 2.1(e).

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Section 2.2Company’s Capitalization.

(a)The authorized, issued and outstanding capital stock of the Company is set forth on Schedule 2.2.  The Shares are the only securities of the Company that are issued or outstanding.

(b)Seller is, and will be on the Closing Date, the legal record and beneficial owner and holder of, and has, and on the Closing Date will have, sole legal record and beneficial title to, the Shares.  Seller owns the Shares free and clear of all Liens.

(c)Each of the issued shares of capital stock of, or other equity interest in, the Company is duly authorized, validly issued and, in the case of shares of capital stock, fully paid and nonassessable, and has not been issued in violation of (nor are any of the authorized shares of capital stock of, or other equity interests in, the Company subject to) any preemptive or similar rights created by applicable Laws, the Articles of Incorporation or Bylaws (or the equivalent Organizational Documents) of the Company, or any Contract to which Seller or the Company is a party or is bound, and all such issued shares or other equity interests of the Company are owned free and clear of all Liens.

(d)Except as set forth on Schedule 2.2, there are no issued or outstanding subscriptions, options, convertible securities, rights (including registration rights), warrants, calls, irrevocable proxies or other agreements or commitments of any kind obligating the Company to grant, sell or issue any security of or equity interest in the Company, or irrevocable proxies or any agreements restricting the transfer of or otherwise relating to any security or equity interest in the Company.

(e)There are no bonds, debentures, notes or other indebtedness of the Company having the right to vote (or convertible into or exchangeable or exercisable for securities or equity interests having the right to vote) on any matters on which shareholders may vote (the “Company Voting Debt”) issued or outstanding.

(f)The Company has no obligations, contingent or otherwise, (i) to repurchase, redeem or otherwise acquire any shares of capital stock or other equity interests of the Company, or (ii) to provide material funds to, or to make any material investment in (in the form of a loan, capital contribution or otherwise), or to provide any guarantee with respect to the material obligations of, any other Person.

(g)The Company (i) does not, directly or indirectly, own, (ii) has not agreed to purchase or otherwise acquire, and (iii) does not hold any interest convertible into or exchangeable or exercisable for, any capital stock or other equity interest of any corporation, partnership, joint venture, limited liability company, or other business association or entity.

(h)Except as set forth on Schedule 2.2 with regard to the payment of Taxes, the Company is not a party to or bound by any Contract of any character, contingent or otherwise, pursuant to which any Person is or may be entitled to receive any payment based on, or calculated in accordance with, the revenues or earnings of the Company.

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(i)There are no voting trusts, proxies or other agreements or understandings to which the Company is a party or by which it is bound with respect to the voting of any shares of capital stock or other equity interests of the Company.

(j)All dividends and distributions that have ever been declared by the Company have been paid in full prior to the Effective Date.

Section 2.3Seller’s Organization and Good Standing.  Seller is a Delaware corporation, validly existing and in good standing under the Laws of the State of Delaware.

Section 2.4Authority Relative to the Agreement.  Seller has full corporate power and corporate authority to execute and deliver this Agreement, and the Transaction Documents to which it is a party, and no further proceedings on the part of the Seller are necessary to consummate the transactions contemplated hereby.  This Agreement has been, and the Transaction Documents to which Seller is a party will be, duly and validly executed and delivered by Seller, and this Agreement constitutes, and the Transaction Documents to which Seller is a party will constitute, the valid and binding obligation of Seller enforceable against Seller in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium, or other similar Laws relating to creditors’ rights generally and general equitable principles.  The Company has full corporate power and corporate authority to execute and deliver the Transaction Documents to which it is a party, and no further proceedings on the part of the Company are necessary to consummate the transactions contemplated hereby.

Section 2.5No Violation.  Except as set forth on Schedule 2.5, neither the execution, delivery nor performance of this Agreement, in its entirety, nor the consummation of the transactions contemplated hereby, as of the Closing Date:

(a)To the Knowledge of Seller and the Company, materially violates (“Violation”) any laws, orders, writs, judgments, injunctions, awards, decrees, rules, statutes, permits, ordinances or regulations (the “Laws”) applicable to Seller or the Company;

(b)Is in material conflict with, results in a material breach or any termination of any provision of, causes the acceleration of the maturity of any debt or obligation pursuant to, constitutes a material default (or gives rise to any right of termination, cancellation or acceleration) under, or results in the creation of any Lien upon any currently owned property of Seller or the Company pursuant to, any terms, conditions or provisions of any note, license, instrument, indenture, mortgage, deed of trust or other agreement or understanding or any other restriction of any kind or character, to which Seller or the Company is a party or by which any currently owned property of Seller or the Company is subject or bound (collectively, “Default”); or

(c)Conflicts (“Conflict”) with or results in any breach of any provision of the Certificate or Articles of Incorporation, Bylaws of Seller or the Company or any other Organizational Documents of Seller or the Company.

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Section 2.6Consents and Approvals.  Except as described on Schedule 2.6, and except for obtaining the required regulatory approvals described on Schedule 2.6 (the “Required Regulatory Approvals”), no prior Consent of, or declaration, filing or registration with, any Person, domestic or foreign, is required of or by Seller or the Company in connection with the execution, delivery and performance by Seller of this Agreement and the transactions contemplated hereby.

Section 2.7Company Financial Statements.

(a)Schedule 2.7(a) contains true, accurate and complete copies of the unaudited financial statements of the Company, consisting of the balance sheets and related statements of operations and shareholder’s equity as of and for the years ended December 31, 2002, December 31, 2003 and December 31, 2004, (collectively, the “Historical Company Financial Statements”).  The Historical Company Financial Statements:  (i) were prepared from the books and records of the Company; (ii) were prepared in accordance with GAAP (except for the absence of footnotes) consistently applied throughout the periods involved; and (iii) fairly present in all material respects the assets and liabilities of the Company as of the dates of the balance sheets and the financial results of the Company for the periods presented.

(b)Schedule 2.7(b) contains true, accurate and complete copies of the interim unaudited financial statements of the Company, consisting of the balance sheet and related statement of operations and shareholder’s equity as of and for the three (3) months ended March 31, 2005, (collectively, the “Interim Company Financial Statements”).  The Interim Company Financial Statements:  (i) were prepared from the books and records of the Company; (ii) were prepared in accordance with GAAP (except for the absence of footnotes) consistently applied throughout the periods involved; and (iii) fairly present in all material respects the assets and liabilities of the Company as of the date of the balance sheet and the financial results of the Company for the period presented.  The Historical Company Financial Statements and Interim Company Financial Statements are collectively referred to in this Agreement as the “Company Financial Statements”.

Section 2.8Absence of Changes.  Except as set forth on Schedule 2.8, since the date of the Interim Company Financial Statements, the Company has conducted business only in the Ordinary Course of Business and there has not been:

(a)Any amendment to its Articles of Incorporation or Bylaws or other Organizational Documents, or any change in the character or conduct of its business in any material respect;

(b)Any declaration, setting aside or payment of any dividends or distributions in respect of the Shares or any redemption, purchase or other acquisition of any of the securities or other equity interests of the Company;

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(c)Any material increase in the benefits under, or the establishment or amendment of, any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, performance awards (including, without limitation, the granting of stock  appreciation rights or restricted stock awards), stock purchase or other employee benefit plan, or any increase in the compensation payable or to become payable to any of the directors or officers of the Company or the employees of the Company as a group; or

(d)Any Material Adverse Effect on the Company; or

(e)Any material agreement, commitment or transaction entered into, except in the Ordinary Course of Business, or except for this Agreement and the transactions contemplated hereby.

Section 2.9Litigation.  Except as set forth on Schedule 2.9, there are no Proceedings pending or, to the Knowledge of Seller and the Company, threatened in writing against the Company or involving any of the material properties or material assets of the Company, at law or in equity or before or by any foreign, federal, state, municipal, or other governmental court, department, commission, board, bureau, agency, or other instrumentality or Person or any board of arbitration or similar entity.  Neither the Company nor any of its properties or assets is subject to any executory judgment, order, writ, injunction, decree or award of any Governmental Body, including without limitation, any cease and desist order and any consent decree, settlement agreement or other similar contract or agreement with any Governmental Body.  To the Knowledge of Seller and the Company, as of the Closing Date, there are no facts or events that have occurred or failed to occur that reasonably could be expected to result in the commencement of any Proceeding involving the Company or any of its material properties or material assets which if determined adversely to the Company would have a Material Adverse Effect on the Company.

Section 2.10Compliance with Applicable Laws.  No uncured material violation of any applicable Laws by the Company exists.  The Company has not received written notice from any Governmental Body or other Person of any failure to materially comply or the material violation of any applicable Laws with respect to the Company or its facilities.

Section 2.11Tax Matters.  Except as and to the extent set forth on Schedule 2.11:

(a)Since April 3, 2000, all Returns in respect of Taxes required to have been filed with respect to the Company (including any consolidated federal income tax return and any state Return that includes the Company on a consolidated, combined or unitary basis) have been timely filed;

(b)All Taxes required to be shown on such Returns or otherwise due or payable have been timely paid and all payments of estimated Taxes required to be made with respect to the Company have been made;

(c)All such Returns are true, correct and complete in all material respects;

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(d)No adjustment relating to any of such Returns has been proposed  formally or informally in writing by any taxing authority and, to the Knowledge of Seller, no basis exists for any such adjustment;

(e)There are no outstanding subpoenas or written requests for information with respect to any such Returns of the Company or the Taxes reflected on such Returns;

(f)There are no pending or, to the Knowledge of Seller and the Company, threatened Proceedings for the assessment or collection of Taxes against (i) the Company or (ii) any corporation that was included in the filing of a Return with the Company on a consolidated, combined or unitary basis which would have a Material Adverse Effect on the Company;

(g)There are no Tax liens on the Company and there are no recorded Tax liens on any asset of the Company;

(h)The Company is not a party to any agreement or arrangement that would result, separately or in the aggregate in, the payment of any “excess parachute payment” within the meaning of section 280G(b) of the Code;

(i)No acceleration of the vesting schedule for any property that is substantially nonvested within the meaning of the regulations under section 83 of the Code will occur in connection with the transactions contemplated by this Agreement;

(j)The Company does not owe any amount pursuant to any written or unwritten Tax sharing agreement or arrangement or will have any liability after the Closing Date in respect of any written or unwritten Tax sharing agreement or arrangement executed or agreed to prior to the Closing Date;

(k)All Taxes required to be withheld, collected or deposited by the Company have been timely withheld, collected or deposited and, to the extent required, have been paid to the relevant taxing authority;

(l)Any adjustment of Taxes of the Company made by the Internal Revenue Service that is required to be reported to any state, local or foreign taxing authority has been so reported and any additional Tax due as a result thereof has been paid in full;

(m)There are no outstanding waivers or agreements extending the statute of limitations for any period with respect to any Tax to which the Company may be subject;

(n)There are no requests for rulings or information currently outstanding that could affect the Taxes of the Company, or any similar matters pending with respect to any taxing authority;

(o)There are no proposed reassessments of any property owned or leased by the Company or other proposals that could increase the amount of any Tax to which the Company would be subject; and

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(p)No power of attorney that is currently in force has been granted with respect to any matter relating to Taxes that could affect the Company.

Section 2.12Bankruptcy.  There are no bankruptcy, reorganization or arrangement Proceedings pending against, being contemplated by or, to the Knowledge of Seller and the Company, threatened in writing against Seller or the Company.

Section 2.13Employment Matters.

(a)Schedule 2.13 sets forth a true, accurate and complete list of the following information about each current employee of the Company, including any employees on leave of absence or layoff status:  name; job title; compensation; any change in compensation since January 1, 2005; vacation accrued; hours of unrecorded sick leave, and service credited for purposes of vesting and eligibility to participate under any of the Company’s Employee Benefit Plans (as defined in Section 2.27 below).

(b)The Company is in compliance in all material respects with all applicable Laws respecting employment practices and terms of employment (“Employment Laws”) and no uncured material violation of any applicable Employment Laws by the Company exists.

(c)The Company has not received written notice from any Governmental Body or other Person of any failure to materially comply or the material violation of any applicable Employment Laws with respect to the Company or its facilities.

(d)The Company is not (i) to the Knowledge of Seller and the Company, now subject to a union organizing effort; or (ii) subject to any collective bargaining agreement with respect to any of its employees.  The Company does not have any current general labor disputes.  To the Knowledge of Seller and the Company, there are no strikes, material slowdowns, work stoppages or lockouts, or threats thereof, by or with respect to any employees of the Company.

Section 2.14Intellectual Property.

(a)Schedule 2.14(a) lists all foreign and domestic patents, patent applications, trademarks and service marks, trademark and service mark applications, trade names, copyrights, and copyright applications (whether registered or unregistered) (collectively, the “Intellectual Property”) held, owned or used by the Company as of the Closing Date (“Included Intellectual Property”).  Except as set forth on Schedule 2.14(a), the Company owns or licenses or otherwise has the right to use all the Included Intellectual Property, without the payment of any royalties or other payments to any third-party.  The Included Intellectual Property constitutes all the Intellectual Property necessary for the conduct of the Business of the Company as it is currently conducted, except where the failure to own, license or have the right to use such Included Intellectual Property would not have or be a Material Adverse Effect on the Company.

(b)The Included Intellectual Property does not include any of the trade names of the Company listed on Schedule 2.14(b), which are assets of Seller that have been used by the Company.

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(c)The Company is not currently in receipt of any written notice of any material violation of, and to the Knowledge of Seller and the Company, is not violating or infringing upon the intellectual property rights of any other Person in any of the Included Intellectual Property.

(d)Except as set forth on Schedule 2.14(d), to the Knowledge of Seller and the Company, no other Person is infringing or threatening to infringe any intellectual property rights of the Company with respect to any of the Intellectual Property.

Section 2.15Environmental Compliance.  Except as set forth on Schedule 2.15, to the Knowledge of Seller and the Company:

(a)No Hazardous Substances exist on the Real Property in quantities which violate, and would require reporting to any Governmental Body and cleanup under, applicable Environmental Laws;

(b)The Company has not received written notice from any Governmental Body or other Person alleging a violation of applicable Environmental Laws; and

(c)Neither the Company nor any of the Company’s facilities are in material violation of any Environmental Laws.

