Empire Water (EWCR) 10-Q 2009 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934
	FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008
OR
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934

Commission file number 000-52256

EMPIRE WATER CORPORATION
(Exact name of registrant as specified in its charter)

NEVADA
(State or other jurisdiction of incorporation or organization)

25 Orchard Road
Lake Forest, California 92630
(Address of principal executive offices, including zip code.)

949-215-1100
(telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 last 90 days.YES [X]    NO [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	[   ]	Accelerated Filer	[   ]
Non-accelerated Filer	[   ]	Smaller Reporting Company	[X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES [   ]    NO [X]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 19,193,300 as of February 12, 2009

PART I – FINANCIAL INFORMATION

EMPIRE WATER CORPORATION
(A Development Stage Company)
BALANCE SHEETS
(Unaudited)
		December 31,			June 30,
		2008			2008
ASSETS
CURRENT ASSETS:
Cash	$	202,004		$	1,316,690
Restricted cash		1,639			1,639
Accounts receivable		7,182			12,193
Prepaid expenses and other current assets		40,017			36,725
Total current assets		250,842			1,367,247
Land and water rights		3,870,000			3,870,000
Property and equipment net of accumulated depreciation
of $74,265 and $36,546, respectively		4,353,132			4,387,489
Deposits		-			100,000
Investments		548,650			-
TOTAL ASSETS	$	9,022,624		$	9,724,736
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITES:
Accounts payable	$	181,258		$	100,363
Other accrued liabilities		21,360			-
Total current liabilities		202,618			100,363
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.00001 par, 100,000,000 shares authorized,
19,193,300 shares issued and outstanding		192			192
Additional paid-in capital		11,846,259			11,194,143
Deficit accumulated during development stage		(3,026,445	)		(1,569,962	)
Total stockholders' equity		8,820,006			9,624,373
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	9,022,624		$	9,724,736
The accompanying notes are an integral part of these financial statements.

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EMPIRE WATER CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
														May 18, 2005
														(Inception)
		Three Months Ended						Six Months Ended						Through
		December 31,						December 31,						December 31,
		2008			2007			2008			2007			2008
Water sales	$	13,728		$	-		$	39,135		$	-		$	72,506
Production costs		25,897			-			57,777			-			106,670
Gross loss		(12,169	)		-			(18,642	)		-			(34,164	)
OPERATING EXPENSES
General and administrative		749,112			3,476			1,445,116			8,930			3,000,666
Depreciation		1,449			-			2,619			-			4,065
Net operating loss		(762,730	)		(3,476	)		(1,466,377	)		(8,930	)		(3,038,895	)
OTHER INCOME (EXPENSES)
Interest income		4,810			42			9,894			42			18,682
Interest expense		-			(916	)		-			(1,832	)		(6,232	)
NET LOSS	$	(757,920	)	$	(4,350	)	$	(1,456,483	)	$	(10,720	)	$	(3,026,445	)
Basic and diluted net loss per
share	$	(0.04	)	$	-		$	(0.08	)	$	-			n/a
Weighted average common
shares outstanding (basic and
diluted)		19,193,300			50,325,909			19,193,300			52,359,604			n/a
The accompanying notes are an integral part of these financial statements.

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EMPIRE WATER CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
May 18, 2005 (Inception) through December 31, 2008
										Deficit
										Accumulated
										During the
	Common						Paid-In			Development
	Shares			Par			Capital			Stage		Totals
Founders shares issued at inception	45,000,000		$	450		$	50		$	- $		500
Net Loss	-			-			-			(10,141	)	(10,141	)
Balances June 30, 2005	45,000,000			450			50			(10,141	)	(9,641	)
Buyback of founders shares	(22,500,000	)		(225	)		(25	)		-		(250	)
Issuance to new director	22,500,000			225			25			-		250
Net Loss	-			-			-			(16,811	)	(16,811	)
Balances, June 30, 2006	45,000,000			450			50			(26,952	)	(26,452	)
Shares issued for cash	9,393,300			94			104,276			-		104,370
Imputed interest	-			-			4,400			-		4,400
Net Loss	-			-			-			(33,066	)	(33,066	)
Balances, June 30, 2007	54,393,300			544			108,726			(60,018	)	49,252
Shares issued for cash	3,800,000			38			4,749,962			-		4,750,000
Stock issuance costs	-			-			(596,224	)		-		(596,224	)
Shares issued for assignment of contract	6,000,000			60			5,879,940			-		5,880,000
Cancellation of founders shares	(45,000,000	)		(450	)		450			-		-
Imputed interest	-			-			1,832			-		1,832
Cancellation of stockholder's loan	-			-			45,421			-		45,421
Stock based compensation	-			-			1,004,036			-		1,004,036
Net Loss	-			-			-			(1,509,944	)	(1,509,944	)
Balances, June 30, 2008	19,193,300			192			11,194,143			(1,569,962	)	9,624,373
Stock based compensation	-			-			652,116			-		652,116
Net Loss	-			-			-			(1,456,483	)	(1,456,483	)
Balances, December 31, 2008	19,193,300		$	192		$	11,846,259		$	(3,026,445	) $	8,820,006
The accompanying notes are an integral part of these financial statements.

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EMPIRE WATER CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
								May 18, 2005
								(Inception)
		Six Months Ended						Through
		December 31,						December 31,
		2008			2007			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,456,483	)	$	(10,720	)	$	(3,026,445	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation		37,719			-			74,265
Stock based compensation		652,116			-			1,656,152
Imputed interest		-			1,832			6,232
Changes in assets and liabilities:
Accounts receivable		5,011			-			(7,182	)
Prepaid expenses and other current assets		(3,292	)		-			(40,017	)
Accounts payable		80,895			1,700			181,258
Other liabilities		21,360			-			21,360
NET CASH USED IN OPERATING ACTIVITIES		(662,674	)		(7,188	)		(1,134,377	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets and land and water rights		(3,362	)		(1,500,000	)		(2,417,397	)
Restricted cash		-			(1,530,265	)		(1,639	)
Deposit made on purchase of fixes assets		-			(300,000	)		-
Cash paid for investment		(448,650	)		-			(548,650	)
NET CASH USED IN INVESTING ACTIVITIES		(452,012	)		(3,330,265	)		(2,967,686	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs		-			3,242,780			4,258,646
Advances from related parties		-			-			45,421
NET CASH PROVIDED BY FINANCING ACTIVITIES		-			3,242,780			4,304,067
NET CHANGE IN CASH AND CASH AND CASH EQUIVALENTS		(1,114,686	)		(94,673	)		202,004
CASH AND CASH EQUIVALENTS - beginning of period		1,316,690			94,673			-
CASH AND CASH EQUIVALENTS - end of period	$	202,004		$	-		$	202,004
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Income taxes paid	$	-		$	-
Interest paid		-			-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for assignment of contract	$	-		$	5,880,000
Accrued liabilities for stock issuance costs		-			53,480
Subscription receivable		-			250,020
Common shares issued		-			450
The accompanying notes are an integral part of these financial statements.

