UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

OR

Commission File Number: 0-25248

CONSOLIDATED WATER CO. LTD.

Registrant’s telephone number, including area code: (345) 945-4277

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

As at July 31, 2004, there were 5,748,855 of the registrant’s ordinary shares of common stock, with CI$ 1.00 par value, outstanding.

EXCHANGE RATES

Unless otherwise indicated, all dollar amounts are in United States Dollars and references to “$”, “U.S.”, or “U.S. $” are to United States Dollars.

The official fixed exchange rate for conversion of CI$ into U.S.$, as determined by the Cayman Islands Monetary Authority, has been fixed since April 1974 at U.S. $1.20 per CI$1.00.

The official fixed exchange rate for conversion of BZE$ into U.S.$, as determined by the Central Bank of Belize, has been fixed since 1976 at U.S.$ 0.50 per BZE$ 1.00.

The official fixed exchange rate for conversion of BAH$ into U.S.$, as determined by the Central Bank of The Bahamas, has been fixed since 1973 at U.S. $1.00 per BAH $1.00.

The official fixed exchange rate for conversation of BDS$ into U.S.$ as determined by the Central Bank of Barbados has been fixed since 1975 at U.S.$ 0.50 per BDS$ 1.00.

The British Virgin Islands’ currency is U.S.$.

TABLE OF CONTENTS

Forward-Looking Statements

This Form 10-Q for Consolidated Water Co. Ltd. (the “Company”) includes statements that may constitute “forward-looking” statements, usually containing the words “believe,” “estimate,” “project,” “intend,” “expect” or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company’s products and services in the marketplace, changes in its relationship with the governments of the jurisdictions in which it operates, the ability to successfully secure contracts for water projects in other countries, the ability to develop and operate such projects profitably, and other risks detailed in the Company’s other periodic report filings with the Securities and Exchange Commission. By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of this Form 10-Q.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED WATER CO. LTD.

The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

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CONSOLIDATED WATER CO. LTD.

The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

2

CONSOLIDATED WATER CO. LTD.

The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

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CONSOLIDATED WATER CO. LTD.

1. Presentation of Financial Information

The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. All adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements have been included. The results of operations for the period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

The accompanying consolidated financial statements of the Company should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10–K for the year ended December 31, 2003.

Certain of the prior period’s figures have been reclassified to conform to the current period’s presentation. The Company has reallocated various expenses in cost of sales, general and administrative expenses and interest expense, as management has determined it more appropriate to reflect these amounts in its current allocations. There is no impact to net income of the Company as a result of these reclassifications.

2 Principles of Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company’s wholly-owned subsidiaries, Cayman Water Company Limited, Belize Water Limited, Ocean Conversion (Cayman) Limited, DesalCo Limited, DesalCo (Barbados) Limited, and its majority owned subsidiary Waterfields Company Limited. All intercompany balances and transactions have been eliminated in consolidation.

3. Stock Based Compensation

The Company currently has four stock compensation plans. The Company accounts for stock–based compensation plans for employees and directors using the intrinsic value method. Under this method, the Company records no compensation expense for stock options granted when the exercise price of options granted is equal to or greater than the fair market value of the Company’s common stock on the date of grant.

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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. Stock Based Compensation (continued)

The following table presents the effect on net income and earnings per share if the Company had applied a fair value recognition method:

4. Segment Information

Under the Statements of Financial Accounting Standards 131, “Disclosure about Segments of an Enterprise and Related Information”, management considers; (i) the operations to supply water to retail customers, (ii) the operations to supply water to bulk customers, and (iii) the provision of engineering and management services as separate business segments.

For purposes of segment information, the accounts of Ocean Conversion (BVI) Ltd. have been proportionally consolidated into the Bulk water segment. An adjustment has been made in reconciling items to account for the investment under the equity method. Also included in reconciling items are corporate expenses including interest expense that do not relate to any specific operating segment.

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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Segment Information (continued)

As at June 30 and for the three months then ended

As at June 30 and for the six months then ended

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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. Earnings Per Share

Basic earnings per common share (“EPS”) is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS assumes the issuance of common shares for all dilutive-potential common shares outstanding during the reporting period. In addition, the dilutive effect of stock options is considered in earnings per common share calculations, if dilutive, using the treasury stock method.

The following summarizes information related to the computation of basic and diluted earnings per share for the three and six month period ended June 30, 2004 and 2003.

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

Overview

Our objective is to provide water services in areas where the supply of potable water is scarce and where the use of reverse osmosis technology to produce potable water is economically feasible. By focusing on this market, we believe that we can provide a superior financial return to our investors. To increase share value and maintain dividend payouts in accordance with current company policy, we need to expand our revenues by developing new business opportunities both within our current service areas, and in new areas. We need to maintain our high operating efficiencies by adhering to our strict equipment maintenance and water loss mitigation programs in order to achieve gross profit margins that have historically been between 40% and 45%. We further believe that many Caribbean basin and adjacent countries, while being water scarce, also present opportunities for operation of our plants in limited regulatory settings which are less restrictive than the highly regulated markets of North America, which promotes cost effective operation of our equipment.

Our business operations and activities are conducted in five countries: the Cayman Islands, Belize, Barbados, the British Virgin Islands and the Bahamas.

Critical Accounting Policies

The preparation of our condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to trade accounts receivable, goodwill and other intangible assets. Our company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies are the most important to the portrayal of our financial condition and results and require management’s more significant judgments and estimates in the preparation of our company’s consolidated financial statements.

Trade accounts receivable: We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management continuously evaluates the collectibility of accounts receivable and records an allowance for doubtful accounts based on estimates of the level of actual write-offs which might be experienced. These estimates are based on, among other things, comparisons of the relative age of accounts and consideration of actual write-off history.