Section 2.16Title to Properties; Encumbrances.  Except as set forth on Schedule 2.16, the Company has good and valid title to all of the assets reflected in the balance sheets included among the Company’s Financial Statements other than any assets therein reflected that (x) have been sold or otherwise disposed of in the Ordinary Course of Business since the date thereof or (y) are not, individually or in the aggregate, material to the Company, free and clear of all Liens other than (i) liens, mortgages, pledges, security interests or other encumbrances securing indebtedness shown on the Company Financial Statements, (ii) liens for taxes, payments of which are not yet delinquent or that are being contested in good faith by appropriate Proceedings, (iii) liens in respect of pledges or deposits under workers’ compensation laws, unemployment insurance, social security or public liability laws, or similar legislation, carriers’, warehousemen’s, mechanics’, laborers’ and materialmen’s and similar liens, if the obligations secured by such liens are not then delinquent or are being contested in good faith by appropriate Proceedings, (iv) liens relating to accounts payable incurred in the Ordinary Course of Business and consistent with past practice, and (v) such imperfections of title which do not materially detract from the value of the assets of the Company (subparagraphs (i), (ii), (iii), (iv) and (v) are referred to herein as “Permitted Liens”).  Except as set forth on Schedule 2.16, the Company holds under valid lease agreements all real and personal properties that are subject to leases and enjoys peaceful and undisturbed possession of such properties under such leases, other than (a) any properties as to which such leases have terminated in the Ordinary Course of Business, and (b) any properties that, individually or in the aggregate, are not material to the Company.

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Section 2.17Insurance.  Schedule 2.17(a) sets forth a list of all policies of insurance currently in effect relating to the business or operations of the Company (true, accurate and complete copies of which have been made available to Purchaser).  All premiums due and payable for such insurance policies have been paid in the Ordinary Course of Business and the insurance policies are in full force and effect.  Except as set forth on Schedule 2.17(a), there are no claims pending under any such policies.  Except as indicated on Schedule 2.17(a), no such policies of insurance will remain in effect upon the consummation of the transactions contemplated by this Agreement.

Section 2.18Permits and Licenses.  Schedule 2.18 sets forth a true, accurate and complete list of all the Governmental Authorizations the Company has which, except as set forth on Schedule 2.18, comprise all the Governmental Authorizations the Company is required to have under applicable Laws to conduct its business as it is now being conducted, except where the failure to have such permits, licenses, certificates and authorities would not result in a Material Adverse Effect on the Company.  Except as set forth in Schedule 2.18, the consummation of the transactions contemplated by this Agreement will not constitute a violation of any permit, license, certificate or authority from any Governmental Body, which would result in a Material Adverse Effect.

Section 2.19Agreements, Contracts and Commitments.

(a)Schedule 2.19 sets forth a true, accurate and complete list of:

(i)All Contracts to which the Company is a party or by which any its assets or properties is bound (i) that involves consideration or other expenditure in excess of $10,000.00 during a fiscal year, (ii) that involves performance by the Company over a period of more than six (6) months, (iii) that cannot, by its terms, be terminated by the Company without penalty or payment on thirty (30) days or less notice, or (iv) that is otherwise material to the ongoing business or ongoing operations of the Company (the “Material Contracts”);

(ii)All Contracts (which schedule shall reflect which such Submetering Contracts are written or oral) to which the Company is a party or by which any of its assets or properties is bound that obligate the Company to furnish meter reading, billing (including allocation billing and ratio billing) or collection services in the Business (the “Submetering Contracts”);

(iii)All Contracts to which the Company is a party or by which any its assets or properties is bound that obligate the Company to furnish installation, construction or maintenance services in the Business (the “Construction Contracts”); and

(iv)All Contracts to which the Company (or the Seller, in the case of Leased Vehicles and Leased Computer Equipment that are used by the Company) is a party or by which any its assets or properties is bound that are real or personal property leases (the “Material Leases”);

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(v)All Contracts to which the Company is a party or by which any its assets or properties is bound that are guarantees or under which the Company indemnifies or is contingently liable for the payment or performance of any liability or obligation of any other Person (the “Guarantees”);

(vi)All Contracts between the Company, on the one hand, and any of its Affiliates or any of the shareholders, officers, directors, employees, consultants, sales representatives, agents (or any of their respective Affiliates), on the other hand (the “Affiliate Agreements”);

(vii)All Contracts to which the Company is a party or by which any its assets or properties is bound that are licenses of any of the Included Intellectual Property (the “Material IP Licenses”); and

(viii)All the Internet domain name registrations used by the Company in conducting its business, together with the name of the applicable registrar of Internet domain names (the “Domain Name Contracts”).

The Material Contracts, Submetering Contracts, Construction Contracts, Material Leases, Guarantees, Affiliate Agreements, Material IP Licenses and Domain Name Contracts are collectively referred to in this Agreement as the “Company Contracts”.

(b)True, accurate and complete copies of the writtenCompany Contracts have been made available to Purchaser.  There are no amendments or modifications to any of the Company Contracts that have not been made available to Purchaser.

(c)To the Knowledge of Seller and the Company, each of the Company Contracts constitutes the valid and legally binding obligation of the parties thereto.  Except as set forth on Schedule 2.19, the Company is in full compliance with all material terms and requirements of the Company Contracts.  To the Knowledge of the Seller and the Company, none of the Company Contracts materially violates any applicable Laws.  To the Knowledge of Seller and the Company, each other Person that has or had any obligation or liability under any of the Company Contracts is in full compliance with all material terms and requirements thereof.

(d)Neither Seller nor the Company has given or received from any other Person any written notice regarding any actual, alleged, possible or potential violation or breach of, or default under, any of the Company Contracts.  There are no renegotiations of, attempts to renegotiate, or outstanding rights to renegotiate any reduction of material amounts paid or payable to the Company under any of the Company Contracts.  Neither Seller nor the Company has received from any Person any written notice regarding the termination or amendment of the term of any of the Company Contracts.

(e)The Company is not a party to or bound by any Contract or Organizational Document which purports to restrict by virtue of a noncompetition, territorial exclusivity or other

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provision covering such subject matter, the scope of the business or operations of the Company or any of its Affiliates geographically or otherwise.

(f)There is no power of attorney that is currently effective and outstanding with respect to the business, operations or any of the assets or properties of the Company.

Section 2.20Warranties.

(a)Except as set forth on Schedule 2.20, there are no pending nor, to the Knowledge of Seller and the Company, threatened in writing, material claims under or pursuant to any warranty, whether expressed or implied, on products or services sold or performed prior to the Closing Date by the Company that are not disclosed or referred to in the Company Financial Statements and that are not fully reservedagainst in accordance with GAAP.

(b)All of the services performed by the Company (whether directly or indirectly through independent contractors) during the 12 months preceding the Closing Date, to the Knowledge of Seller and the Company, have been performed in material conformity with all express written warranties, and, except with respect to Transmitter Warranty Claims (as defined in Section 8.2(c)(ii) below) for which Seller has agreed to indemnify Purchaser and the Company, to the Knowledge of the Seller and the Company, the Company will not have any material liability for replacement or repair or for other damages relating to or arising from any such services, except for amounts incurred in the Ordinary Course of Business which are immaterial and not required by GAAP to be disclosed in the Company Financial Statements.

(c)Schedule 2.20(c) is a true, accurate and complete list of all MTI Transmitter Systems installed as of the Closing Date (and not otherwise replaced or removed) in any dwellings or buildings for which the Company furnishes billing (including allocation billing and ratio billing) services under a Submetering Contract.

(d)Schedule 2.20(d) is a true, accurate and complete list of all billing meters reading “zero” at June 8, 2005.

Section 2.21Books and Records.  The books, accounts, ledgers and files of the Company are true, accurate and complete in all material respects and have been maintained in accordance with sound business and accounting practices.

Section 2.22Material Assets.

(a)A true, complete and accurate list of all the properties, rights and assets owned by the Company (whether tangible or intangible, and whether real, personal or mixed) and reflected on the balance sheet included in the Interim Company Financial Statements is set forth on Schedule 2.22 (the “Material Assets”).  A true and complete and accurate list of all the properties, rights and assets leased by the Company under the Material Leases is listed on Schedule 2.22 as leased properties, rights and assets.

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(b)Except as set forth on Schedule 2.22, the Material Assets together with the Material Leases (i) constitute all the material properties, rights and assets, including contract rights and equipment, used or held for use by the Company in the operation of the facilities and other business operations of the Company as they were operated in the 12-month period ending on the date of the Interim Company Financial Statements, and are operated on the Effective Date and will be operated through the Closing Date, and (ii) constitute all of the material properties, rights and assets that are necessary for operation of the facilities and other business operations of the Company as they are operated on the Effective Date and will be operated through the Closing Date.

(c)The Company has good and valid title, free and clear of all Liens, to all the Material Assets reflected in the Interim Company Financial Statements as being owned by the Company, as of the date thereof, other than (i) any assets or properties that have been sold or otherwise disposed of in the Ordinary Course of Business since the date of such Interim Company Financial Statements, (ii) Liens disclosed in the notes to such financial statements, (iii) statutory Liens for current Taxes not yet due, (iv)  Liens arising in the Ordinary Course of Business, and (v) Liens and imperfections of title described in Section 2.16.

Section 2.23Condition of Personal Property.  Each material item of personal property of the Companyis in good working order and repair (taking its age and ordinary wear and tear into account), has been operated and maintained in the Ordinary Course of Business and remains in suitable and adequate condition for use consistent with its primary use.

Section 2.24Accounts Receivable.  The accounts receivable of the Company reflected in the balance sheet dated as of March 31, 2005 included in the Interim Company Financial Statements, and the additional accounts receivable reflected on the books and records of the Company since the date of the Interim Company Financial Statements (collectively, the “Accounts Receivable”), unless paid prior to the Closing Date, and except to the extent and net of the aggregate amount reserved against thereon as set forth in the Interim Company Financial Statements (the “A/R Reserve”), represent valid obligations arising from sales actually made or services actually performed by the Company in the Ordinary Course of Business.  Schedule 2.24 sets forth a true, accurate and complete list (identifying the name and address of the obligor, amount owed and aging) of the Accounts Receivable as of the date of the Interim Company Financial Statements and at the Cut-Off Time.  Except as set forth on Schedule 2.24, the Accounts Receivable are owned by the Company free and clear of all Liens, other than Permitted Liens and except to the extent otherwise reserved against or reflected in the Interim Company Financial Statements.  To the Knowledge of Seller and the Company, there is no contest, claim or right of set-off under any Contract with the obligor of any Accounts Receivable.

Section 2.25Inventories.

(a)Except as set forth in Schedule 2.25(a):

(i)The inventories held by the Company are reflected in the balance sheet dated as of March 31, 2005 included in the Interim Company Financial Statements, and in

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the Pre-closing Inventory for additional inventory reflected on the books and records of the Company since the date of the Interim Financial Statements, at the lower of cost or market value in accordance with GAAP;

(ii)None of such inventories have been written up in value or repurchased by, or returned to, the Company at an increased value;

(iii)All such inventories are owned by the Company free and clear of all Liens, other than Permitted Liens and except to the extent otherwise reserved against or reflected in the Interim Company Financial Statements; and

(iv)To the Knowledge of the Company, there are no material adverse conditions that affect the supply of materials available to the Company, and to the Knowledge of Seller and the Company, the consummation of the transactions contemplated hereby will not adversely affect any such supply.

(b)Schedule 2.25(b) lists a true, complete and accurate inventory of all Inovonics Transmitter Systems owned by the Company and designed for use to replace MTI Transmitter Systems listed on Schedule 2.20(c) (the “Replacement Transmitters”).

Section 2.26No Undisclosed Liabilities.  Except (a) as and to the extent of the amounts specifically reflected or accrued for in the balance sheet dated as of March 31, 2005 included in the Interim Company Financial Statements, (b) for current liabilities and obligations incurred in the Ordinary Course of Business since such balance sheet date, (c) as to the specific matters disclosed in or arising out of matters set forth on Schedule 2.26 and the other Seller Schedules or which are the subject of other representations and warranties in this ARTICLE II and (d) liabilities or obligations which do not have a Material Adverse Effect on the Company, to the Knowledge of Seller, the Company does not have any liabilities or obligations of any nature (whether matured, absolute, accrued, contingent, conditional or otherwise, and whether due or to become due), and to the Seller’s Knowledge, there is no basis for the assertion or recovery against the Company of any liability or obligation not excepted by the preceding clauses (a) through (d) of this Section 2.26.

Section 2.27Employee Benefit Plans; ERISA.

(a)Set forth on Schedule 2.27(a), is a complete and accurate list of all Employee Benefit Plans under which any of the Company’s employees, or any dependents thereof, participates or benefits or are eligible to participate or benefit.

(b)As used in this Agreement, the term “Employee Benefit Plans” means:  (i) any “employee benefit plan” or “plan” within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”); and (ii) all plans or policies providing for “fringe benefits” (including vacation, paid holidays, personal leave, employee discounts, educational benefits or similar programs), and each other bonus, incentive compensation, deferred compensation, profit sharing, stock, severance, retirement, health, life,

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disability, group insurance, employment, stock option, stock purchase, stock appreciation right, performance share, supplemental unemployment, layoff, consulting, or any other similar plan, agreement, policy or understanding (whether written or oral, qualified or nonqualified, currently effective or terminated), and any trust, escrow or other agreement related thereto, which:  (A) is or has been established, maintained or contributed to by Seller or the Company or any other corporation or trade or business under common control with Seller (an “ERISA Affiliate”) as determined under Section 414(b), (c) or (m) of the Code with respect to Seller, or with respect to which Seller has or may have any liability that could affect Seller or Seller’s assets, properties, operations, or activities; or (B) provides benefits, or describes policies or procedures applicable, to any present or former director, officer or employee of Seller or any dependent thereof, regardless of whether funded.  Employee Benefit Plans also includes any written or oral representations made to any present or former director, officer or employee of the Company promising or guaranteeing any employer payment or funding for the continuation of medical, dental, life or disability coverage for any period of time beyond the end of the current plan year (except to the extent of coverage required under Section 4980B of the Code).

