UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended August 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

PURE CYCLE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		84-0705083
(State of incorporation)		(I.R.S. Employer Identification No.)
8451 Delaware Street, Thornton, CO		80260
(Address of principal executive office)		(Zip Code)

Registrant’s telephone number, including area code: (303) 292-3456

Securities registered pursuant to Section 12(b) of the Act:

Common Stock 1/3 of $.01 par value		The NASDAQ Stock Market, LLC
Title of Class		Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No þ

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.                                                                              Yes þ No o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                                                              o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o       Accelerated filer þ       Non-accelerate filer o

Indicate by check mark whether the registrant is a shell company (as defied in Rule 12b-2 of the Exchange Act).             Yes o No þ

The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates on February 28, 2007, the last business day of the registrants most recently completed second fiscal quarter was:                                                        $84,289,000

Number of shares of Common Stock outstanding, as of October 31, 2007:                                                                             20,206,566

Documents incorporated by reference: The information required by Part III is incorporated by reference from the registrant’s definitive proxy statement for the 2007 annual meeting of stockholders, which will be filed with the SEC within 120 days of the close of the fiscal year ended August 31, 2007.

 

 

Table of Contents

Item				Page
		Part I
1.		Business			3
1A.		Risk Factors			16
1B.		Unresolved Staff Comments			21
2.		Properties			21
3.		Legal Proceedings			21
4.		Submission of Matters to a Vote of Security Holders			21
		Part II
5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			22
6.		Selected Financial Data			24
7.		Management’s Discussion and Analysis of Financial Condition and Results of Operation			25
7A.		Quantitative and Qualitative Disclosures About Market Risk			35
8.		Financial Statements and Supplementary Data			36
9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			67
9A.		Controls and Procedures			67
9B.		Other Information			68
		Part III
10.		Directors, Executive Officers and Corporate Governance			68
11.		Executive Compensation			68
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			68
13.		Certain Relationships and Related Transactions, and Director Independence			68
14.		Principal Accounting Fees and Services			68
		Part IV
15.		Exhibits, Financial Statement Schedules			68
		Signatures			71
Exhibit 10.20
Exhibit 10.21
Exhibit 10.22
Exhibit 10.23
Exhibit 10.24
Exhibit 10.25
Exhibit 10.26
Exhibit 10.27
Exhibit 10.28
Exhibit 10.29
Exhibit 10.30
Exhibit 10.31
Exhibit 10.32
Exhibit 10.33
Exhibit 10.34
Exhibit 10.35
Exhibit 10.36
Exhibit 14
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 32.1

“SAFE HARBOR” STATEMENT UNDER THE UNITED STATES PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

Statements that are not historical facts contained in this Annual Report on Form 10-K are forward looking statements that involve risk and uncertainties that could cause actual results to differ from projected results. The words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. We cannot assure you that any of our expectations will be realized. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation, the timing of development of the areas where we may sell our water, including uncertainties related to the development of projects we currently have under contract, the market price of water, changes in applicable statutory and regulatory requirements, uncertainties in the estimation of water available under decrees, costs of delivery of water and treatment of wastewater, uncertainties in the estimation of costs of construction projects, the strength and financial resources of our competitors, our ability to find and retain skilled personnel, climatic and weather conditions, labor relations, availability and cost of material and equipment, delays in anticipated permit and construction dates, environmental risks, the results of financing efforts and the ability to meet capital requirements, and general economic conditions.