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EMPIRE WATER CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

NOTE 1-BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICY

The accompanying unaudited interim financial statements of Empire Water Corporation (“Empire”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Empire’s Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for fiscal 2008 as reported in the Form 10- K, have been omitted.

Use of estimates– The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ from the estimates.

Cash and Cash Equivalents–For purposes of the statement of cash flows, Empire considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Property and Equipment–Property and equipment consists of land, pipeline, wells and related equipment are stated at cost less accumulated depreciation. Depreciation on pipeline, wells and related equipment are calculated using the straight line method over the estimated useful lives of fifty years.

Impairment of Long-Lived Assets– Empire evaluates long-lived assets and intangible assets for impairment in accordance with SFAS No. 144,Accounting for the Impairment of Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the use of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairment losses were recorded from May 18, 2005 (inception) through December 31, 2008.

Asset Retirement Obligations– Empire accounts for its asset retirement obligations in accordance with SFAS No. 143,Accounting for Asset Retirement Obligationsand Financial Accounting Standard Board Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations(FIN 47). As of September 30, 2008 no asset retirement obligation was deemed necessary.

Maintenance and Repairs– The costs of maintenance and repairs, which are not significant improvements, are expensed when incurred.

Revenue Recognition–Revenues are derived from sales of water from wells owned by us, which is delivered through our canal system. The revenues are recognized based on the actual volume of water delivered each month.

Accounts Receivable–Empire records accounts receivable net of allowances for uncollectible accounts. Any allowance for uncollectible accounts would be determined based on a review of past due amounts.

Income taxes– Empire recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the

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EMPIRE WATER CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

differences are expected to be recovered. Empire provides a valuation allowance for deferred tax assets for which Empire does not consider realization of such assets to be more likely than not.

Recently issued accounting pronouncements– Empire does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operations, financial position or cash flow.

Fair value of financial instruments– The carrying values of receivables, payables, marketable securities and short-term obligations approximate their fair value due to their short-term maturities.

Basic and diluted net loss per share– The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the period ended December 31, 2008 and 2007, there were no potential dilutive securities.

Stock-based compensation–Stock based compensation expense is measured at the date of grant, based on the calculated fair value of the stock-based award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the award).

Note 2-GOING CONCERN

As shown in the accompanying financial statements, Empire incurred recurring net losses and has had no significant revenues since inception. This raises substantial doubt that Empire can continue as an on-going business for the next twelve months unless Empire obtains additional capital. Management is attempting to raise additional funding.

Note 3-INVESTMENT

On November 19, 2008, Empire purchased 3% outstanding shares of Meeks & Daley Water Company for the purchase price of $548,250 paid in cash from California Portland Cement Company. The shares entitle Empire to approximately 219 acre feet of water annually from Meeks & Daley. Empire accounts for its investment in Meeks and Daley Water Company under the cost method of accounting.

Note 4 -COMMITMENTS AND CONTINGENCIES

Empire is the assignee of a Water Supply, Sale and Purchase Agreement (“Water Supply Agreement”) with the Jurupa Unified School District (“JUSD”), dated July 2, 2002, relating to a single school site. As set forth in the Water Supply Agreement, Empire is required to provide up to 0.81 acre feet of water per day, at a price of $250 per acre foot, subject to further adjustment. The term of the Water Supply Agreement is 20 years and it is only terminable for cause upon default (and failure to cure) by one of the parties. JUSD has a unilateral right to terminate without cause, but will have to pay for capital costs involved in building the water supply facilities based on a schedule included in the Water Supply Agreement.

Empire has an obligation to provide water to the Indian Hills Golf Course (“IHGC”), pursuant to Section 3.3(d) of the Assignment Agreement. As set forth therein, Empire is required to provide IHGC with up to 505 acre ft. of water per year, at a price equal to our cost of producing and delivering the water. This is an ongoing obligation, but if Empire fails to deliver at least 90% of the required water for a 60 day period, IHGC will be permitted to use, for its own benefit, the wells and pipelines necessary to obtain water.

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EMPIRE WATER CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

The Company and Peter L. Jensen, Chairman of the Board and Chief Executive Officer of the Company, are named as defendants in a lawsuit captioned:In re Basin Water, Inc. Derivative Litigation, Case No. CIVRS800870, which is pending in the Superior Court of the State of California, County of San Bernardino, West District. The complaint is a derivative action brought by the shareholders of Basin Water, Inc. (“Basin Water”) on behalf of Basin Water seeking to recover alleged damages sustained by Basin Water. Plaintiffs assert claims for unjust enrichment and aiding and abetting breach of fiduciary duty against the Company arising out of the Company’s December 2007 transaction with Basin Water Resources, Inc. The damages that plaintiffs are seeking to recove r from the Company include compensatory damages, rescission of the transaction, injunctive relief, disgorgement, and attorney’s fees and costs. With respect to Mr. Jensen, plaintiffs assert claims for breach of fiduciary duty, violations of the California Corporations Code, waste of corporate assets, and unjust enrichment arising out of alleged conduct by Mr. Jensen while he was an officer and/or director of Basin Water. The damages that plaintiffs are seeking to recover include compensatory damages, treble damages for violations of the California Corporations Code, and attorney’s fees and costs.

As the case is still in the early stage, Empire could not assess the possibility of a loss.

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ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

     This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this prospectus. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.

     Empire Water is engaged in the business of the ownership, development and sale of water resources. We are a start-up corporation even though we were incorporated on May 18, 2005. We were a shell corporation until December, 2007. We have not yet generated or realized any significant revenues from our business operations. In December 2007 and January 2008 we received $4,000,000 through the sale of common stock and warrants and used a portion of the money to acquire title to certain material assets. One of the assets we acquired was a canal. In June 2008, we received an additional $750,000 through the sale of additional common stock and warrants

     In order to supply the development of agricultural property in Riverside County, four canals were constructed in the late 1800’s to transport water from San Bernardino to Riverside. Three of the four canals are now owned by cities and municipalities and operated to supply a portion their water. We own the remaining canal (the “Canal”).

