Exhibit 13.1

                               2003 Annual Report

         Ten-Year Financial Review
         California Water Service Group


(Dollars in thousands, except common share data)                  2003              2002              2001          2000       1999
                                                                                                            
SUMMARY OF OPERATIONS
Operating revenue
  Residential                                                 $194,903          $184,894          $173,823      $171,234   $163,681
  Business                                                      49,666            46,404            44,944        44,211     41,246
  Industrial                                                    11,255            11,043             9,907        11,014     12,695
  Public authorities                                            12,789            12,706            11,860        11,609     10,898
  Other                                                          8,515             8,104             6,286         6,738      6,417
- ------------------------------------------------------------------------------------------------------------------------------------
  Total operating revenue                                      277,128           263,151           246,820       244,806    234,937
Operating expenses                                             246,894           232,404           221,116       211,610    201,890
Interest expense, other income and expenses, net                10,817            11,674            10,739        13,233     11,076
- ------------------------------------------------------------------------------------------------------------------------------------
  Net income                                                  $ 19,417          $ 19,073          $ 14,965      $ 19,963   $ 21,971
- ------------------------------------------------------------------------------------------------------------------------------------

COMMON SHARE DATA
Earnings per share - diluted                                  $   1.21          $   1.25          $   0.97      $   1.31   $   1.44
Dividend declared                                                1.125             1.120             1.115         1.100      1.085
Dividend payout ratio                                               93%               90%              115%           84%        75%
Book value                                                    $  14.44          $  13.12          $  12.95      $  13.13   $  12.89
Market price at year-end                                         27.40             23.65             25.75         27.00      30.31
Common shares outstanding at year-end (in thousands)            16,932            15,182            15,182        15,146     15,094
Return on average common stockholders' equity                      9.1%              9.7%              7.6%         10.1%      11.5%
Long-term debt interest coverage                                  2.78              2.73              2.64          3.31       3.79
- ------------------------------------------------------------------------------------------------------------------------------------

BALANCE SHEET DATA
Net utility plant                                             $759,498          $696,988          $624,342      $582,782   $564,390
Utility plant expenditures                                      74,253            88,361            62,049        37,161     48,599
Total assets                                                   873,035           798,478           710,214       666,605    645,507
Long-term debt including current portion                       273,130           251,365           207,981       189,979    171,613
Capitalization ratios:
  Common stockholders' equity                                     47.0%             44.0%             48.8%         51.1%      53.0%
  Preferred stock                                                  0.7%              0.7%              0.9%          0.9%       0.9%
  Long-term debt                                                  52.3%             55.3%             50.3%         48.0%      46.1%
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OTHER DATA
Water production (million gallons)
  Wells and surface supply                                      68,416            67,488            65,283        65,408     65,144
  Purchased                                                     63,264            64,735            61,343        62,237     58,618
- ------------------------------------------------------------------------------------------------------------------------------------
    Total water production                                     131,680           132,223           126,626       127,645    123,762
- ------------------------------------------------------------------------------------------------------------------------------------
Metered customers                                              387,579           380,087           371,281       366,242    361,235
Flat-rate customers                                             78,843            78,901            79,146        78,104     77,892
- ------------------------------------------------------------------------------------------------------------------------------------
  Customers at year-end                                        466,422           458,988           450,427       444,346    439,127
- ------------------------------------------------------------------------------------------------------------------------------------
New customers added                                              7,434             8,561             6,081         5,219      6,727
Revenue per customer                                          $    594          $    579          $    552      $    554   $    539
Utility plant per customer                                    $  2,313          $  2,182          $  2,020      $  1,916   $  1,851
Employees at year-end                                              813               802               783           797        790
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                                       18




                                                              1998       1997       1996       1995       1994
                                                                                       
SUMMARY OF OPERATIONS
Operating revenue
  Residential                                             $150,491   $158,210   $148,313   $132,859   $127,228
  Business                                                  38,854     40,520     37,605     35,873     33,712
  Industrial                                                10,150     10,376      9,748      9,952      9,080
  Public authorities                                         9,654     11,173     10,509      9,585      9,397
  Other                                                      5,777      4,886      4,083      4,833      3,767
- --------------------------------------------------------------------------------------------------------------
  Total operating revenue                                  214,926    225,165    210,258    193,102    183,184
Operating expenses                                         183,245    188,020    177,356    164,958    155,012
Interest expense, other income and expenses, net            11,821     11,388     11,502     11,176     11,537
- --------------------------------------------------------------------------------------------------------------
  Net income                                              $ 19,860   $ 25,757   $ 21,400   $ 16,968   $ 16,635
- --------------------------------------------------------------------------------------------------------------

COMMON SHARE DATA
Earnings per share - diluted                              $   1.31   $   1.71   $   1.42   $   1.13   $   1.17
Dividend declared                                            1.070      1.055      1.040      1.020      0.990
Dividend payout ratio                                           82%        62%        73%        90%        85%
Book value                                                $  12.49   $  12.15   $  11.47   $  10.97   $  10.72
Market price at year-end                                     31.31      29.53      21.00      16.38      16.00
Common shares outstanding at year-end (in thousands)        15,015     15,015     15,015     14,934     14,890
Return on average common stockholders' equity                 10.8%      14.5%      12.8%      10.6%      11.1%
Long-term debt interest coverage                              3.64       4.37       3.81       3.41       3.49
- --------------------------------------------------------------------------------------------------------------

BALANCE SHEET DATA
Net utility plant                                         $538,741   $515,917   $495,985   $471,994   $455,769
Utility plant expenditures                                  41,061     37,511     40,310     31,031     32,435
Total assets                                               613,143    594,444    569,745    553,027    516,507
Long-term debt including current portion                   152,674    153,271    151,725    154,416    138,628
Capitalization ratios:
  Common stockholders' equity                                 54.6%      53.8%      52.7%      50.9%      52.9%
  Preferred stock                                              1.0%       1.0%       1.1%       1.1%       1.2%
  Long-term debt                                              44.4%      45.2%      46.2%      48.0%      45.9%
- ---------------------------------------------------------------------------------------------------------------

OTHER DATA
Water production (million gallons)
  Wells and surface supply                                  57,482     63,736     60,964     54,818     53,274
  Purchased                                                 54,661     59,646     56,769     57,560     59,850
- --------------------------------------------------------------------------------------------------------------
    Total water production                                 112,143    123,382    117,733    112,378    113,124
- --------------------------------------------------------------------------------------------------------------
Metered customers                                          354,832    350,139    345,307    335,238    332,146
Flat-rate customers                                         77,568     77,878     77,991     78,330     79,159
- --------------------------------------------------------------------------------------------------------------
  Customers at year-end, including Hawthorne               432,400    428,017    423,298    413,568    411,305
- --------------------------------------------------------------------------------------------------------------
New customers added                                          4,383      4,719      9,730      2,263      3,325
Revenue per customer                                      $    500   $    529   $    502   $    468   $    447
Utility plant per customer                                $  1,768   $  1,694   $  1,632   $  1,580   $  1,520
Employees at year-end                                          759        752        740        738        729
- --------------------------------------------------------------------------------------------------------------



                                       19


         Management's Discussion and Analysis of
         Financial Condition and Results of Operations
         California Water Service Group

         FORWARD-LOOKING STATEMENTS

         This  annual  report,   including  the  Letter  to   Stockholders   and
Management's Discussion and Analysis, contains forward-looking statements within
the meaning established by the Private Securities  Litigation Reform Act of 1995
(Act). The  forward-looking  statements are intended to qualify under provisions
of the federal  securities laws for "safe harbor"  treatment  established by the
Act.  Forward-looking  statements are based on currently available  information,
expectations,  estimates, assumptions and projections, and management's judgment
about the Company,  the water utility industry and general economic  conditions.
Such  words  as  expects,   intends,   plans,  believes,   estimates,   assumes,
anticipates,  projects,  predicts,  forecasts  or  variations  of such  words or
similar  expressions are intended to identify  forward-looking  statements.  The
forward-looking  statements are not guarantees of future  performance.  They are
subject to  uncertainty  and changes in  circumstances.  Actual results may vary
materially from what is contained in a forward-looking  statement.  Factors that
may cause a result different than expected or anticipated include:  governmental
and  regulatory  commissions'  decisions;  changes  in  regulatory  commissions'
policies and  procedures;  the  timeliness  of regulatory  commissions'  actions
concerning rate relief; new legislation; electric power interruptions; increases
in suppliers' prices and the availability of supplies including water and power;
fluctuations in interest rates;  changes in  environmental  compliance and water
quality  requirements;  acquisitions  and the ability to successfully  integrate
acquired  companies;  the  ability to  successfully  implement  business  plans;
changes in customer water use patterns; the impact of weather on water sales and
operating  results;  access to sufficient  capital on satisfactory  terms; civil
disturbances or terrorist  threats or acts, or  apprehension  about the possible
future occurrences of acts of this type; the involvement of the United States in
war or other  hostilities;  restrictive  covenants  in or  changes to the credit
ratings on our current or future debt that could increase our financing costs or
affect our ability to borrow, make payments on debt or pay dividends;  and other
risks and unforeseen events. When considering  forward-looking  statements,  you
should keep in mind the cautionary  statements  included in this  paragraph.  We
assume no obligation to provide public updates of forward-looking statements.

         OVERVIEW

         California  Water Service  Group  provides  water  utility  services to
customers in California,  Washington, New Mexico and Hawaii. The majority of the
business is regulated by the respective state's public utility  commission.  Our
California  regulated water business  comprises the majority of the business and
contributed  96% of our revenues and 84% of our net income in 2003. We also have
a  regulated  wastewater  business in New Mexico.  Non-regulated  activities  we
provide relate  primarily to the water utility  business and include  operating,
maintenance, billing, meter reading and water testing services.

         The regulatory entities governing our regulated operations are referred
to as "the  Commissions"  in this  report.  Revenues,  income and cash flows are
earned primarily  through  delivering  drinking water through pipes to homes and
businesses. Rates charged to customers for the regulated business are determined
by the  Commissions.  These rates are intended to allow us to recover  operating
costs and earn a reasonable rate of return on capital.

         Major factors  relevant to the drinking  water industry and our Company
are:  the process and timing of setting  rates  charged to  customers;  weather;
water  quality  standards;  other  regulatory  standards;  water  supply;  water
quality; and level of capital expenditures.

         The most significant risk and challenge to our business during the past
several years has been obtaining  timely rate increases to cover increased costs
and  investments.  We are  addressing  this risk by having an  experienced  team
dedicated solely to pursuing rate increases and managing  Commission issues. Our
business  can also be impacted by weather,  as it was in 2003.  Weather  risk is
partially   mitigated  by  having  operations  in  both  northern  and  southern
California,  as well as in three other  states.  Another risk in our industry is
obtaining  adequate   financing,   as  the  capital   expenditures   needed  for
infrastructure  may significantly  exceed the cash flow generated by operations.
Management  believes that the Company has a strong  balance sheet and is capable
of  supporting  the  financing  needs of the  business  through  use of debt and
equity. Finally, the water industry is highly regulated,  and must comply with a
multitude  of  standards  related  to water  quality  and  service.  To  address
compliance   issues,   we  have  a  highly  trained,   focused  team  that  uses
state-of-the-art  technology  and works  closely  with  government  agencies  to
monitor supplies and operations.


                                       20


         For 2003,  net income was $19.4  million  compared to $19.1  million in
2002.  Diluted earnings per share for 2003 were $1.21 compared to $1.25 in 2002.
The decline in earnings per share was primarily due to delays in receiving  rate
relief on our large  general rate case filing,  higher  rainfall  which  lowered
sales and increased shares outstanding.  Partially offsetting these factors were
higher gains from property sales additional revenue from other rate filings, and
increases  in  customers.  We plan to continue to invest in the  business,  with
budgeted  capital  expenditures  of $66 million for 2004,  which we plan to fund
from  operating  cash  flows,  additional  debt and  issuance  of common  stock.
Overall, we expect our 2004 operational  performance and operating cash flows to
improve due to the rate increases approved to date.

         BUSINESS

         California  Water Service Group is a holding  company  incorporated  in
Delaware with five operating subsidiaries: California Water Service Company (Cal
Water),  CWS Utility  Services  (Utility  Services),  New Mexico  Water  Service
Company (New Mexico Water),  Washington Water Service Company (Washington Water)
and Hawaii Water Service  Company,  Inc.  (Hawaii Water).  Cal Water, New Mexico
Water,  Washington  Water and Hawaii Water are regulated public  utilities.  The
regulated  utility entities also provide some  non-regulated  services.  Utility
Services   provides    non-regulated   services   to   private   companies   and
municipalities.

         Cal Water, which began operation in 1926, is a public utility supplying
water  service to 446,000  customers  in 75  California  communities  through 25
separate  districts.  Cal  Water's 24  regulated  systems,  which are subject to
regulation by the California Public Utilities  Commission (CPUC),  serve 439,900
customers.  An additional  6,100  customers  receive service through a long-term
lease of the City of  Hawthorne's  system by Cal Water,  which is not subject to
CPUC  regulation.  Cal Water accounts for 96% of the total  customers and 96% of
the total operating revenue.

         Washington Water started  operations in 1999 through the acquisition of
two water companies.  It provides  domestic water service to 14,700 customers in
the  Tacoma  and  Olympia  areas.  Washington  Water's  utility  operations  are
regulated by the Washington Utilities and Transportation Commission.  Washington
Water  accounts  for 3% of the total  customers  and 2% of the  total  operating
revenue.

         New Mexico Water began providing  non-regulated  meter reading services
in 2000, and assumed regulated  operations in July 2002 with the purchase of the
assets of Rio Grande Utility  Corporation.  New Mexico Water provides service to
2,400 water and 1,700 wastewater customers south of Albuquerque, New Mexico. Its
regulated  operations are subject to the  jurisdiction  of the New Mexico Public
Regulation  Commission.  New Mexico Water accounts for 1% of the total customers
and 1% of the total operating revenue.

         Hawaii Water was formed in May 2003 with the  acquisition  of Kaanapali
Water  Corporation.  Hawaii Water provides water service to 500 customers on the
island of Maui, including several large resorts and condominium  complexes.  Its
regulated  operations  are  subject to the  jurisdiction  of the  Hawaii  Public
Utilities  Commission.  Hawaii  Water  accounts  for less  than 1% of the  total
customers and 1% of the total operating revenue.

         Utility Services conducts only  non-regulated  activities.  Included in
Utility  Services'  operations is a long-term  lease  agreement with the City of
Commerce,  which serves approximately 1,100 customers.  Non-regulated activities
are primarily  contracted in Utility Services and include contracting with other
private companies and  municipalities to operate water systems and provide meter
reading and billing services.  Other  non-regulated  activities  include leasing
communication  antenna  sites,  operating  recycled  water  systems,   providing
brokerage  services  for  water  rights,  providing  lab  services  and  selling
non-utility property. Due to the different mix of services we provide, customers
are not tracked for non-regulated  activities.  Excluding sales of non-operating
property, non-regulated activities comprised 6% of the total net income in 2003.

         Rates  and  operations  for  regulated  customers  are  subject  to the
jurisdiction of the respective  state's regulatory  commission.  The Commissions
require  that  water  and  wastewater  rates  for  each  regulated  district  be
independently  determined.  The  Commissions  are  expected to  authorize  rates
sufficient to recover normal operating  expenses and allow the utility to earn a
fair and reasonable return on capital.  Rates for the City of Hawthorne and City
of


                                       21


Commerce water systems are established in accordance  with operating  agreements
and are subject to ratification by the respective city councils.  Fees for other
non-regulated activities are based on contracts negotiated between the parties.

         RESULTS OF OPERATIONS

         Earnings and Dividends.  Net income in 2003 was $19.4 million  compared
to $19.1 million in 2002 and $15.0 million in 2001.  Diluted earnings per common
share were $1.21 in 2003,  $1.25 in 2002 and $0.97 in 2001. The weighted average
number of common  shares  outstanding  used in the  diluted  earnings  per share
calculation was 15,893,000 in 2003,  15,185,000 in 2002, and 15,186,000 in 2001.
As explained  below,  the decline in 2003 earnings per share resulted from these
primary  factors:  delay in receiving rate relief on a general rate case filing,
lower water sales to existing  customers due to weather conditions and increased
shares outstanding. The effects of these factors were almost entirely negated by
higher gains from property sales,  additional  revenue from other rate increases
and an increase in customers.

         At the  January  2003  meeting,  the Board of  Directors  declared  the
quarterly dividend,  increasing it for the 36th consecutive year. Dividends have
been paid for 59 consecutive years. The annual dividend paid in 2003 was $1.125,
a 0.4% increase over the $1.12 paid in 2002,  which was an increase of 0.4% over
the $1.115 paid in 2001. The dividend  increases were based on projections  that
the higher dividend could be sustained while still providing  adequate financial
resources and flexibility.  Earnings not paid as dividends are reinvested in the
business for the benefit of  stockholders.  The dividend payout ratio was 93% in
2003,  90% in 2002 and 115% in 2001,  an average  of 98%  during the  three-year
period.