(c)Seller has made available to Purchaser a true, accurate and complete copy of each Employee Benefit Plan under which any of the Company’s employees, or any dependents thereof, participates or benefits or are eligible to participate or benefit and, if applicable, related trust agreements, all amendments thereto and written interpretations thereof, the most recently disseminated summary plan description and an explanation of any material plan modifications made after the date thereof, and the most recent determination letter received from the Internal Revenue Service, if applicable.  Seller has no formal plan or commitment, whether legally binding or not, to create any additional Employee Benefit Plans or modify or change any existing Employee Benefit Plans that would affect any employee of the Company, or any dependent or beneficiary thereof.

(d)Seller or an ERISA Affiliate other than the Company is the primary sponsoring employer of each Employee Benefit Plan that covers any employees of the Company, or any dependents thereof.

(e)Each Employee Benefit Plan under which any of the Company’s employees, or dependents thereof, participates or benefits or are eligible to participate or benefit, and each agreement, contract or other commitment, obligation or arrangement relating to any Employee Benefit Plan or the assets of any Employee Benefit Plan (or its related trust) including, but not limited to, each administrative services agreement, insurance policy or annuity contract, may be amended or terminated to reflect the withdrawal of the Company as a covered or participating employer at any time without any liability to the Company, other than liabilities which would not have a Material Adverse Effect on the Company.

(f)To the Knowledge of Seller and the Company, each Employee Benefit Plan has been operated in all material respects in compliance with applicable ERISA and Tax qualification requirements and all other applicable Laws.

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(g)There is no Employee Benefit Plan that is maintained or contributed to by Seller or any ERISA Affiliate that is or was subject to Part 3 of Title I of ERISA or Title IV of ERISA and none of the Employee Benefit Plans is or was a “multiple employer plan” or a “multi-employer plan” (as described or defined in ERISA or the Code).

(h)Except for coverage required under Code Section 4980B, no written or oral representations have been made by, or on behalf of, the Company, the Seller or any ERISA Affiliate to any employee or officer or former employee or officer of the Company promising or guaranteeing any coverage under any employee welfare benefit plan (as defined in ERISA Section 3(1)) for any period of time beyond the end of the current plan year.

(i)Other than routine claims for benefits, there are no material actions, suits, claims, audits or investigations pending for which the Company has received written notice or, to the Knowledge of Seller and the Company, threatened in writing against, or with respect to, any of the Employee Benefit Plans or their assets, trustees or administrators; and all contributions required to be made to the Employee Benefit Plans have been made timely and, in all material respects, in accordance with applicable Laws.

(j)Purchaser does not, directly or indirectly, assume or otherwise take any responsibility for contributions or benefits under, or the administration, maintenance or sponsorship of, any of the Employee Benefit Plans of Seller, and Purchaser shall have no liability therefore.

Section 2.28Certain Business Practices.  Since April 3, 2000, to the Knowledge of Seller, neither the Company nor any directors, officers, representatives, agents or employees of the Company (in their capacities as such) has, directly or indirectly:  (a)  (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful purposes relating to political activity, (ii)  made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended and including any corresponding provisions of succeeding law, and the regulations promulgated thereunder (the “FCPA”), or (iii) made any other unlawful payment; (b) made or received any contribution, gift, bribe, rebate, payoff, influence payment, kickback or other payment to or from any Person, private or public, regardless of the form, whether in money, property or services (i) to obtain favorable treatment in securing business, (ii) to pay for favorable treatment for business secured, (iii) to obtain special concessions or for special concessions already obtained, for or in respect of the Company, or (iv) in violation of any applicable Laws; or (c) established or maintained any fund or asset that has not been recorded in the books and records of the Company.

Section 2.29Customers and Suppliers.  Except as set forth on Schedule 2.29, no customer of the Company that accounted for more than five percent (5%) of the consolidated revenues or income of the Company during both the last full fiscal year ending December 31, 2004 and the interim period ending May 31, 2005 has advised the Company in writing that, with respect to customers of the Company, such customer will stop or materially terminate buying materials, products or services from the Company.  No supplier of the Company that is a sole

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supplier of any significant product or component to the Company, has advised the Company in writing that it will stop, or materially decrease the rate of, supplying materials, products, or services to the Company.

Section 2.30Brokers.  Except as set forth on Schedule 2.30, no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Seller or the Company.  Seller is responsible for and will pay in full the fee owed each Person listed on Schedule 2.30 in connection with the transactions contemplated hereby.

Section 2.31Bank Accounts.  Schedule 2.31 lists all of the deposit, savings, money market and other accounts at banks or other financial institutions (with each identified by name of the bank, name of the account, account number and the name of any Person authorized to withdraw from or access the account) where any funds or monies of the Company are kept or deposited.

Section 2.32Disclaimer of Additional and Implied Warranties.  Seller is making no representations or warranties, expressed or implied, of any nature whatsoever except as specifically set forth in ARTICLE II.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER

Purchaser hereby makes the representations and warranties set forth in this ARTICLE III to Seller.

Section 3.1Organization and Authority.

(a)Purchaser is a limited partnership duly organized, validly existing and in good standing under the Laws of the State of Delaware.  Purchaser has all requisite limited partnership power and limited partnership authority to carry on its business as it is now being conducted, and to own, lease and operate its properties and assets, and to perform all its obligations under the agreements and instruments to which it is a party or by which it is bound.  Purchaser is duly qualified to do business as a foreign limited partnership and is in good standing under the Laws of each state or other jurisdiction in which the properties and assets owned, leased or operated by it or the nature of the business conducted by it make such qualification necessary, except in such jurisdictions where the failure to be duly qualified or in good standing would not have or be a Material Adverse Effect on Purchaser.

(b)True, correct and complete copies of the Organizational Documents of Purchaser, with all amendments thereto through the date of this Agreement, have been delivered by Purchaser.

Section 3.2Authority Relative to Agreement.  Purchaser has full limited partnership power and authority to execute and deliver this Agreement, and the Transaction Documents to which it is a party, and no further proceedings on the part of Purchaser are necessary to

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consummate the transactions contemplated hereby.  This Agreement and the Transaction Documents to which Purchaser is a party has been duly and validly executed and delivered by Purchaser, and this Agreement, and the Transaction Documents to which Purchaser is a party will constitute the valid and binding obligation of Purchaser enforceable against Purchaser in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium, or other similar Laws relating to creditors’ rights generally and general equitable principles.

Section 3.3No Violation.  Neither the execution, delivery nor performance of this Agreement, in its entirety, nor the consummation of the transactions contemplated hereby, as of the Closing Date, (i) to Purchaser’s knowledge, violates (“Purchaser’s Violation”) in any material respect any Law , order, writ, judgment, injunction, award, decree, rule, statute, ordinance or regulation applicable to Purchaser, (ii) is in conflict with, results in a breach or termination of any provision of, causes the acceleration of the maturity of any debt or obligation pursuant to, constitutes a default (or gives rise to any right of termination, cancellation or acceleration) under, or results in the creation of any Lien upon any currently owned property of Purchaser pursuant to, any terms, conditions or provisions of any note, license, instrument, indenture, mortgage, deed of trust or other agreement or understanding or any other restriction of any kind or character, to which Purchaser is a party or by which any currently owned property of Purchaser is subject or bound (collectively, “Purchaser’s Default”), or (iii) conflicts (“Purchaser’s Conflict”) with or results in any breach of any provision of the Certificate or Articles of Incorporation or Bylaws of Purchaser, which Purchaser’s Violation, Purchaser’s Default or Purchaser’s Conflict could reasonably be expected to have or be a Material Adverse Effect on Purchaser.

Section 3.4Consents and Approvals.  No prior consent, approval or authorization of, or declaration, filing or registration with any person, domestic or foreign, is required of or by Purchaser in connection with the execution, delivery and performance by Purchaser of this Agreement and the transactions contemplated hereby.

Section 3.5Investment Intent.

(a)Purchaser is acquiring the Shares for its own account for investment and not with a view toward resale or redistribution in a manner which would require registration under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state, and Purchaser does not presently have any reason to anticipate any change in its circumstances or other particular occasion or event which would cause it to sell the Shares or any part thereof or interest therein.  Purchaser has not offered or sold the Shares or any part thereof or interest therein, and has no present intention of dividing the Shares with others or of reselling or otherwise disposing of the Shares or any part thereof or interest therein either currently or after the passage of a fixed or determinable period of time or upon the occurrence or nonoccurrence of any predetermined event or circumstance.

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(b)Purchaser acknowledges that (i) its acquisition of the Company involves a high degree of risk and (ii) it understands that the purchase of the Shares is an illiquid investment.

(c)Purchaser acknowledges that Seller has made available, or caused the Company to make available, to Purchaser the opportunity to evaluate the merits and risks associated with ownership of the Shares, including information related to the financial position and results of operations of the Company.  Specifically, Purchaser acknowledges receipt of the Company Financial Statements and Purchaser has had access to officers of the Company to make such further inquiry as Purchaser has deemed appropriate.  Purchaser represents that it has made other investments of a similar nature or, by reason of Purchaser’s business and financial experience and of the business and financial experience of those persons it has retained to advise it with respect to its purchase and ownership of the Shares, it is a sophisticated, well-informed investor and has acquired the capacity to protect its own interest in investments of this nature.  In reaching the conclusion that it desires to acquire the Shares, Purchaser has carefully evaluated its financial resources and investment position, and the risks associated with this investment and acknowledges that it is able to bear the economic risks of this investment.

Section 3.6Financing.  Purchaser has sufficient capital resources to enable Purchaser to pay the Purchase Price in accordance with Section 1.2 and to effect the other transactions contemplated by this Agreement at the Closing Date.

Section 3.7Disclaimer of Additional and Implied Warranties.  Purchaser is making no representations or warranties, express or implied, of any nature whatsoever except as specifically set forth in ARTICLE III of this Agreement.

ARTICLE IV
CERTAIN TAX MATTERS

Section 4.1Preparation and Filing of Returns.

(a)Seller shall prepare and timely file, or shall cause to be prepared and timely filed, at its cost and expense, the following Returns with respect to the Company or in respect of its businesses, assets or operations:

(i)All Returns for any Taxes for any taxable period ending on or before the Closing Date imposed upon, or measured by, income; and

(ii)All other Returns required to be filed (taking into account extensions) prior to the Closing Date.

(b)Any Return to be prepared and filed by Seller in accordance with Section 4.1(a) shall, to the extent permitted by applicable Laws, be prepared on a basis consistent with the last previous Return of the Company.

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(c)Purchaser shall prepare and timely file, or shall cause to be prepared and timely filed, at its cost and expense, all other Returns with respect to Company or in respect of its businesses, assets or operations.

(d)Any Return to be prepared and filed by Purchaser for taxable periods beginning before the Closing Date and ending after the Closing Date shall, to the extent permitted by applicable Law, be prepared on a basis consistent with the last previous Return of the Company.

Section 4.2Tax Indemnification by Seller.  Seller shall indemnify the Purchaser Indemnified Parties (as defined in Section 8.2 below) in respect of, and hold the Purchaser Indemnified Parties harmless against (i) the failure to perform any covenant or agreement set forth in this Article IV, and (ii) without duplication, the following Taxes:

(a)Any and all Taxes due and payable by the Company for any taxable period ending (or deemed pursuant to Section 4.4(b) to end) on or before the Closing Date; and

(b)Any liability of the Company for Taxes for periods ending (or deemed pursuant to Section 4.4(b) to end) on or before the Closing Date under Treasury Regulation Section 1.1502-6 or under any comparable or similar provision under state, local or foreign laws or regulations except to the extent of the accruals or reserves for Taxes set forth on the Closing Date Balance Sheet.

Section 4.3Tax Indemnification by Purchaser.  Purchaser shall indemnify the Seller Indemnified Parties in respect of, and hold the Seller Indemnified Parties harmless against, any and all Taxes for any taxable period beginning (or deemed pursuant to Section 4.4(b) to begin) after the Closing Date.

Section 4.4Allocation of Certain Taxes.

(a)The Parties agree that if the Company is permitted but not required under applicable state or local Tax Laws to treat the Closing Date as the last day of a taxable period, the Parties shall treat such day as the last day of a taxable period.  The Parties agree that they will treat the Company as if it ceased to be part of the affiliated group of corporations of which Seller is a member within the meaning of Section 1504 of the Code, and any comparable or similar provision of state, local or foreign Laws, at the Effective Time.

(b)Any Taxes for a taxable period ending after the Closing Date with respect to the Company shall be paid by Purchaser or the Company, and the Taxes for such period shall be apportioned for purposes of Section 4.2 and Section 4.3 between the Parties based on the actual operations of the Company during the portion of such period ending on the Closing Date, if any, and the portion of such period beginning on the day following the Closing Date, and for purposes of the provisions of Section 4.2, Section 4.3 and Section 4.5, each portion of such period shall be deemed to be a taxable period (whether or not it is in fact a taxable period).  Any Taxes allocated or apportioned by means of this Section 4.4(b) shall, to the extent allocated to

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the period before the Closing Date, be for the account of Seller and any Taxes allocated or apportioned by means of this Section 4.4(b) shall, to the extent allocated to the period after the Closing Date, be for the account of Purchaser.

(c)Seller shall make any payment of Taxes apportioned under Section 4.4(b) for which it is liable under Section 4.2(a) to Purchaser not later than five Business Days prior to the due date for the payment of such Taxes (including estimated Taxes).

(d)The Parties agree that neither Seller nor Purchaser shall, in connection with the purchase of the Shares under this Agreement, make any election under Section 338 of the Code.

Section 4.5Refunds and Carrybacks.

(a)Seller shall be entitled to an amount equal to any refunds (including any interest paid thereon) or credits of Taxes attributable to taxable periods ending (or deemed pursuant to Section 4.4(b) to end) on or before the Closing Date to the extent such refunds (including any interest paid thereon) or credits were not included in the Closing Date Balance Sheet.  Purchaser shall promptly notify Seller in writing of any Tax refund(s) received by or payable to the Company after the Closing in respect of periods before or including the Closing Date.