     To date, the Company has spent significant time and resources on due diligence related to development of the property. The environmental assessment has been completed. The assessment discloses that there are no issues along the entire length of the Canal. Although we plan to acquire other water resources in the future, at the present time we have no planned capital expenditures. There are no contractual obligations other than for monthly rent of office facilities. We have been approached by municipal agencies regarding a sale, joint venture or partnership of projects. We have not entered into any negotiations or agreements with any of them. In light of the current economic recession it is unlikely we will raise the $16,000,000 in the short run and as such there is no assurance that we will be able to raise the additional capital we need to fully implement our plan of operation.

Plan of Operation

     Our plan of operation for the next twelve months calls for us to:

*	Raise sufficient capital to complete project design and due diligence.
*	Complete record of survey on the Canal.
*	Perfect title in the Canal.
*	Expand production of irrigation water.

     We intend to complete all due diligence and preliminary engineering work required for the full utilization of the Canal property. This includes a survey, environmental review, hydraulic engineering, and a title report. It is estimated that the installation and construction of two pipelines will cost $15-$20 million. Our original plan was to raise sufficient capital to fund the construction. While we have had discussions with financial institutions regarding funding the project, we have also been approached by municipal agencies regarding the sale, joint venture, and partnership of the project. We are considering all of our options at this time and have not made a decision as of the date of this report.

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     In the short term we are attempting to raise sufficient funds to sustain our current operations at the current level. There is no assurance, however, that these efforts will be successful

Limited operating history; need for additional capital

     There is limited historical financial information about us upon which to base an evaluation of our performance. We are in development stage operations and have not generated significant revenues. We cannot guarantee that we will be successful in our business operations. Our business is subject to risks inherent in the establishment of new business enterprises, including limited capital resources and possible cost overruns.

     To become profitable and competitive, we will need to raise an additional $16,000,000 or joint venture the project with a municipal or financial partner to fully implement our plan of operation, and no assurances can be given that we will become profitable or competitive.

     We have no assurance that future financing will be available to us on acceptable terms. If financing is not available on satisfactory terms, we may be unable to continue, develop or expand our operations. Equity financing could result in additional dilution to existing shareholders.

Results of Operations

From Inception on May 18, 2005 to December 31, 2008

     On September 1, 2008, we completed Phase I of our environmental review. No significant environmental concerns or impairments were encountered during the review. Further, as a result of the review it was determined by the engineering firm that Phase II was not required.

     Our loss from inception through December 31, 2008 is $3,026,445 of which $3,000,666 is for general and administrative expenses, including $1,656,152 for stock based compensation, and $106,670 is for production costs including $70,200 of depreciation of the canal assets. We generated gross revenues of $72,506 during the period from May 18, 2005 (inception) through December 31, 2008.

     In May 2008, the Company retained a land surveying firm to conduct a survey of the canal property. To date, the record of survey for San Bernardino County is complete and the survey for the County of Riverside should be completed by mid-March. The surveyors are working closely with the county surveyors for Riverside and San Bernardino to coordinate approval of the final survey. Upon completion of the survey, maps will be submitted to both Riverside and San Bernardino counties for official recording.

     Empire Water intends to increase water production by installing pipelines along the length of the property. The survey and environmental assessment are the major items which must be completed prior to the engineering and construction of pipelines. Based on the positive results of the environmental site assessment and the survey, engineering on the project could be started in the near future.

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     In addition to completing the work necessary to construct conveyance pipelines, Empire Water is acquiring additional water ownership to supplement its existing water rights from the 350” water company. The company purchased water from Cal Portland Cement Company, which is a subsidiary of Mitsubishi of Japan. This is a permanent water right representing roughly 71 million gallons of water per year. Empire Water plans to continue acquiring water production which can be utilized with its conveyance assets.

Six months ended December 31, 2008 and 2007

     The following table summarizes the significant components of revenues and gross loss for the three and six months ended December 31, 2008 compared to the same period in the prior year:

		Three Months Ended					Six Months Ended
		December 31,					December 31,
		2008		2007			2008		2007
Revenues	$	13,728		$	-	$	39,135		$	-
Costs of Revenues
Production costs		8,347			-		22,677			-
Depreciation		17,550			-		35,100			-
Total Cost of Revenues		25,897			-		57,777			-
Gross Profit (Loss)	$	(12,169	)	$	-	$	(18,642	)	$	-

Revenues

     The Company currently provides irrigation water to two customers. Revenues were $13,728 and $39,135 during the three and six months ended December 31, 2008, respectively. There were no revenues generated during the three or six months ended December 31, 2007.

Cost of Revenues

     Costs of revenues of $25,897 for the three months ended December 31, 2008 were comprised of $8,347 for production costs and $17,550 of depreciation of the wells and pipelines which were acquired in December, 2007. For the six months ended December 31, 2008, productions costs were $22,677 and depreciation of the wells and pipelines was $35,100. There were no production costs for the three or six months ended December, 2007.

     We expect that our costs of revenues will continue to exceed revenues in future periods until our customer base has been expanded due to the depreciation costs.

General and Administrative Expense

     The following table summarizes the significant components of general and administrative expenses (in thousands) for the three and six month periods ended December 31, 2008 as compared to the same periods in the prior year.

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		Three Months Ended				Six Months Ended
		December 31,				December 31,
		2008	2007			2008	2007
Compensation and benefits	$	86	$	-	$	160	$	-
Stock based compensation		326		-		652		-
Professional fees		243		3		418		8
Travel and entertainment		25		-		45		-
Directors fees and public
company costs		20		1		40		-
Insurance		12		-		23		-
Other SG&A		37		-		107		1
Total SG&A	$	749	$	4	$	1,445	$	9

Liquidity and Capital Resources

     We initiated our canal operations in January 2008 and generated revenues of $33,371 in the third and fourth quarter of our fiscal year ended June 30, 2008. Revenue for the six months ended December 31, 2008 was $39,135. As of December 31, 2008, our total assets were $9,022,624 and our total liabilities were $202,618 and we had working capital of $48,224.