         Operating Revenue.  Operating revenue,  which includes revenue from the
City of Hawthorne and City of Commerce leases,  was $277.1 million,  an increase
of 5.3% over 2002.  Operating revenue in 2002 was $263.2 million, an increase of
6.6% over 2001.  The sources of changes in operating  revenue  were:

Dollars in millions                                      2003               2002

Customer usage                                     $     (4.6)        $      6.9
Rate increases                                           12.6                6.6
Usage by new customers                                    6.0                2.8
- --------------------------------------------------------------------------------
  Net change                                       $     14.0         $     16.3


Average revenue per customer (in dollars)          $      594         $      579
New customers added                                     7,400              8,600

         Overall,  temperatures in our service areas for 2003 were comparable to
2002.  Rainfall in our  California  service areas was higher than normal between
February and April. Partially offsetting higher rainfall in California was lower
rainfall in our Washington service area during the summer,  which had a positive
impact on water usage.  Higher rainfall in California was the primary factor for
the $4.6 million  decrease in revenue from customer  usage in 2003. In 2002, the
weather  patterns were  relatively  normal.  In 2001, the weather was cooler and
more rainy than normal.

         Rate  increases  added $12.6  million to 2003  revenues.  The estimated
impact of various  rate  increases  were:  step rate  increases - $2.2  million;
Bakersfield  treatment plant - $2.3 million;  balancing accounts - $1.9 million;
2001 General Rate Case (GRC) - $3.7 million;  2001 GRC  "catch-up"  surcharges -
$1.3 million;  purchased  water rate  increases - $0.9 million;  and  Washington
Water rate increases - $0.3 million.

         For 2002,  rate increases  added $6.6 million to revenue.  Revenue from
GRC decisions accounted for $2.7 million of the increase, $2.0 million came from
step rate  increases and $1.9 million came from offset rate increases to recover
electric  costs  included  in  expense-balancing  accounts  for four  California
districts.  No new GRC  decisions  were  authorized  by the  CPUC  during  2002.
Washington  Water  received a GRC  decision  in 2002.  The RATES AND  REGULATION
section of this report provides a detailed discussion of regulatory activity.

         The December 31, 2003, customer count,  including the City of Hawthorne
and City of Commerce customers,  was 466,400, an increase of 2% from the 459,000
customers at the end of 2002, which was an increase of


                                       22


2% from the 450,400  customers at the end of 2001.  The increase in customers is
due to normal growth within  existing  service areas and  acquisitions  of water
systems.  The  addition  of Hawaii  Water  added 500  customers  in 2003 and the
addition of New Mexico Water added 4,100  customers in 2002.  These are included
in the customer count increases.

         Water Production Expenses.  Water production expenses, which consist of
purchased water, purchased power and pump taxes, comprise the largest segment of
total operating costs.  Water  production  costs accounted for 44.2%,  45.6% and
45.3% of total operating costs in 2003, 2002 and 2001,  respectively.  The rates
charged for wholesale water supplies, electricity and pump taxes are established
by various public  agencies.  As such,  these rates are beyond our control.  The
table below provides the amount of increases  (decreases) and percent changes in
water production costs during the past two years: Dollars in millions


                                      2003                         2002
                           -------------------------    --------------------------
                           amount   change  % change    amount    change  % change
                                                           
Purchased Water          $   80.8   $  4.1     5%      $   76.7   $  3.5     5%
Purchased Power              21.9     (1.0)   (4%)         22.9      1.8     8%
Pump Taxes                    6.3     --      --            6.3      0.4     7%
- -----------------------------------------------------------------------------------
Total Water Production   $  109.0   $  3.1     3%      $  105.9   $  5.7     6%
- -----------------------------------------------------------------------------------


         Two of the principal  factors  affecting water production  expenses are
the amount of water produced and the source of the water. Generally,  water from
wells costs less than water purchased from wholesale suppliers.  The table below
provides the amounts, percentage change and source mix for the respective years:
Millions of gallons (MG)


                                     2003                    2002                      2001
                            ---------------------    --------------------      ---------------------
                                MG   % of total          MG    % of total         MG    % of total
                                                                            
Source:
Wells                       66,009        50.0%      68,663         51.9%     64,646          51.1%
% change from prior year        (4%)                      6%

Purchased                   63,264        48.2%      62,811         47.5%     61,344          48.4%
% change from prior year         1%                       2%

Surface                      2,407         1.8%         751          0.6%        638           0.5%
% change from prior year       221%                      18%

Total                      131,680       100.0%     132,225        100.0%    126,628         100.0%
% change from prior year        (1%)                      4%


         Purchased  water  expenses are affected by quantity  changes,  supplier
prices and cost differentials  between wholesale  suppliers.  For 2003, the $4.1
million  increase in  purchased  water costs was  primarily  driven by increased
wholesale rates charged by wholesale suppliers in the Stockton and San Francisco
Bay area districts. Overall, wholesale water rates increased 5%. Purchased power
expenses  are  affected  by water  pumped from  wells,  water moved  through the
distribution  system,  rates  charged by  electric  utility  companies  and rate
structures  applied  for  usage  during  peak and  non-peak  times of the day or
season.  The majority of the change in purchased  power expenses is attributable
to credits received from the electric utility  companies (total of $0.9 million)
and lower quantities of water pumped from wells.

         In 2002, four wholesale water  suppliers  increased their rates,  which
increased  purchased  water  costs.  The  increases  ranged  from 2% to 5%.  One
wholesale  supplier  reduced its rate by 9%. The 2002  purchased  power  expense
increase was caused by higher  electric  rates paid through May 2002 as compared
to 2001's electric rates and a 6% increase in well production. In December 2001,
wholesale   suppliers  in  the  Los  Angeles  area  refunded  $1.4  million  for
over-collection of prior period water purchases.  The refunds were recorded as a
reduction of purchased water costs. There were no comparable refunds in 2002.


                                       23


         Administrative  and General Expenses.  The components of administrative
and general  expenses  include  payroll  related to  administrative  and general
functions, all company benefits charged to expense accounts,  insurance expense,
legal fees,  audit fees,  regulatory  utility  commissions'  expenses,  board of
directors' fees and general corporate expenses.

         During  2003,   administrative  and  general  expenses  increased  $3.8
million,  or 10%, compared to 2002. Payroll expenses increased $0.6 million,  or
9%, due to the addition of new employees and wage increases.  Employee  benefits
increased $3.0 million due primarily to increases in retirement  plan expense of
$2.3 million (51%) and  employee/retiree  health  expenses of $0.4 million (7%).
The  retirement  plan cost  increase was due primarily to changes in the pension
plan effective  January 1, 2003,  which will improve  benefits to employees.  As
part of the  negotiations  with the unions,  lower pay increases  were offset by
increased pension benefits. Other expense elements contributed to the balance of
the change, but none were individually significant.

         During  2002,   administrative  and  general  expenses  increased  $1.2
million,  or 3%, compared to 2001.  Payroll expenses increased $1.2 million with
the addition of new employees and wage  increases that were effective in January
2002.  However,  the payroll increase was offset by the reduction of consultants
who worked primarily on information  systems projects.  Certain consultants were
replaced with permanent employees. As a result of these changes, consulting fees
decreased  $2.1  million.  Employee  benefits  increased  $2.3  million  due  to
increases  mainly in group health ($0.4 million),  workers'  compensation  ($0.5
million) and retirement plan expenses ($1.3  million).  The retirement plan cost
increase was based on an actuarial report that considered asset  performance and
the cost of an  improvement  in the  retirement  benefit  provided to employees.
Partially  offsetting  these  increases  was an  increased  allocation  of costs
attributable to non-regulated  operations of $0.3 million, which are reported in
a separate  line on the  Consolidated  Statements of Income.  These  allocations
reduce administrative and general expenses.

         Other Operations Expenses.  The components of other operations expenses
include payroll, material and supplies, and contract services costs of operating
the  regulated  water  systems,   including  the  costs  associated  with  water
transmission and distribution,  pumping, water quality,  meter reading,  billing
and operations of district offices.

         For 2003, other operating  expenses  increased $3.4 million or 10% from
2002.  Payroll costs charged to other operating expenses increased $1.1 million,
or 6%, due to general wage increases, labor related to the Bakersfield Treatment
Plant and labor related to customer service in our district offices. Other major
cost increases were related to lab expenses of $0.5 million (56%), chemicals and
filters of $0.5 million  (42%),  uncollectible  account  expense of $0.4 million
(73%) and rent expense of $0.4 million (45%). Other expense elements contributed
to the balance of the change, but none were individually significant.

         For 2002, other operating expenses were virtually unchanged compared to
2001. Payroll costs charged to other operating  expenses declined  approximately
$1.1 million due to synergies realized from combining four Los Angeles operating
districts  at one  location  and by shifting of labor to support the increase in
capital  construction  projects.  Offsetting  the  decline  in labor  costs were
increases in non-labor pumping and water quality expenses.

         Maintenance.  Maintenance  expense increased $1.1 million (10%) in 2003
compared to 2002.  For 2002,  maintenance  expense  decreased  $0.5 million (5%)
compared to 2001. The variance is impacted by a variety of factors.  In 2003, we
completed  more repairs  related to leaks and breaks in mains and service lines.
We also  incurred  increased  maintenance  costs  for  pumps.  Additionally,  we
expended $0.2 million on a well and treatment plant in the City of Hawthorne.

         Depreciation and  Amortization.  Depreciation and amortization  expense
increased due to the level of company-funded capital expenditures. See LIQUIDITY
AND CAPITAL RESOURCES section for more information.

         Non-Regulated Income, Net. The major components of non-regulated income
are revenue and expenses  related to the  following  activities:  operating  and
maintenance  services  (O&M),  meter  reading and billing  services,  leases for
cellular phone antennas,  water rights  brokering,  and design and  construction
services. Overall,  non-regulated income in 2003 was relatively flat compared to
2002,  with increases  primarily from O&M and cellular phone antennas  offset by
decreases in water rights  brokerage  income.  Water rights  brokerage income is
sporadic and is affected by market opportunities and price volatility.  See note
3 of the consolidated financial statements for additional information.


                                       24


         Gain on Sale of  Non-Utility  Property.  Pretax gains from  non-utility
property sales were $4.6 million,  $3.0 million,  and $3.9 million in 2003, 2002
and 2001, respectively. The 2003 gains were primarily from three properties sold
in the San  Francisco Bay area.  Earnings and cash flow from these  transactions
are sporadic and may or may not continue in future periods depending upon market
conditions.  We have other  non-utility  properties  that may be marketed in the
future based on real estate market conditions.

         Interest  Expense.  Interest expense increased by $0.7 million (4%) and
$0.8 million (5%) in 2003 and 2002, respectively.  The increased expense was due
primarily to higher  borrowing of long-term  debt.  Refinancing  activities  and
lower  short-term  interest  rates  partially  offset the  increase  in interest
expense. See LIQUIDITY AND CAPITAL RESOURCES section for more information.

         RATES AND REGULATION

         Following  are  summaries  of approved and pending  rate  filings.  The
amounts reported are annual amounts;  therefore,  the impact to recorded revenue
will generally be recognized over a twelve-month  period from the effective date
of the decision. Most increases are permanent in nature except for the increases
related  to the 2001 GRC  "catchup"  and the  offsetable  expenses,  which  have
specific time frames for recovery.

         2003  Regulatory  Activity - Approved  Filings.  In  January  2003,  we
received approval for step rate increases totaling $2.2 million.  Step increases
allow recovery of cost increases, primarily from inflation, between GRC filings.
GRC filings are normally made every three years for each district.

         In April  2003,  the CPUC  authorized  a second  advice  letter  filing
related to the  Bakersfield  Treatment  Plant.  This  advice  letter  allowed an
increase  in  rates  of $1.8  million  on an  annual  basis.  The  plant  became
operational  in the  second  quarter  of 2003  and had a total  project  cost of
approximately $50 million.

         In May 2003,  the CPUC  authorized  the  recovery  of $5.4  million  in
offsetable expenses (also known as balancing  accounts),  of which approximately
$3.6 million will be collected from May 2003 through May 2004 and  approximately
$1.8  million  will be  collected  from June 2004  through  May 2005.  Partially
offsetting this increase is a $0.8 million decrease for one district,  effective
from June 2003 through June 2004.

         In September 2003, the CPUC approved Cal Water's 2001 GRC applications.
These filings were submitted in July 2001 for 14 of our 24 California districts.
This  GRC  decision  authorizes  an 8.9%  return  on rate  base  and will add an
estimated $12.8 million to annual revenues. In addition, we received approval to
collect an  additional  $4.5  million in  revenues  over 12 months to reflect an
effective date of April 3, 2003. The 2001 GRC also authorized the filing of step
rate increases for $2.7 million annually for 2004 and 2005 that are effective in
January of each year pending approval by the CPUC.

         In the  September  2003 to  December  2003  period,  the CPUC  approved
increases to recover higher  purchased  water costs for our districts in the San
Francisco Bay area. The total annual amount of these increases is $4.8 million.

         In October  2003,  the CPUC  authorized  a third advice  letter  filing
related to the Bakersfield Treatment Plant. This allowed an increase in rates of
$4.2 million on an annual basis.  Due to depreciation  expense for the new plant
beginning in January  2004,  only $0.4 million was billed in the October 2003 to
December  2003 period.  The full $4.2  million  annual  amount was  effective in
January 2004.

         No filings were approved during 2003 for Washington  Water,  New Mexico
Water or Hawaii Water.

         2004 Regulatory Activity - Approved Filings (through February 2004). In
January  2004,  we  received  approval  for step rate  increases  totaling  $4.2
million.

         In February 2004, the CPUC authorized an advice letter for $0.7 million
for one district related to increased wholesale purchased water rates.

         Pending  Filings.  Annual amounts  provided below reflect our requested
increases;  the CPUC has  historically  approved  increases  that are lower than
those requested.

         Cal Water 2002 GRC Applications - Applications have been filed for rate
increases for several  districts.  As of this report date, the current  proposed
settlement is $4.0 million. The amount of the proposed settlement may or


                                       25

may not be adjusted  when final  decisions are issued by the CPUC. At this time,
we are unable to predict  when the final  decisions  and rulings will be issued,
their composition or their financial impact on revenues for future periods.

         Cal Water 2003 GRC Applications - Applications have been filed for rate
increases for two  districts  totaling  approximately  $5.7 million on an annual
basis.  The amount of the filing may or may not be adjusted when final decisions
are issued by the CPUC.  At this time,  we are unable to predict  when the final
decisions  and rulings  will be issued,  their  composition  or their  financial
impact on revenues for future periods.

         Expense  Balancing and Memorandum  Accounts - Advice letters were filed
for recovery of approximately $5.5 million related to balancing-type  memorandum
accounts.  During the initial review  process,  the CPUC raised certain  issues,
requiring us to refile our request,  which we expect to do in the 1st quarter of
2004. At this time,  we cannot  predict if  adjustments  will be made during the
CPUC review process nor can we predict the timing of the decision on the filing.

         No filings  were pending as of this report date for  Washington  Water,
New Mexico Water or Hawaii  Water.  We plan on filing  during 2004 for increased
rates for New Mexico Water's  wastewater  operations and for Hawaii Water. These
filings are not expected to impact 2004 revenues significantly.

         2002 Regulatory Activity - Approved. In January 2002, step increases of
$2.0 million were approved by the CPUC.

         In April 2002,  Washington Water was granted by the Washington  Utility
Trade  Commission  (WUTC) a $1.0  million  increase  in annual  revenue to cover
higher operating costs and capital expenditures.

         In June  2002,  the  CPUC  authorized  an  increase  in  rates  for our
Bakersfield  District  of $0.8  million  on an annual  basis  related to the new
treatment  plant being  constructed at that time.  This decision was based on an
advice letter filing to cover  approximately  $6 million of  construction  costs
incurred as of the filing date.

         Regulatory Tardiness and Legislative  Initiative.  Regulatory delays in
obtaining  CPUC  decisions  regarding GRC filings have been costly to California
regulated  water  utilities.  In recent years, we have  experienced  significant
revenue losses due to regulatory  delays.  We normally file GRC  applications in
July,  but filed  later in 2002 and 2003 due to the delays in the 2001 GRC.  The
CPUC's rate  processing  timeline  provides  for a decision  within 12 months of
accepting a GRC  application.  When decisions are not issued in a timely manner,
customer rates are not increased in line with cost  increases.  As a result,  we
lose revenue and do not fully  recover costs during the period the decisions are
delayed.

         We  have  experienced  significant  revenue  losses  due to  delays  in
obtaining  GRC filing  approvals in  California.  The  estimated  loss from CPUC
delays was $9.3 million in revenue and $5.6 million in net income. This estimate
covers  the July  2002  through  March  2003  period  and was due to the  delays
concerning the 2001 GRC application. These figures represent the revenue and net
income that would have been collected if the CPUC had issued its decision on the
2001 GRC in July  2002,  which  is when a  decision  would  normally  have  been
rendered on a September 2001 filing.  The estimated impact of approval delays on
our balancing  accounts filings was not permanent and the loss of the time value
of money is not deemed to be material.

         California  State  Assembly  Bill 2838 became  effective  on January 1,
2003, and applies to filings made in January 2003 and thereafter. It is designed
to preserve the cash flow of regulated water utilities by providing interim rate
relief if the CPUC has not issued a decision for a requested  GRC rate  increase
in a timely  manner.  While  the  CPUC  has not  issued  formal  procedures  for
implementing the provisions of this bill, we believe interim rate increases will
be  authorized  if the CPUC does not  issue a final  rate  decision  in a timely
manner.  In our initial  application  of this bill,  we did receive  approval to
charge  interim  rates to cover  inflation  costs and we received  approval  for
establishment  of an effective  date.  While the impact to 2003 revenue was very
minor,  we view the approval of interim rate and  establishment  of an effective
date as  positive  indications  that the  basic  provisions  of this law will be
applied as intended.