(b)Purchaser, the Company, and/or their Affiliates, as the case may be, shall be entitled to any refunds (including any interest paid thereon) or credits of Taxes attributable to (i) taxable periods beginning (or deemed pursuant to Section (b) to begin) after the Closing Date and (ii) taxable periods ending (or deemed pursuant to Section 4.4(b) to end) on or before the Closing Date to the extent such refunds (including any interest paid thereon) or credits were included in the Closing Date Balance Sheet.

(c)Purchaser shall, or shall cause the Company promptly to, forward to or reimburse Seller for any refunds (including any interest paid thereon) or credits due Seller (pursuant to the terms of this Agreement) after receipt thereof, and Seller shall promptly forward to Purchaser or reimburse Purchaser for any refunds (including any interest paid thereon) or credits due Purchaser after receipt thereof.

(d)Purchaser and Seller agree that the Company shall not carry back in respect to any consolidated, combined or unitary Return any item of loss, deduction or credit which arises in any taxable period ending after the Closing Date to any taxable period ending on or before the Closing Date.

Section 4.6Cooperation on Tax Matters; Tax Audits.

(a)The Parties and their respective Affiliates shall cooperate in the preparation of all Returns for any Tax periods for which one Party could reasonably require the assistance of the other Party in obtaining any necessary information.  Such cooperation shall include, but not be limited to, furnishing prior years’ Returns or return preparation packages to

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the extent related to a Company or Subsidiary illustrating previous reporting practices or containing historical information relevant to the preparation of such Returns, and furnishing such other information within such Party’s possession requested by the Party filing such Returns as is relevant to their preparation.  Such cooperation and information also shall include without limitation provision of powers of attorney for the purpose of signing Returns and defending audits and promptly forwarding copies of appropriate notices and forms or other communications received from or sent to any applicable governmental authority responsible for the imposition of Taxes (the “Taxing Authority”) which relate to the Company, and providing copies of all relevant Returns to the extent related to either Company, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by any Taxing Authority and records concerning the ownership and tax basis of property, which the requested Party may possess.  The Parties and their respective Affiliates shall make their respective employees and facilities available on a mutually convenient basis to explain any documents or information provided hereunder.

(b)Purchaser shall promptly notify Seller in writing of any written notice of a proposed assessment or claim in an audit or administrative or judicial proceeding involving the Company which, if determined adversely to the taxpayer, would be grounds for indemnification under this ARTICLE IV; provided, however, that a failure to give such notice will not affect Purchaser’s right to indemnification hereunder, except to the extent, if any, that, but for such failure, Seller could have avoided the Tax liability in question.  In the case of an audit or administrative or judicial Proceeding that relates to any pre-Closing taxable year or period, provided that within thirty (30) days after Seller receives the written notice from Purchaser required under this  Section 4.6(b) and prior to taking any action with respect to such audit or administrative or judicial proceeding, Seller acknowledges in writing its liability under this Section 4.6 to hold the Purchaser Indemnified Parties harmless against the full amount of any adjustment which may be made as a conduct of such audit or proceeding; provided, however, that Seller shall not settle or otherwise compromise any issue or matter without Purchaser’s prior written consent if such issue or matter will have a material affect on the Tax liability of Purchaser or the Company for a post-Closing taxable year or period.  Purchaser also may participate in any such audit or proceeding.  Purchaser may, without any effect to its right to indemnification under this ARTICLE IV, to defend the same in such manner as it may deem appropriate, including, but not limited to, settling such audit or proceeding.  Except as provided otherwise in this ARTICLE IV, Purchaser shall control at its own expense any and all audit, administrative and judicial proceedings related to the Company or the Company’s Taxes.

Section 4.7Termination of Tax-Sharing Agreements.  All Tax sharing agreements or similar arrangements with respect to or involving the Company shall be terminated prior to the Closing Date and, after the Closing Date, the Company shall not be bound thereby or have any liability thereunder for amounts due in respect of periods ending on or before the Closing Date.

Section 4.8Tax Claims.  Notwithstanding any provision of this Agreement to the contrary, this ARTICLE IV shall govern all indemnity or other claims related to, or in respect of, Taxes (collectively, “Tax Claims”) and the provisions set forth in ARTICLE VIII of this Agreement shall not apply or have any effect on Tax Claims.  Purchaser and Seller agree that any

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amounts paid by either of them to the other Party pursuant to this ARTICLE IV or pursuant to ARTICLE VIII of this Agreement shall be treated as an adjustment to the Purchase Price for all Tax purposes.

ARTICLE V
ADDITIONAL COVENANTS

Section 5.1Access To, and Information Concerning, Properties and Records.   Intentionally Omitted.

Section 5.2Public Announcements.  Without the prior written approval of Seller (in the case of a release or statement by Purchaser) or Purchaser (in the case of a release or statement by Seller), no Party hereto will issue, or permit any agent or Affiliate of such Party to issue, any press releases or otherwise make, or cause any agent or Affiliate of such Party to make, any public statements with respect to this Agreement and the transactions contemplated hereby, except when such release or statement is deemed in good faith by the releasing Party to be required by applicable Laws or under the applicable rules and regulations of a stock exchange or market on which the securities of the releasing Party or any of its Affiliates are listed.  In each case to which such exception applies, the releasing Party will use its reasonable efforts to provide a copy of such release or statement to Purchaser (in the case of a release or statement by Seller) or Seller (in the case of a release or statement by Purchaser) and incorporate any reasonable changes which are suggested by such non-disclosing Party prior to releasing or making the statement.  Without limiting the foregoing, Seller will file a Form 8-K in connection with this Agreement and the transactions contemplated by this Agreement containing such information as Seller deems appropriate.

Section 5.3Good Faith Efforts to Consummate Transactions.  Subject to the terms and conditions of this Agreement, Purchaser and Seller agree to use reasonable good faith efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper, or advisable under this Agreement and applicable Laws and regulations, to consummate and make effective, as soon as practicable after the Effective Date, the transactions contemplated by this Agreement, including, without limitation, securing all third-party approvals and the Required Regulatory Approvals necessary to consummate the transactions provided herein and to satisfy the other conditions to Closing contained herein as soon as reasonably practicable.  Each Party agrees to make copies of its respective regulatory filings and related correspondence to regulatory agencies available to the other Party.  Notwithstanding any provision contained in this Agreement to the contrary, Seller shall direct the initiation and prosecution of, and through counsel of its own choosing will have control over, all filings and Proceedings before any Governmental Bodies in order to obtain the Required Regulatory Approvals.

Section 5.4Company’s Employees.  During the pendency of the transactions contemplated hereby, Seller shall cause the Company, to the extent not prohibited by Law or Contract, to give to Purchaser and its representatives access, upon reasonable request and at reasonable times, throughout the period prior to the Closing, to all employees of Company.

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Section 5.5Resignations.  On or prior to the Closing Date, each of Peter J. Moerbeek, James Wisener, David Rodrigue, and Cheryl L. Claryshall resign, in writing, from all positions held by him as an officer, director, employee, consultant and/or independent contractor of the Company, effective as of the Closing Date.

Section 5.6Further Assurances.  Seller and Purchaser each agree that from time to time after the Closing Date, they will execute and deliver, and will cause their respective Affiliates to execute and deliver such further documents and instruments, and take, and cause their respective Affiliates to take such other action, as may be reasonably necessary to carry out the purposes and intents of this Agreement.

Section 5.7Restrictive Covenants. Seller and Purchaser covenant and agree as follows:

(a)Statement of Enforceability.  Seller acknowledges that this Section 5.7 is entered into in conjunction with the sale of a going concern business and is fully enforceable as written under Tex. Bus. Comm. Code §15.50 and other applicable Laws.  Seller further acknowledges that the provisions in this Section 5.7 are conditions precedent and material inducements to Purchaser entering into this Agreement and consummating the transactions contemplated by this Agreement.

(b)Noncompetition Covenant.  Seller agrees that, during the Restricted Period, it will not, and will not permit any other Seller Restricted Person, to, for itself or any other Person, engage in any Restricted Activity anywhere in the Restricted Territory, except on behalf of the Company in providing any transition services agreed upon in writing by the Parties in connection with this Agreement.

(c)Nonsolicitation Covenant.  Seller agrees that, during the Restricted Period (except for employment advertisements which are placed in newspapers or other periodicals of general circulation), it will not, and will not permit any other Seller Restricted Person, for itself or any other Person, to directly or indirectly, induce or attempt to induce any Person Known to Seller to be employed by the Purchaser Group in a managerial or supervisory capacity to leave the employ of the Purchaser Group, except, in each case, if such Person first solicits any Seller Restricted Person.

(d)Mutual Nondisparagement Covenant. Neither any of the Seller Restricted Persons, on the one hand, nor the Purchaser Group, on the other hand, will, or encourage any of their respective shareholders, directors, officers, employees, or agents to, at any time during or after the Restricted Period, disparage the other Party or any of its shareholders, directors, officers, employees, agent, Subsidiaries, or Affiliates.

(e)Remedies.

(i)Injunctive Remedy.  Seller acknowledges that the foregoing restrictions in this Section 5.7 (the “Restrictions”), including those relating to geographic area,

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duration and scope of activity, in view of the nature of the business in which the Purchaser Group has been, is and will be engaged, are reasonable and necessary in order to protect the goodwill and other legitimate business interests of the Purchaser Group, and that any violation thereof would result in immediate and irreparable injury to the Purchaser Group, and Seller, therefore, further acknowledges that, in the event it violates, or threatens to violate, any of the Restrictions, the Purchaser Group will be entitled to obtain from any court of competent jurisdiction, without the posting of any bond or other security, preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights will be cumulative and in addition to any other rights or remedies in law or equity to which it may be entitled.  If Seller violates any of the Restrictions, the applicable restricted period will be tolled from the time of commencement of the violation until such time as the violation has been cured to the Purchaser Group’s satisfaction.  If any Restrictions, or any part thereof, are determined in any Proceeding to be invalid or unenforceable, the remainder of the Restrictions will not thereby be affected and will be given full effect without regard to the invalid provisions.  If the Restrictions should be adjudged unreasonable in any Proceeding, then the reviewing Governmental Body or other Person will have the power to reform the Restrictions to the extent reasonably necessary to make the Restrictions valid and enforceable and, in the modified form, such provisions will then be enforceable and must be enforced.

(ii)Survival.  Notwithstanding any other provision of this Agreement, the provisions of this Section 5.7 will survive for the Restricted Period, and longer with respect to Section 5.7(d).

Section 5.8Certain Employee Matters.

(a)Foltz Employment Agreement.

(i)Schedule 5.8(a)-1 is a true, correct and complete copy of the Master Tek International, Inc. Key Employee Agreement between Greg Foltz (“Foltz”) and the Company dated June 18, 2004 (the “Employment Agreement”).  Schedule 5.8(a)-2 is a true, correct and complete list of the commission schedule which Purchaser would cause Company to offer to Foltz, assuming the closing of the transactions contemplated hereby (the “Purchaser Commission Schedule”), but for the existence of the Employment Agreement.

(ii)Following the Closing, Seller will reimburse the Company, monthly in arrears through the remaining term of the Employment Agreement (i.e., through December 31, 2007), an amount equal to (i) the amount the Company actually paid to Foltz under Sections 3.1, 3.2, and 3.4 of the Employment Agreement (and for no other payments thereunder) during such period, plus an amount equal to the employer’s portion of amounts payable under the Federal Insurance Contributions Act for each payment made to Foltz, plus applicable state and Federal unemployment insurance for each payment made to Foltz, plus a reasonable fee for Purchaser’s cost to process payroll payments to Foltz, less (ii) the amount which Company would have had to pay Foltz pursuant to the Purchaser Commission Schedule during the same period for the actual work or services performed by Foltz during such period.

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As a condition to each of Seller’s monthly payments, the Company will provide Seller with reasonable written documents illustrating and evidencing the determination of the amount to be reimbursed pursuant to this Section 5.8(b) and evidence of actual payments made to Foltz.

(iii)Purchaser will cause the Company to refrain from amending the Employment Agreement in any manner (i) that results in Seller being required to make additional or greater reimbursement payments under Section 5.8(a)(ii); and (ii) without Foltz’s prior written consent.  Purchaser will cause the Company to comply with each and all of its obligations under the Employment Agreement, as such may be amended, which accrue or arise following the Effective Time.  Purchaser will cause the Company to materially comply with all applicable Laws with respect to the Company’s employment of Foltz under the Employment Agreement, as such may be amended.

(b)Armstrong Release.  For and on behalf of the Company, following the Closing, Seller will timely make each and all of the payments and reimbursements due to Scott Armstrong under the Armstrong Release.  Seller will promptly notify Purchaser in the event that Seller is notified of any dispute or claim relating to the Armstrong Release.

Section 5.9Intercompany Debt.  Seller will convert the net amount of Intercompany Debt owed to Seller into equity prior to the Closing Date without any resulting Tax or other consequences, whether or not adverse, on the financial condition of the Company.  The Company shall not be subject to, bound by or obligated to pay any of the Intercompany Debt following the Effective Time, and all of it is hereby terminated if not converted.  As used in this Agreement, the term “Intercompany Debt” means the aggregate indebtedness as of the Effective Time payable by the Company to Seller or any of its Affiliates.

Section 5.10Collection of Accounts Receivable; Repurchase of Accounts Receivable.

(a)Following the Closing Date, Purchaser will cause the Company to collect the Accounts Receivable in substantially the same manner and with the same effort and diligence as the Company used in collecting its other accounts receivable during the 12-month period preceding the date of the Interim Company Financial Statements.  But, the Company will not be required to commence litigation or other Proceedings in attempting to collect any Accounts Receivable.  The Company may not compromise, settle or adjust the amount of any Accounts Receivable without Seller’s prior written consent, which shall not be unreasonably withheld or delayed.  For purposes of this Agreement, the Accounts Receivable will be deemed to be uncollectible if, after taking into account and exhausting A/R Reserve, full payment is not collected by the Company through the collection efforts contemplated by this Section 5.10 within one hundred eighty (180) days following the Closing Date (the “Repurchase Date”).