Well Production

     The following reflects production and expenses from the school district (JUSD) and the golf course (IHGC) in 2006, 2007, and 2008:

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						JUSD					IHGC
	Combined	JUSD	JUSD	JUSD	JUSD	Other	JUSD	IHGC	IHGC	IHGC	Other	IHGC
	Gallons	Gallons	Billing	Electric	Insurance	Costs Repairs		Gallons	Electric	Insurance	Costs Repairs
	(in000)	(in000)	(in$)	(in$)	(in$)	(in$)	(in$)	(in000)	(in$)	(in$)	(in$)	(in$)
Jan-06	7,544	806	665	66	41	100	427	6,738	548	346	840	3,568
Feb-06	9,289	1,714	1,414	142	71	173	-	7,575	629	316	767	-
Mar-06	3,411	196	162	19	22	54	35	3,215	311	365	886	574
Apr-06	8,298	825	681	61	38	93	-	7,473	548	349	847	-
May-06	17,295	3,843	3,170	235	86	209	13	13,452	823	301	731	44
Jun-06	18,007	4,604	3,798	391	99	240	-	13,403	1,139	288	700	-
Jul-06	27,945	6,976	5,755	718	97	235	688	20,969	1,889	290	705	2,069
Aug-06	22,326	5,408	4,461	512	94	228	2,098	16,918	1,601	293	712	6,562
Sep-06	21,179	4,071	3,358	425	74	181	645	17,108	1,785	313	759	2,709
Oct-06	10,783	1,637	1,351	149	59	143	46	9,146	835	328	797	255
Nov-06	14,697	2,122	1,830	191	56	136	-	12,575	1,133	331	804	-
Dec-06	10,328	1,720	1,483	149	64	157	-	8,608	747	323	783	-
	171,102	33,922	28,127	3,058	802	1,949	3,951	137,180	11,988	3,842	9,331	15,781
Jan-07	8,645	1,723	1,422	165	83	187	-	6,922	662	335	753	-
Feb-07	8,504	1,572	1,297	148	77	174	-	6,932	651	341	766	2
Mar-07	15,654	2,477	2,044	172	66	149	-	13,177	914	352	791	-
Apr-07	13,540	2,842	2,345	204	88	197	-	10,698	768	330	743	-
May-07	19,604	4,044	3,336	243	86	194	-	15,560	934	332	746	-
Jun-07	20,269	4,199	3,464	397	87	195	436	16,070	1,518	331	745	1,670
Jul-07	21,586	4,862	4,011	487	94	212	-	16,724	1,675	324	728	-
Aug-07	24,834	5,109	4,214	426	86	193	-	19,725	1,645	332	747	-
Sep-07	18,700	2,476	2,042	206	55	124	-	16,224	1,350	363	816	-
Oct-07	11,059	2,835	2,338	338	107	241	-	8,224	979	311	699	-
Nov-07	12,753	2,298	1,895	196	75	169	-	10,455	891	343	771	-
Dec-07	8,110	673	743	59	35	78	470	7,437	649	383	862	5,190
	183,258	35,110	29,151	3,039	940	2,114	906	148,148	12,637	4,076	9,166	6,862
Jan-08	3,391	370	362	55	53	102	-	3,022	446	434	838	-
Feb-08	6,000	544	533	60	44	85	-	5,456	602	443	855	-
Mar-08	14,834	2,461	2,411	185	81	156	-	12,373	928	406	784	-
Apr-08	19,295	3,600	3,527	248	91	175	10	15,695	1,079	396	765	43
May-08	19,754	3,070	3,008	244	76	146	19	16,684	1,327	412	794	104
Jun-08	21,751	4,379	4,290	433	98	189	677	17,372	1,720	390	751	2,686
Jul-08	25,092	5,072	4,970	468	99	190	908	20.020	1,848	389	750	2,200
Aug-08	24,134	4,821	4,724	429	98	205	79	19,313	1,717	390	822	317
Sep-08	18,540	3,018	2,957	330	79	161		15.522	1,699	409	830
Oct-08	19,020	3,045	2,954	224	78	163	57	15,974	1,178	410	853	297
Nov-08	10,290	1,511	1,480	148	72	127	91	8,779	861	416	823	530
Dec-08	5,015	356	349	51	35	146		4,659	667	453	930
	187,116	27,335	31,565	2,452	719	1,410	1,693	154,869	11,366	3,669	7,189	5,647

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     Although no assurances can be given, these wells are believed to have a capacity of over 300 million gallons per year, which if true, we believe can be marketed. The operating cost to produce water from these wells is approximately $20 per acre foot, which is primarily due to the costs of electricity. The school district is charged based on a price per unit based on meter readings. The current price is $315 per acre-foot. The golf course is charged for operating costs based upon its percentage of the total water pumped.

     The water produced and sold from the Company's wells is used for irrigation purposes. Accordingly, the volume of water produced is almost entirely determined by external factors such as temperature and drought conditions which cannot be controlled or predicted by the Company. The major production expense is electricity, which is a factor of the water pumped and therefore, it is also not subject to projecting future trends.

     The two operating wells have a combined capacity of 1,050 gallons per minute. To produce the existing approximately 200 million gallons per year, the two wells need to operate for 3,175 hours per year, which is only 36% of the available operating hours in a year. Management uses 300 million gallons per year as a conservative estimate. Although no assurances can be given, these wells are believed to have a capacity of over 300 million gallons per year, which if true, we believe can be marketed. The operating cost to produce water from these wells is approximately $20 per acre foot, which is primarily due to the costs of electricity. The school district is charged based on a price per unit based on meter readings. The current price is $315 per acre-foot. The golf course is charged for operating costs based upon its percentage of the total water pumped.

     In addition to the Canal property, under the West Riverside Purchase Agreements, we acquired the water rights of 350IWC which was formed in 1916. 350IWC has produced water from the Riverside basin for much of the period since inception.

     There is no assurance that we acquired title to all of the property comprising the foregoing or that the title to the foregoing is unencumbered. Further, there is no assurance that the title to the property we acquired is not materially defective.

Contractual Obligations

     Pursuant to the terms of the West Riverside Purchase Agreements, the West Riverside Sellers will initially receive fifty percent (50%) of all net income relating to the operation of our business, with such percentage to decline (but not below 15%) as additional investments are made in the Canal and related assets; provided however, that the West Riverside Sellers have the right to co-invest with us, and in the event that they elect to do so, their net income participation will not decrease to the extent that they have matched our capital infusions. We will reflect the payments under the income participation agreement with West Riverside Sellers as net profit interest expense in our statement of operations.