         Review of Property  Sales by CPUC. In September  2003,  the CPUC issued
decision D. 03-09-021.  In this decision, the CPUC ordered Cal Water to maintain
and track sales  records for each property that was at any time included in rate
base and subsequently  sold and to share these records with the CPUC. The CPUC's
staff is reviewing our recording of proceeds and recognition of gain on sales of
these  non-utility,   surplus  properties.  We  believe  the  sales  of  surplus
properties  were  properly   recorded  in  accordance  with  the  Water  Utility
Infrastructure Act of 1995 and the


                                       26


CPUC's decision  authorizing the holding company  structure for California Water
Service Group.  Gains have been recognized outside of regulated  operations,  as
the  properties  sold were not being used in the regulated  operations  and were
excluded from rate base for  rate-setting  purposes.  Also,  proceeds from these
sales have been reinvested in the regulated  business of Cal Water. The CPUC has
requested  documentation  to determine  whether we  appropriately  removed these
non-utility,  surplus  properties  from  rate base in a timely  manner,  and has
requested  documentation on the determination  that they were no longer used and
useful.  If the CPUC  finds  that any  surplus  property  sale or  transfer  was
recorded  inappropriately,  then this could  result in a reduction  to rate base
used to determine future rates charged to regulated customers. This could reduce
future revenues, net income and cash flows. We are not able to provide estimates
of the timing or what the ultimate resolution may be.

         In Washington  Water,  New Mexico Water and Hawaii  Water,  we have not
experienced  regulatory tardiness or variations to established processes on rate
filings.

         WATER SUPPLY

         Our source of supply  varies  among our  operating  districts.  Certain
districts  obtain all of the supply from wells;  some districts  purchase all of
the supply from wholesale  suppliers;  and other districts  obtain supply from a
combination  of wells and  wholesale  suppliers.  A small  portion of the supply
comes  from  surface  sources  and  is  processed  through  company-owned  water
treatment  plants.  We are currently  meeting water quality,  environmental  and
other regulatory standards.

         California's normal weather pattern yields little precipitation between
mid-spring and mid-fall.  The Washington service areas receive  precipitation in
all seasons with the heaviest amounts during the winter.  New Mexico's  rainfall
is  heaviest  in  the  summer  monsoon  season.  Hawaii  receives  precipitation
throughout the year with the largest  amounts in the winter months.  Water usage
in all service areas is highest  during the warm and dry summers and declines in
the cool  winter  months.  Rain and snow  during  the  winter  months  replenish
underground  water basins and fill  reservoirs,  providing  the water supply for
subsequent delivery to customers. To date, snow and rainfall accumulation during
the 2003-2004  water year has been above average.  Water storage in California's
reservoirs  at the end of 2003 was at average  levels.  We believe  that  supply
pumped from underground  aquifers and purchased from wholesale  suppliers should
be adequate to meet customer demand during 2004 and beyond. We develop long-term
water  supply plans for each of our  districts to help assure an adequate  water
supply under various operating and supply conditions. Some of our districts have
unique  challenges  in meeting  water  quality  standards;  but we  believe  our
supplies will meet current standards using current treatment  processes.  We are
executing a plan to meet more stringent EPA standards related to arsenic,  which
will become effective in January 2006. Additional information on water supply is
reported in our Form 10-K filing.

         LIQUIDITY AND CAPITAL RESOURCES

         Liquidity.

         Short-Term  Financing.  Our  short-term  liquidity  is provided by bank
lines of credit and internally  generated funds. On a long-term basis, we obtain
financing through access to debt and equity markets.  Short-term bank borrowings
were $6.5 million at December 31, 2003,  and $36.4 million at December 31, 2002.
Cash and cash  equivalents  were $2.9  million at December  31,  2003,  and $1.1
million at December 31, 2002.  Given our ability to access these lines of credit
on a daily basis,  we keep cash balances down to levels  required for daily cash
needs and use surplus cash to pay down lines of credit when  available.  Minimal
operating  levels of cash are maintained for Washington  Water, New Mexico Water
and Hawaii Water.

         The water  business  is  seasonal.  Revenue  is lower in the cool,  wet
winter  months when less water is used  compared to the warm,  dry summer months
when water use is higher.  During the  winter  period,  the need for  short-term
borrowings under the bank lines of credit  increases.  The increase in cash flow
during the  summer  allows  short-term  borrowings  to be paid down.  Short-term
borrowings that remain outstanding more than one year have generally been


                                       27


converted  to  long-term  debt.  In 2003,  we used both  long-term  debt and the
issuance of common stock to provide funding to pay down  short-term  borrowings.
In years when more than  normal  precipitation  falls in the  Company's  service
areas or  temperatures  are lower than normal,  especially in the summer months,
customer  water usage can be lower than  normal.  The  reduction  in water usage
reduces  cash  flow  from  operations  and  increases  the need  for  short-term
borrowings.

         During the first seven months of 2003,  short-term borrowings were used
as an initial funding source for capital  expenditures.  This caused  short-term
borrowings to increase  through July 2003. In August 2003, we issued a secondary
offering of common stock under a shelf registration. These proceeds were used to
pay down the  short-term  borrowings and provide  long-term  funding for capital
expenditures.  During 2002, the need for  short-term  borrowings was high due to
capital  expenditures  primarily  related  to  construction  of the  Bakersfield
Treatment  Plant.  Cash  generated by operations was not sufficient to meet cash
needs of the business,  primarily due to  company-funded  capital  expenditures.
Capital was obtained through short-term borrowings and long-term borrowings.

         Cal Water has a $45 million credit facility.  The term of the agreement
expires in April 2005. This agreement has a requirement for balances to be below
certain  thresholds  for 30  consecutive  days each  calendar  year. We met this
requirement  in 2003 and have  already met this  requirement  in 2004.  No other
financial  covenants apply,  such as interest expense coverage or capitalization
ratios. The agreement terms include a provision that allows the bank to call the
loan and cancel the facility if Cal Water's  debt ratings fall below  investment
grade (Moody's Baa3 or S&P BBB-).  Cal Water's  current debt ratings are A2 from
Moody's  and A+ from S&P. In addition to  borrowings,  the  facility  allows for
letters of credit up to $10 million. We had one letter of credit outstanding for
$0.5 million related to an insurance policy,  which reduces the amount available
to borrow.  Interest  is charged on a variable  basis and fees are  charged  for
unused  amounts.  As of December 31, 2003, we had borrowed $4.0 million  against
the facility.

         A $10 million  credit  facility  exists for  California  Water  Service
Group,  Utility  Services,  Washington Water, New Mexico Water and Hawaii Water.
Until recently  modified,  the agreement  covered only California  Water Service
Group,  Utility Services and New Mexico Water. The term of the agreement expires
in April 2005. This agreement has a requirement for balances to be below certain
thresholds for 30 consecutive  days each calendar year. We met this  requirement
in 2003 and  have  already  met this  requirement  in 2004.  No other  financial
covenants apply, such as interest expense coverage or capitalization ratios. The
agreement  terms  include a provision  that allows the bank to call the loan and
cancel the facility if Cal Water's debt ratings fall below investment  grade. In
addition  to  borrowings,  the  facility  allows for  letters of credit up to $5
million.  We had no letters of credit outstanding at December 31, 2003. Interest
is charged on a variable  basis and fees are charged for unused  amounts.  As of
December 31, 2003, we had no borrowings against the facility.

         New Mexico  Water has $2.5  million  in loans that  expire in May 2004.
These loans do not have an out-of-debt  compliance  period.  An additional  $0.1
million is available for borrowing under the current arrangement.  At this time,
we believe  these loans can be renewed at market rates.  Washington  Water has a
$0.1 million  credit  facility that is currently  unused.  Hawaii Water does not
have a credit facility or other third party loans as of December 31, 2003.

         Generally,  short-term  borrowings  under the commitments are converted
annually to long-term borrowings.

         Credit  Ratings.  Cal Water's first mortgage bonds are rated by Moody's
Investors  Service  (Moody's)  and  Standard  & Poor's  (S&P).  The bank  credit
facility  agreements  contain a provision  that if Cal Water's  Moody's or S&P's
senior  debt  rating  falls  below  investment  grade,  the  credit  line may be
terminated by the bank and the loan  accelerated.  During the fourth  quarter of
2003, management met separately with the two credit rating agencies during their
annual rating  reviews.  In February 2004,  Moody's issued a report lowering Cal
Water's  senior  secured  debt from A1 to A2 and noted the rating as stable.  In
November  2003,  S&P issued a report  keeping its rating of A+, but changing its
outlook from stable to negative.  Both cited  concerns  about the lack of timely
rate relief from the CPUC and the projected capital expenditure requirements for
water  infrastructure and environmental  compliance needs. Moody's also issued a
report about the water industry, citing the difficulties small operators face in
financing needed capital  expenditures  and delays in commission  rulings as two
main  concerns.  We believe  that the rate  increases  received and pending will
increase  revenues,  income and cash  flows in 2004,  which  will  increase  our
financial  strength.  The  rating  agencies  may  or may  not  agree  with  this
assessment and may further  change their ratings in the future.  We would expect
to be


                                       28


able to meet financing needs even if our ratings were further downgraded,  but a
rating change may result in a higher interest rate on new debt.

         Long-Term Financing.  Long-term financing, which includes senior notes,
other debt  securities  and common  stock,  has been used to replace  short-term
borrowings  and fund capital  expenditures.  Internally-generated  funds,  after
making  dividend  payments,  provide  positive cash flow, but have not been at a
level to meet all of our  capital  expenditure  needs.  We expect  this trend to
continue  given  our  plan for  capital  expenditures  for the next 5 years.  We
believe  that  long-term  financing  is  available to us through debt and equity
markets.

         In March 2002, the CPUC issued a decision  granting Cal Water authority
to  complete  up to $250  million of equity  and debt  financing  through  2005,
subject to certain  restrictions.  We currently have raised $206 million through
additional debt, refinanced debt and a common stock offering. We plan to request
an  additional  authorization  for $250 million  covering the next five years to
address  future  capital  needs.  In  addition  to Company  funds,  construction
projects are funded by developers'  contributions in aid of construction,  which
are not refundable, and advances for construction, which are refundable.

         During  2002,  we  initiated  a program to  refinance  a portion of Cal
Water's  outstanding  first mortgage bonds. The refinancing was intended to take
advantage of the available lower interest rates. The total program was completed
in three  phases.  The first  phase of the  program  was  completed  in 2002 and
included  refinancing of Series S, BB and DD first mortgage bonds,  and Series P
that matured on November 1, 2002.  Including  Series P, the total first mortgage
bond principal balance refinanced was $33.9 million. In addition,  call premiums
and  transaction  costs were incurred in the  transactions.  The refinancing was
accomplished  with funds from the  issuance by Cal Water of two lower  interest,
unsecured  senior  notes.  Series G Senior  Notes for $20 million were issued in
November  2002 and Series H Senior Notes for $20 million were issued in December
2002.  The interest  rate on both series is 5.29% and both mature in 2022.  Each
series requires annual sinking fund payments of $1.8 million commencing in 2012.

         The second phase of the  refinancing  was  completed  in May 2003.  Cal
Water issued $10 million,  5.54%, 20-year Series I Senior Notes and $10 million,
5.44%,  15-year Series J Senior Notes.  Both notes were unsecured.  The proceeds
from these borrowings were used to prepay the Series EE first mortgage bond that
had an interest rate of 7.9%. The principal, call premiums and transaction costs
were approximately $20 million.

         The third phase was completed in November  2003.  In October 2003,  Cal
Water issued a $20 million,  5.55%,  Series N Senior Note. The note is unsecured
and matures on December 1, 2013. Payment of principal is due at maturity.  Funds
received  were used to prepay  first  mortgage  bond  Series FF,  which  accrued
interest at a rate of 6.95% and had a  principal  balance of $19.1  million.  In
addition to the  prepayment of the principal  balance,  funds were used to pay a
call premium related to Series FF,  transaction  costs and for general corporate
purposes.  In November  2003,  Cal Water issued a $20 million,  5.52%,  Series M
Senior Note.  The note is unsecured and matures on November 1, 2013.  Payment of
principal is due at maturity.  Funds received were used to prepay first mortgage
bond Series GG,  which  accrued  interest at a rate of 6.98% and had a principal
balance  of $19.1  million.  In  addition  to the  prepayment  of the  principal
balance, funds were used to pay a call premium related to Series GG, transaction
costs and for general corporate purposes.

         The  transactions  described above  concluded our refinancing  program.
Based on terms currently  available in the marketplace,  we have determined that
additional refinancing at this time would be cost prohibitive.  The refinanc-ing
program encompassed approximately $100 million of long-term debt and we estimate
it will save  approximately  $2.0 million in interest expense on an annual basis
through the year 2013.

         In 2002,  long-term  financing was provided by issuance of senior notes
by Cal Water.  In May 2002,  Cal Water  completed  the  issuance of $20 million,
7.11%,  30-year Series E Senior Notes.  In August 2002, Cal Water  completed the
issuance of $20 million, 5.90%, 15-year Series F Senior Notes. These senior note
issues do not require sinking fund payments.

         In 2003,  long-term  financing was provided by issuance of senior notes
by Cal Water and issuance of common stock by the Company.

         In February  2003,  Cal Water  completed  the  issuance of $10 million,
4.58%,  7-year Series K Senior Notes and $10 million,  5.48%,  15-year  Series L
Senior  Notes.  Both notes were  unsecured.  The proceeds  were used to pay down
short-term borrowings and to fund capital expenditures.


                                       29


         On July 11, 2003, a shelf registration became effective, which provides
for the  issuance  from  time to time of up to $120  million  in  common  stock,
preferred  stock  and/or  debt  securities.  We may issue any of these  types of
securities  until  the  amount  registered  is  exhausted,  and will add the net
proceeds  from the sale of the  securities  to our general  funds to be used for
general  corporate  purposes,  which may  include  investment  in  subsidiaries,
working  capital,  capital  expenditures,  repayment of  short-term  borrowings,
refinancing  of  existing  long-term  debt,   acquisitions  and  other  business
opportunities.

         On August 4, 2003,  we announced  the issuance of 1,750,000  additional
shares of common  stock  from the shelf  registration  statement.  A  prospectus
supplement  and  prospectus  were  filed  with the SEC under Rule 424 (b) (2) on
August 5, 2003. The shares were sold at $26.25 per share. The net proceeds to us
were $43.8 million and the  transaction  was closed on August 7, 2003. The funds
were used to pay down  short-term  borrowings and to invest in short-term  money
market  instruments  pending  their use for general  corporate  purposes.  After
issuance of the  1,750,000  shares,  there  remains  $74.1 million in securities
under the shelf registration, which are available for future issuance.

         Washington  Water has long-term  debt  primarily from two banks to meet
its operating and capital  equipment  purchase  requirements  at interest  rates
negotiated with the banks.

         We do not  utilize  off-balance  sheet  financing  or  utilize  special
purpose  entity  arrangements.  We do not have equity  ownership  through  joint
ventures or partnership arrangements.

         Additional information regarding the bank borrowings and long-term debt
is presented in notes 8 and 9 in the consolidated financial statements.

         Dividend  Reinvestment  and Stock  Purchase  Plan.  We have a  Dividend
Reinvestment  and Stock Purchase Plan (Plan).  Under the Plan,  stockholders may
reinvest dividends to purchase  additional common stock without commission fees.
The Plan also allows existing  stockholders  and other  interested  investors to
purchase  common stock  through the  transfer  agent up to certain  limits.  Our
transfer  agent  operates  the Plan and  purchases  shares on the open market to
provide shares for the Plan.

         2004  Financing   Plan.  Our  2004  financing  plan  includes   raising
approximately  $40-$50  million of new capital.  The plan  includes  issuance of
$20-$30  million in senior  notes to  institutional  investors  and  issuance of
$20-$30  million of common stock.  As currently  contemplated,  the common stock
offering  will be  accomplished  with one issuance in 2004 pursuant to the shelf
registration. The timing of the issuance has not been established.  Beyond 2004,
we intend to fund capital needs through a relatively  balanced  approach between
long-term debt and equity.

         Contractual  Obligations.  We have  contractual  obligations  which are
summarized in the table below.  Long-term  debt payments  include annual sinking
fund payments on first mortgage  bonds,  maturities of long-term debt and annual
payments on other long-term  obligations.  Advances for  construction  represent
annual contract  refunds to developers for the cost of water systems paid for by
the developers. The contracts are non-interest bearing and refunds are generally
on a straight-line  basis over a 40-year period.  The total amount presented for
operating leases is for a 20-year period.


                                                     Less Than                                After
Contractual Obligations (In thousands)        Total     1 Year   1-3 Years   3-5 Years      5 Years

                                                                            
Long-Term Debt                             $273,130     $  904     $ 1,688     $ 1,623     $268,915
Advances for Construction                   121,952      4,728       8,714       8,279      100,231
Operating Leases                             15,324      1,417       2,656       2,464        8,787
Take or Pay Purchase Agreements              53,978      8,138      17,265      18,674        9,901


         Cal Water has water supply contracts with wholesale  suppliers in 16 of
its operating districts.  For each contract, the cost of water is established by
the  wholesale  supplier  and is generally  beyond our control.  The amount paid
annually to the wholesale suppliers is charged to purchased water expense on our
statements of income.  Most contracts do not require minimum annual payments and
vary with the volume of water purchased.