(b)Purchaser shall have the right, by written notice (the “Receivables Notice”) to Seller given on, or not later than ten (10) days after the Repurchase Date, to require Seller to repurchase for cash and without recourse, within sixteen (16) Business Days of the date of the Receivables Notice, the uncollected account(s) receivable identified in the Receivables

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Notice, provided that such account(s) receivable remains uncollected at such time.  Seller shall repurchase the applicable uncollected account(s) receivable for a purchase price equal to its/their aggregate face value, and Seller shall purchase and pay for such account(s) receivable as provided herein.

(c)The repurchase price of the accounts receivables to be purchased shall be paid, one-half (1/2) of the amount owed through a claim against and deduction from the Holdback Fund, and the other one-half (1/2) in cash.  The Holdback Fund claim and the cash payment must be paid to Purchaser within sixteen (16) Business Days after the date of the Receivables Notice.  To the extent the amount in the Holdback Fund is insufficient to pay the claim against the Holdback Fund, such amount will be paid by Seller in cash.

(d)Purchaser shall execute and deliver to Seller all instruments as shall be reasonably necessary to effectively vest in Seller all of the right, title and interest of Purchaser with respect to any uncollected Accounts Receivable repurchased by Seller pursuant to this subsection without representation or recourse, but free and clear of all Liens created by Purchaser following the Closing Date, other than Permitted Liens.

Section 5.11MTI Transmitter System Replacement.

(a)Following the Effective Time, Purchaser will cause the Company to continue, with commercially reasonable diligence, Company’s program of replacing all MTI Transmitter Systems installed as of the Closing Date in those dwellings or buildings for which the Company furnishes billing services (including allocation billing and ratio billing) under a Submetering Contract with Inovonics Transmitter Systems in a manner consistent with the Company’s past business practices (the “Replacement Program”).

(b)Purchaser shall cause Company to use the Replacement Transmitters only for the Replacement Program and for no other purpose.  For each MTI Transmitter System replaced in connection with the Replacement Program, Purchaser shall have the right to receive for each MTI Transmitter System replaced an amount equal to Company’s actual and reasonable third party costs incurred to replace said transmitter or, if a third party is not engaged to replace the transmitters, a reasonable allocation of the internal costs actually incurred by the Company (but such allocation of internal costs actually incurred shall not exceed the reasonable costs of an independent third party to replace said transmitter).  Purchaser shall not receive any amount on account of the cost of a Replacement Transmitter.  To the extent that Replacement Transmitters are insufficient for the Replacement Program, then Purchaser shall have the right to receive for each MTI Transmitter System replaced an amount equal to Company’s actual and reasonable third party cost incurred to acquire additional Inovonics Transmitter Systems.

(c)Monthly Claim Report; Payment.

(i)Within thirty (30) days following the end of each calendar month following Closing Date through and including December 31, 2005, Purchaser and Company will deliver to Seller a report certified by officers of Purchaser and Company reflecting the total

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number of MTI Transmitter Systems replaced during the preceding calendar month pursuant to the Replacement Program, the address of replacement for each such MTI Transmitter System replaced, the name of the applicable customer, the number of Replacement Transmitters remaining in Company’s possession, the total amount due to Purchaser in accordance with Section 5.11(b) on account of transmitter replacements concluded during the preceding month, and other facts reasonably requested by Seller (the “Monthly Claim Report”).  The failure to deliver the Monthly Claim Report within the 30-day period does not affect Purchaser’s right to be paid by Seller.

(ii)Seller shall have a period of fifteen (15) days after such delivery of the Monthly Claim Report to (A) acknowledge that the claim stated in the Monthly Claim Report is accurate and that the amount claimed is correct, in which case Purchaser shall have the right to receive, by making a written request therefor to the Escrow Agent, the sum equal to the claim set forth in the applicable Monthly Claim Report from the Holdback Fund, or (B) deny that either the Monthly Claim Report is accurate or that the amount claimed is incorrect, in which case, the Escrow Agent shall retain in the Holdback Fund an amount reasonably sufficient to pay such unresolved claim if required pursuant to Section 8.8(e).  The failure of Seller to give such notice within such fifteen (15) day period shall be deemed to be an acknowledgment that such claim set forth in the Monthly Claim Report and the amount claimed are correct.

(d)Concluding Claim Report; Payment.

(i)Within thirty (30) days following December 31, 2005, Purchaser and Company will deliver to Seller a report certified by officers of Purchaser and Company reflecting:  (i) the total number of MTI Transmitter Systems replaced in the Replacement Program since the Closing Date, (ii) the address of replacement for each such MTI Transmitter System replaced, (iii) the name of the applicable customer, (iv) the number of Replacement Transmitters remaining in Company’s possession, if any, (v) the number of MTI Transmitter Systems which have not been replaced as of December 31, 2005 in accordance with the Replacement Program, and (vi) Purchaser’s reasonable estimate of the amounts which will be payable by Seller in accordance with Section 5.11(b) on account of all transmitter replacements to be made pursuant to the Replacement Program, and other facts reasonably requested by Seller (the “Concluding Claim Report”).  The failure to deliver the Concluding Claim Report within the 30-day period does not affect Purchaser’s right to be paid by Seller.

(ii)Seller shall have a period of fifteen (15) days after such delivery of the Concluding Claim Report to (A) acknowledge that the claim stated in the Concluding Claim Report is accurate and that the estimated to be payable is correct, in which case Purchaser shall have the right to receive, by making a written request therefor to the Escrow Agent, the sum equal to the claim set forth in the applicable Concluding Claim Report from the Holdback Fund, or (B) deny that either the Concluding Claim Report is accurate or that the amount estimated is incorrect, in which case, the Escrow Agent shall retain in the Holdback Fund an amount reasonably sufficient to pay such estimate if required pursuant to Section 8.8(e).  The failure of Seller to give such notice within such fifteen (15) day period shall be deemed to be an

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acknowledgment that such claim set forth in the Concluding Claim Report and the amount claimed are correct.

Section 5.12Employee and Independent Contractor Matters.

(a)Immediately following the Closing and without cost or expense to Seller, Purchaser will cause the Company to credit each of Company’s employees with such hours of “sick leave” as each such employee shall have accrued as listed in Schedule 2.13.  Any and all liabilities or costs associated with crediting and honoring such sick leave will be borne entirely by the Purchaser and the Company and, as described on Schedule 1.6(b)–C, such costs shall not be an adjustment to the Closing Date Balance Sheet.

(b)For each of Company’s employees and dependents of such employees participating in medical, dental, life insurance, and long-term disability insurance plans on the Closing Date, Seller shall maintain and continue coverage through and including June 30, 2005, at no cost or expense to Purchaser, the Company or such employees or dependents, of each such employee and dependents in the same manner as provided immediately prior to the Closing Date.

(c)If Seller maintains a group health plan, then Seller will to the extent, and for the entire period necessary, satisfy the requirements of Code Section 4980 and the group health plan requirements of Chapter 100 of the Code (collectively, “COBRA”).

(d)Within thirty (30) days following the Closing, Seller will assume from the Company all the liabilities and obligations of the Company under that certain Exclusive Retainer Agreement, dated January 1, 2004, between Mr. DiGregorio and the Company (the “DiGregorio Retainer Agreement”).  Purchaser will cause the Company to reasonably cooperate with Seller in effecting this assumption.  Neither Purchaser nor the Company will have any liability or obligation following the Closing under the DiGregorio Retainer Agreement.

ARTICLE VI
CONDITIONS TO CLOSING

Section 6.1Conditions to Each Party’s Obligation Under this Agreement.  The respective obligations of (i) Purchaser to purchase and pay for the Shares and (ii) Seller to sell the Shares, at the Closing are subject to the satisfaction or waiver of the following conditions on or prior to the Closing Date:

(a)The receipt of any required approvals required by a Governmental Body under applicable Law for the consummation of the transactions contemplated by this Agreement and the expiration or termination of any applicable waiting period with respect thereto;

(b)All consents, approvals and waivers from third parties required to be obtained to consummate the transactions contemplated by this Agreement shall have been obtained; and

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(c)The Closing will not violate any injunction, order or decree of any court or governmental body having competent jurisdiction.

Section 6.2Conditions to the Obligations of Purchaser Under this Agreement.  The obligations of Purchaser to purchase and pay for the Shares at the Closing are subject to the satisfaction or waiver of the following conditions on or prior to the Closing Date:

(a)All representations and warranties of Seller shall be true and correct as of the Effective Date (subject to Seller’s right to cure any inaccuracy or breach of any representation or warranty set forth herein) and at and as of the Closing, with the same force and effect as though made on and as of the Closing;

(b)On the Closing Date, no Proceeding (excluding any such matter initiated by Seller or any of its Affiliates) shall be pending or threatened before any Governmental Body or private tribunal of competent jurisdiction seeking to enjoin or restrain the consummation of the Closing or recover substantial damages from Seller or Purchaser or any of their respective Affiliates resulting therefrom; and

(c)Seller shall have performed all obligations and agreements and complied with all covenants contained in this Agreement to be performed or complied with by it prior to the Closing Date.

Section 6.3Conditions to the Obligations of Seller Under this Agreement.  The obligation of Seller to sell its Shares at the Closing is subject to the satisfaction or waiver of the following conditions on or prior to the Closing Date:

(a)All representations and warranties of Purchaser contained herein shall be true and correct as of the Effective Date (subject to Purchaser’s right to cure any inaccuracy or breach of any representation or warranty set forth herein) and at and as of the Closing, with the same force and effect as though made on and as of the Closing; and

(b)Purchaser shall have performed all obligations and agreements and complied with all covenants contained in this Agreement to be performed or complied with by it prior to the Closing Date.

ARTICLE VII
TERMINATION; AMENDMENT; WAIVER

Section 7.1Termination.

(a)This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing Date:

(i)By mutual written consent executed by the Parties;

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(ii)By Purchaser if there is an inaccuracy or breach of any representation, warranty or covenant of Seller set forth in this Agreement which breach has not been cured within thirty (30) days following receipt by Seller of written notice of such breach and which breach results in or can reasonably be anticipated to result in a Material Adverse Effect on the Company;

(iii)By Seller if there is an inaccuracy or breach of any representation, warranty or covenant of Purchaser set forth in this Agreement which breach has not been cured within thirty (30) days following receipt by Purchaser of written notice of such breach and which breach results in or can reasonably be anticipated to result in a Material Adverse Effect on the Company; or

(iv)By Purchaser or Seller if any court of competent jurisdiction in the United States of America or other (federal or state) governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have not been terminated, dismissed, or otherwise vacated within six (6) months after being issued.

(b)This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing by Purchaser if the amount of the Purchase Price to paid at the time of Closing, after giving effect to any adjustments to the Purchase Price required by Section 1.5(b)(i), is or would be less than $12,000,000.00.  But, if Purchaser does not terminate this Agreement pursuant to this Section, then notwithstanding Section 1.5(b)(i) but subject to Section 1.5(b)(ii), the amount of the Purchase Price paid at the time of the Closing, as adjusted to the Closing Date, shall not be less than $12,000,000.00.  However, nothing in this Agreement restricts the Purchase Price from being reduced below $12,000,000.00 based on adjustments required under Section 1.6 following the Closing Date.

Section 7.2Effect of Termination.  In the event of the termination and abandonment of this Agreement pursuant to Section 7.1, this Agreement shall thereafter become null and void and have no effect, without any liability on the part of any Party or its directors, officers or shareholders, other than the provisions of Section 5.2, ARTICLE VIII and ARTICLE X.

Section 7.3Amendment and Modification.  This Agreement may be amended, modified, terminated, rescinded, or supplemented only by written agreement of the Parties.

Section 7.4Extension; Waiver.  At any time prior to the Closing Date, the Parties may (i) extend the time for the performance of any of the obligations or other acts of the other Party hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document, certificate or writing delivered pursuant hereto, or (iii) waive compliance with any of the agreements or conditions contained herein.  Any agreement on the part of any Party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed by or on behalf of such Party.

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ARTICLE VIII
REMEDIES

Section 8.1Remedies for Breach of Representations, Warranties and Covenants of Seller Before the Closing Date.  Upon execution of this Agreement through and including the Closing, the exclusive remedy, for any material inaccuracy or breach of any representation, warranty or covenant in this Agreement by Seller shall be termination of this Agreement by Purchaser in accordance with and subject to Section 7.1(b).