PART I

Item 1. Business

Summary of our business

Pure Cycle Corporation was incorporated in Delaware in 1976. We are a vertically integrated water and wastewater service provider engaged in the design, construction, operation and maintenance of water and wastewater systems. Our philosophy is that water is a precious commodity, one which is often undervalued and used inefficiently. We have assets located in the Denver, Colorado metropolitan area, in southeastern Colorado in the Arkansas River, and on the western slope of Colorado; however, we primarily operate in metropolitan Denver, Colorado. We center our business practices around efficient and environmentally responsible water management programs to ensure we have high quality water to meet the long-term needs of our customers. This means we withdraw, treat, store and deliver water to our customers, then collect wastewater from our customers, treat it, and reuse that water through our dual distribution delivery systems. A dual distribution system is one in which domestic water demands and irrigation water demands are provided through separate independent infrastructure which promotes efficient water resource management and reduces the amount of water that is “wasted” by traditional water systems. This enables us to maximize our water supplies and allows us the ability to provide long-term water solutions on a regional basis.

The Denver metropolitan region continues to experience growth, even in the slow housing construction market experienced throughout 2007. In recent years, cities and municipalities have begun requiring property developers to demonstrate they have sufficient water supplies for their proposed projects before the cities and municipalities will consider rezoning or annexation applications. Our water marketing activities focus on developers and homebuilders developing new areas along the Front Range, which includes the greater Denver and Colorado Springs metropolitan areas. Our groundwater supplies are largely undeveloped and are located in the southeast portion of the greater Denver area in Arapahoe County. The majority of our surface water is located in the Arkansas River Valley, and we anticipate using it in our target service market and throughout the Front Range of Colorado.

We work with area developers to investigate water supply constraints, water and wastewater utility issues and other issues related to water and wastewater services in order to identify suitable areas for development. We negotiate individual service agreements with developers and/or homebuilders and cities and municipalities to design, construct and operate water and wastewater systems and services. These service agreements address all aspects of the development of the water and wastewater systems, which are more specifically discussed below, but include: (i) the purchase of water and wastewater taps in exchange for our obligation to construct the “Wholesale Facilities;” (ii) the establishment of payment terms, timing, capacity and location of “Special Facilities” (if any); and (iii) specific terms related to our provision of ongoing water and wastewater services.

Our Water Assets

We own the following water assets in Colorado, which are described in greater detail below:

•		Approximately 60,000 acre-feet of senior 1883 water rights in the Arkansas River and its tributaries represented by over 21,600 shares of the Fort Lyon Canal Company (“FLCC”);
•		Approximately 11,650 acre-feet of water located in Arapahoe County, Colorado at property known as the Lowry Range (described below), which we can “export” from the Lowry Range to supply water to nearby communities and developers in need of additional water supplies (this water asset is referred to as our “Export Water”);
•		Approximately 363 acre-feet of groundwater pursuant to an Agreement for Water Service (the “County Agreement”) with Arapahoe County (the “County”), which will be added to our overall Denver metropolitan water supply portfolio (we are awaiting the delivery of a water rights deed for approximately 336 acre-feet of this water valued at approximately $240,000, the value of which is included in the construction proceeds receivable account on our balance sheet as of August 31, 2007, until the water rights deed is received); and
•		Approximately 89 acre-feet of water located beneath Sky Ranch together with the right to purchase an additional 671 acre-feet of water (for a total of 760 acre-feet), which will be used to provide water service to the initial 1,500 taps purchased at Sky Ranch.

In addition to the water we own, we also control the following water assets in Colorado, which are described in greater detail below:

•		We have the exclusive rights to use, through 2081, approximately 15,050 acre-feet of water located at the Lowry Range. This water is required to be used specifically on the Lowry Range (collectively we refer to the 15,050 acre-feet of water designated for use on the Lowry Range and the 11,650 acre-feet of Export Water as our “Rangeview Water Supply”);
•		We own conditional water rights in western Colorado that entitle us to build a 70,000 acre-foot reservoir to store Colorado River tributary water and a right-of-way permit from the U.S. Bureau of Land Management for property at the dam and reservoir site (collectively known as the “Paradise Water Supply”).