         The wholesale  water contract with Stockton East Water District  (SEWD)
is a fixed fee  contract.  The SEWD  payments  totaled $3.8 million in 2003.  We
estimate the annual price to increase $0.8-$1.5 million for the


                                       30


SEWD contract  effective  April 2004. SEWD rates include  incorporating  current
year  estimated  costs  and  adjustments   related  to  prior  years  costs  and
allocations with other customers. We are unable to estimate price changes beyond
a one-year period.

         We  currently  have  two  contracts,  one  in  Los  Altos  and  one  in
Bakersfield,  that contain  minimal  purchase  provisions  (take or pay).  These
contract  payments vary with the volume of water purchased.  We plan to continue
to purchase and use at least the minimum water requirement under these contracts
in the  future.  Both  contracts  renew  annually.  Obligations  were  estimated
assuming a five-year horizon beyond 2004.

         Capital  Requirements.  Capital  requirements  consist primarily of new
construction  expenditures for expanding and replacing  utility plant facilities
and the acquisition of water systems.  They also include refunds of advances for
construction.

         Company-funded  utility plant  expenditures  were $53.9 million,  $71.6
million and $53.4 million in 2003, 2002 and 2001, respectively.  A major project
during this time frame was the $50  million  water  treatment  plant and related
water  transmission  and  distribution  pipelines  in  Bakersfield,  California.
Expenditures to construct the plant were incurred over a five-year period,  with
the  largest  portion,  $27.1  million,  incurred  in  2002.  The  plant  became
operational in 2003. Other major components of capital  expenditures  were mains
and water treatment equipment.

         For 2004,  company-funded  capital  expenditures  are budgeted at $65.8
million.  For years beyond 2004,  capital  expenditures are estimated at $70-$80
million per year for the next 5 years and will  primarily be for mains,  related
water distribution equipment, pumping and water treatment equipment.

         Other capital  expenditures are funded through  developer  advances and
contributions  in aid of  construction  (non-company  funded).  The  expenditure
amounts were $20.4  million,  $16.8  million and $8.7 million in 2003,  2002 and
2001, respectively.  The changes from year to year reflect expansion projects by
developers  in our service  areas.  Funds are  received in advance of  incurring
costs for these projects.  Advances are normally  refunded over a 40-year period
without  interest.  Future  payments  for  advances  received  are listed  under
Contractual Obligations above.

         We  expect  to incur  non-company-funded  expenditures  in 2004.  These
expenditures  will be financed by  developers  through  refundable  advances for
construction and non-refundable contributions in aid of construction. Developers
are required to deposit the cost of a water  construction  project with us prior
to our  commencing  construction  work,  or the  developers  may  construct  the
facilities   themselves  and  deed  the  completed  facilities  to  us.  Because
non-company-funded   construction  activity  is  solely  at  the  discretion  of
developers, we cannot predict the level of future activity. The cash flow impact
is expected to be minor due to the structure of the arrangements.

         Capital Structure. In 2003, common stockholders' equity increased $45.3
million  (22.7%),  primarily due to the issuance of common stock in August 2003.
The long-term debt portion of the capital  structure  increased in 2003 by $21.9
million,  primarily due to issuance of Series K and Series L Senior Notes, which
were $10 million each.  See  Long-Term  Financing  section above for  additional
information.

         Total  capitalization  at December  31,  2003,  was $520.2  million and
$453.1  million at the end of 2002. We expect that our plan for using a balanced
approach of common equity and long-term  debt,  coupled with increased  earnings
above dividend  growth,  will increase the equity portion of  capitalization  in
future years. At December 31, capitalization ratios were:

                                                        2003              2002

Common Equity                                          47.0%              44.0%
Preferred Stock                                         0.7%               0.7%
Long-term Debt                                         52.3%              55.3%

         The return  (from  both  regulated  and  non-regulated  operations)  on
average common stockholders' equity was 9.1% in 2003 compared to 9.7% in 2002.

         Acquisitions.  Although there were no significant  acquisitions  in the
periods presented,  the following  acquisitions are reported since they expanded
operations into new states.


                                       31


         In July,  2002,  we  acquired  certain  assets  of Rio  Grande  Utility
Corporation  (Rio Grande)  through New Mexico Water.  The purchase  included the
water and  wastewater  assets of Rio Grande,  which serves 2,400 water and 1,700
wastewater  customers  about 30 miles  south of  Albuquerque,  New  Mexico.  The
purchase  price was $2.3  million in cash,  plus  assumption  of $3.1 million in
outstanding  debt. Rate base for the system is approximately  $5.4 million.  The
results of  operations  include the  operating  results of Rio Grande  since the
acquisition  date.  Revenue  for 2003 was $1.6  million  and net income was $0.1
million.

         In April 2003, we acquired the  Kaanapali  Water  Corporation  for $6.1
million in cash. After completing the acquisition, the entity's name was changed
to Hawaii Water Service  Company,  Inc.  (Hawaii  Water).  Hawaii Water provides
water utility  services to 500  customers in Maui,  Hawaii.  The final  purchase
price will be determined  after certain  events have occurred,  principally  the
resolution  of  determining  rate base after filing for a general rate case with
the Hawaii Public Utilities  Commission (HPUC). A filing is planned for 2004. At
that  time,  the  purchase  price  could be  adjusted,  which  could  result  in
additional  refunds estimated between 0% and 5% of the purchase price. For 2003,
revenue was $2.1 million and net income was $0.3 million. These amounts were for
an eight-month period.

         In June 2002, New Mexico Water signed an agreement to purchase National
Utilities  Corporation (National Utilities) and related assets for approximately
$1.1 million.  National Utilities serves 700 water customers located adjacent to
the Rio Grande  water system and another 900 water  customers  located 150 miles
south of Albuquerque.  The acquisition will entitle New Mexico Water to purchase
up to 2,000  acre-feet  of water  annually as required for its  operations.  The
purchase is not expected to have a material impact on revenues,  net income,  or
cash flows.  The  purchase is subject to the  approval of the New Mexico  Public
Regulation  Commission.  We estimate regulatory approval to be received prior to
June 2004.

         Real Estate  Program.  We own more than 900 real estate  parcels.  From
time to time,  certain  parcels  are deemed not  necessary  for or used in water
utility operations. Most surplus properties have a low cost basis. A program was
developed  to realize the value of certain  surplus  properties  through sale or
lease of those  properties.  The program will be ongoing for a period of several
years.  Property sales produced  pretax gains of $4.6 million,  $3.0 million and
$3.9 million in 2003,  2002 and 2001,  respectively.  As sales are  dependent on
real  estate  market  conditions,  future  sales may or may not be at prior year
levels.

         CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         We  maintain  our  accounting  records in  accordance  with  accounting
principles generally accepted in the United States of America and as directed by
the regulatory  commissions to which our operations are subject.  The process of
preparing  financial  statements  requires  the use of  estimates on the part of
management.  The estimates used by management  are based on historic  experience
and an  understanding  of  current  facts and  circumstances.  A summary  of our
significant  accounting  policies  are  listed  in  note 2 of  the  consolidated
financial  statements  and  other  notes  provide  additional  information.  The
following sections describe the level of subjectivity,  judgment and variability
of  estimates  that  could have a material  impact on the  financial  condition,
operating performance and cash flows of the business.

         Regulated  Utility  Accounting.  Because  we operate  extensively  in a
regulated  business,  it is subject to the  provisions of Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of  Regulation."  Application  of SFAS No. 71  requires  accounting  for certain
transactions in accordance with regulations defined by the respective regulatory
commission of that state.  In the event that a portion of our operations were no
longer  subject to the  provisions of SFAS No. 71, we would be required to write
off  related  regulatory  assets  and  liabilities  that  are  not  specifically
recoverable  and  determine if other  assets might be impaired.  If a regulatory
commission  determined  that a portion of our  assets  were not  recoverable  in
customer  rates,  we would be required to  determine if it had suffered an asset
impairment that would require a write-down in the assets'  valuation.  There has
been no such asset  impairment as of December 31, 2003.  Additional  information
relating  to  regulatory  assets  and  liabilities  are  listed in note 2 of the
consolidated financial statements.

         Revenue  Recognition.  Revenue is estimated  for metered  customers for
water used between the last reading of the  customer's  meter and the end of the
accounting period. This estimate is based on the usage from the last bill to the
customer,  which normally covers a 30-day period,  and is prorated from the last
meter read date to the end of the



                                       32


accounting  period.  The amount of variability is low at December 31, as this is
one of the lowest  usage  months of the year and usage for the  previous  30-day
period is relatively  consistent  during this time of the year. Actual usage may
vary from this estimate.

         Flat-rate  customers  are  billed in advance  at the  beginning  of the
service period. Since these are constant amounts, appropriate adjustments can be
calculated to determine the revenue related to the applicable period.

         Estimated  Expenses.  Some expenses are recorded  using  estimates,  as
actual payments are not known or processed by the accounting deadline. Estimates
are made for unbilled purchased water,  unbilled purchased power,  unbilled pump
taxes,  payroll and other types of similar expenses.  While management  believes
its estimates are  reasonable,  actual results could vary.  Differences  between
actual results and estimates are recorded in the period when the  information is
known.

         Expense-Balancing and Memorandum Accounts.  Expense-balancing  accounts
and  memorandum  accounts  (offsetable  expenses)  represent  recoverable  costs
incurred,  but not  billed  to our  customers.  The  amounts  included  in these
accounts relate to rate increases  charged to us by suppliers of purchased water
and  purchased   power,   and  increases  in  pump  taxes.   We  do  not  record
expense-balancing or memorandum accounts in our financial statements as revenue,
nor as a  receivable,  until  the  CPUC and  other  regulators  have  authorized
recovery of the higher costs and customers have been billed. Therefore, a timing
difference may occur between when costs are  recognized  and the  recognition of
associated  revenues.  The  balancing and  memorandum  accounts are only used to
track the higher costs outside of the financial statements.  The cost increases,
which are beyond our control,  are referred to as "offsetable  expenses" because
under certain circumstances they are recoverable from customers in future offset
rate  increases.  In May 2003, the CPUC gave approval to charge  customers for a
portion of our offsetable expenses (See Rates and Regulations). Additionally, we
have  pending  filings  with the  CPUC  for  offsetable  expenses.  The  amounts
requested  may not be  ultimately  collected  through  rates,  as amounts may be
disallowed  during the review process or subject to an earnings test.  While the
adjustments  would not impact previously  recorded amounts,  the adjustments may
impact future earnings and cash flows.  We are not able to provide  estimates of
what the ultimate collection will be from these accounts.

         Washington  Water,  New  Mexico  Water  and  Hawaii  Water did not have
material amounts in expense-balancing or memorandum accounts.

         Income  Taxes.  Significant  judgment is required  in  determining  the
provision for income taxes. The process involves estimating current tax exposure
and assessing temporary  differences  resulting from treatment of certain items,
such  as  depreciation,   for  tax  and  financial  statement  reporting.  These
differences result in deferred tax assets and liabilities, which are reported in
the  consolidated  balance  sheets.  We must also  assess  the  likelihood  that
deferred tax assets will be recovered in future  taxable  income.  To the extent
recovery is unlikely,  a valuation  allowance would be required.  If a valuation
allowance were required, it could significantly  increase income tax expense. In
management's view, a valuation  allowance was not required at December 31, 2003.
Detailed  schedules  relating  to income  taxes are  provided  in note 11 of the
consolidated financial statements.

         Employee  Benefit Plans. We incur costs associated with our pension and
postretirement  benefit  plans.  To  measure  the  expense  of  these  benefits,
management must estimate compensation increases,  mortality rates, future health
cost  increases  and discount  rates used to value  related  liabilities  and to
determine  appropriate  funding.  We work with independent  actuaries to measure
these  benefits.  Different  estimates  and/or  actual  amounts  could result in
significant variances in the costs and liabilities  recognized for these benefit
plans.  The estimates  used are based on historical  experience,  current facts,
future expectations and recommendations from independent advisors and actuaries.

         We use an  investment  advisor to provide  expert  advice for  managing
investments in these plans. To diversify  investment risk, the plans' goal is to
invest 60% of the assets in various  equity  mutual funds and 40% in bond funds.
At December 31, 2003, 57% of the assets were invested in equity mutual funds and
43% in bond funds.  Based on the market values of the  investment  funds for the
year ended  December 31,  2003,  the total return on the pension plan assets was
19%.  For 2002 and 2001,  returns  were a  negative  3.3% and a  positive  2.2%,
respectively.  Future  returns  on  investments  could vary  significantly  from
estimates and could impact our earnings and cash flows.  We would expect changes
to these costs to be recovered in future rate filings,  mitigating the financial
impact.


                                       33


         For our  measurement  in 2003, we estimated the discount rate at 6.25%,
which  approximates  the rate of Moody's AA rated  bonds at December  2003.  The
discount rate used for 2002 was 6.7% using the same methodology.  We assumed the
rate  of  compensation  to  increase  1.5% in  2004,  2.0%  in  2005  and  4.25%
thereafter.  Any change in these assumptions would have an effect on the service
costs,   interest  costs  and  accumulated   benefit   obligations.   Additional
information  related  to  employee  benefit  plans are  listed in note 12 of the
consolidated financial statements.

         Workers' Compensation, General Liability and Other Claims. For workers'
compensation,  we utilize an actuary firm to estimate the  discounted  liability
associated  with  claims  submitted  and  claims  not  yet  submitted  based  on
historical  data.  These estimates could vary  significantly  from actual claims
paid,  which could  impact our earnings  and cash flows.  For general  liability
claims and other  claims,  we estimate the cost  incurred but not yet paid using
historical information. Actual costs could vary from these estimates. We believe
actual costs incurred would be allowed in future rates, mitigating the financial
impact.

         Contingencies.  We  did  not  record  any  provisions  relating  to the
contingencies reported in note 15 of the consolidated  financial statements,  as
these  did not  qualify  for  recording  under  SFAS No.  5 or other  accounting
standards.  If our  assessment is  incorrect,  these items could have a material
impact on the financial  condition,  results of operations and cash flows of the
business.

         FINANCIAL RISK MANAGEMENT

         We do not participate in hedge arrangements, such as forward contracts,
swap agreements,  options or other contractual agreements relative to the impact
of market  fluctuations  on our assets,  liabilities,  production or contractual
commitments.  We  operate  only in the United  States,  and  therefore,  are not
subject to foreign currency exchange rate risks.


         Terrorism Risk.  Since the September 11, 2001,  terrorist  attacks,  we
have heightened  security at our facilities and have taken added  precautions to
protect  our  employees  and the  water we  deliver  to our  customers.  We have
complied with EPA regulations concerning vulnerability assessments and have made
filings  to the EPA as  required.  In  addition,  communication  plans have been
developed as a component of our procedures related to this risk. While we do not
make public  comments on our  security  programs,  we have been in contact  with
federal,  state and local law  enforcement  agencies to  coordinate  and improve
water delivery systems' security.

         Interest Rate Risk. We are subject to interest rate risk, although this
risk is lessened  because we are regulated.  If interest costs were to increase,
we  believe  our rates  would  increase  accordingly.  The  majority  of debt is
long-term,  fixed-rate.  Interest rate risk does exist on short-term  borrowings
within our credit facilities, as these interest rates are variable. We also have
interest rate risk with new financing,  as we may incur higher interest rates on
new debt if interest rates increase.

         Stock Price Risk. Because we operate primarily in a regulated industry,
our stock price risk is somewhat lessened;  however,  regulated  parameters also
can be recognized as limitations to operations and earnings,  and the ability to
respond to certain business condition changes. In the past, we experienced stock
price risk because of the impact on earnings caused by the delay of certain CPUC
decisions.  The adverse change in our stock price could make use of common stock
financing more expensive in the future.

         Stock Market Performance Risk. Although our stock price did not reflect
the  volatility  of the  general  market  over the past few  years,  we could be
impacted by changes in the general market that may influence our stock price. In
addition,  we could be impacted by changes in the general stock and bond markets
in other  areas.  We provide our  employees a defined  benefit  pension plan and
postretirement  benefit plan. We are responsible for funding both of these plans
and a portion  of the  plans'  assets  are  invested  in stock  market  equities
(excluding our stock) and in corporate bonds. Poor performance of the equity and
bond investments  could result in a need for additional future funding and costs
to make up for a loss of value in the equity investments. We believe we would be
able to recover these costs associated with the benefit plans in customer rates.

         Equity Risk. We do not have equity investments and,  therefore,  do not
have equity risks.


                                       34


         RECENT ACCOUNTING PRONOUNCEMENTS AND RECENT LAW CHANGES

         The description and impact of recent accounting pronouncements that are
effective for the period  reported are  described in note 2 of the  consolidated
financial statements.

         As  of  the  filing  date,  there  were  no  accounting  pronouncements
affecting  future  periods  that would have a material  impact on our  financial
condition, results of operations or cash flows.

         The change in the law concerning  Medicare for  prescription  drugs may
have a positive impact on our business.  We elected to defer  incorporating  the
law change into the  measurement of our  postretirement  plans. At this time, we
are unable to estimate the impact and have not made any decisions on whether the
plan will be amended due to this change in the law.