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     We are the assignee of a Water Supply, Sale and Purchase Agreement ("Water Supply Agreement") with the Jurupa Unified School District ("JUSD"), dated July 2, 2002, relating to a single school site. As set forth in the Water Supply Agreement, we are required to provide up to 0.81 acre feet of water per day, at a price of $250 per acre foot, subject to further adjustment. The current price is $315 per acre foot. The term of the Water Supply Agreement is 20 years and it is only terminable for cause upon default (and failure to cure) by one of the parties. JUSD has a unilateral right to terminate without cause, but will have to pay for capital costs involved in building the water supply facilities based on a schedule included in the Water Supply Agreement.

     We have an obligation to provide water to the Indian Hills Golf Course ("IHGC"), pursuant to Section 3.3(d) of the Assignment Agreement. As set forth therein, we are required to provide IHGC with up to 505 acre ft. of water per year, at a price equal to our costs of producing and delivering the water. This is an ongoing obligation, but if we fail to deliver at least 90% of the required water for a 60 day period, IHGC will be permitted to use, for its own benefit, the wells and pipelines necessary to obtain water.

     On December 1, 2008, we paid $548,250 to California Portland Cement Company to acquire 219 acre feet of water annually from Meeks & Daley Water Company located in southern California. Our ownership interest is evidenced by 21,390 shares of Meeks & Daley Water Company.

Off-Balance Sheet Arrangements

     We have no off balance sheet arrangements.

     We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Critical Accounting Policies and Estimates

     The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates.

     These significant accounting policies relate to revenue recognition, valuation of long-lived assets and income taxes. These policies, and the related procedures, are described in detail below.

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Revenue Recognition– Our revenues are derived from sales of water from our wells, which is delivered through our canal system. Our revenues are recognized based on the actual volume of water delivered each month times certain rate defined in the long-term contracts with our customers.

Valuation of long-lived assets –In conjunction with our December 2007 acquisition of assets from Indian Hills Corporation, we engaged an independent third party appraiser to assess the fair value of the assets acquired in this transaction. The aggregate purchase price of $7,380,000 was allocated to land, right of way and water rights in the amount of approximately $3.9 million, wells $1.4 million and pipeline $2.1 million. Wells and pipeline were estimated with useful life of 50 years in according to the independent third party appraiser and the industry standard. Judgments and estimates made by us related to the expected useful lives of the assets are affected by factors such as changes in industry, operating performance, loss of existing customers or service contracts, failure to obtain final approval for permits, fluctuations in economic conditions an d expected future performance. If our assumptions change in the future, we may be required to record impairment charges for these assets.

Income Taxes –Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Contingencies– In the ordinary course of business, we have entered into various contractual relationships with strategic corporate partners, customers, and distributors, licensors, licensees, suppliers, vendors and other parties. As such, we could be subject to litigation, claims or assessments arising from any or all of these relationships. We account for contingencies such as these in accordance with SFAS No. 5,Accounting for Contingencies(SFAS 5). SFAS 5 requires us to record an estimated loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial stateme nts and the amount of the loss can be reasonably estimated. Accounting for contingencies arising from contractual or legal proceedings requires that we use our best judgment when estimating an accrual related to such contingencies. As additional information becomes known, our accrual for a loss contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency which significantly exceeds the amount accrued for in our financial statements could have a material adverse impact on our operating results for the period in which such actual loss becomes known.

Stock-based Compensation –We account for our stock-based compensation according to the provisions of SFAS No. 123(R), Share-Based Payment. This statement requires the recognition of the fair value of stock-based compensation awards in financial statements. Under the provisions of SFAS No. 123(R), stock-based compensation expense is measured at the date of grant, based on the calculated fair value of the stock-based award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the award). We estimated the fair value of stock options granted during the year ended June 30, 2008 using the Black-Scholes method. Key assumptions used to estimate the fair value of stock options include the exercise price of the reward, the fair value of our common stock on the date of grant, the expected option term, the r isk free interest rate at the date of grant, the expected volatility of our common stock over the expected option term,

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and the expected annual dividend yield on our common stock. The expected option term in years was calculated using an average of the vesting period and the option term in accordance with the “simplified method” for “plain vanilla” stock options allowed under Staff Accounting Bulletin (SAB) 107. The expected volatility was derived from the trading activity of our stock. For the six months ended December 31, 2008, we recorded approximately $652 thousand in stock based compensation expense. Judgments and estimate made by us related to the compensation are affected by factors such as changes in the expected volatility of our common stock, the expected option term and the assumed risk free interest rate.

 
ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

     We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 
ITEM 4.      CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

     We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are 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 in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this r eport pursuant to Rule 13a-15 of the Exchange Act. Based on this Evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our Disclosure Controls were effective as of the end of the period covered by this report.

Changes in Internal Controls

     We have also evaluated our internal controls for financial reporting, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.

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PART II - OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

     The Company and Peter L. Jensen, Chairman of the Board and Chief Executive Officer of the Company, are named as defendants in a lawsuit captioned:In re Basin Water, Inc. Derivative Litigation, Case No. CIVRS800870, which is pending in the Superior Court of the State of California, County of San Bernardino, West District. The complaint is a derivative action brought by the shareholders of Basin Water, Inc. (“Basin Water”) on behalf of Basin Water seeking to recover alleged damages sustained by Basin Water. Plaintiffs assert claims for unjust enrichment and aiding and abetting breach of fiduciary duty against the Company arising out of the Company’s December 2007 transaction with Basin Water Resources, Inc. The damages that plaintiffs are seeking to recover from the Company include compensatory damages, rescission of the transaction, injunctive relief, disgorgement, and attorney’s fees and costs. With respect to Mr. Jensen, plaintiffs assert claims for breach of fiduciary duty, violations of the California Corporations Code, waste of corporate assets, and unjust enrichment arising out of alleged conduct by Mr. Jensen while he was an officer and/or director of Basin Water. The damages that plaintiffs are seeking to recover include compensatory damages, treble damages for violations of the California Corporations Code, and attorney’s fees and costs.

 
ITEM 1A.    RISK FACTORS

Need for substantial additional capital.