Section 8.2Indemnification by Seller.  Except as otherwise expressly provided in Section 5.1 with respect to Taxes or this ARTICLE VIII, and subject to Section 8.5 and the other limitations stated in this ARTICLE VIII and ARTICLE IX, beginning immediately after the Closing and continuing for the applicable periods after the Closing Date provided in ARTICLE IX, Seller agrees to and shall defend, indemnify and hold harmless Purchaser and the Company and their respective successors, assigns, officers, directors, employees, agents, attorneys, accountants, financial advisers and representatives (the “Purchaser Indemnified Parties”) from and against, and shall reimburse the Purchaser Indemnified Parties for, each and every claim, action, loss, suit, demand, cost, expense, liability, penalty, assessment, judgment, settlement, fine, diminution in value and other damage (including incidental and consequential damages), including, without limitation, reasonable attorney’s fees (collectively, a ”Loss”) incurred by any of the Purchaser Indemnified Parties, relating to, resulting from or arising out of, or any allegation by any third-party of, the following:

(a)Any breach of or inaccuracy in any representation or warranty of Seller set forth in this Agreement or in any of the Transaction Documents;

(b)Any breach or nonfulfillment of any covenant, agreement or other obligation of Seller set forth in this Agreement or in any of the Transaction Documents; or

(c)Without limiting the generality of the preceding provisions of this Section 8.2, any Losses relating to, resulting from or arising out of:

(i)Claims or Proceedings by any of the Company’s directors, officers or employees relating to this Agreement or the transactions contemplated hereby, or claims by any of the Company’s current or former shareholders, directors or officers relating to any matter occurring prior to the Effective Time, including without limitation, claims for reimbursement of expenses or indemnification under the Company’s Organizational Documents or otherwise;

(ii)Subject to Section 5.11, expenses relating to the Replacement Program, and to the extent not duplicative, warranty and related claims or Proceedings with respect to the MTI Transmitter Systems sold and installed by the Company prior to the Effective Time (the ”Transmitter Warranty Claims”);

(iii)Claims or Proceedings by, or on behalf of, Scott Armstrong, or any of his agents, successors, assigns, heirs or legal representatives, relating to (i) his employment or

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termination of employment with the Company (including, without limitation, the entering into the Armstrong Release or the payments and reimbursements due to Scott Armstrong under the Armstrong Release, or (ii) the Retention and Change of Control Agreement, dated April 11, 2005, between the Company and Scott Armstrong (collectively, the ”Armstrong Claims”);

(iv)Claims or Proceedings by, or on behalf of, Foltz, or any of his successors, assigns, heirs or legal representatives, relating to (1) his employment with the Company (including, without limitation, under the Employment Agreement), subject to, following the Closing the Company’s compliance with its obligations under the Employment Agreement and not violating applicable Laws with respect to Foltz’s employment, or (2) without limiting the generality of the preceding clause (1), Claims or Proceedings under Section 3.3, Section 3.4(a), Section 3.4(b) (but limited only to Claims, if any, as a result of differences between the “401(k) plan” in effect prior to the Effective Time and the “401(k) plan” in effect after the Effective Time, or Section 3.5 of the Employment Agreement, or (3) Claims or Proceedings related to or arising out of the allegations in that certain letter dated June 8, 2005 from Brett B. Flagg to James C. Wisener, a true, accurate and complete copy of which has been made available to Purchaser prior to the Closing Date, but only to the extent the allegations in the letter apply to acts or omissions prior to or at the Closing (collectively, the “Foltz Claims”);

(v)Any of the following matters disclosed in the Seller Schedules (collectively, the “Disclosed Matters”):  The conduct of the utility aggregation business in Texas without a Governmental Authorization issued by the Texas Public Utility Commission or other applicable Government Body.

The foregoing matters giving rise to the rights of the Purchaser Indemnified Parties to indemnification hereunder are referred to as the “Purchaser Claims”.

With respect to matters not involving any Proceeding brought or asserted by third-parties, within ten (10) days after notification from Purchaser supported by reasonable documentation setting forth the nature of the circumstances entitling Purchaser to indemnity hereunder, Seller, at no cost or expense to Purchaser, shall diligently commence resolution of such matters in a reasonably acceptable manner and shall diligently and timely prosecute such resolution to completion.  With respect to those claims that may be satisfied by payment of a liquidated sum of money, including, without limitation, claims for reimbursement of expenses incurred in connection with any circumstances entitling Purchaser to indemnity hereunder, Seller shall pay the full amount so claimed to the extent supported by reasonable documentation within fifteen (15) days of such resolution.  If litigation or any other Proceeding is commenced or threatened by any third-party for which Purchaser is entitled to indemnification under this Section 8.2, the provisions of Section 8.4 shall control.

Section 8.3Indemnification by Purchaser.  Except as otherwise expressly provided in this ARTICLE VIII, Purchaser agrees to and shall defend, indemnify and hold harmless Seller from and against, and shall reimburse Seller and each of Seller’s successors, assigns, officers, directors, employees, agents, attorneys, accountants, financial advisors, and representatives

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(the ”Seller Indemnified Parties”) for, each and every Loss, relating to, resulting from or arising out of, or any allegation by any third-party of, the following:

(a)Any breach of inaccuracy in any representation or warranty of Purchaser set forth in this Agreement or in any of the Transaction Documents;

(b)Any breach or nonfulfillment of any covenant, agreement or other obligation of Purchaser set forth in this Agreement or in any of the Transaction Documents; or

(c)To the extent applicable, any compliance or non-compliance by the Company on or after the Closing Date with the Worker Adjustment and Retraining Notification Act or any similar state or local Law;

(d)The failure to obtain (or the refusal to grant) the Consent of or required by or pursuant to, as the case may be, those Persons listed or referred to in Schedule 2.6 which have not been obtained prior to the Closing Date, except for those Consents indicated on Schedule 2.6 as being obtained on or prior to the Closing Date;

(e)Any Proceeding relating to events, conditions, operations, facts, circumstances or acts of Purchaser, the Company or any of their respective Affiliates which shall occur subsequent to the Closing Date, other than any Proceeding relating to this Agreement or the transactions contemplated by this Agreement, or as contemplated by this Agreement as being the responsibility or obligation of Seller following the Closing.

With respect to matters not involving Proceedings brought or asserted by third parties, within ten (10) days after notification from Seller or the Company supported by reasonable documentation setting forth the nature of the circumstances entitling such party to indemnity hereunder, Purchaser, at no cost or expense to such party shall diligently commence resolution of such matters in a reasonably acceptable manner and shall diligently and timely prosecute such resolution to completion.  With respect to those claims that may be satisfied by payment of a liquidated sum of money, Purchaser shall pay the amount so claimed to the extent supported by reasonable documentation within fifteen (15) days of such resolution.  If litigation or any other Proceeding is commenced or threatened by any third-party for which Seller is entitled to indemnification under this Section 8.3, the provisions of Section 8.4 shall control.

Section 8.4Notice and Defense of Third-Party Claims.  If any Proceeding shall be brought or asserted by a third-party against an indemnified party or any successor thereto (the “Indemnified Person”) in respect of which indemnity may be sought under this ARTICLE VIII from an indemnifying person or any successor thereto (the “Indemnifying Person”) pursuant to any Proceeding, the Indemnified Person shall give prompt written notice of such Proceeding to the Indemnifying Person who shall either assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Person and the payment of all reasonable expenses, or notify the Indemnified Person of its election to tender its maximum liability, if limited, under this Agreement for such claim to the Indemnified Person in full and complete satisfaction and release of its obligation under ARTICLE VIII; provided, that any delay or failure

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so to notify the Indemnifying Person shall relieve the Indemnifying Person of its obligations hereunder only to the extent, if at all, that it is prejudiced by reason of such delay or failure.  In no event shall any Indemnified Person be required to make any expenditure or bring any cause of action to enforce the Indemnifying Person’s obligations and liability under and pursuant to the indemnifications set forth in this ARTICLE VIII.  The Indemnified Person shall have the right to employ separate counsel in any of the foregoing Proceedings and to participate in the defense thereof, but the reasonable fees and expenses of such counsel shall be at the expense of the Indemnified Person if there exist actual conflicts of interest which make representation by the same counsel inappropriate.  The Indemnified Person’s right to participate in the defense or response to any Proceeding should not be deemed to limit or otherwise modify its obligations under this ARTICLE VIII.  In the event that the Indemnifying Person, within twenty (20) days after notice of any such Proceeding, fails to assume the defense thereof, the Indemnified Person shall have the right to undertake the defense, compromise or settlement of such Proceeding for the account of and at the expense of the Indemnifying Person, subject to the right of the Indemnifying Person to assume the defense of such Proceeding with counsel reasonably satisfactory to the Indemnified Person at any time prior to the settlement, compromise or final determination thereof.  Notwithstanding anything in this ARTICLE VIII to the contrary, the Indemnifying Person shall not, without the Indemnified Person’s prior written consent (which consent shall not be unreasonably withheld or delayed), settle or compromise any Proceeding or consent to the entry of any judgment with respect to any Proceeding; provided, however, if the Indemnified Person withholds its consent to a settlement involving monetary consideration only, the Indemnifying Person may notify the Indemnified Person of its election to tender the monetary amount of the proposed settlement to the Indemnified Person in full and complete satisfaction and release of its obligation under ARTICLE VIII; and provided, further, the Indemnifying Party may settle or compromise any Proceeding or claim asserted with respect to Transmitter Warranty Claims asserted by third-party(ies), except to the extent covered by the Replacement Program and Section 5.11.

Section 8.5Limitations of Liability.

(a)An Indemnifying Person shall have no liability under this ARTICLE VIII unless written notice of a claim for indemnity, or written notice of specific facts as to which an indemnifiable Loss is expected to be incurred, shall have been given within the applicable period provided in ARTICLE IX.

(b)Notwithstanding any other provision of this Agreement to the contrary, the aggregate liability of Seller under this Agreement shall not exceed (i) with respect to breaches or the inaccuracy of any representations or warranties contained in Section 2.1, Section 2.2, Section 2.3, Section 2.4, Section 2.6, Section 2.11, Section 2.16 or Section 2.30 an amount equal, in the aggregate, to the Purchase Price, or (ii) with respect to any of the other representations or warranties in ARTICLE II of this Agreement, the aggregate amount of $2,000,000.00.  This Section 8.5(b) shall not apply to limit the liability of Seller for any of the Retained Seller Liabilities or Tax Claims.

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As used in this Agreement, the term “Retained Seller Liabilities” means:  (i) payment of the Purchase Price or any adjustments thereto under Section 1.5 or Section 1.6, (ii) the Transmitter Warranty Claims, (iii) the Armstrong Claims, (iv) the Foltz Claims, (v) Tax Claims, and (vi) the Disclosed Matters.

(c)Notwithstanding any other provision of this Agreement to the contrary, but subject to the last sentence of this Section 8.5(c), Seller shall be liable for indemnification under this Agreement only to the extent that the amount of any indemnifiable Loss, individually or in the aggregate with all other such Losses covered by this Agreement, exceeds $75,000.00 (the “Basket Amount”), and in such event, Seller shall be liable only for the amount of all such Losses that exceed the Basket Amount up to the applicable indemnification cap under Section 8.5(b).  But, this Section 8.5(c) shall not apply to limit the liability of Seller for any of the Retained Seller Liabilities or Tax Claims.

(d)Notwithstanding any other provision of this Agreement to the contrary, if Seller has committed fraud, there shall be no limitations under this Agreement on Seller’s liability for indemnity or otherwise.

(e)Purchaser shall use commercially reasonable efforts to mitigate any Loss suffered, incurred or sustained by Purchaser arising out of any matter for which Purchaser is entitled to indemnification herein, upon Purchaser having obtained actual knowledge of such breach by Seller.  In the event that Purchaser shall fail to make such commercially reasonable efforts to mitigate such Loss, then notwithstanding anything else to the contrary contained herein, Seller shall not be required to indemnify Purchaser for any Loss that could reasonably be expected to have been avoided had Purchaser made such efforts.

(f)In calculating the amount of any Loss for which any Indemnifying Person is liable under this ARTICLE VIII, there shall be deducted (i) the amount of any insurance recoveries, excluding any amounts which are in effect self-insured whether through retention amounts or otherwise, the Indemnified Person in fact receives as a direct consequence of the circumstances to which the Loss related or from which the Loss resulted or arose; and (ii) any indemnification, contribution or other similar payment actually recovered by the Indemnified Person from any third-party with respect thereto.  The Indemnified Person agrees to first make claim against any applicable insurance coverage, including, if applicable, the insurance coverage for the Company to seek recovery for any Loss, and the Indemnifying Person shall have the right to pursue such recovery against any such insurance coverage in the name of the insured.  Seller, Purchaser and the Company hereby mutually waive all express and/or implied subrogation rights, and assignment of such rights, against each other in regard to any such insurance claim. The above-required waivers shall also extend to all Affiliates of Seller, Purchaser, and the Company, and their respective officers, directors, agents, and employees.  Any such amounts or benefits received by an Indemnified Person with respect to any indemnity claim after it has received an indemnity payment hereunder shall be promptly paid over to the Indemnifying Person, but not in excess of the amount paid by the Indemnifying Person to the Indemnified Person with respect to such claim.  For purposes of determining the insurance recoveries, if Purchaser elects not to maintain insurance coverage identical to the insurance coverage of the

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Company maintained by Seller as of the Closing Date, Purchaser and the Company shall be deemed to have received insurance benefits equal to the greater of the insurance benefits Purchaser and/or Company, as the case may be, would have received had it maintained such insurance policies in effect after the Closing or the insurance benefits it actually receives.

(g)In the event that (i) any condition set forth in ARTICLE VI is not satisfied, (ii) the failure of such condition to be satisfied is waived in writing by the Party or Parties entitled to the benefit of such condition, and (iii) the Parties nevertheless consummate the transactions contemplated by this Agreement at the Closing, then the Parties shall be deemed to have waived any claim for Loss or other relief only to the extent that such Loss or other relief relates solely and directly to such condition that was so waived.

(h)NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, ABSENT FRAUD NO PARTY HERETO SHALL HAVE ANY LIABILITY UNDER THIS AGREEMENT FOR CONSEQUENTIAL DAMAGES (SUCH AS LOSS OF PROFIT), OR, MULTIPLE, TREBLE, EXEMPLARY OR PUNITIVE DAMAGES OF ANY TYPE UNDER ANY CIRCUMSTANCES REGARDLESS OF WHETHER SUCH DAMAGES MAY BE AVAILABLE UNDER TEXAS LAW, THE LAW OF ANY OTHER STATE, OR FEDERAL LAW.

Section 8.6Exclusive Remedies.

(a)Except with respect to Tax Claims (which are governed solely by ARTICLE IV), and absent fraud, the remedies of the Parties specifically provided for by this ARTICLE VIII shall be the sole and exclusive remedies of the Parties for (i) any breach or inaccuracy of the representations and warranties contained in this Agreement or any of the Transaction Documents, or (ii) the failure to perform any covenants, agreements or obligations contained in this Agreement, any Transaction Document or in any other agreement or document furnished or delivered pursuant hereto.

(b)Without limiting the generality of the foregoing provisions of Section 8.6(a), the Parties acknowledge and agree that, before the Closing Date, Section 8.1 provides the exclusive remedies for any material breach or inaccuracy of the representations, warranties and covenants of Seller contained in this Agreement.

Section 8.7Mediation.  Before either Party may initiate any suit, arbitration or other Proceeding, the Parties pledge to attempt first to resolve the controversy or claim arising out of or relating to this Agreement (“Dispute”) by mediation before a mutually acceptable mediator within thirty (30) days after either Party first gives notice of mediation.  Mediation shall be conducted in Dallas, Texas and shall be conducted and completed within sixty (60) days following the date either Party first gives notice of mediation.  The fees and expenses of the mediator shall be shared equally by the Parties.  The mediator shall be disqualified as a witness, expert or counsel for any party with respect to the Dispute and any related matter.  Mediation is a compromise negotiation and shall constitute privileged communications.  The entire mediation process shall be confidential and the conduct, statements, promises, offers, views and opinions of

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the mediator and the Parties shall not be discoverable or admissible in any legal Proceeding for any purpose; provided, however, that evidence which is otherwise discoverable or admissible shall not be excluded from discovery or admission as a result of its use in the mediation.