                                       35




Consolidated Balance Sheets
California Water Service Group

In thousands, except per share data



December 31,                                                                    2003            2002
                                                                                    
ASSETS

Utility plant:
  Land                                                                    $   12,318      $   11,513
  Depreciable plant and equipment                                          1,038,058         927,244
  Construction work in progress                                               13,770          48,624
  Intangible assets                                                           14,829          13,929
- ----------------------------------------------------------------------------------------------------
    Total utility plant                                                    1,078,975       1,001,310
  Less accumulated depreciation and amortization                             319,477         304,322
- ----------------------------------------------------------------------------------------------------
    Net utility plant                                                        759,498         696,988
- ----------------------------------------------------------------------------------------------------

Current assets:
  Cash and cash equivalents                                                    2,856           1,063
  Receivables, net of allowance for uncollectible accounts:
    Customers                                                                 18,434          14,831
    Other                                                                      5,125           9,130
  Unbilled revenue                                                             8,522           7,969
  Materials and supplies at weighted average cost                              2,957           2,760
  Taxes and other prepaid expenses                                             5,609           5,130
- ----------------------------------------------------------------------------------------------------
    Total current assets                                                      43,503          40,883
- ----------------------------------------------------------------------------------------------------

Other assets:
  Regulatory assets                                                           53,326          46,089
  Unamortized debt premium and expense                                         9,071           6,798
  Other                                                                        7,637           7,720
- ----------------------------------------------------------------------------------------------------
    Total other assets                                                        70,034          60,607
- ----------------------------------------------------------------------------------------------------
                                                                          $  873,035      $  798,478
- ----------------------------------------------------------------------------------------------------


                                       36




                                                                                2003           2002
                                                                                    
CAPITALIZATION AND LIABILITIES

Capitalization:
  Common stock, $0.01 par value; 25,000 shares authorized,
    16,932 and 15,182 outstanding in 2003 and 2002, respectively           $     169      $     152
  Additional paid-in capital                                                  93,748         49,984
  Retained earnings                                                          150,908        149,215
  Accumulated other comprehensive loss                                          (301)          (134)
- ----------------------------------------------------------------------------------------------------
    Total common stockholders' equity                                        244,524        199,217
  Preferred stock without mandatory redemption provision,
    $25 par value; 380 shares authorized, 139 shares outstanding               3,475          3,475
  Long-term debt, less current maturities 272,226                            250,365
- ----------------------------------------------------------------------------------------------------
    Total capitalization                                                     520,225        453,057
- ----------------------------------------------------------------------------------------------------

Current liabilities:
  Current maturities of long-term debt                                           904          1,000
  Short-term borrowings                                                        6,454         36,379
  Accounts payable                                                            23,776         23,706
  Accrued taxes                                                                2,074          1,365
  Accrued interest                                                             2,896          2,873
  Other accrued liabilities                                                   27,460         24,114
- ----------------------------------------------------------------------------------------------------
    Total current liabilities                                                 63,564         89,437
- ----------------------------------------------------------------------------------------------------

Unamortized investment tax credits                                             2,925          2,774
Deferred income taxes                                                         38,005         31,371
Regulatory liabilities                                                        16,676         17,201
Advances for construction                                                    121,952        115,459
Contributions in aid of construction                                          90,529         77,576
Other long-term liabilities                                                   19,159         11,603
Commitments and contingencies                                                   --             --
- ----------------------------------------------------------------------------------------------------
                                                                           $ 873,035      $ 798,478
- ----------------------------------------------------------------------------------------------------


See accompanying Notes to Consolidated Financial Statements.

                                       37


Consolidated Statements of Income
California Water Service Group

In thousands, except per share data



For the years ended December 31,                                    2003          2002          2001
                                                                                   
Operating revenue                                               $277,128      $263,151      $246,820
- ----------------------------------------------------------------------------------------------------
Operating expenses:
  Operations:
    Purchased water                                               80,831        76,672        73,174
    Purchased power                                               21,921        22,897        21,130
    Pump taxes                                                     6,272         6,344         5,910
    Administrative and general                                    40,969        37,196        35,968
    Other                                                         37,476        34,073        34,109
  Maintenance                                                     12,717        11,587        12,131
  Depreciation and amortization                                   23,256        21,238        19,226
  Income taxes                                                    12,898        12,568         9,728
  Property and other taxes                                        10,554         9,829         9,740
- ----------------------------------------------------------------------------------------------------
    Total operating expenses                                     246,894       232,404       221,116
- ----------------------------------------------------------------------------------------------------

  Net operating income                                            30,234        30,747        25,704
- ----------------------------------------------------------------------------------------------------

Other income and expenses:
  Non-regulated income, net                                        2,097         2,187         1,426
  Gain on sale of non-utility property                             4,603         2,980         3,864
- ----------------------------------------------------------------------------------------------------
    Total other income and expenses                                6,700         5,167         5,290
- ----------------------------------------------------------------------------------------------------

Interest expense:
  Interest expense                                                19,512        18,314        16,887
  Less capitalized interest                                        1,995         1,473           858
- ----------------------------------------------------------------------------------------------------
    Net interest expense                                          17,517        16,841        16,029
- ----------------------------------------------------------------------------------------------------

Net income                                                      $ 19,417      $ 19,073      $ 14,965
- ----------------------------------------------------------------------------------------------------

Earnings per share:
  Basic                                                         $   1.21      $   1.25      $   0.98
- ----------------------------------------------------------------------------------------------------
  Diluted                                                       $   1.21      $   1.25      $   0.97
- ----------------------------------------------------------------------------------------------------

Weighted average number of common shares outstanding:
  Basic                                                           15,882        15,182        15,182
- ----------------------------------------------------------------------------------------------------
  Diluted                                                         15,893        15,185        15,186
- ----------------------------------------------------------------------------------------------------


See accompanying Notes to Consolidated Financial Statements.

                                       38


Consolidated Statements of Common Stockholders' Equity
and Comprehensive Income
California Water Service Group



In thousands                                                                                         Accumulated
                                                                  Additional                               Other               Total
For the years ended                                 Common           Paid-in          Retained     Comprehensive       Stockholders'
December 31, 2003, 2002 and 2001                     Stock           Capital          Earnings              Loss              Equity
                                                                                                           
Balance at December 31, 2000                     $     151         $  49,984         $ 149,185         $    (486)         $ 198,834
- ------------------------------------------------------------------------------------------------------------------------------------

  Net income                                            --                --            14,965                --             14,965
- ------------------------------------------------------------------------------------------------------------------------------------
  Other comprehensive loss                              --                --                --              (330)              (330)
- ------------------------------------------------------------------------------------------------------------------------------------
  Comprehensive income                                  --                --                --                --             14,635
- ------------------------------------------------------------------------------------------------------------------------------------

  Acquisition                                            1                --               220                --                221
- ------------------------------------------------------------------------------------------------------------------------------------
  Dividends paid:
    Preferred stock                                     --                --               153                --                153
    Common stock                                        --                --            16,918                --             16,918
- ------------------------------------------------------------------------------------------------------------------------------------
      Total dividends paid                              --                --            17,071                --             17,071
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001                           152            49,984           147,299              (816)           196,619
- ------------------------------------------------------------------------------------------------------------------------------------

  Net income                                            --                --            19,073                --             19,073
- ------------------------------------------------------------------------------------------------------------------------------------
  Other comprehensive income                            --                --                --               682                682
- ------------------------------------------------------------------------------------------------------------------------------------
  Comprehensive income                                  --                --                --                --             19,755
- ------------------------------------------------------------------------------------------------------------------------------------

  Dividends paid:
    Preferred stock                                     --                --               153                --                153
    Common stock                                        --                --            17,004                --             17,004
- ------------------------------------------------------------------------------------------------------------------------------------
      Total dividends paid                              --                --            17,157                --             17,157
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002                           152            49,984           149,215              (816)           199,217
- ------------------------------------------------------------------------------------------------------------------------------------

  Net income                                            --                --            19,417                --             19,417
- ------------------------------------------------------------------------------------------------------------------------------------
  Other comprehensive loss                              --                --                --              (167)              (167)
- ------------------------------------------------------------------------------------------------------------------------------------
  Comprehensive income                                  --                --                --                --             19,250
- ------------------------------------------------------------------------------------------------------------------------------------

  Issuance of common stock                              17            43,764                --                --             43,781
- ------------------------------------------------------------------------------------------------------------------------------------
  Dividends paid:
    Preferred stock                                     --                --               153                --                153
    Common stock                                        --                --            17,571                --             17,571
- ------------------------------------------------------------------------------------------------------------------------------------
      Total dividends paid                              --                --            17,724                --             17,724
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003                     $     169         $  93,748         $ 150,908         $    (301)         $ 244,524
- ------------------------------------------------------------------------------------------------------------------------------------


See accompanying Notes to Consolidated Financial Statements.

                                       39


Consolidated Statements of Cash Flows
California Water Service Group

In thousands



For the years ended December 31,                                            2003          2002           2001

                                                                                           
Operating activities:
  Net income                                                            $ 19,417      $ 19,073      $ 14,965
- -------------------------------------------------------------------------------------------------------------
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization                                         23,256        21,238        19,226
    Deferred income taxes, investment tax credits
      and regulatory assets and liabilities, net                           2,834           786         2,919
    Gain on sale of non-utility property                                  (4,603)       (2,980)       (3,864)
    Changes in operating assets and liabilities:
      Receivables                                                          1,292        (1,088)       (2,186)
      Unbilled revenue                                                      (554)         (561)          673
      Taxes and other prepaid expenses                                    (2,876)          (86)       (1,913)
      Accounts payable                                                      (301)         (431)       (2,461)
      Other current assets                                                  (197)         (613)          571
      Other current liabilities                                            7,537         1,911         7,812
      Other changes, net                                                  (1,374)         (696)         (436)
- -------------------------------------------------------------------------------------------------------------
      Net adjustments                                                     25,014        17,480        20,341
- -------------------------------------------------------------------------------------------------------------
        Net cash provided by operating activities                         44,431        36,553        35,306
- -------------------------------------------------------------------------------------------------------------

Investing activities:
  Utility plant expenditures:
    Company-funded                                                       (53,884)      (71,553)      (53,379)
    Developer advances and contributions in aid of construction          (20,369)      (16,808)       (8,670)
  Proceeds from sale of non-utility assets                                 4,803         3,006         3,999
  Acquisitions                                                            (6,094)       (2,300)         (701)
- -------------------------------------------------------------------------------------------------------------
        Net cash used in investing activities                            (75,544)      (87,655)      (58,751)
- -------------------------------------------------------------------------------------------------------------

Financing activities:
  Net changes in short-term borrowings                                   (29,925)       12,435         7,402
  Issuance of common stock, net of expenses                               43,781            --            --
  Issuance of long-term debt, net of expenses                             80,114        79,718        20,507
  Advances for construction                                               13,248        12,545         6,498
  Refunds of advances for construction                                    (4,838)       (4,597)       (4,166)
  Contributions in aid of construction                                     9,311         7,740        10,868
  Retirement of long-term debt                                           (61,061)      (39,472)       (2,881)
  Dividends paid                                                         (17,724)      (17,157)      (17,071)
- -------------------------------------------------------------------------------------------------------------
        Net cash provided by financing activities                         32,906        51,212        21,157
- -------------------------------------------------------------------------------------------------------------

Change in cash and cash equivalents                                        1,793           110        (2,288)
Cash and cash equivalents at beginning of year                             1,063           953         3,241
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                $  2,856      $  1,063      $    953
- -------------------------------------------------------------------------------------------------------------

Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest (net of amounts capitalized)                               $ 17,672      $ 16,527      $ 14,785
    Income taxes                                                           6,188        10,205        11,775
  Non-cash financing activity - common stock issued in acquisitions           --            --           899


See accompanying Notes to Consolidated Financial Statements

                                       40


         Notes to Consolidated Financial Statements
         California Water Service Group
         December 31, 2003, 2002 and 2001
         Amounts in thousands, except per share data and share data

         1
         ORGANIZATION AND OPERATIONS

         California  Water  Service  Group  (Company) is a holding  company that
through its wholly-owned  subsidiaries  provides water utility and other related
services in  California,  Washington,  New Mexico and Hawaii.  California  Water
Service  Company (Cal  Water),  Washington  Water  Service  Company  (Washington
Water),  New Mexico Water  Service  Company (New Mexico  Water) and Hawaii Water
Service Company,  Inc. (Hawaii Water) provide  regulated  utility services under
the rules and  regulations of their  respective  state's  regulatory  commission
(jointly  referred  to  as  the  Commissions).  CWS  Utility  Services  provides
non-regulated water utility and utility-related  services.  The Company operates
primarily in one business segment, providing water and related utility services.


         2
         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation  and Accounting  Records.  The consolidated
financial  statements  include the accounts of the Company and its  wholly-owned
subsidiaries.  Intercompany transactions and balances have been eliminated.  The
accounting  records of the Company are maintained in accordance with the uniform
system of accounts prescribed by the Commissions.

         Reclassifications. Certain prior years' amounts have been reclassified,
where necessary, to conform to the current presentation.

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

         Revenue.  Revenue  consists  of monthly  cycle  customer  billings  for
regulated  water and wastewater  service at rates  authorized by the Commissions
and billings to certain non-regulated  customers.  Revenue from metered accounts
includes  unbilled  amounts based on the  estimated  usage from the latest meter
reading  to the end of the  accounting  period.  Flat-rate  accounts,  which are
billed at the beginning of the service period,  are included in revenue on a pro
rata basis for the portion applicable to the current accounting period.

         The Company provides an allowance for doubtful accounts. The balance of
customer  receivables is net of the allowance for doubtful  accounts at December
31, 2003 and 2002 of $289 and $181,  respectively.  The  activity in the reserve
account is as follows:

                                                           2003         2002
Beginning balance                                         $ 181        $ 224
  Provision for uncollectible accounts                      833          480
  Net write off of uncollectible accounts                  (725)        (523)
- -----------------------------------------------------------------------------
Ending balance                                            $ 289        $ 181
- -----------------------------------------------------------------------------

         Non-regulated  Revenue.   Revenue  from  non-regulated  operations  and
maintenance  agreements  is  recognized  when  services  have been  rendered  to
companies or municipalities  under such agreements.  Expenses are netted against
the  revenue  billed  and are  reported  in Other  Income  and  Expenses  on the
Consolidated  Statements of Income.  Other  non-regulated  revenue is recognized
when title has  transferred to the buyer, or ratably over the term of the lease.
For  construction and design  services,  revenue is generally  recognized on the
completed  contract  method,  as most  projects are completed in less than three
months.  One  construction and design project spanned multiple years and revenue
was recognized using the percentage-of-completion  method based on a zero profit
margin until project completion. See Note 3, Other Income and Expenses.

                                       41


         Expense  Balancing  and  Memorandum  Accounts.  Expense  balancing  and
memorandum  accounts are used to track  suppliers'  rate increases for purchased
water,  purchased  power and pump taxes that are not included in customer  water
rates. The cost increases are referred to as "Offsetable Expenses" because under
certain  circumstances  they are  recoverable  from  customers  in  future  rate
increases  designed to offset the higher costs.  The Company does not record the
balancing and  memorandum  accounts until the Commission has authorized a change
in customer rates and the customer has been billed.

         Utility  Plant.  Utility  plant is carried at original  cost when first
constructed or purchased, except for certain minor units of property recorded at
estimated  fair  values  at  dates of  acquisition.  When  depreciable  plant is
retired,  the cost is eliminated  from utility plant accounts and such costs are
charged  against  accumulated  depreciation.  Maintenance  of  utility  plant is
charged to operating expenses as incurred.  Maintenance projects are not accrued
for in  advance.  Interest  is  capitalized  on plant  expenditures  during  the
construction  period and amounted to $1,995 in 2003,  $1,473 in 2002 and $858 in
2001.

         Intangible  assets  acquired  as part of water  systems  purchased  are
stated at amounts as prescribed by the Commissions.  All other  intangibles have
been  recorded at cost and are  amortized  over their useful  life.  Included in
intangible  assets is $6,515 paid to the City of  Hawthorne in 1996 to lease the
City's water system and associated water rights. The asset is being amortized on
a straight-line basis over the 15-year life of the lease.

         The following table  represents  depreciable  plant and equipment as of
December 31:

                                                           2003             2002

Equipment                                            $  199,157       $  163,946
Transmission and distribution plant                     772,641          718,251
Office buildings and other structures                    66,260           45,047
- --------------------------------------------------------------------------------
  Total                                              $1,038,058       $  927,244
- --------------------------------------------------------------------------------

         Depreciation  of utility  plant for  financial  statement  purposes  is
computed on a  straight-line  basis over the assets'  estimated  useful lives as
follows:

                                                                   Useful Lives

Equipment                                                         5 to 50 years
Transmission and distribution plant                              40 to 65 years
Office buildings and other structures                            40 to 50 years

         The  provision  for  depreciation  expressed  as a  percentage  of  the
aggregate  depreciable  asset  balances  was 2.5% in 2003,  and 2.4% in 2002 and
2001. For income tax purposes, as applicable,  the Company computes depreciation
using the  accelerated  methods  allowed by the respective  taxing  authorities.
Plant additions since June 1996 are depreciated on a straight-line basis for tax
purposes in accordance with tax regulations.

         Cash Equivalents.  Cash equivalents  include highly liquid investments,
primarily money market funds.

         Restricted  Cash.   Restricted  cash  primarily   represents   proceeds
collected  through a surcharge on certain  customers' bills plus interest earned
on the  proceeds  and is used to service  California  Safe  Drinking  Water Bond
obligations.  In addition,  there are compensating balances at a bank in support
of borrowings.  All restricted cash is classified in other prepaid expenses.  At
December  31,  2003 and 2002,  the  amounts of  restricted  cash were $1,154 and
$1,131, respectively.