     We are in need of substantial additional capital, without which our ability to continue as a going concern will be jeopardized. In order to fund our ongoing, day-to-day operations, as well as to develop the Canal and water resources, we will continue to require significant amounts of additional capital, and the failure to obtain such additional capital will materially adversely affect our operations. In order to fully implement our plan of operation, it will be necessary to raise at least an additional $16,000,000 or joint venture the project with a municipality or financial partner. There is no assurance that we will be successful in raising additional capital or joint venturing the project. If we raise additional capital through the sale of common stock, you could experience significant dilution. If we are unsuccessful in raising such additional capital or joint venturing the project you could lose your e ntire investment.

Our operations and the quality of water we supply are subject to extensive environmental laws and regulations. Our proposed expenses are expected to increase as a result of complying with environmental laws and regulations. We also could incur substantial costs as a result of violations of or liabilities under such laws and regulations.

     Our planned water operations will be subject to extensive United States federal, state and local laws and regulations. These requirements include United States Safe Drinking Water Act of 1974, which we refer to as the Safe Drinking Water Act, and similar state laws and regulations. We will also be required to obtain various environmental permits from state and other regulatory agencies for our operations. If we deliver water to our customers that do not comply with regulatory standards, or otherwise violate environmental laws, regulations or permits, or other health and safety and water quality laws and regulations, we could incur substantial fines, penalties or other sanctions or costs or damage to our reputation. In the most serious cases, regulators could force us to discontinue operations and sell our operating assets to another entity, utility or municipality. Given the nature of our

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proposed business which, in part, will involve supplying water for human consumption, any potential non-compliance with, or violation of, environmental laws or regulations would likely pose a more significant risk to us than to an issuer not similarly involved in the water industry. We will incur substantial operating and capital costs on an ongoing basis to comply with environmental laws and regulations and other health and safety and water quality laws and regulations. These laws and regulations, and their enforcement, have tended to become more stringent over time, and new or stricter requirements could increase our costs. Although we may seek to recover ongoing compliance costs in our rates, there can be no guarantee that the various state or similar regulatory bodies that govern our businesses would approve rate increases to recover such costs or that such costs will not adversely and materially affect our financial condition, resu lts of operations, cash flow and liquidity. We may also incur liabilities under environmental laws and regulations requiring us to investigate and clean up environmental contamination at our properties or at off-site locations where we have disposed of waste or caused adverse environmental impacts. The discovery of previously unknown conditions, or the imposition of cleanup obligations in the future, could result in significant costs, and could adversely affect our financial condition, results of operations, cash flow and liquidity. Such remediation losses may not be covered by our insurance policies and may make it difficult for us to secure insurance in the future at acceptable rates.

Changes in laws and regulations over which we have no control can significantly affect our business and results of operations.

     Any governmental entity that regulates our operations may enact new legislation or adopt new laws and regulations or policies at any time, and new judicial decisions may change the interpretation of existing legislation or regulations at any time. The individuals who serve as regulators are elected or are political appointees. Therefore, elections which result in a change of political administration or new appointments may also result in changes in the individuals who serve as regulators and the policies of the regulatory agencies that they serve. New laws, or regulations, new interpretations of existing laws or regulations, or changes in agency policy, including as a response to shifts in public opinion, or conditions imposed during the regulatory hearing process may affect our business in a number of ways, including the following:

• changing water quality or delivery service standards, treatment and discharge standardswith which we must comply;

• restricting our ability to terminate our services to customers who owe us money forservices previously provided;

• restricting our ability to sell assets or issue debt or equity securities;

• changing regulatory benefits that we expected to receive when we began offeringservices in a particular area;

• changing or placing additional limitations on change in control requirements relating toany concentration of ownership of our common stock;

• making it easier for governmental entities to convert our assets to public ownership viaeminent domain; and

• restricting or prohibiting our extraction of water from rivers, streams, reservoirs oraquifers.

     Any of these changes or any other changes in laws, regulations, judicial decisions or agency policies applicable to us may have an adverse effect on our business, financial condition, results of operations, cash flow and liquidity.

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Weather conditions, natural hazards, overuse of water supplies and competing uses may interfere with our sources of water, demand for water services and our ability to supply water to customers.

     Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water. We anticipate that most of the water that we will be transporting or treating will come from groundwater aquifers. Drought, overuse of sources of water, the protection of threatened species or habitats or other factors may limit the availability of ground and surface water. Governmental restrictions on water use during drought conditions may also result in decreased use of water services, even if our water supplies are sufficient to serve our customers, which may adversely affect our financial condition and results of operations. Seasonal drought conditions that would impact our water services are possible in our intended service area. Following drought conditions, water demand may not return to pre-drought levels even after restrictions are lifted. Cool and wet weather may also reduce demand f or water, thereby adversely affecting our financial condition, results of operations, cash flow and liquidity. Service interruptions due to severe weather events are possible in our intended service area. These include earthquakes, high water conditions and severe electrical storms. These weather events may affect the condition or operability of our facilities, limiting or preventing us from delivering water services to our customers. Any interruption in our ability to supply water or to collect, treat and properly dispose of waste, or any costs associated with restoring service, could adversely affect our financial condition and results of operations.

Risks associated with water treatment may impose significant costs; contamination of our sources of water could result in service interruptions and human exposure to hazardous substances and subject our subsidiaries to civil or criminal enforcement actions, private litigation and clean-up obligations.

     One component of our proposed business plan involves treating nonpotable water, which can result in the creation of waste. If collection or industrial sewage systems fail, overflow or do not operate properly, untreated waste or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages, which may not be recoverable in rates. Liabilities resulting from such damage could adversely and materially affect our business, results of operations and financial condition. Moreover, in the event that we are deemed liable for any damage caused by overflow, our losses might not be covered by insurance policies (if such policies are in place at all), and such losses may make it difficult for us to secure insurance in the future at acceptable rates. Although we have not conducted any environmental analysis of the water sources that we intend to use, these water supplies are very likely to be subject to contamination, including contamination from naturally-occurring compounds, chemicals in groundwater systems, such as nitrates, pollution resulting from man-made sources, such as perchlorate and methyl tertiary butyl ether (MTBE), and possible terrorist attacks. In the event that our water supply is contaminated, our financial condition, results of operations, cash flow, liquidity and our reputation may be adversely affected. We might not be able to recover costs associated with treating or decontaminating water supplies through rates, or such recovery may not occur in a timely manner. Moreover, we could be held liable for environmental damage as well as damages arising from toxic tort or other lawsuits or criminal enforcement actions or other consequences arising out of human exposure to hazardous substances in our drinking water supplies.

