The demand for fresh water continues to escalate, driven by the need for drinking water to satisfy the world’s growing population, changing weather patterns, an increasing need for water for agriculture and industry and the concentration of populations in urban areas that lack sufficient fresh water resources. The power industry is also a large consumer of water, as water is critical to the cooling processes used in fossil fuel and nuclear plants and in the production of biofuels.

The United Nations Population Fund expects the global consumption of water to double every 20 years. A study conducted by the International Water Management Institute projects that by 2025, 33% of the population of the developing world will face severe water shortages. The uneven geographic distribution of fresh water supplies compounds this problem. Even in water-rich nations, population growth, environmental regulation and irrigation needs are placing constraints on existing water resources.

The United Nations Environmental Program estimates that by 2010, 80% of the world’s population will live within 100 kilometers of a sea coast. With the growth of population centers along coastal areas and improvements in technology, desalination, once a luxury of oil-rich Middle Eastern countries and large-scale resorts, is rapidly becoming an economically viable alternative in many regions where traditional fresh water sources are becoming increasingly stressed.

According to the February/March 2008 issue of International Desalination & Water Reuse Quarterly, there are approximately 14,000 desalination plants installed worldwide. Global Water Intelligence, or GWI, estimates that as of December 31, 2005, there were 39.9 million cubic meters per day of installed capacity, and that the growth in the market for new total desalination capacity should increase by approximately 13% per year from 2005-2015.

The PX-220 has been the Company’s flagship product. However, the Company expects the recently introduced PX-260 to become its flagship product in late 2008. The 65-Series PX product line, named for the diameter of the rotor, includes the following models: The 65-Series is designed for SWRO plants with production capacities greater than 120 gpm (650 m3/day). PX devices are manifolded together into trains to achieve unlimited capacity ranges.

The 4S-Series devices are designed for plants with production capacities in the range of 25 to 300 gpm (140 to 1,600 m3/day).

The Company’s PX booster pumps are suitable for SWRO plants with production rates ranging from approximately 25 to 300 gpm (140 to 1,600 m3/day).

The Company recently has developed and commercially released several new products. In addition, the Company is currently developing several new products for possible commercial release in 2009 and 2010. The Company launched the PX-260 in late 2007. The PX-260 utilizes the same vessel as the PX-220 but incorporates new ceramic designs and internal components.

The PX-30S was designed as a test unit and entry point to gain the approval and acceptance of large municipal projects. With only a 4-inch rotor, the PX-30S allows a municipal water operator to achieve the same efficiency as the Company’s larger recovery devices, except on a smaller scale.

The Company has developed and recently introduced a new line of brackish PX devices that takes advantage of the less stringent requirements of brackish water applications.

The Company is developing a new PX device designed for customers who are more sensitive to up-front costs and who operate small plants or are in regions where energy costs are low.

The Company currently manufactures and sells a line of booster pumps for plants with production rates ranging from 25–300 gpm.

Sales and marketing expense increased by $1.6 million, or 43%, to $5.2 million in 2007 from $3.6 million in 2006.

Research and development expense increased by $438,000, or 35%, to $1.7 million in 2007 from $1.3 million in 2006.

Other income (expense), net increased by $431,000 to $412,000 in 2007 from $(19,000) in 2006.