         Regulatory  Assets and  Liabilities.  The  Company  records  regulatory
assets for future  revenues  expected to be realized  in  customers'  rates when
certain items are  recognized as expenses for rate making  purposes.  The income
tax temporary  differences  relate primarily to the difference  between book and
income tax  depreciation  on utility plant that was placed in service before the
Commissions adopted  normalization for rate making purposes.  Previously the tax
effect was passed onto customers.  In the future,  when such timing  differences
reverse,  the Company will be able to include the impact in customer rates.  The
regulatory  assets are net of adjustments  related to deferred income taxes that
were  provided  at prior tax rates and the  amount  that  would be  provided  at
current tax rates. The differences will reverse over the remaining book lives of
the related assets.

                                       42


         In addition,  regulatory  assets  include items that are  recognized as
liabilities for financial statement purposes,  which will be recovered in future
customer rates. The liabilities  relate to  postretirement  benefits,  vacation,
self-insured workers' compensation and asset retirement obligations.

         Regulatory  liabilities represent future benefit to rate payers for tax
deductions that will be allowed in the future for funds received as Advances for
Construction and  Contributions in Aid of Construction.  Regulatory  liabilities
also reflect  timing  differences  provided at higher than the current tax rate,
which will flow through to future rate payers.

         Regulatory  assets and liabilities are comprised of the following as of
December 31:

                                                              2003          2002
REGULATORY ASSETS
Income tax temporary differences                           $30,157       $31,341
Asset retirement obligations                                 4,985            --
Postretirement benefits other than pensions                  6,846         5,165
Accrued vacation and workers' compensation                  11,338         9,583
- --------------------------------------------------------------------------------
  Total regulatory assets                                  $53,326       $46,089
- --------------------------------------------------------------------------------

REGULATORY LIABILITIES
Future tax benefits to ratepayers                          $16,676       $17,201
- --------------------------------------------------------------------------------

         Long-lived  Assets. The Company regularly reviews its long-lived assets
for impairment annually or when events or changes in business circumstances have
occurred,  which  indicate the  carrying  amount of such assets may not be fully
realizable.  Potential  impairment  of  assets  held  for use is  determined  by
comparing the carrying amount of an asset to the future  undiscounted cash flows
expected to be generated by that asset. If assets are considered to be impaired,
the  impairment to be recognized is measured by the amount by which the carrying
value of the assets  exceeds  the fair value of the  assets.  There have been no
such impairments as of December 31, 2003 or 2002.

         Long-term Debt Premium, Discount and Expense. The discount and issuance
expense on long-term  debt is amortized  over the original  lives of the related
debt issues.  Premiums  paid on the early  redemption of certain debt issues and
unamortized  original  issue  discount and expense of such issues are  amortized
over the life of new debt issued in conjunction with the early redemption. These
amounts  were  $3,154,  $2,449  and $0 in  2003,  2002 and  2001,  respectively.
Amortization  expense  included in interest  expense was $415, $183 and $188 for
2003, 2002 and 2001, respectively.

         Accumulated  Other  Comprehensive  Loss.  The  Company  has an unfunded
Supplemental   Executive  Retirement  Plan.  The  unfunded  accumulated  benefit
obligation of the plan, less the accrued benefit, exceeds the unrecognized prior
service cost resulting in an accumulated other comprehensive loss which has been
recorded  as  a  separate  component  of  Stockholders'  Equity.   Advances  for
Construction.

         Advances for Construction  consist of payments received from developers
for installation of water  production and  distribution  facilities to serve new
developments.  Advances are excluded from rate base for  rate-setting  purposes.
Annual refunds are made to developers without interest over a 20-year or 40-year
period.  Refund amounts under the 20-year contracts are based on annual revenues
from the extensions.  Unrefunded  balances at the end of the contract period are
credited  to  Contributions  in Aid of  Construction  when  they  are no  longer
refundable in accordance  with the contracts.  Reclassifications  were $1,813 in
2003 and $214 in 2002.  Refunds on contracts entered into since 1982 are made in
equal annual  amounts over 40 years.  At December 31, 2003 and 2002, the amounts
refundable under the 20-year contracts were $1,350 and $3,248, respectively, and
under 40-year contracts were $119,699 and $111,136,  respectively.  In addition,
other  Advances for  Construction  totaling $903 and $1,075 at December 31, 2003
and  2002,  respectively,   are  refundable  based  upon  customer  connections.
Estimated  refunds of advances for each succeeding year  (2004-2008) are $4,728,
$4,492, $4,221, $4,221 and $4,058, and $100,231 thereafter.

         Contributions  in  Aid  of   Construction.   Contributions  in  Aid  of
Construction  represent  payments  received from developers,  primarily for fire
protection  purposes,  which are not  subject to refunds.  Facilities  funded by
contributions  are  included  in utility  plant,  but  excluded  from rate base.
Depreciation  related  to assets  acquired  from  contributions  is  charged  to
Contributions in Aid of Construction.

                                       43


         Income Taxes. The Company accounts for income taxes using the asset and
liability  method.  Deferred tax assets and  liabilities  are recognized for the
future tax  consequences  attributable  to  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax bases.  Measurement of the deferred tax assets and liabilities is
at enacted tax rates  expected to apply to taxable  income in the years in which
those temporary  differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.

         It is  anticipated  that  future rate  action by the  Commissions  will
reflect  revenue  requirements  for the tax  effects  of  temporary  differences
recognized,  which  have  previously  been  flowed  through  to  customers.  The
Commissions have granted the Company rate increases to reflect the normalization
of the tax benefits of the federal accelerated methods and available  Investment
Tax Credits (ITC) for all assets placed in service after 1980.  ITC are deferred
and amortized over the lives of the related properties for book purposes.

         Advances for  Construction  and  Contributions  in Aid of  Construction
received from developers  subsequent to 1986 were taxable for federal income tax
purposes and subsequent to 1991 were subject to California  income tax. In 1996,
the federal  tax law,  and in 1997,  the  California  tax law,  changed and only
deposits for new services were taxable.  In late 2000, federal  regulations were
further modified to exclude fire services from tax.

         Workers  Compensation,  General Liability and Other Claims. For workers
compensation,  the Company  utilizes an actuary firm to estimate the  discounted
liability associated with claims submitted and claims not yet submitted based on
historical  data.  For general  liability  claims and other claims,  the Company
estimates the costs incurred but not yet paid using historical information.

         Earnings Per Share.  Basic  earnings per share (EPS) is  calculated  by
dividing  income  available to common  stockholders  (net income less  preferred
stock dividends of $153) by the weighted average shares  outstanding  during the
year.  Diluted  EPS  is  calculated  by  dividing  income  available  to  common
stockholders by the weighted average shares  outstanding  including  potentially
dilutive  shares as determined by application of the treasury stock method.  The
difference  between basic and diluted  weighted  average  number of common stock
outstanding is the effect of dilutive common stock options outstanding.

         Stock-based  Compensation.   The  Company  has  a  stockholder-approved
Long-Term Incentive Plan that allows granting of nonqualified stock options. The
Company  has adopted the  disclosure  requirements  of  Statement  of  Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based  Compensation,"
as amended by SFAS No.148, "Accounting for Stock-Based Compensation - Transition
Disclosure - An  Amendment to SFAS No. 123," and as permitted by the  statement,
applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees,"  for its plan. All of the Company's  outstanding  options have an
exercise  price  equal to the  market  price on the date they were  granted.  No
compensation expense was recorded for the years ended December 31, 2003, 2002 or
2001.

         The table below  illustrates  the effect on net income and earnings per
share as if the Company had applied  the fair value  recognition  provisions  of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation:



                                                                                   2003           2002           2001
                                                                                                  
Net income, as reported                                                      $   19,417     $   19,073     $   14,965
Deduct: Total stock-based employee compensation expense determined under
  fair value based method for all awards, net of related tax effects                 68             70             57
- ---------------------------------------------------------------------------------------------------------------------
Pro forma net income                                                         $   19,349     $   19,003     $   14,908
- ---------------------------------------------------------------------------------------------------------------------

Earnings per share:
  Basic - as reported                                                        $     1.21     $     1.25     $     0.98
  Basic - pro forma                                                          $     1.21     $     1.24     $     0.98


  Diluted - as reported                                                      $     1.21     $     1.25     $     0.97
  Diluted - pro forma                                                        $     1.21     $     1.24     $     0.97


         Recent   Accounting   Pronouncements.   In  June  2001,  the  Financial
Accounting  Standards  Board (FASB) issued SFAS No. 143,  "Accounting  for Asset
Retirement  Obligations," which applies to legal obligations associated with the
retirement of long-lived  assets and the associated asset retirement  costs. The
Statement was effective for the

                                       44


Company in the first quarter of 2003. The Company recorded a long-term liability
associated with its obligation to retire wells in accordance with the Department
of Health  Services'  regulations  when  wells are  abandoned  and are no longer
useful for utility  operations.  The balance of the  obligation was $7,707 as of
December 31, 2003. A portion of the cost ($2,722) has been previously recognized
as a component of depreciation expense. The remaining future obligation has been
recorded as a regulatory asset, as it will be recovered in the customers' future
rates.  As the  Company  incurs the  expense of asset  retirements,  the cost is
offset against accumulated  depreciation.  The accretion element recognized each
period is recorded as an increase in the regulatory asset.

         In July 2002,  the FASB  issued  SFAS No.  146,  "Accounting  for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs  associated with exit or disposal  activities
and  nullifies  Emerging  Issues Task Force (EITF)  Issue No.  94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."  This Statement
requires that a liability for costs associated with an exit or disposal activity
be  recognized  and measured  initially at fair value only when the liability is
incurred.  The  provisions of this  Statement are effective for exit or disposal
activities  that are initiated after December 31, 2002. The adoption of SFAS No.
146 did not impact the Company's  financial  position,  results of operations or
cash flows.

         In November 2002, the FASB issued  Interpretation No. 45,  "Guarantors'
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of  Indebtedness  of Others."  Interpretation  No. 45 requires that a
liability be  recognized  at the time a company  issues a guarantee for the fair
value  of  the   obligations   assumed  under  certain   guarantee   agreements.
Interpretation  No. 45 is  effective  for  guarantees  issued or modified  after
December 31, 2002.  The disclosure  requirements  of the  Interpretation  expand
existing  disclosures  required by a  guarantor  about its  obligations  under a
guarantee.  The adoption of  Interpretation  No. 45 did not impact the Company's
financial position, results of operations or cash flows.

         In   December   2003,   the  FASB   issued   Interpretation   No.  46R,
"Consolidation of Variable Interest  Entities," which amends  Interpretation No.
46, "Consolidation of Variable Interest Entities." The revision exempted certain
entities and modified the effective  dates.  The original  guidance issued under
Interpretation No. 46 in January 2003 is still applicable. Interpretation No. 46
and  Interpretation  No. 46R provide  guidance  for  determining  when a primary
beneficiary   should  consolidate  a  variable  interest  entity  or  equivalent
structure that  functions to support the activities of the primary  beneficiary.
Interpretation No. 46R is effective for public entities for periods ending after
March 15,  2004.  The  adoption  of  Interpretation  No. 46R will not impact the
Company's financial position, results of operations or cash flows.

         In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of Statement
No. 133 on Derivative Instruments and Hedging Activities." The Statement impacts
the  accounting  for certain  derivative  contracts  entered into after June 30,
2003.  This Statement is effective for quarters  beginning  after June 15, 2003.
The Company currently does not enter into derivative or hedging  contracts.  The
adoption  of SFAS No.  149 did not have an  impact  on the  Company's  financial
position, results of operations or cash flows.

         In May 2003,  the FASB  issued SFAS No.  150,  "Accounting  for Certain
Financial  Instruments with Characteristics of both Liabilities and Equity." The
Statement  establishes  standards  for the  classification  and  measurement  of
certain  financial  instruments  with  characteristics  of both  liabilities and
equity. The Statement is effective for financial  instruments entered into after
May 31, 2003, and is otherwise  effective for quarters  beginning after June 15,
2003. In November  2003,  the FASB issued a staff  position,  which deferred the
application  of several  provisions  of SFAS No. 150. The Company has not issued
financial  instruments that have characteristics of both liabilities and equity.
The  adoption  of SFAS No. 150 did not have nor is expected to have an impact on
the Company's financial position, results of operations or cash flows.

         In December 2003, federal legislation was passed reforming Medicare and
introducing the Medicare Part D prescription  drug program.  The Company has not
yet  determined  the  effects,  if any,  the new  legislation  will  have on its
postretirement  benefit plan or  calculations  that are required  under SFAS No.
106,  "Employers'  Accounting for Postretirement  Benefits Other than Pensions,"
which are disclosed in Note 12. The legislation may provide a special subsidy to
the Company that may affect the actuarial  assumptions  used in determining  the
utilization rates and medical cost trends. In addition, the FASB may take future
action in response to the legislation.

                                       45


         3
         OTHER INCOME AND EXPENSES

         The Company conducts various  non-regulated  activities as reflected in
the table below. Income reflects revenue less direct and allocated costs. Income
taxes are not included.




                                             2003                     2002                     2001
                                     Revenue      Income      Revenue      Income      Revenue      Income
                                                                                 
Operating and maintenance            $ 4,137     $   939      $ 4,007     $   800      $ 3,724     $   619
Meter reading and billing              1,337         473        1,179         464        1,130         204
Leases                                 1,190         781        1,050         661          818         469
Water rights brokering                   196         112        1,382         515          483         309
Design and construction                1,305         204        6,267         206        7,185         400
Other and non-regulated expenses         320        (412)         262        (459)         411        (575)
- ----------------------------------------------------------------------------------------------------------
  Total                              $ 8,485     $ 2,097      $14,147     $ 2,187      $13,751     $ 1,426
- ----------------------------------------------------------------------------------------------------------


         Operating  and  maintenance  services  and meter  reading  and  billing
services  are  provided  for  water  and  wastewater  systems  owned by  private
companies and  municipalities.  The  agreements  call for a fee per service or a
flat-rate  amount per month due from companies and  municipalities.  Leases have
been entered into with telecommunications  companies for cellular phone antennas
placed on the  Company's  property.  Water  right  brokering  activity  involves
purchasing  water rights from third parties and reselling  those rights to other
third  parties.  Design  and  construction  services  are  for  the  design  and
installation  of water mains and other water  infrastructure  for others outside
our regulated service areas.


         4
         ACQUISITIONS

         In 2003, after receiving regulatory approval,  the Company acquired the
Kaanapali Water  Corporation  and renamed the  corporation  Hawaii Water Service
Company,  Inc. The purchase was for $6,094 in cash for the approximate amount of
rate  base.  If the rate base is  adjusted  by the  Commission  in the next rate
proceeding, the purchase price will be adjusted accordingly.

         During 2002, after receiving regulatory approval,  the Company acquired
the  assets  of  Rio  Grande  Utility   Corporation  (Rio  Grande)  through  its
wholly-owned  subsidiary,  New Mexico Water. The purchase includes the water and
wastewater assets of Rio Grande,  which serves water and wastewater customers in
unincorporated  areas of Valencia  County,  New Mexico.  The purchase  price was
$2,300 in cash, plus assumption of $3,100 in outstanding debt. Rate base for the
system is $5,400, including intangible water rights valued at $732.

         In 2001, the Company  acquired four companies  operating in Cal Water's
Visalia District.  The acquisitions were completed in February 2001, in exchange
for 36,180  shares of Company  common stock worth $899 and assumed debt of $218.
The  acquisitions  were  accounted for under the pooling of interests  method of
accounting;  however,  due to the results from  operations not being material to
the  Company's  consolidated  results from  operations,  prior  periods were not
restated.  The net equity  acquired  was  recorded  as an  increase  to retained
earnings at the beginning of the year. In addition,  Washington  Water purchased
the assets of eight water companies for cash of $701.

         Condensed  balance sheets and pro forma results of operations for these
acquisitions have not been presented since the effect of these purchases are not
material. Acquisitions that involved purchase of assets were accounted for under
the purchase method of accounting.

                                       46


         5
         INTANGIBLE ASSETS

         As of December 31, 2003 and 2002,  intangible assets that will continue
to be amortized and those not amortized were:




                                                                           2003                                   2002
                                                              -------------------------------        -------------------------------
                                              Weighted
                                               Average        Gross                       Net        Gross                       Net
                                          Amortization     Carrying  Accumulated     Carrying     Carrying  Accumulated     Carrying
                                          Period (yrs.)       Value Amortization        Value        Value Amortization        Value
                                                                                                        
Amortized intangible assets:
  Hawthorne lease                                   15      $ 6,515      $ 3,402      $ 3,113      $ 6,515      $ 2,968      $ 3,547
  Water pumping rights                           usage        1,046            8        1,038        1,046            2        1,044
  Water planning studies                            14        2,234          386        1,848        1,783          238        1,545
  Leasehold improvements
    and other                                       15        2,338          952        1,386        2,160        1,027        1,133
- ------------------------------------------------------------------------------------------------------------------------------------
      Total                                         15      $12,133      $ 4,748      $ 7,385      $11,504      $ 4,235      $ 7,269
- ------------------------------------------------------------------------------------------------------------------------------------

Unamortized intangible assets:
  Perpetual water rights                           --       $ 2,696           --      $ 2,696      $ 2,425           --      $ 2,425



         For the years ending December 31, 2003, 2002 and 2001,  amortization of
intangible  assets  was $713,  $670 and  $630,  respectively.  Estimated  future
amortization  expense related to intangible assets for the succeeding five years
is $788, $786, $770, $641 and $612 for 2004 to 2008, and $3,788 thereafter.