Arkansas River Water

On August 31, 2006, we acquired approximately 60,000 acre-feet of Arkansas River water from High Plains A&M, LLC (“HP A&M”), in exchange for 3.0 million shares of our common stock, pursuant to an acquisition agreement (the “Arkansas River Agreement”). Of this, we anticipate that approximately 40,000 acre-feet will be available for non-agricultural uses along the front range of Colorado. This acquisition allows us to more effectively market our water and wastewater services to customers in the Denver metropolitan market as well as other markets such as the Colorado Springs region. It also expands our service capacities from approximately 78,000 Single Family Equivalent units (“SFE”) to over 180,000 SFE units. An SFE is defined in our water and wastewater service rules and regulations applicable to our services (the “Rules and Regulations”) as the amount of water required each year by a family of four persons living in a single family house on a standard sized lot, which is equivalent to approximately 0.4 acre-feet of water per year. The Arkansas River water rights we own are represented by approximately 21,600 shares of the FLCC. The FLCC is a non-profit mutual ditch company established in the 1800’s that operates and maintains the 110 mile Fort Lyon Canal between La Junta, Colorado and Lamar, Colorado.

Along with these water rights, we also acquired approximately 17,500 acres of real property located in the counties of Bent, Otero and Prowers, Colorado, and certain contract rights, tangible personal property, mineral rights, and other water interests associated with the real property. The real and personal property and other non-water assets were acquired because the water we intend to ultimately develop for municipal purposes is based on the current and historical “consumptive use” of such water on the land. By owning the land and having the water continue to be used for agricultural purposes, we ensure that there is continued beneficial use of the water.

The real property is comprised of approximately 80 separate parcels, which are subject to operating lease agreements permitting the lessees to farm the land, in return for defined lease payments, and use the water rights for irrigation purposes. These properties are subject to a management agreement which is described below. Additionally, certain of the properties are subject to outstanding promissory notes which are secured by deeds of trust on the properties. We did not assume these promissory notes and are not responsible for making any of the required payments. This responsibility remained with HP A&M. In the event of default by HP A&M, we may choose to pay HP A&M’s obligations in order to protect our water interests. As collateral on HP A&M’s obligation to pay the promissory notes, HP A&M placed 1.5 million shares of our common stock in escrow, pursuant to a stock pledge agreement, which stock will only be released upon the circumstances described in the pledge agreement. In the event of default, we could foreclose on this stock and the payments required under the Tap Participation Fee (described in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations below) could be reduced.

Timing of the development of the Arkansas River water will depend on the timing of connections added to our existing water and wastewater systems along the Front Range. We will fund the development of the Arkansas River water, much like the other water we own, by using proceeds generated from the sale of taps or connection fees associated with new connections to our system. In addition to increasing our service capacities, this additional water may present other market opportunities for us to assist existing water providers in solving their long-term water supply needs for their existing and new connections. Along the Front Range, there are over 70 separate independent water providers with varying needs for replacement and new water supplies, which presents an opportunity for us to assist these water providers in meeting their existing and future water needs.

We are working with the FLCC and other interested parties in the Arkansas River Valley to mitigate any impact to the community and to make investments and decisions on farming operations which benefit our water as well as the traditional water users. If any of our real property is converted to non-irrigated uses, we will be required to re-vegetate the land to its natural state.

In addition to the Arkansas River Agreement and the stock pledge agreement with HP A&M noted above, we also signed various other agreements with HP A&M, including:

•		A pledge agreement, whereby the Company pledged to HP A&M a defined number of FLCC shares acquired pursuant to the Arkansas River Agreement which will be released as the consideration (the value of the stock and the Tap Participation Fees paid) exceeds certain defined amounts;
•		A property management agreement with HP A&M whereby HP A&M will manage the real estate leases in exchange for all the rental income from the assumed leases for a period of five years (through August 31, 2011), which can be extended under defined circumstances;
•		A registration rights agreement, pursuant to which we granted HP A&M one demand right to register 750,000 shares of Pure Cycle common stock and piggyback rights to register an additional 750,000 shares of Pure Cycle common stock (HP A&M exercised the piggyback rights in July 2007 and registered 750,000 shares of common stock); and
•		A voting agreement, pursuant to which our President agreed to vote shares of Pure Cycle common stock owned by him for HP A&M’s designated board member.