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Our reliance on third-party suppliers and service providers poses significant risks to our business and prospects.

     We intend to contract with third parties for goods and services that will be essential to our operations, such as maintenance and operation services, pipes, electricity and other materials. We have also agreed to enter into a water services agreement with Basin Water, Inc. If the scope of services or pricing of this agreement are not commercially reasonable, we may incur additional costs. Further, we will be subject to substantial risks because of our reliance on other suppliers and service providers. For example:

• our suppliers may not provide raw materials that meet our specifications in sufficientquantities;

• our service providers may fail to properly operate the Canal or the treatment facilities;

• our suppliers and service providers may face production delays due to natural disasters orstrikes, lock-outs or other such actions;

• one or more suppliers or service providers could make strategic changes in the lines ofproducts and services they offer; and

• some of our suppliers will be small companies which are more likely to experiencefinancial and operational difficulties than larger, well-established companies, because oftheir limited financial and other resources.

     As a result of any of these factors, we may be required to find alternative suppliers for the raw materials and services on which we rely. Accordingly, we may experience delays in obtaining appropriate raw materials and services on a timely basis and in sufficient quantities from such alternative suppliers at a reasonable price, which could interrupt services to our customers and adversely affect our revenues, financial condition, results of operations, cash flow and liquidity.

The assets of the Canal property are subject to potential condemnation through eminent domain.

     Municipalities and other government subdivisions have historically been involved in the provision of water services in the United States, and organized movements may arise from time to time in one or more of the service areas in which our business is expected to operate to convert our assets to public ownership and operation through the governmental power of eminent domain. Should a municipality or other government subdivision seek to acquire the Canal or other assets through eminent domain, we may resist the acquisition. Contesting an exercise of condemnation through eminent domain may result in costly legal proceedings and may divert the attention of management from the operation of its business, and there can be no assurances that such efforts will be successful. If the Canal is condemned, the price paid for it could be much less than the aggregate paid for our shares, and our operations will discontinue as a going concern.

Title to the Canal property may be defective which could materially limit or prevent our rights to use and develop the Canal.

     Title to the West Riverside Canal was held by the West Riverside Sellers pursuant to a deed recorded in 1916 and transferred to us by quit claim deed. Our rights to use significant portions of the Canal (the extent of which is currently unknown) may be limited to those of an easement holder, rather than a fee simple owner. We are currently in the process of conducting a survey to determine whether there may be significant encroachments on the Canal (although we are aware of some encroachments, the full extent of them are not presently known), or whether third parties may have vested rights to

- 21 -

continue to occupy and use the Canal under claims of adverse possession or other prescriptive claims. Upon the transfer of ownership of the Canal, third parties claiming the right to continue to occupy and/or use the Canal may undertake legal action against us to seek enforcement of such rights, and we may be required to undertake legal action to evict third parties from the Canal, all of which may result in considerable expense. Efforts to obtain title insurance for the Canal property (which might have revealed certain adverse claims) have been unsuccessful, and we have been advised that no title policy can be obtained, if at all, until a record of survey has been completed for the entire Canal and approved by local governmental authorities, which will be expensive and time consuming. Although we intend to commission the record of survey, even if a title policy is ultimately obtained, it may not reveal all encroachments or prescriptive claims, and it may contain a number of disclaimers, exceptions, and exemptions limiting the title company’s liability under the policy. As a result, we are likely to incur substantial costs for the record of survey and other curative title work, and there can be no assurances that we will ever obtain clear, unencumbered title to the Canal. If we cannot obtain clear title to the Canal, or if we are unable to obtain clear title to critical portions of the Canal that carry water between the source of water and the end users, our ability to raise further capital, develop the Canal, and use substantial portions, will be materially adversely affected.

Taxes on the Canal property may not have been paid.

     The West Riverside Sellers have advised us that significant portions of the Canal and certain equipment and other improvements erected on the Canal have not been assessed for real and personal property tax purposes. Additionally, the real property comprising the Canal has not been assessed by the California State Board of Equalization (“BOE”) as may be mandated under applicable law, and if assessed by the BOE, such assessments will not be subject to Article 13A of the California Constitution (Proposition 13), which means that the taxes on the Canal could be increased significantly on a year-to-year basis. Further, the West Riverside Sellers cannot confirm that all taxes have been paid on the entire Canal, nor can they confirm that such taxes have been paid to the proper taxing authority. As a result, (i) there could be significant tax penalties applicable to the Canal, (ii) claims of adverse posse ssion by other parties claiming an ownership interest in portions of the Canal could be strengthened, and (iii) if taxes owed with respect to the Canal are not paid once due, the taxing authorities may place a lien on the Canal and the fixtures and improvements located thereon to secure payment of past and future taxes.

Portions of the Canal are inoperative.

     Substantial portions of the Canal are not currently being operated and may not be made operational without installing pipelines, at significant cost and expense. Installing pipelines and other equipment will require obtaining permits and approvals from local governmental authorities, which could result in additional delays and costs, and to the extent such permits or approvals are discretionary on behalf of the governmental authorities, there is no guaranty that we can obtain such permits and approvals. Additionally, the West Riverside Sellers have informed us that a portion of one of two tunnels through which the Canal runs has collapsed, and may not be made serviceable again. If we are unable to utilize significant portions of the Canal, our ability to fully implement our business plan will be materially adversely affected.

 - 22 -

We have conducted limited due diligence and are presently unable to identify environmental and other liabilities associated with the Canal property.

     We have conducted very little due diligence regarding the Canal and the other assets acquired. The acquisition of the Canal properties was inexact and inherently uncertain as a result of the age of the original conveyances and other factors. We have assumed the risk of the physical condition of the Canal property, including but not limited to environmental issues, including but not limited to soils contamination, accumulated waste, etc. The West Riverside Sellers have not obtained any “Phase I” or “Phase II” environmental site assessments, or any other environmental reports regarding the Canal. The costs of any environmental cleanup could be very substantial.

The nature of the water rights acquired from the West Riverside Sellers is uncertain.