         6
         PREFERRED STOCK

         As of December 31, 2003 and 2002,  380,000  shares of  preferred  stock
were  authorized.  Dividends on  outstanding  shares are payable  quarterly at a
fixed rate before any dividends can be paid on common stock.

         The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series
C preferred  shares are not convertible to common stock. A premium of $243 would
be due to preferred stock  shareholders upon voluntary  liquidation of Series C.
There is no premium in the event of an  involuntary  liquidation.  Each Series C
preferred share is entitled to sixteen votes, with the right to cumulative votes
at any election of directors.


         7
         COMMON STOCKHOLDERS' EQUITY

         The Company is authorized to issue 25 million shares of $0.01 par value
common stock. As of December 31, 2003 and 2002, 16,932,046 shares and 15,182,046
shares, respectively, of common stock were issued and outstanding.

         Dividend  Reinvestment  and  Stock  Repurchase  Plan.  Under  the Plan,
stockholders may reinvest dividends to purchase  additional common stock without
commission fees. The Plan also allows existing stockholders and other interested
investors  to purchase  common stock  through the  transfer  agent up to certain
limits.  The Company's  transfer agent operates the Plan and purchases shares on
the open market to provide shares for the Plan.

                                       47



         Stockholder Rights Plan. The Company's Stockholder Rights Plan (SRP) is
designed to provide stockholders protection and to maximize stockholder value by
encouraging  a  prospective  acquirer to negotiate  with the Board.  The SRP was
adopted in 1998 and authorized a dividend  distribution  of one right (Right) to
purchase 1/100th share of Series D Preferred Stock for each outstanding share of
Common Stock in certain circumstances. The Rights are for a ten-year period that
expires in February 2008.

         Each Right  represents  a right to purchase  1/100th  share of Series D
Preferred Stock at the price of $120,  subject to adjustment  (Purchase  Price).
Each share of Series D Preferred  Stock is entitled to receive a dividend  equal
to 100 times any  dividend  paid on common  stock and 100 votes per share in any
stockholder  election.  The  Rights  become  exercisable  upon  occurrence  of a
Distribution   Date.  A  Distribution  Date  event  occurs  if  (a)  any  person
accumulates 15% of the then outstanding  Common Stock, (b) any person presents a
tender offer that would cause the person's ownership level to exceed 15% and the
Board determines the tender offer not to be fair to the Company's  stockholders,
or (c) the Board determines that a stockholder maintaining a 10% interest in the
Common  Stock could have an adverse  impact on the  Company or could  attempt to
pressure the Company to repurchase the holder's shares at a premium.

         Until the occurrence of a Distribution Date, each Right trades with the
Common  Stock  and is not  separately  transferable.  When a  Distribution  Date
occurs: (a) the Company would distribute  separate Rights Certificates to Common
Stockholders  and the Rights would  subsequently  trade separate from the Common
Stock;  and (b) each holder of a Right,  other than the acquiring  person (whose
Rights would thereafter be void),  would have the right to receive upon exercise
at its then current  Purchase Price that number of shares of Common Stock having
a market  value of two times the  Purchase  Price of the Right.  If the  Company
merges into the acquiring  person or enters into any  transaction  that unfairly
favors the acquiring person or disfavors the Company's other  stockholders,  the
Right becomes a right to purchase Common Stock of the acquiring  person having a
market value of two times the Purchase Price.

         The Board may determine that in certain  circumstances  a proposal that
would cause a Distribution Date is in the Company  stockholders'  best interest.
Therefore, the Board may, at its option, redeem the Rights at a redemption price
of $0.001 per Right.


         8
         SHORT-TERM BORROWINGS

         At December  31,  2003,  the Company  maintained  a bank line of credit
providing unsecured borrowings of up to $10 million at the prime lending rate or
lower rates as quoted by the bank. Cal Water  maintained a separate bank line of
credit for an additional  $45 million on the same terms as the Company's line of
credit. Both agreements required a 30-day out-of-debt period for 2003, which was
met. For 2004,  the $10 million  line has a  requirement  where the  outstanding
balance  must be  below $5  million  for a 30-day  consecutive  period.  The $45
million Cal Water line has a requirement  that the  outstanding  balance must be
below $10 million for a 30-day  consecutive  period.  Both agreements  include a
provision  that allows the bank to call the loan and cancel the  facility if Cal
Water's debt ratings fall below  investment  grade (Moody's Baa3 or S&P's BBB-).
The Company and Cal Water were in  compliance  with all covenants as of December
31, 2003. At December 31, 2003, $4 million was outstanding on the Cal Water line
and there were no borrowings on the Company line.

         Washington  Water has a loan commitment for $0.1 million from a bank to
meet its operating and capital equipment purchase requirements at interest rates
negotiated with the bank. At December 31, 2003,  nothing was  outstanding  under
the short-term commitment.

         New Mexico Water has a $2.6 million credit  agreement with a New Mexico
bank that expires in May 2004.  The interest  rate for the agreement is based on
prime rate plus 75 basis points.  At December 31, 2003, the amount  borrowed was
$2.5 million.

                                       48


         The  following  table  represents  borrowings  under the bank  lines of
credit:

                                           2003            2002            2001
Maximum short-term borrowings        $   58,633      $   52,285      $   36,800
Average amount outstanding           $   30,388      $   25,495      $   24,453
Weighted average interest rate             2.96%           3.44%           5.29%
Interest rate at December 31               4.08%           3.61%           3.16%


         9
         LONG-TERM DEBT

         As of December 31, 2003 and 2002, long-term debt outstanding was:

                             Interest    Maturity
                   Series        Rate        Date        2003            2002

First Mortgage Bonds:   J       8.86%        2023    $  3,800        $  4,000
                        K       6.94%        2012       5,000           5,000
                       CC       9.86%        2020      18,300          18,400
                       EE       7.90%        2023          --          19,100
                       FF       6.95%        2023          --          19,100
                       GG       6.98%        2023          --          19,100
- -----------------------------------------------------------------------------
                                                       27,100          84,700
- -----------------------------------------------------------------------------

Senior Notes:           A       7.28%        2025      20,000          20,000
                        B       6.77%        2028      20,000          20,000
                        C       8.15%        2030      20,000          20,000
                        D       7.13%        2031      20,000          20,000
                        E       7.11%        2032      20,000          20,000
                        F       5.90%        2017      20,000          20,000
                        G       5.29%        2022      20,000          20,000
                        H       5.29%        2022      20,000          20,000
                        I       5.54%        2023      10,000              --
                        J       5.44%        2018      10,000              --
                        K       4.58%        2010      10,000              --
                        L       5.48%        2018      10,000              --
                        M       5.52%        2013      20,000              --
                        N       5.55%        2013      20,000              --
- -----------------------------------------------------------------------------
                                                      240,000         160,000
- -----------------------------------------------------------------------------

California Department of
  Water Resources loans  3.0% to 7.4%     2003-33       2,747           2,797

Other long-term debt                                    3,283           3,868
- -----------------------------------------------------------------------------

  Total long-term debt                                273,130         251,365
Less current maturities                                   904           1,000
- -----------------------------------------------------------------------------

  Long-term debt, less current maturities            $272,226        $250,365
- -----------------------------------------------------------------------------

         The first mortgage bonds and unsecured  senior notes are obligations of
Cal Water.  All bonds are held by  institutional  investors  and are  secured by
substantially  all of Cal Water's  utility  plant.  The senior notes are held by
institutional  investors  and require  interest-only  payments  until  maturity,
except Series G and H Senior Notes, which have an

                                       49


annual sinking fund requirement of $1.8 million starting in 2012. The Department
of Water  Resources (DWR) loans were financed under the California Safe Drinking
Water Bond Act.  Repayment of principal and interest on the DWR loans is through
a surcharge on customer bills.  Other long-term debt is primarily  equipment and
system   acquisition   financing   arrangements  with  financial   institutions.
Compensating  balances of $228 as of December  31,  2003,  are required by these
institutions. Aggregate maturities and sinking fund requirements for each of the
succeeding five years (2004 through 2008) are $904,  $880,  $808, $819 and $804,
and $268,915 thereafter.


         10
         OTHER ACCRUED LIABILITIES

         As of December 31, 2003 and 2002, other accrued liabilities were:

                                                              2003          2002
Accrued pension and postretirement benefits                $11,828       $ 9,635
Accrued and deferred compensation                            7,192         6,041
Accrued insurance                                            2,894         2,914
Other                                                        5,546         5,524
- --------------------------------------------------------------------------------
                                                           $27,460       $24,114
- --------------------------------------------------------------------------------


         11
         INCOME TAXES

         Income tax expense (benefit) consists of the following:

                                    Federal       State        Total

2003                 Current       $  8,506     $ 2,604     $ 11,110
                    Deferred          1,697          91        1,788
- --------------------------------------------------------------------
                       Total       $ 10,203     $ 2,695     $ 12,898
- --------------------------------------------------------------------

2002                 Current       $  8,797     $ 2,406     $ 11,203
                    Deferred          1,039         326        1,365
- --------------------------------------------------------------------
                       Total       $  9,836     $ 2,732     $ 12,568
- --------------------------------------------------------------------

2001                 Current       $  6,472     $ 2,136     $  8,608
                    Deferred          1,456        (336)       1,120
- --------------------------------------------------------------------
                       Total       $  7,928     $ 1,800     $  9,728
- --------------------------------------------------------------------

                                       50


         Income tax expense  computed by  applying  the current  federal 35% tax
rate to pretax book income  differs  from the amount  shown in the  Consolidated
Statements of Income. The difference is reconciled in the table below:



                                                         2003          2002          2001
                                                                        
Computed "expected" tax expense                      $ 11,310      $ 11,074      $  8,643
Increase (reduction) in taxes due to:
  State income taxes, net of federal tax benefit        1,846         1,818         1,170
  Investment tax credits                                  (91)         (191)         (156)
  Other                                                  (167)         (133)           71
- -----------------------------------------------------------------------------------------
Total income tax expense                             $ 12,898      $ 12,568      $  9,728
- -----------------------------------------------------------------------------------------



         The components of deferred income tax expense were:

                                                 2003         2002          2001
Depreciation                                  $ 3,110      $ 2,405      $ 2,337
Developer advances and contributions           (1,136)        (789)        (783)
Bond redemption premiums                          911          806          (42)
Investment tax credits                           (110)         (95)         (94)
Other                                            (987)        (962)        (298)
- -------------------------------------------------------------------------------
Total deferred income tax expense             $ 1,788      $ 1,365      $ 1,120
- -------------------------------------------------------------------------------


         The tax effects of differences  that give rise to significant  portions
of the deferred tax assets and deferred tax liabilities at December 31, 2003 and
2002 are presented in the following table:



                                                                                              2003        2002
                                                                                                 
Deferred tax assets:
  Developer deposits for extension agreements and contributions in aid of construction     $42,517     $41,776
  Federal benefit of state tax deductions                                                    6,439       6,325
  Book plant cost reduction for future deferred ITC amortization                             1,728       1,639
  Insurance loss provisions                                                                  1,179         876
  Pension plan                                                                               1,359       1,136
  Other                                                                                        945         850
- --------------------------------------------------------------------------------------------------------------
Total deferred tax assets                                                                   54,167      52,602
- --------------------------------------------------------------------------------------------------------------

Deferred tax liabilities:
  Utility plant, principally due to depreciation differences                                89,464      82,130
  Premium on early retirement of bonds                                                       2,708       1,843
- --------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities                                                              92,172      83,973
- --------------------------------------------------------------------------------------------------------------
  Net deferred tax liabilities                                                             $38,005     $31,371
- --------------------------------------------------------------------------------------------------------------


         A valuation  allowance  was not required at December 31, 2003 and 2002.
Based on historical  taxable income and future taxable income  projections  over
the period in which the deferred assets are deductible,  management  believes it
is more  likely  than not that the  Company  will  realize  the  benefits of the
deductible differences.

                                       51


         12
         EMPLOYEE BENEFIT PLANS

         Pension  Plan.  The  Company  provides  a  qualified  defined  benefit,
non-contributory  pension plan for substantially all employees. The Company also
maintains an unfunded,  non-qualified,  supplemental  executive retirement plan.
The costs of the plans are  charged to expense and  utility  plant.  The Company
makes annual  contributions  to fund the amounts  accrued for pension cost.  The
Company  estimates  that the annual  contribution  to the  pension  plan will be
$8,235 in 2004. Plan assets in the pension plan as of December 31, 2003 and 2002
(the measurement dates for the plan) were as follows:

Asset Category                          Target    2003      2002

Bond Funds                              40.0%     42.9%     52.6%
Equity Accounts                         60.0%     57.1%     47.4%

         The  investment  objective  of the fund is to  maximize  the  return on
assets, commensurate with the risk the Company Trustees deem appropriate to meet
the obligations of the Plan,  minimize the volatility of the pension expense and
account for  contingencies.  The  Trustees  utilize  the  services of an outside
investment  advisor and periodically  measure fund performance  against specific
indexes,  in an effort to generate a rate of return for the total portfolio that
equals or exceeds the actuarial investment rate assumptions.

         Pension  benefit  payments are generally done in the form of purchasing
an  annuity  from  a  life  insurance   company.   Benefit  payments  under  the
supplemental executive retirement plan are paid currently.  Benefits expected to
be paid in each year 2004 to 2008 are $3,711, $4,078, $4,817, $5,028 and $6,746,
respectively.  The aggregate  benefit expected to be paid in the five years 2009
to 2013 is  $44,861.  The  expected  benefit  payments  are based  upon the same
assumption  used to measure the  Company's  benefit  obligation  at December 31,
2003, and include estimated future employee service.

         The accumulated benefit obligations of the pension plan are $62,368 and
$58,318  as of  December  31,  2003 and 2002,  respectively.  The fair  value of
pension  plan assets was  $63,216 and $56,303 as of December  31, 2003 and 2002,
respectively.  The unfunded  supplemental  executive retirement plan accumulated
benefit  obligations  were $6,480 and $5,972 as of  December  31, 2003 and 2002,
respectively.

         The data in the tables  below  includes  the  unfunded,  non-qualified,
supplemental  executive retirement plan. In addition,  the tables reflect a plan
amendment effective January 1, 2003, which increased the annual minimum benefit,
which is recognized over the estimated working lives of the employees.

         Savings  Plan.  The  Company  sponsors  a  401(k)  qualified,   defined
contribution  savings plan that allows  participants  to contribute up to 20% of
pretax compensation. The Company matches fifty cents for each dollar contributed
by the employee up to a maximum  Company  match of 4.0%.  Company  contributions
were $1,433, $1,422 and $1,425, for the years 2003, 2002 and 2001, respectively.

         Other  Postretirement  Plans.  The Company provides  substantially  all
active,  permanent employees with medical,  dental and vision benefits through a
self-insured plan. Employees retiring at or after age 58 are offered, along with
their spouses and dependents,  continued participation in the plan by payment of
a premium.  Plan assets are invested in mutual funds and short-term money market
funds. Retired employees are also provided with a life insurance benefit.

         The Company  records the costs of  postretirement  benefits  during the
employees'  years of active service.  The Commissions have issued decisions that
authorize rate recovery of tax deductible funding of postretirement benefits and
permit  recording  of a  regulatory  asset for the portion of costs that will be
recoverable in future rates.

                                       52



         The following table  reconciles the funded status of the plans with the
accrued pension  liability and the net  postretirement  benefit  liability as of
December 31, 2003 and 2002:



                                                                    Pension Benefits                Other Benefits
                                                               ------------------------        ------------------------
                                                                   2003            2002            2003            2002
                                                                                                   
Change in projected benefit obligation:
Beginning of year                                              $ 79,569        $ 60,359        $ 17,503        $ 14,708
Service cost                                                      3,879           2,968           1,033             815
Interest cost                                                     5,374           4,404           1,224           1,037
Assumption change                                                 6,662              30           1,462             699
Plan amendment                                                       --          15,424              --              40
Experience loss                                                   2,058             660           1,106             845
Benefits paid                                                    (9,186)         (4,276)           (109)           (641)
- -----------------------------------------------------------------------------------------------------------------------
End of year                                                    $ 88,356        $ 79,569        $ 22,219        $ 17,503
- -----------------------------------------------------------------------------------------------------------------------

Change in plan assets:
Fair value of plan assets at beginning of year                 $ 56,303        $ 57,340        $  2,465        $  2,300
Actual return on plan assets                                     10,667          (2,377)            364             (79)
Employer contributions                                            5,432           5,616             977             885
Retiree contributions                                                --              --             580             470
Benefits paid                                                    (9,186)         (4,276)           (689)         (1,111)
- -----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year                       $ 63,216        $ 56,303        $  3,697        $  2,465
- -----------------------------------------------------------------------------------------------------------------------

Funded status                                                  $(25,140)       $(23,266)       $(18,522)       $(15,038)
Unrecognized actuarial loss                                       4,031           1,281           7,175           5,025
Unrecognized prior service cost                                  17,074          18,875             712             786
Unrecognized transition obligation                                   --              --           2,769           3,045
Unrecognized net initial asset                                       --              --            (276)           (276)
- -----------------------------------------------------------------------------------------------------------------------
Net amount recognized                                          $ (4,035)       $ (3,110)       $ (8,142)       $ (6,458)
- -----------------------------------------------------------------------------------------------------------------------



         Amounts recognized on the balance sheets consist of:



                                           Pension Benefits           Other Benefits
                                         --------------------      --------------------
                                            2003         2002         2003         2002
                                                 
Accrued benefit costs                    $(4,035)     $(3,110)     $(8,142)     $(6,458)
Additional minimum liability              (2,992)      (4,784)          --           --
Intangible asset                           2,691        4,650           --           --
Accumulated other comprehensive loss         301          134           --           --
- ---------------------------------------------------------------------------------------
Net amount recognized                    $(4,035)     $(3,110)     $(8,142)     $(6,458)
- ---------------------------------------------------------------------------------------


         Below are the actuarial assumptions used for the benefit plans:



                                                         Pension Benefits     Other Benefits
                                                       --------------------   --------------
                                                       2003            2002    2003    2002
                                                                          
Weighted average assumptions as of December 31:
  Discount rate                                       6.25%           6.70%   6.25%   6.70%
  Long-term rate of return on plan assets             8.00%           8.00%   8.00%   8.00%
  Rate of compensation increases              1.50 to 4.25%   1.00 to 4.25%     --       --


                                       53



         The long-term rate of return  assumption is the expected rate of return
on a balanced portfolio invested roughly 60% in equities and 40% in fixed income
securities.  The average return for the plan for the last five and ten years was
6.2% and 8.6%, respectively.