The Rangeview Water Supply and Related Agreements

Our Rangeview Water Supply is located at the Lowry Range. The Lowry Range is owned by the State Board of Land Commissioners (the “Land Board”), and is located in unincorporated Arapahoe County approximately 15 miles southeast of Denver and 12 miles south of the Denver International Airport. The Land Board acquired this property in the 1960’s and has stated that the Lowry Range is one of the most valuable pieces of property in its nearly 2.5 million acre portfolio. The Lowry Range encompasses approximately 27,000 acres, of which approximately 24,000 acres are within our exclusive service area. In June 2007, the Land Board entered into a Development and Management Services Agreement with Australian based Lend Lease Communities, LLC (see www.lendlease.com for more information on Lend Lease Communities) for the development of approximately 3,900 acres of the Lowry Range. Of this 3,900 acres, we have the exclusive right to provide water and wastewater services to approximately 1,300 acres.

We acquired our Rangeview Water Supply in April 1996 pursuant to the following agreements (i) the Amended and Restated Lease Agreement (the “Lease”) between the Land Board and the Rangeview Metropolitan District (the “District”), a quasi-municipal political subdivision of the State of Colorado, (ii) the Agreement for Sale of Export Water between us and the District and (iii) the Service Agreement between us and the District for the provision of water service to the Lowry Range (collectively these agreements are referred to as the “Rangeview Water Agreements”).

The Rangeview Water Supply is a combination of tributary surface water, nontributary groundwater rights, and storage rights associated with the Lowry Range. We own the rights to use 11,650 acre-feet of non-tributary groundwater that can be exported off the Lowry Range to serve area users. We also have the exclusive rights to use an additional 15,050 acre-feet of tributary surface water and nontributary groundwater to serve customers on the Lowry Range. The Export Water we own, together with water owned by the Land Board that we have contracted to utilize under our Service Agreement, includes over 26,700 acre-feet of water per year. Based on independent engineering estimates, the 15,050 acre-feet of water designated for use on the Lowry Range is capable of providing water service to approximately 44,500 SFE units, and the 11,650 acre-feet of Export Water we own can serve approximately 33,600 SFE units throughout the Denver metropolitan region, for a combined service capacity, of our Denver based water assets, of approximately 78,100 SFE units.

Pursuant to the Rangeview Water Agreements we will design, construct, operate and maintain the District’s water system to provide water service to customers within the District’s service area, namely the Lowry Range, using approximately 15,050 acre-feet of water per year located on the Lowry Range. This 15,050 acre-feet of water is dedicated for use specifically on the Lowry Range per the Rangeview Water Agreements. In exchange for providing water service to customers within the District’s service area, we receive 95% of all amounts received by the District relating to water services, after deducting required royalties to the Land Board, which initially total approximately 12% of gross revenues received from water sales.

We will also design, finance, construct, operate and maintain the District’s wastewater system to provide wastewater service to customers within the District’s service area. In exchange for providing wastewater service, we receive 100% of the District’s wastewater tap fees and 90% of the District’s monthly wastewater fees, as well as the rights to use or sell the reclaimed water.

On the Lowry Range, we operate both the water and the wastewater systems during our contract period and the District owns both systems. However, after 2081, ownership of the water system infrastructure servicing customers on the Lowry Range reverts to the Land Board, with the District retaining ownership of the wastewater infrastructure. Off the Lowry Range, we will use our Export Water to provide water and wastewater services to our customers, along with the Arkansas River water described above, and we plan to own these facilities. We plan to contract with third parties for the construction of these facilities.