Section 8.8Holdback Fund.

(a)Escrow of Holdback Fund.  At the Closing, Purchaser shall cause the Holdback Fund to be delivered, by wire transfer of immediately available funds to and directly deposited with, JPMorgan Chase Bank, a National Association (the “Escrow Agent”), on behalf of Seller, in escrow for the account and future potential benefit of Seller.  The Holdback Fund shall be held by the Escrow Agent pursuant to the terms and conditions of an Escrow Agreement in the form attached hereto as Exhibit B (the “Escrow Agreement”).  The costs and expenses of the Escrow Agent shall be paid by Purchaser.

(b)Procedure for Claims Against Holdback Fund.

(i)The Holdback Fund shall be held in escrow from the Closing Date through March 31, 2006 (the “Holdback Period”).

(ii)In addition to Purchaser’s rights under Section 5.11, if, during the Holdback Period, any Purchaser Indemnified Party believes that it is entitled to indemnification with respect to any Tax Claim or Purchaser Claim, subject to Section 5.11, the Purchaser Indemnified Party shall give Seller notice thereof by delivering to Seller, no later than the last day of the Holdback Period, a certificate signed by the Purchaser Indemnified Party (a “Claim Certificate”) stating that Losses exist pursuant to Section 4.2 or Section 8.2, as the case may be, and specifying such Tax Claim or Purchaser Claim in reasonable detail, to the extent it has actual knowledge thereof.

(iii)Seller shall have a period of fifteen (15) days after such delivery of the Claim Certificate, to (A) acknowledge that such Tax Claim or Purchaser Claim, as the case may be, is covered by the indemnification provisions of Section 4.2 or Section 8.2, as applicable, and that the amount claimed is correct, in which case the Purchaser Indemnified Party shall have the right to receive, by making a written request therefor to the Escrow Agent, the amount of such Tax Claim or Purchaser Claim, as the case may be, from the Holdback Fund, or (B) deny that the amount claimed is correct, in which case Seller shall indemnify, defend and hold the Purchaser Indemnified Party harmless with respect to such Tax Claim or Purchaser Claim, as the case may be, as provided in Section 4.2 or Section 8.2, as applicable, or (C) deny that the Tax Claim or Purchaser Claim, as the case may be, is covered by the indemnification provisions of Section 4.2 or Section 8.2, as applicable, in which case, without waiving or limiting its rights to indemnification pursuant to Section 4.2 or Section 8.2, as applicable, the Purchaser Indemnified Party shall have the sole and exclusive right to determine whether to pay or contest any amount claimed by a third-party and relating to the Tax Claim or Purchaser Claim, as the case may be, and, subject to resolution of whether and to what extent such Tax Claim or Purchaser Claim, as the case may be, is covered by such indemnification provisions, the Escrow Agent shall retain in the Holdback Fund an amount reasonably sufficient to pay such unresolved Tax Claim or

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Purchaser Claim, as the case may be, if required pursuant to Section 8.8(e) hereof.  The failure of Seller to give such notice within such fifteen (15) day period shall be deemed to be an acknowledgment that such Tax Claim or Purchaser Claim is covered by the indemnification provisions of Section 4.2 or Section 8.2, as the case may be, and that the amount of the Tax Claim or Purchaser Claim is correct.

(c)Release of Holdback Fund.  Subject to the provisions of this Agreement and the Escrow Agreement, the Holdback Fund shall be held in escrow until the earlier of (i)  the date Purchaser and Seller agree such funds may be released and paid to Seller pursuant to Section 8.8(e), and (ii) the fifth (5^th) Business Day after the last day for the escrow of the Holdback Fund as specified in Section 8.8(b)(i).

(d)Delivery to Seller.  No later than five (5) Business Days after the date of release of the Holdback Fund pursuant to Section 8.8(c), the Escrow Agent shall deliver to Seller  (i)  any remaining portion of the Holdback Fund after payment of any amounts therefrom to Purchaser pursuant to Section 8.8(b) or Section 8.8(c), plus (ii)  the aggregate amount of any remaining portion of interest or other income earned thereon during the period such funds were held in escrow.

(e)Exception from Release.  If there is any Tax Claim or Purchaser Claim with respect to which Purchaser has given notice to Seller prior to the earliest date of release of the Holdback Fund pursuant to Section 8.8(c), which is not then resolved, the amount of the Holdback Fund reasonably sufficient to pay such unresolved Tax Claim or Purchaser Claim, as the case may be, may be retained in escrow, subject to the Escrow Agreement, if desired by Purchaser in its sole discretion.  If Purchaser desires that any portion of the Holdback Fund be retained pursuant to this Section 8.8(e), it shall give notice thereof to Seller and the Escrow Agent no later than the subject release date.  Upon resolution of the Tax Claim or Purchaser Claim, as the case may be, the portion of the Holdback Fund retained pursuant to this Section 8.8(e) shall be delivered to Seller in the same manner as provided herein for funds not retained.

ARTICLE IX
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND INDEMNITIES

Section 9.1Survival of Representations, Warranties and Indemnities.  The Parties agree that their respective representations, warranties and indemnities contained in this Agreement or any of the Transaction Documents shall survive as follows:  (a) any claim related to representations, warranties and indemnities contained in Section 2.1, Section 2.2, Section 2.3, Section 2.4, Section 3.1 or Section 3.2 shall survive the Closing and must be commenced within two (2) years after the Closing Date; (b) any claim related to representations, warranties and indemnities contained in Section 2.20 or Section 8.2(c)(ii) shall survive the Closing and must be commenced within the shorter of (i) one year after the Closing Date, or (ii) one year after the date of installation of applicable product or the performance of the services to which Sections 2.20 and 8.2(d)(ii) relate; (c) any claim related to representations, warranties and indemnities contained in Section 2.11 or ARTICLE IV shall survive the Closing and must be commenced within the longer of three (3) years after the Closing Date and the period of the applicable statute

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of limitations; (d) any claims related to the indemnities in Section 8.2(c)(iv) shall survive the Closing and must be commenced within the period of the applicable statue of limitations; (e) any claims related to the indemnities in Section 8.3(e) shall survive the Closing and must be commenced within the longer of four (4) years after the Closing Date and the period of the applicable statue of limitations and (f) any claim related to any other representations, warranties and indemnities not specified in the preceding clauses (a) through (e) shall survive the Closing and must be commenced within one (1) year after the Closing Date.

ARTICLE X
FORCE MAJEURE

Section 10.1Force Majeure.  No Party shall be liable to the other Party, its Subsidiaries, Affiliates, or any other Person in privity with such other Party, its Subsidiaries or Affiliates, for any delays or damage or any failure to act hereunder (other than the failure to pay money) that may be due, occasioned, or caused by reason of any Laws promulgated by any federal, state, or local Governmental Body or any court of law or by the rules, regulations, or orders of any public body or official purporting to exercise authority or control respecting the activities and operations contemplated hereunder, or due, occasioned, or caused, directly or indirectly, by strikes, attacks of terrorists, wars (declared or undeclared), insurrections, civil unrests, hostilities, action of the elements, weather or water conditions, inability to obtain critical materials or supplies, or any other cause beyond the control of the non-performing Party.  In the event of the occurrence of any of the foregoing, the obligations of the non-performing Party shall be suspended during the continuance of any such event or condition, and the time permitted for performance under this Agreement shall be extended for a period of time equal to the period of such suspension.

Section 10.2Termination Upon Extended Force Majeure.  In the event that either Party cannot perform its obligations hereunder for a period of ninety (90) consecutive days due to an event of Force Majeure, the Parties will meet promptly to endeavor to reach a mutual agreement on the course of action to be taken.  If the Parties cannot mutually agree on such course of action, the non-affected Party may, at its sole option, serve notice terminating this Agreement, effective upon the receipt of such notice by the affected Party.

ARTICLE XI
MISCELLANEOUS

Section 11.1Expenses.  All costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the Party incurring such costs and expenses.  Seller shall pay from its funds, and not the funds of the Company, all costs and expenses incurred by either Seller or the Company in connection with the transactions contemplated by this Agreement.

Section 11.2Brokers and Finders.  Except for the Persons identified in Schedule 2.30, all negotiations on behalf of Purchaser and Seller relating to this Agreement and the transactions contemplated by this Agreement have been carried on by the Parties hereto and their respective

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agents directly without the intervention of any other person in such manner as to give rise to any claim against Purchaser or Seller for financial advisory fees, brokerage or commission fees, finder’s fees or other like payment in connection with the consummation of the transactions contemplated hereby.

Section 11.3Entire Agreement; Assignment.  This Agreement (a) constitutes the entire agreement among the Parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the Parties or any of them with respect to the subject matter hereof, and (b) shall not be assigned by operation of law or otherwise, without consent of the other Party.

Section 11.4Waiver; Consents.  Any failure of a Party to comply with any obligation, covenant, agreement or condition herein may be waived by the Party affected thereby only by a written instrument signed by the Party granting such waiver.  No waiver, or failure to insist upon strict compliance, by any Party of any condition or any breach of any obligation, term, covenant, representation, warranty or agreement contained in this Agreement, in any one or more instances, shall be construed to be a waiver of, or estoppel with respect to, any other condition or any other breach of the same or any other obligation, term, covenant, representation, warranty or agreement.  Whenever this Agreement requires or permits consent by or on behalf of any Party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver.

Section 11.5Severability.  The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which  shall remain in full force and effect.

Section 11.6Notices.  All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed delivered at the time delivered by hand, one Business Day after transmission by facsimile (with confirmation copy sent by regular U.S. mail), or three (3) Business Days after placement in the United States Mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed as follows:

if to Seller:

Mr. Peter Moerbeek

President and Chief Operating Officer

Southwest Water Company

One Wilshire Building

624 S. Grand Avenue

Los Angeles, CA  90017

Telecopy No. (213) 929-1888

with copy (which will not constitute notice) to:

John F. Cermak, Esq.

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Jenkens & Gilchrist, LLP

12100 Wilshire Boulevard, 15^th Floor

Los Angeles, CA  90025

Telecopy No. (310) 820-8859

if to Purchaser:

Michael S. Quigley, President

Minol, L.P.

15280 Addison Road, Suite 100

Dallas, TX 75001

Telecopy No. (972) 386-7711

with copy (which will not constitute notice) to:

Jonathan K. Henderson, Esq.

Hughes & Luce LLP

1717 Main Street, Suite 2800

Dallas, TX 75201

Telecopy No. (214) 939-5849

or to such other address as the person to whom notice is given may have previously furnished to the others in writing in the manner set forth above (provided that notice of any change of address shall be effective only upon receipt thereof).

Section 11.7Governing Law.  Any dispute between the Parties relating to this Agreement or any of the other Transaction Documents will be construed under and in accordance with the laws of the State of Texas applicable to contracts between residents of Texas that are to be wholly performed within such state, without regard to conflicts of law principles.

Section 11.8Jurisdiction and Venue.  Any process against Purchaser or Seller in or in connection with, any Proceeding arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement may be served personally or by certified mail at the address set forth in Section 11.6 with the same effect as though served on it or him personally.  Purchaser and Seller hereby irrevocably submit in any Proceeding arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement to the exclusive jurisdiction and venue of a United States District Court located in Dallas, Texas.

Section 11.9Waiver of Jury Trial.  EACH OF PURCHASER AND SELLER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY AND ALL RIGHTS IT MAY HAVE TO TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OR OMISSIONS OF PURCHASER OR SELLER RELATING TO THIS AGREEMENT, PROCEEDING OR OTHER LITIGATION BROUGHT TO RESOLVE ANY DISPUTE ARISING UNDER, ARISING OUT OF, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER AGREEMENT, DOCUMENT

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OR INSTRUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITH.

Section 11.10Descriptive Headings.  The descriptive headings are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.

Section 11.11Parties in Interest; No Third-Party Beneficiary.  Except as contemplated in ARTICLE VIII for Indemnified Persons other than Seller and Purchaser, this Agreement shall be binding upon and inure solely to the benefit of each Party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement.

Section 11.12Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement.

Section 11.13Incorporation by Reference.  Any and all Seller Schedules, schedules, exhibits, annexes, statements, reports, certificates or other documents or instruments referred to herein or attached hereto are incorporated herein by reference hereto as though fully set forth at the point referred to in the Agreement.

Section 11.14Certain Definitions.  For the purposes of this Agreement, the following terms shall have the meanings specified or referred to below whether or not capitalized when used in this Agreement.

(a)“Affiliate” means, with respect to any Person, any Person that, directly or indirectly, controls, is controlled by, or is under common control with, the Person in question.  For the purposes of this definition, “control” (including “controlling,” “controlled by” and “under common control with”) as used with respect to any person or other entity, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person or other entity, whether through the ownership of voting securities, by contract or otherwise.

(b)“Billing Unit” means an individual apartment, suite or similar unit covered by a Submetering Contract for which meter reading, billing (including allocation billing and ratio billing) or collection services have been furnished prior to the Cut-Off Time and for which a valid invoice for billing services has been presented prior to the Cut-Off Time to the occupant for payment or, if the unit is vacant, to the client or customer under the Submetering Contract that is paying the billing fee while the unit is vacant.  In order to qualify as a “Billing Unit”, as of the Cut-Off Time, the Submetering Contract covering the Billing Unit must not have been terminated and no written notice of termination can have been received by the Company or any of its Affiliates.

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(c)“Business” means the business of selling meter reading equipment and furnishing meter reading, billing (including allocation billing and ratio billing), collection, installation, construction and maintenance services for owners of multi-unit residential dwellings and commercial office buildings with respect to the water, sewer, electrical and other utilities provided to the occupants of the dwellings and buildings.