         Net  periodic  benefit  costs for the pension and other  postretirement
plans for the  years  ending  December  31,  2003,  2002 and 2001  included  the
following components:



                                              Pension Plan                         Other Benefits
                                   ---------------------------------      ---------------------------------
                                      2003         2002         2001         2003         2002         2001
                                                                                  
Service cost                       $ 3,879      $ 2,968      $ 2,786      $ 1,033      $   815      $   625
Interest cost                        5,374        4,404        4,333        1,224        1,037          858
Expected return on plan assets      (4,757)      (4,497)      (4,946)        (233)        (216)        (212)
Net amortization and deferral        1,861        1,166          855          637          500          363
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit cost          $ 6,357      $ 4,041      $ 3,028      $ 2,661      $ 2,136      $ 1,634
- -----------------------------------------------------------------------------------------------------------



         Postretirement  benefit  expense  recorded  in 2003,  2002 and 2001 was
$1,160, $1,157 and $885, respectively. A regulatory asset of $6,846 was recorded
and is expected to be recoverable  through future  customer  rates.  The Company
intends to make annual contributions to the plan up to the amount deductible for
tax purposes.

         For 2003 measurement purposes,  the Company assumed a 6% annual rate of
increase in the per capita cost of covered  benefits for 2004.  Thereafter,  the
Company assumed a 5% annual rate. The health care cost trend rate assumption has
a significant effect on the amounts reported.  A one-percentage  point change in
assumed health care cost trends is estimated to have the following effect:



                                                       1-percentage    1-percentage
                                                     Point Increase  Point Decrease
                                                                   
Effect on total service and interest costs                $     487      $    (378)
Effect on accumulated postretirement benefit obligation   $   3,926      $  (3,119)



         13
         STOCK-BASED COMPENSATION PLAN

         The Company has a  stockholder-approved  Long-Term  Incentive Plan that
allows granting of non-qualified stock options,  performance shares and dividend
units.  Under the plan, a total of 1,500,000  common shares are  authorized  for
option  grants.  Options are granted at an exercise  price that is not less than
the per share common  stock market price on the date of grant.  The options vest
at a 25% rate on their  anniversary  date over  their  first  four years and are
exercisable  over a ten-year period.  At December 31, 2003,  74,625 options were
exercisable  at a weighted  average price of $24.45.  No options were granted in
2003.

         The fair value of stock  options  used to compute  pro forma net income
and earnings per share  disclosures  is the  estimated  fair value at grant date
using the Black-Scholes option-pricing model with the following assumptions:

                                         2003       2002       2001
Expected dividend                         n/a       4.5%       4.3%
Expected volatility                       n/a      14.4%      30.4%
Risk-free interest rate                   n/a      3.25%       4.6%
Expected holding period in years          n/a      5.0         5.0

                                       54


         The following table summarizes the activity for the stock option plan:



                                                                Weighted
                                                    Weighted     Average                Weighted
                                                     Average   Remaining                 Average
                                                    Exercise Contractual     Options        Fair
                                       Shares          Price        Life Exercisable       Value
                                                                         
Outstanding at December 31, 2000       53,500      $   23.06         9.5          --          --
Granted                                58,000          25.94                            $   5.65
Cancelled                             (12,000)         24.50
- ------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001       99,500          24.57         8.8      11,875          --
Granted                                55,000          25.15                                2.05
- ------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002      154,500          24.77         8.2      36,750          --
Cancelled                              (5,250)         24.78
- ------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003      149,250      $   24.77         7.2      74,625          --
- ------------------------------------------------------------------------------------------------


         14
         FAIR VALUE OF FINANCIAL INSTRUMENTS

         For those financial instruments for which it is practicable to estimate
a fair  value,  the  following  methods  and  assumptions  were  used.  For cash
equivalents,  accounts receivables, accounts payables and short-term borrowings,
the carrying amount  approximates fair value because of the short-term  maturity
of the instruments.  The fair value of the Company's long-term debt is estimated
at $272  million as of December  31,  2003,  and $306 million as of December 31,
2002,  using a  discounted  cash  flow  analysis,  based  on the  current  rates
available  to the  Company  for debt of  similar  maturities.  The fair value of
advances for  construction  contracts is estimated at $48 million as of December
31, 2003 and $34  million as of December  31,  2002,  based on data  provided by
brokers who purchase and sell these contracts.


         15
         COMMITMENTS AND CONTINGENCIES

         Commitments.  The  Company  leases  office  facilities  in  many of its
operating  districts.  The total paid and charged to operations  for such leases
was $577 in 2003, $700 in 2002 and $620 in 2001.

         The Company has long-term  contracts with two wholesale water suppliers
that require the Company to purchase minimum annual water quantities.  Purchases
are priced at the  suppliers'  then current  wholesale  water rate.  The Company
operates to purchase  sufficient water to equal or exceed the minimum quantities
under both  contracts.  The total paid under the  contracts  was $8,557 in 2003,
$6,816 in 2002 and $6,208 in 2001.

         The  Company  leases  the  City of  Hawthorne  water  system,  which in
addition to the upfront lease payment,  includes an annual payment.  The 15-year
lease  expires in 2011.  The annual  payments in 2003,  2002 and 2001 were $111,
$100 and $100,  respectively.  In July 2003 the Company  entered  into a 15-year
lease of the City of Commerce  water system.  The lease includes an annual lease
payment of $845 per year plus a cost savings sharing arrangement.

         Payments for these contracts are summarized below:


                      Office Leases   Water Contracts   System Leases
2004                        $   456          $  8,138          $  961
2005                            379             8,463             961
2006                            355             8,802             961
2007                            285             9,154             961
2008                            257             9,520             961
thereafter                      441             9,901           8,346

                                       55


         The water supply  contract  with Stockton  East Water  District  (SEWD)
requires  a fixed,  annual  payment  and does not vary  during the year with the
quantity  of  water  delivered  by the  district.  Because  of the  fixed  price
arrangement, the Company operates to receive as much water as possible from SEWD
in  order  to  minimize  the  cost  of  operating  Company-owned  wells  used to
supplement  SEWD  deliveries.  The total paid under the  contract  was $3,779 in
2003,  $2,967 in 2002 and  $3,496 in 2001.  Pricing  under the  contract  varies
annually.

         In 2002,  New Mexico Water  signed an  agreement  to purchase  National
Utilities  Corporation  and land for  approximately  $1.1  million in cash.  The
purchase  of  National  Utilities  is subject to the  approval of the New Mexico
Public Regulation Commission, which is expected in the first half of 2004.

         Contingencies.  In 1995, the State of California's  Department of Toxic
Substances Control (DTSC) named the Company as a potential responsible party for
cleanup of a toxic contamination plume in the Chico groundwater. The toxic spill
occurred when cleaning  solvents,  which were  discharged  into the city's sewer
system by local dry cleaners, leaked into the underground water supply. The DTSC
contends that the Company's  responsibility stems from its operation of wells in
the surrounding  vicinity that caused the contamination  plume to spread.  While
the Company is cooperating with the cleanup effort, it denies any responsibility
for the  contamination or the resulting cleanup and intends to vigorously resist
any action that may be brought  against it. The Company has negotiated with DTSC
regarding  dismissal of the Company from the claim in exchange for the Company's
cooperation in the cleanup effort.  However,  no agreement has been reached with
DTSC regarding  dismissal of the Company from the DTSC action. In December 2002,
the Company was named along with eight other  defendants  in a lawsuit  filed by
DTSC for the cleanup of the plume.  The suit  asserts  that the  defendants  are
jointly and  severally  liable for the estimated  cleanup of $8.7  million.  The
Company  believes that it has  insurance  coverage for this claim and that if it
were ultimately held responsible for a portion of the cleanup costs, there would
not be a material adverse effect on the Company's  financial position or results
of operations.  The Company's  insurance carrier is currently paying the cost of
legal representation in this matter.

         In 2003, the Company was served with a lawsuit in state court naming it
as one of several defendants for damages alleged to have resulted from waste oil
contamination  in the groundwater in the Marysville  District.  The suit did not
specify a dollar amount. The Company does not believe that the complaint alleges
any facts under which it may be held liable.  The Court has twice  dismissed the
complaint on various grounds raised by the Company,  but the Court has continued
to grant the plaintiff leave to amend the complaint.  If necessary,  the Company
intends to  vigorously  defend the suit.  In 2002,  the plaintiff in this action
brought a suit  against the Company in federal  court with  similar  allegations
concerning groundwater contamination. The suit was dismissed; however, the Court
did not bar the  plaintiff  from  filing  a state  claim.  If an  assessment  is
determined by a court, the Company believes that its insurance policy will cover
costs related to this matter under the terms of the policy.

         In December 2001, the Company and several other  defendants were served
with a lawsuit by the estate and immediate family members of a deceased employee
of a pipeline construction  contractor.  The contractor's employee had worked on
various Company projects over a number of years. The plaintiffs  allege that the
Company and other  defendants are  responsible for an  asbestos-related  disease
that is  claimed  to have  caused the death of the  contractor's  employee.  The
complaint  seeks damages in excess of $0.1 million,  in addition to  unspecified
punitive damages.  The Company denies  responsibility in the case and intends to
vigorously defend itself against the claim.  Pursuant to an indemnity  provision
in the contracts  between the  contractor  and the Company,  the  contractor has
accepted  liability  for the claim  against the Company and is  reimbursing  the
Company for its defense costs.

         The Company and City of Stockton  (City)  purchase  water from Stockton
East Water District (SEWD).  The City believes that SEWD's meter, which recorded
water  deliveries to the City's system,  malfunctioned  for some period of time,
and as a result the City overpaid for water  deliveries from SEWD. If the City's
assertion  is correct,  SEWD would owe the City a credit  which may be recovered
from its other  customers,  which is primarily  the Company.  SEWD has initially
agreed with the City's assertion and has recommended a reimbursement to the City
and a billing  adjustment to the Company of $1.9 million over a 24-month period.
At this time,  the Company has not agreed  with the  assertion  or the method in
which the  overcharging  to the City was  determined.  The  Company has not been
formally  notified by SEWD of a liability to the  Company.  The Company has been
billed $0.7  million,  and has paid in 2003 higher  costs  associated  with this
claim. These amounts were recorded as an expense in 2003. The Company has ceased
further  payments of this  adjustment  and has hired a  consultant  to perform a
study  on the  situation.  After  completion  of the  study,  the  Company  will
negotiate with SEWD and the City. Given the assertion of the City, the estimated
settlement  is between  $0.7 and $1.9  million.  The Company  believes  that any
additional expense associated with settlement would be recoverable in customers'
rates.

                                       56


         In February 2003, the California  Public  Utilities  Commission  (CPUC)
Office of  Ratepayer  Advocates  recommended  that Cal Water be fined up to $9.6
million  and  refund  $0.5   million  in  revenue  for  failing  to  report  two
acquisitions  as required by the CPUC. One  acquisition  was completed  prior to
adoption of the reporting  requirement by the CPUC; the other was  inadvertently
not  reported.  Cal  Water  acquired  the two  water  systems,  which  serve 283
customers,  for approximately $0.1 million. The staff's  recommendation does not
challenge the level of service  provided or amounts charged for water service to
the  customers;  it is based  solely on the fact that Cal Water failed to report
the  acquisitions  to the  CPUC.  On July 10,  2003 the CPUC  issued  Resolution
W-4390.  In this resolution,  the CPUC's staff challenged  whether Cal Water was
properly  authorized to make these two acquisitions,  as a result of the failure
to report.  The resolution  grants Cal Water's  request to consult and work with
the CPUC's Water Division to resolve the matters.  Since the CPUC's policy is to
encourage  large  water  utilities  to acquire  small water  systems,  Cal Water
believes that a reasonable  resolution will be reached.  At this time, Cal Water
cannot  estimate the costs or the timing of the resolution of these issues.  Cal
Water does not believe that the staff's  recommendation will be upheld when this
matter is considered by the CPUC.  Accordingly,  no liability was accrued in the
financial statements.

         In  September  2003,  the CPUC issued  decision D.  03-09-021.  In this
decision,  the CPUC  ordered Cal Water to maintain  and track sales  records for
each property that was at any time included in rate base and  subsequently  sold
and to share these  records with the CPUC.  The CPUC's  staff is  reviewing  Cal
Water's  recording  of  proceeds  and  recognition  of gain on  sales  of  these
non-utility,  surplus  properties.  Cal  Water  believes  the  sales of  surplus
properties  were  properly   recorded  in  accordance  with  the  Water  Utility
Infrastructure  Act of 1995 and the  CPUC's  decision  authorizing  the  holding
company structure for California Water Service Group. Gains have been recognized
outside of regulated  operations,  as the properties sold were not being used in
the  regulated  operations  and were  excluded  from rate base for rate  setting
purposes.  Also, proceeds from these sales have been reinvested in the regulated
business of Cal Water. The CPUC has requested documentation to determine whether
Cal Water appropriately removed these non-utility,  surplus properties from rate
base in a timely manner,  and has requested  documentation on the  determination
that these  properties  were no longer  used and  useful.  If the CPUC finds any
surplus property sale or transfer was recorded inappropriately,  then this could
result in a reduction  to rate base used to determine  future  rates  charged to
regulated  customers.  This could reduce  future  revenues,  net income and cash
flows.  The Company is not able to provide  estimates  of the timing or what the
ultimate resolution may be.

         The Company is involved in other  proceedings or litigation  arising in
the ordinary course of operations.  The Company believes the ultimate resolution
of such matters will not materially  affect its financial  position,  results of
operations or cash flows.

                                       57


         16
         QUARTERLY FINANCIAL DATA (UNAUDITED)

         The  Company's  common  stock is traded on the New York Stock  Exchange
under the symbol "CWT."  Through 2003,  dividends have been paid on common stock
for 59 consecutive years and the rate has been increased each year since 1968.



2003 - in thousands except per share amounts        First             Second             Third            Fourth
                                            -------------      -------------     -------------     -------------
                                                                                       
Operating revenue                           $      51,311      $      67,994     $      88,197     $      69,626
Net operating income                                2,625              7,548            12,519             7,542
Net income (loss)                                    (768)             4,585             8,587             7,013
Diluted earnings (loss) per share                   (0.05)              0.30              0.53              0.41
Common stock market price range:
  High                                              26.27              30.97             29.98             27.99
  Low                                               23.92              25.79             25.20             25.51
Dividends paid                                     .28125              .2812             .2812            .28125

2002 - in thousands except per share amounts


Operating revenue                           $      51,611      $      69,183     $      81,440     $      60,917
Net operating income                                5,353              8,405            11,597             5,392
Net income                                          1,928              6,619             7,675             2,851
Diluted earnings per share                           0.12               0.43              0.50              0.19
Common stock market price range:
  High                                              26.25              26.69             26.45             25.95
  Low                                               23.20              23.40             21.60             23.65
Dividends paid                                      .2800              .2800             .2800             .2800


                                       58


         Independent Auditors' Report

         THE BOARD OF DIRECTORS AND STOCKHOLDERS
         CALIFORNIA WATER SERVICE GROUP:

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
California  Water  Service  Group and  subsidiaries  as of December 31, 2003 and
2002, and the related  consolidated  statements of income,  common stockholders'
equity  and  comprehensive  income,  and cash flows for each of the years in the
three-year  period  ended  December  31,  2003.  These  consolidated   financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material  respects,  the financial position of California
Water Service Group and  subsidiaries  as of December 31, 2003 and 2002, and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended  December  31,  2003,  in  conformity  with  accounting
principles generally accepted in the United States of America.

KPMG LLP
Mountain View, California
January 27, 2004


         Certifications

         As provided  in the rules of the New York Stock  Exchange  (NYSE),  the
Company's Chief Executive  Officer has certified to the NYSE in writing that, as
of March 4, 2004, he was not aware of any violation by the Company of the NYSE's
Corporate  Governance  listing  standards.  The Company has included as Exhibits
31.1 and 31.2 to its Annual Report on Form 10-K for the year ended  December 31,
2003,  certifications  from its Chief  Executive  Officer  and  Chief  Financial
Officer regarding the quality of the Company's public disclosure.

                                       59