Goodwill and other intangible assets: Goodwill represents the excess costs over fair value of the assets of an acquired business. Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimatable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”. The Company periodically evaluates the possible impairment of goodwill. Management identifies its reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing

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goodwill and intangible assets, to those reporting units. The Company determines the fair value of each reporting unit and compares it to the carrying amount of the reporting unit. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, the Company is required to perform the second step of the impairment test, as this is an indication that the reporting unit goodwill may be impaired. In this step, the Company compares the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, “Business Combinations”. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the implied fair value is less than its carrying amount, the impairment loss is recorded.

Revenue

Revenue is comprised of retail water sales via pipeline to individual customers, bulk water sales to large commercial or municipal customers, and fees for management and engineering services.

Expenses

Expenses include the cost of sales (“direct expenses’’) and indirect, or general and administrative, expenses. Direct expenses include royalty payments to the Cayman Islands government, electricity and chemicals expenses, production equipment and facility depreciation costs, equipment maintenance expenses, operational staff costs and amortization of intangible assets. Indirect, or general and administrative, expenses consist primarily of salaries and employee benefits for administrative personnel, stock compensation expenses, office lease payments, depreciation on fixed assets used for administrative purposes and legal and professional fees. There are no income taxes in the Cayman Islands, and we are currently exempt from taxes in the British Virgin Islands and Belize. We pay an annual business license fee in the Bahamas. We pay income tax in Barbados.

Results of Operations

Three and Six Months Ended June 30, 2004 Compared to Three and Six Months Ended June 30, 2003

Revenue

Total revenue increased by 34.9% from $4,750,381 to $6,409,364 for the three months ended June 30, 2004 and by 45.4% from $8,769,106 to $12,747,061 for the six months ended June 30, 2004 when compared to the same three and six month period in 2003.

Revenue from our retail water (“Retail”) operations increased by 23.5% from $2,862,424 to $3,536,311 for the three months ended June 30, 2003 and 2004, respectively, and by 25.2% from $5,681,376 to $7,111,387 for the six months ended June 30, 2003 and 2004, respectively. For the three and six months ended these increases were due to higher water sales in our primary market in the Cayman Islands due to increased demand in both our tourist and residential markets. Published tourist air arrivals records show a 17.6% increase for the three months ended June 30, 2004 and a 12.7% increase for the six months ended June 30, 2004 over the same periods in the prior year. Residential markets increased due to increased residential development.

Revenue from our bulk water (“Bulk”) operations increased by 76.4% from $1,505,716 to $2,655,693 for the three months ended June 30, 2003 and 2004, respectively, and by 105.7% from $2,510,857 to

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$5,163,872 for the six months ended June 30, 2003 and 2004, respectively. For the three month period this increase was due to the additional three months of revenue from our acquisition of Waterfields Company Limited when compared to the same three month period in 2003. For the six months periods these increases were due to an additional month of revenue from our acquisition of Ocean Conversion (Cayman) Limited operations and six months of revenue from our acquisition of Waterfields Company Limited operations when compared to the same six month period in 2003. Revenues from our Belize operations declined by 26% and 32%, respectively during the same three and six month periods due to the reduced water rates in the new long term contract which was signed in September 2003 and has come into full effect on June 1, 2004 now that all conditions precedent have been met or waived. These reduced prices will be offset by the reduced amortization costs on the intangible asset which is being amortized over 23 years. The new contract also makes us the exclusive producer of potable water for our customer on Ambergris Caye for the term of the agreement.

Revenue from services (“Service”) decreased by 43.1% from $382,241 to $217,360 for the three months ended June 30, 2003 and 2004, respectively, and by 18.2% from $576,873 to $471,802 for the six months ended June 30, 2003 and 2004, respectively. For the three and six month periods these decreases were due to fewer construction projects and the related decrease in engineering fees that are charged on labour and material costs associated with these projects. During the three and six month periods, we substantially completed our existing construction projects and have not commenced any new construction projects. We are in the process of bidding for one plant in BVI and are awaiting the results of three other bids which we submitted earlier this year on projects in the Bahamas, Barbados and Mexico.

Other Income (Expenses)

Total other income increased from a net expense of $140,461 to a net income of $314,255 for the three months ended June 30, 2003 and 2004, respectively, and from a net expense of $129,615 to a net income of $470,046 for the six months ended June 30, 2003 and 2004, respectively. These increases were due primarily to decreased interest expense because we repaid our bridge loan facility with proceeds from our 2003 equity offering on July 8, 2003 and due to the full amortization of our bridge financing fees in the prior year. Our profit sharing and equity income from our investment in Ocean Conversion (BVI) Ltd. also contributed to the increase.

Cost of Sales

Total cost of sales increased by 34.8% from $2,641,400 to $3,559,819 for the three months ended June 30, 2004 and by 43.4% from $4,874,863 to $6,990,769 for the six months ended June 30, 2004 when compared to the same three and six month periods in 2003. During these same periods in 2004, our total revenue increased by 34.9% and 45.4%, respectively.

Cost of sales of our Retail operations increased by 17.0% from $1,214,120 to $1,420,869 for the three months ended June 30, 2003 and 2004, respectively, and by 14.7% from $2,433,996 to $2,791,151 for the six months ended June 30, 2003 and 2004, respectively, while our Retail revenue increased by 23.5% and 25.2% for the same period. For the three and six month periods, these increases in cost of sales resulted primarily from additional variable costs related to the production of the additional water sold.

Cost of sales of our Bulk operations increased by 54.1% from $1,284,141 to $1,978,442 for the three months ended June 30, 2003 and 2004, respectively, and by 78.6% from $2,180,160 to $3,894,