(d)“Business Day” means any day other than a Saturday, a Sunday or a holiday on which national banking associations in the State of Texas are closed.

(e)“Code” means the Internal Revenue Code of 1986, as amended.  All citations to the Code or to the regulations promulgated thereunder shall include any amendments or any substitute or successor provisions thereto.

(f)“Consent” means any approval, consent, ratification, waiver, notification, license, permit, or other authorization (including any Governmental Authorization).

(g)“Contract” means any contract, agreement, obligation, promise, purchase order, sales order, license, lease, commitment, arrangement, or undertaking (whether written or oral, and whether express or implied) that is legally binding.

(h)“Cut-Off Time” means 5:00 P.M. (Westminster, Colorado time), on the last Business Day prior to the Closing Date.

(i)“Environment” means all air, surface water, groundwater, or land, including land surface or subsurface, including all fish, wildlife, biota and all other natural resources.

(j)“Environmental Law” means any and all Laws (including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601, et. seq.) relating to the protection of health and the Environment, worker health and safety, and/or governing the handling, use, generation, treatment, storage, transportation, disposal, manufacture, distribution, formulation, packaging, labeling, or Release of Hazardous Substances, whether now existing or subsequently amended or enacted, and the state analogies thereto, all as amended or superseded from time to time; and any common law doctrine, including, but not limited to, negligence, nuisance, trespass, personal injury, or property damage related to or arising out of the presence, Release, or exposure  to a Hazardous Substance.

(k)“GAAP” means generally accepted accounting principles in the United States, applied on a basis consistent with the Company Financial Statements.

(l)“Governmental Authorization” means any approval, consent, ratification, notification, franchise, license, permit, waiver, product registration, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement.

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(m)“Governmental Body” means any (i) nation, state, county, city, town, village, district or other jurisdiction of any nature, (ii) federal, state, local, municipal, foreign or other government, (iii) governmental or quasi-governmental authority of any nature (including any governmental agency, commission, branch, department, official, or entity and any court or other tribunal), (iv) multi-national organization or body, or (v) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature.

(n)“Hazardous Substance” means petroleum, petroleum hydrocarbons or petroleum products, petroleum by-products, radioactive materials, asbestos or asbestos-containing materials, gasoline, diesel fuel, pesticides, radon, urea formaldehyde, lead or lead-containing materials, polychlorinated biphenyls; and any other chemicals, materials, substances or wastes in any amount or concentration which are now included in the definition of “hazardous substances,” “hazardous materials,” “hazardous wastes,” “extremely hazardous wastes,” “restricted hazardous wastes,” “toxic substances,” “toxic pollutants,” “pollutants,” “regulated substances,” “solid wastes,” or “contaminants” or words of similar import, under any Environmental Law.

(o)“Inovonics Transmitter System” means the following group of Inovonics transmitter components / part numbers:  225-008 (Inovonics DCC), 260-004 (repeaters-Inovonics), 450-022 (Inovonics serial receiver), 950-016 (Transmitter Inovonics) and 950-017 (Transmitter Inovonics).

(p)“Knowledge” or “Known” means, when used with reference to Seller or the Company, that Seller or the Company shall be deemed to have “knowledge” of or to have “known” a particular fact or other matter only if any of Peter Moerbeek, James Wisener, Linda Moore or Scott Armstrong has current, actual knowledge or knows of such fact or other matter.

(q)“Liens” means all mortgages, deeds of trust, claims, liens, judgments, security interests, pledges, leases, conditional sale contracts, rights of first refusal, options, charges, liabilities, obligations, agreements, powers of attorney, limitations, reservations, restrictions and other encumbrances or adverse claims of every kind and nature, including any restriction on use, voting, transfer, receipt of income or exercise of any attribute of ownership.

(r)“Material Adverse Effect” means any adverse change, singularly or in the aggregate when taken together with all other adverse changes, in the properties or assets, earnings, financial condition, results of operations, business or prospects of the Company or Purchaser, as applicable, from the Effective Date, Closing Date or such other date specified in the applicable provision of this Agreement, of more than $200,000.00.  But, none of the following changes may be considered in determining whether any particular change has a Material Adverse Effect:  (i) changes in general economic conditions that do not adversely affect the Company or Purchaser, as applicable, relative to other similarly situated Persons; (ii) changes resulting from the announcement and performance of this Agreement and the transactions contemplated hereby and compliance with the covenants set forth herein; (iii) changes or developments in the industries in which the Company or Purchaser, as applicable, operates that

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generally affect all Persons in such industries and do not adversely affect the Company or Purchaser, as applicable,, relative to other similarly situated Persons; (iv) changes or developments in markets or commodity prices that generally affect all entities and do not adversely affect the Company or Purchaser, as applicable,, relative to other similarly situated Persons; (v) changes arising out of the adoption, amendment or issuance, after the Effective Date, of any applicable Laws or any new interpretation of any Laws by any Governmental Body that generally affects all Persons and do not adversely affect the Company or Purchaser, as applicable,, relative to other similarly situated Persons; (vi) changes in any applicable tax Laws or accounting principles that generally affect all Persons and do not adversely affect the Company or Purchaser, as applicable, relative to other similarly situated Persons; or (vii) any changes resulting from a failure to consummate the transactions contemplated by this Agreement, or otherwise resulting from or relating to the taking of any action contemplated by this Agreement.

(s)“MTI Transmitter System” means the following group of MTI transmitter components / part numbers:  225-006 (central station receiver), 260-003 (repeater-pilot LED), 275-013 (computer for central station), 450-012 (isolation module), 450-014 (interface module-white) and 950-015 (transmitter TX2002).

(t)“Ordinary Course of Business” means an action taken by a Person that is:

(i)Consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person; or

(ii)Similar in nature and magnitude to actions customarily taken, without any authorization by the board of directors (or by any Person or group of Persons exercising similar authority), in the ordinary course of the normal day-to-day operations of other Persons that are in the same line of business as such Person.

(u)“Organizational Documents” means, with respect to any entity, the certificate of incorporation, articles of incorporation, certificate of formation, by-laws, articles of organization, limited liability company agreement, limited partnership agreement, formation agreement, joint venture agreement, general partnership agreement or other similar organizational documents of such entity, together with any shareholder agreement, voting agreement or similar agreement among two or more of the equity owners of any such entity.

(v)“Person” means an individual, partnership, joint venture, corporation, limited liability company, trust, association or unincorporated organization, any governmental authority, or any other entity.

(w)“Proceeding” means any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator.

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(x)“Purchaser Group” means and includes Purchaser and, following the Closing, the Company.

(y)“Real Property” means real property owned or leased by the Company as of the Effective Date or the Closing Date, as applicable.

(z)“Release” means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing of a Hazardous Substance into the Environment.

(aa)“Returns” means all returns, declarations, reports, statements, and other documents required to be filed in respect of Taxes (including any information returns), and the term “Return” means any one of the foregoing Returns.

(bb)“Restricted Activity” means engaging in or conducting, as an owner, principal, partner, shareholder, member, manager, consultant or in any other capacity, the business of (A) providing or furnishing water, natural gas, or electricity submeter reading, submeter billing (including allocation billing and ratio billing) or submeter collection services for apartment, suite or similar units, and/or (B) selling or installing submeters for apartment, suite or similar unit and related equipment for providing or furnishing submeter reading services for individual apartment, suite or similar units.

But, the term “Restricted Activity” does not including the following (the “Permitted Activity”):

(i)Any Restricted Activity that a Seller Restricted Person is permitted to perform or required under applicable Laws to perform by any Governmental Body within the geographic areas covered by the certificates of convenience and necessity issued by the Governmental Body to a regulated utility at any time owned by a Seller Restricted Person; or

(ii)Any Restricted Activity that occurs as a result of a Seller Restricted Person:

(A)Acquiring, directly or indirectly, by purchase, merger or otherwise, another Person, or control of another Person, that engages in a Restricted Activity, or

(B)Acquiring, directly or indirectly, all or substantially all of the assets of a business of another Person that engages in a Restricted Activity,

Except the foregoing activity described in clause (A) and (B) are not permitted if such Restricted Activity occurs as a result of a Seller Restricted Person:  (1) acquiring a Target Person by merger with such Target Person; (2) directly acquiring all of the capital stock, limited liability company membership interests, partnership interests (or other equity ownership interests) of a Target Person (but this does not restrict indirectly acquiring such equity interests by virtue of purchasing, merging with or otherwise acquiring the Person that owns or holds the subject equity ownership interests), or (3) directly acquiring all or substantially

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all of the assets of a business of a Target Person (but this does not restrict indirectly acquiring such assets by virtue of acquiring such assets in connection with the acquisition of all or substantially all of the business of a Person that is not a Target Person).

The term “Restricted Activity” also does not include: (x) any business or activity of any Seller Restricted Person, excluding Company, as conducted on the Effective Date and the Closing Date; or (y) the business of any Person (or such Person’s Subsidiaries) that, directly or indirectly, acquires Seller (by merger or otherwise) or control of Seller.

(cc)“Restricted Period” means the period beginning on the Closing Date and ending on the third anniversary of the Closing Date.

(dd)“Restricted Territory” means the geographic area including the continental United States.

(ee)“Seller Restricted Person” means Seller and any Person required under GAAP to be consolidated with Seller for financial statement purposes.

(ff)“Subsidiary” means, when used with reference to an entity, any corporation, partnership or limited liability company, a majority of the outstanding voting securities, partnership interests or membership interests of which are owned directly or indirectly by such entity or any partnership, joint venture or other enterprise in which such entity currently has, directly or indirectly, any controlling equity interest.

(gg)“Target Person” means and includes the following Persons: American Utility Management, Inc. of Hillside, IL; CBSI – An Alliance Data Systems Company of Hillside, IL; Commercial Water and Energy Company of Miami, FL; Conservice, LLC of North Logan, UT; Energy Billing Systems, Inc. of Colorado Springs, CO; Holcutt, Inc. of Dallas, TX; Ista (formally Viterra Energy Services) of San Diego, CA; National Water & Power of Santa Ana, CA; Ocius, LLC of Chicago, IL; Studebaker Submetering, Inc. of Alexandria, VA; and ViaStar Energy, Inc. of Indianapolis, IN.

(hh)“Taxes” means all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties, or other taxes, fees, assessments, or charges of any kind whatever, together with any interest and any penalties, additions to tax, or additional amounts with respect thereof, and the term “Tax” means any one of the foregoing Taxes.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be duly executed on its behalf by its officers thereunto duly authorized, all as of the Effective Date.

SELLER:
SOUTHWEST WATER COMPANY, a Delaware corporation
By:
Name:
Title:
PURCHASER:
MINOL, L.P., a Delaware limited partnership
	By:	MINOL, LLC, a Delaware limited liability company
		By:
			Alexander Lehmann,

LIST OF SCHEDULES AND EXHIBITS

Schedules
Schedule 1.5(c)	–	Leased Vehicles
Schedule 1.5(d)	–	Leased Computer Equipment
Schedule 1.6(b)-A	–	Adjustments to Closing Date Net Working Capital
Schedule 1.6(b)-B	–	Example of Closing Date Net Working Capital
Schedule 1.6(b)-C	–	Accepted Adjustments to Base Working Capital
Schedule 1.6(c)(i)	–	Non-Billing Units
Schedule 2.1(a)	–	Company’s Organization and Qualification
Schedule 2.1(e)	–	Officers and Directors of the Company
Schedule 2.2	–	Company’s Capitalization
Schedule 2.5	–	Violations/Conflicts
Schedule 2.6	–	Consents and Approvals
Schedule 2.7(a)	–	Historical Company Financial Statements
Schedule 2.7(b)	–	Interim Company Financial Statements
Schedule 2.8	–	Absence of Changes
Schedule 2.9	–	Litigation
Schedule 2.11	–	Tax Matters
Schedule 2.13	–	Employment Matters
Schedule 2.14(a)	–	Included Intellectual Property
Schedule 2.14(b)	–	Retained Intellectual Property
Schedule 2.14(d)	—	Infringement of Intellectual Property
Schedule 2.15	–	Environmental Compliance
Schedule 2.16	–	Title to Properties
Schedule 2.17(a)	–	Insurance – List of Policies
Schedule 2.18	–	Licenses and Permits
Schedule 2.19	–	Agreements, Contracts and Commitments
Schedule 2.20	–	Warranties
Schedule 2.20(c)	–	MTI Transmitter Systems
Schedule 2.20(d)	–	Billing Meters Reading “Zero”
Schedule 2.22	–	Material Assets
Schedule 2.24	–	Accounts Receivable
Schedule 2.25(a)	–	Inventories
Schedule 2.25(b)	–	Replacement Transmitters
Schedule 2.26	–	No Undisclosed Liabilities
Schedule 2.27(a)	–	Employee Benefit Plans
Schedule 2.29	–	Customers and Suppliers
Schedule 2.30	–	Brokers
Schedule 2.31	–	Bank Accounts
Schedule 5.8(a)-1	–	Employment Agreement (Greg Foltz)
Schedule 5.8(a)-2	–	Purchaser Commission Schedule

Exhibits
Exhibit A	–	Form of Closing Statement
Exhibit B	–	Form of Escrow Agreement

EXHIBIT A

FORM OF CLOSING STATEMENT

[SEE ATTACHED]

EXHIBIT B

FORM OF ESCROW AGREEMENT

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Anton C. Garnier, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Southwest Water Company;

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:	August 9, 2005	/s/ ANTON C. GARNIER
		Anton C. Garnier
		Chief Executive Officer

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EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Cheryl L. Clary, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Southwest Water Company;

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:	August 9, 2005	/s/ CHERYL L. CLARY
		Cheryl L. Clary
		Chief Financial Officer
		(Principal Financial Officer and Chief
		Accounting Officer)

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Southwest Water Company (the “Company”) for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anton C. Garnier, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	August 9, 2005	/s/ ANTON C. GARNIER
		Anton C. Garnier
		Chief Executive Officer

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EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Southwest Water Company (the “Company”) for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cheryl L. Clary, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	August   , 2005	/s/ CHERYL L. CLARY
		Cheryl L. Clary
		Chief Financial Officer
		(Principal Financial Officer and Chief
		Accounting Officer)

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