Drinking water throughout the United States is supplied primarily from surface water and groundwater. In the Arid West, available surface water is largely claimed, leaving little room for expansion of this source to meet increasing demand. Procurement of surface water can also be expensive, often requiring miles of transport before consumption. Desalination is a potential source of drinking water; however, it is believed that the potential benefit of desalination as an alternative source of drinking water is limited due to a number of factors, including the high energy costs associated with the process, the relative inefficiency of the process, the substantial financial investment required to construct a desalination plant, the need to place such plants near an electric power generation plant and in a coastal location and the environmental opposition to brine discharge and entrapment and impingement of marine organisms.

Groundwater, which serves as the primary source of drinking water for more than half of the United States population, has numerous advantages over surface water as a dependable source for water providers. According to the United States Geological Survey, at any given time, the 1.0 million cubic miles of groundwater in storage is more than 30 times greater than the available supply of surface water in freshwater lakes and streams. Compared to surface water resources, the extraction of groundwater is relatively inexpensive due to its abundance and minimal need for investment by water providers for transport.

Population growth has resulted in increased demand for drinking water in much of the United States. As a result, water providers are challenged continually with securing drinking water resources to meet the needs of their customers. Many areas in the United States experience drinking water shortages on an annual basis. This is a problem particularly acute in California and other states in the Arid West, where population growth has resulted in rapidly increasing demand for drinking water. For example, the population of California and Arizona, collectively, grew by approximately 5.6 million people between 1990 and 2000. The U.S. Census Bureau expects this trend of population growth to continue, with the combined population of these two states expected to increase by more than 12.0 million people over the next 20 years.

The Company manufactures groundwater treatment systems on a build-to-order basis with a four to six week lead-time. The Company receives its raw materials from suppliers located in the United States, and it manufactures its system in a 16,000 square foot plant at its headquarters in Rancho Cucamonga, California. The Company’s existing manufacturing facilities can manufacture five systems simultaneously.

The Company’s customers must obtain a license and/or permit from a state regulatory agency in order to operate each system that it installs at their wellheads. Each customer installation is designed using the Company’s proprietary BasinWater-IX software program. The BasinWater-IX software generally provides the data in a matter of minutes and generates accurate assessments of cost, post-treatment contaminant levels and waste rates, eliminating the need for a pilot test, which can cost more than $100,000 and take up to six months to complete.

Typically the Company’s system is installed adjacent to a wellhead. The system uses the well pump’s pressure to move water through the system. The Company’s system requires at least one waste brine tank to be placed onsite. The brine tank is connected to a waste line that allows for a contracted waste removal company to remove the brine without entering the well site. During the course of the groundwater treatment process, the Company does not take ownership of the water or title to the waste generated from the treatment of water. Title to both the water rights and the waste remains with the water provider at all times during this process.

The Company’s system is fully automatic and uses a Program Logic Controller, or PLC, that runs advanced control programs to maximize treatment system performance and reliability while also minimizing waste products. The PLC controls all process equipment and constantly monitors values from process instrumentation and analyzers as well as operator-entered commands and set points and then executes control actions based on these values. An operator interface provides the user with real time information on process performance, as well as a comprehensive trending, reporting, and historical database function.

Cost of revenues increased by $2.89 million, or 150%, from $1.93 million during the first nine months of 2004 to $4.82 million during the first nine months of 2005.

Gross profit increased by $1.15 million, or 67%, from $1.71 million during the first nine months of 2004 to $2.86 million in the first nine months of 2005.

Research and development expense increased by $0.37 million, or 218%, from $0.17 million in the first nine months of 2004 to $0.54 million in the first nine months of 2005.

Other expense increased by $0.13 million, or 87%, from $0.15 million during the first nine months of 2004 to $0.28 million during the first nine months of 2005.