The sale of Export Water generates a royalty payment to the Land Board, which is described in greater detail in the Revenues – Export Water Customers section below. A portion of the proceeds from the sale of Export Water are subject to the Comprehensive Amendment Agreement No. 1 (the “CAA”), which is one of the agreements we used to purchase our Export Water and is more fully described in “Item 6 – Critical Accounting Policies – Accounting for CAA Payments” and Note 5 – Participating Interests in Export Water in the accompanying financial statements.

Arapahoe County Fairgrounds Agreement for Water Service

We entered into the County Agreement in August 2005 to design, construct, operate and maintain a water system for, and provide water services to, the Arapahoe County Fairgrounds (the “Fairgrounds”), which was constructed West of the Lowry Range. Pursuant to the County Agreement, we acquired approximately 363 acre-feet of water from the County, which we can use in conjunction with our Rangeview Water Supply to supply water to nearby communities. As of August 31, 2007, we have not received the water rights deed for approximately 336 acre-feet of groundwater, which is valued at approximately $240,000. Therefore, we have not capitalized the cost of this water and will not do so until the satisfactory transfer of this deed. Until the deed is transferred, the value of this water is included under the caption “construction proceeds receivable” on the balance sheet as the County would be required to pay us this amount in cash if the water rights deed is not transferred to us.

Pursuant to the County Agreement, the County purchased water taps for 38.5 SFEs for approximately $567,500 (which was comprised of $514,600 in cash and 27 acre-feet of water rights valued at approximately $52,900), or $14,740 per tap. The County also paid us, or will pay us, approximately $1.25 million (which can be lowered by the value of the 336 acre-feet of water rights we agreed to acquire as explained above, or approximately $240,000) to design and build certain Special Facilities (as defined below).

We are servicing the Fairgrounds using our Export Water, and therefore, the tap fees we received generated royalty payments to the Land Board totaling approximately $34,500, which was 10% of the net revenues we received from the sale of Export Water taps in fiscal 2006. The agreement with the Land Board requires royalty payments on Export Water sales based on the net revenues we receive. These net revenues are defined as proceeds from the sale of Export Water less direct and indirect costs, including reasonable overhead charges, associated with the withdrawal, treatment and delivery of Export Water. In addition, the tap fees, net of the Land Board royalty, were subject to the CAA. This resulted in us distributing approximately $533,000 of the tap fees received from the County to the escrow agent in September 2005. Based on our CAA ownership at the time, we received back $373,100, or 70% of this distribution. The tap fees we retained were used to construct the Wholesale Facilities required to provide water service to the Fairgrounds.

See also Note 3 – Water, Water Systems and Service Agreements in the accompanying financial statements for a discussion of the funding of the “Special Facilities” at the Fairgrounds as well as a proposed amendment to the County Agreement.

The construction of the Special and Wholesale facilities were completed in our fiscal 2006, and we began providing water service to the Fairgrounds at the opening of the 100^th Annual Arapahoe County fair on July 21, 2006. This is when we started recognizing the tap fees and special facilities funding revenue in income (as described in the Critical Accounting Policies section in Item 7 below) and we started depreciating the facilities constructed to serve the Fairgrounds.

Sky Ranch Water Supply and Water Service Agreements

On October 31, 2003, and May 14, 2004, we entered into two Water Service Agreements (collectively the “Sky Ranch Agreements”) with the developer of approximately 950 acres of property located 4 miles north of the Lowry Range along Interstate 70 in Colorado, known as Sky Ranch. Under the Sky Ranch Agreements, once the project commences, we are to provide water service to the homes and other buildings that are expected to be built at Sky Ranch, which could be as high as 4,850 SFEs.

As of the date of this filing, we have not received any payments for tap purchases from the developer and have no information on if or when the developer will begin developing the project and purchase water taps from us. As part of the Sky Ranch Agreements, the developer is required to dedicate approximately 537 acre-feet of water to us in exchange for a $3,400 per tap credit for the first 767 water taps purchased. Additionally, pursuant to the Sky Ranch Agreements, the developer is required to pay us $3.41 million for the construction of certain Special Facilities required to extend service to Sky Ranch. As of August 31, 2007, none of this water has been dedicated to us because Sky Ranch has not yet purchased any water taps, and construction of the Special Facilities has not occurred so therefore none of the $3.41 million for construction of the Special Facilities has been paid.