     The groundwater rights acquired are governed by a court judgment, where the amount of groundwater pumped out of a groundwater basin exceeds the amount of water that is naturally recharged by rainfall or other means. In these types of cases, the court allocates the amount of groundwater each user can pump in order to ensure that the groundwater supply is not depleted in the long-term. The court judgment governing 350IWC’s water supply clearly defines the amount of groundwater certain “named parties” can pump from the San Bernardino Basin. 350IWC is not specifically a “named party” to the judgment, however, it is recognized as a groundwater user that pumps groundwater for use on non-overlying land. Because 350IWC is not a named party, its right to pump groundwater is established as a collective right along with all other non-parties who collectively pump groundwater for use on non-ove rlying land. As such, it is unclear precisely what the nature of those rights are as the court judgment pertains primarily to named parties. It is also unclear to what extent those rights can be increased beyond the amount of water which the West Riverside Sellers currently pump. Because the court retains jurisdiction over the court judgment, if groundwater pumping dramatically increases and some other groundwater user is “materially harmed” the court may be asked to modify or amend the judgment. If this occurs, there is the possibility we may need to obtain additional water rights from some other source to pump groundwater to the extent the water rights acquired from the West Riverside Sellers are insufficient. We also may need to undertake or defend against legal actions to perfect our interest in the water rights being acquired from the West Riverside Sellers. Such limitations and deficiencies with respect to the water rights could materially limit or prevent us from raising further capital, dev eloping the Canal, or using portions of the Canal.

The purchase of the Water Treatment Unit may not be on an arms-length basis, or on commercially reasonable terms.

     The purchase of the Water Treatment Unit was not the result of extensive negotiation among the parties, and was not the result of competitive bidding. Also, the seller of the Water Treatment Unit is an affiliate of BWRI. Although the price paid for such Water Treatment Unit is within the range customarily charged by the seller for similar products, the procurement process and pricing was not a result of competitive bidding and better prices for similar products may be available.

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Lack of Corporate Formalities; Potential Minority Shareholder Claims.

     WRCC and 350IWC have been in existence since 1899 and 1916, respectively. Consequently, their corporate records are incomplete and the West Riverside Sellers cannot represent that all corporate formalities have been observed over the years, including but not limited to proper meetings of their boards of directors and shareholders. As such, WRCC and 350IWC are not certain as to the identities of all shareholders and have relied upon public notice to inform unknown shareholders of recent events. Further, at least one minority shareholder has raised claims regarding his ownership of shares of and interest in the West Riverside Sellers. As a result, although we are purchasing assets from the West Riverside Sellers, no assurances can be made that we will not be named in any claim made by such persons. If we are named in any litigation or other claim, the costs of defending such claims may be significant.

We are subject to complex laws and regulations, including environmental regulations, that can adversely affect the cost, manner or feasibility of doing business.

     Development, production and sale of water in the U.S. are subject to extensive laws and regulations, including environmental laws and regulations. We may be required to make large expenditures to comply with environmental and other governmental regulations. Matters subject to regulation include, among other things, construction and discharge permits for drilling and pipeline installation operations. Under these laws and regulations, we could be liable for personal injuries, property damage, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. Failure to comply with these laws and regulations also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, these laws and regulations could change in ways that substantially increase our costs. Accordingly, any of these liabilities, penalties , suspensions, terminations or regulatory changes could materially adversely affect our financial condition and results of operations.

We lack an operating history and have losses that we expect to continue into the future. There is no assurance our future operations will result in profitable revenues. If we cannot generate sufficient revenues to operate profitably, we will cease operations and you will lose your investment.

     We were incorporated in May 2005 and we have just started our proposed business operations. We have not realized any significant revenues. We have no operating history upon which an evaluation of our future success or failure can be made.

Because our officers and directors do not have prior experience in financial accounting and the preparation of reports under the Securities Exchange Act of 1934, we will have to hire experienced individuals. This need could result in an expense we are unable to pay.

     Because our officers and directors do not have prior experience in financial accounting and the preparation of reports under the Securities Act of 1934, we will need to hire additional experienced personnel to assist us with the preparation of financial reports. If we need the additional, experienced personnel and we do not hire them, we could fail in our plan of operations and have to suspend operations or cease operations entirely. As a result, you could lose your investment.

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Because there is an extremely limited public trading market for our common stock, you may not be able to resell your stock.

     There is currently an extremely limited public trading market for our common stock, and there may never be a broad public trading market. Therefore, investors may not be able to resell their common stock.

Because the SEC imposes additional sales practice requirements on brokers who deal in penny stocks, some brokers may be unwilling to trade our shares. This means that you may have difficulty reselling your shares and this may cause the price of the shares to decline.

     Our shares would be classified as penny stocks and are covered by Section 15(g) of the Securities Exchange Act of 1934 and the rules promulgated thereunder which impose additional sales practice requirements on brokers/dealers who sell our securities. For sales of our securities, the broker/dealer must make a special suitability determination and receive from you a written agreement prior to making a sale for you. Because of the imposition of these additional sales practices, it is possible that brokers will not want to make a market in our shares. This could prevent you from reselling your shares and may cause the price of the shares to decline.

FINRA sales practice requirements may limit a stockholder's ability to buy and sell our stock.

     The Financial Industry Regulation Authority (FINRA) has adopted rules that apply to broker/dealers in recommending an investment to a customer. The broker/dealers must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker/dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker/dealers to recommend our common stock to their customers, which may have the effect of reducing the level of trading activity and liquidity of our common stock. Further, man y brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker/dealers may be willing to make a market in our common stock, reducing our stockholder's ability to resell shares of our common stock.

 
ITEM 2.      UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

     All unregistered sales of equity securities during the period of this report have been included in Current Reports on Form 8-K.

 
ITEM 3.      DEFAULTS ON SENIOR SECURITIES

     None.

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

     No matters were submitted to a vote of the shareholders in the quarter covered by this report.

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ITEM 5.      OTHER INFORMATION

     None

 
ITEM 6.      EXHIBITS.

     The following documents are included herein:

Exhibit No.	Document Description
31.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant
	Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant 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, this report has been signed below by the following person on behalf of the Registrant and in the capacities on this 17^th day of February, 2009.

EMPIRE WATER CORPORATION 

(Registrant) 

BY:  PETER L. JENSEN

       Peter L. Jensen, Principal Executive Officer,

       Principal Financial Officer, Principal Accounting 

       Officer, Treasurer and a member of the Board of 

       Directors. 

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EXHIBIT INDEX

Exhibit No.	Document Description
31.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant
	Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant Section
	906 of the Sarbanes-Oxley Act of 2002.

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