We also entered into a five year groundwater purchase agreement with Sky Ranch to acquire the 223 acre-feet of Denver Aquifer groundwater located at Sky Ranch, with the final $50,000 payment due in April 2008. As of the date of this filing, we have acquired 40% of this water, or 89.2 acre-feet for payments totaling $100,000. The 89.2 acre-feet of water we have acquired from Sky Ranch, for which we have the water rights deeds, does not have to be used at Sky Ranch, at our discretion it can be used throughout our target service area. We have also paid the developer an additional $100,000 to acquire the next 40% (89.2 acre-feet) of water pursuant to this groundwater purchase agreement, but the developer has not cashed our checks or remitted the water rights deed for this water to us. Therefore, we have not capitalized this 89.2 acre-feet of water purchased as a water asset yet. In addition to this, Sky Ranch is required to make annual option payments to us of $50,000 and $10,400 for the right to use our Export Water at Sky Ranch. As of the date of this filing, we have not received either of the option payments due in fiscal 2007 or 2006, and therefore Sky Ranch is in default on these payments (totaling $120,800). Notwithstanding Sky Ranch being in default on its option fees, our service agreements with Sky Ranch currently remain in effect. Pursuant to the Sky Ranch Agreements, we maintain responsibility to provide water service to up to 1,500 single family units at the Sky Ranch development using the water we have, or expect to acquire, from Sky Ranch. Continued default by Sky Ranch on payment of the option fees places the Sky Ranch development at risk of not being able to use our Export Water to service development in excess of the 1,500 single family units. There is currently no development occurring at Sky Ranch and the developer of Sky Ranch has listed the property for sale.

By combining the 537 acre-feet of water to be purchased from the developer of Sky Ranch together with the 89.2 acre-feet of water already purchased, and the 133.8 acre-feet anticipated to be purchased under the agreement to purchase Denver Aquifer groundwater, we will have acquired a total of 760 acre-feet of water from Sky Ranch, which we plan to use to provide water service to the first 1,500 SFEs at Sky Ranch.

Paradise Water Supply

In 1987 we acquired the conditional rights to build a 70,000 acre-foot reservoir to store Colorado River tributary water and a right-of-way permit from the U.S. Bureau of Land Management for property at the dam and reservoir site. Due to the nature of the Paradise water rights, the significant development costs of water assets along the western slope, and agreements with other western slope water interests, the use of our Paradise Water Supply is limited to opportunities along the western slope. While we continue to identify potential new users for these rights, we cannot assure you that we will ever be able to make use of this asset or sell the water profitably. See discussion of impairment analysis in the Critical Accounting Policies section below.

Every six years our Paradise Water Supply is subject to a Finding of Reasonable Diligence review by the water court and the State Engineer to determine if we are diligently pursuing the development of the water rights. During fiscal 2005 the water court began the latest review. In 2007, we completed the due diligence review with the State Engineers office and received a Finding of Reasonable Diligence, but only after certain objectors came forward. The objectors were questioning our anticipated use of the conditional water rights outside of the Colorado River Basin and the western slope of Colorado. Following months of discussions, we reached an agreement with the objectors on our continued development activities as well as certain milestones to be met during our next diligence period for the Paradise Water Supply, and the objectors agreed to remove their objections from the review process. As a result, we acknowledged that we can only use our Paradise Water Supply in the Colorado River basin, we will consider alternative locations for constructing a reservoir, and we agreed the objectors can have the right to lease up to 10,000 acre-feet of water per year if we develop the Paradise Water Supply.

Revenues

We generate revenues predominately from three sources:

	1.		Water and wastewater tap fees,
	2.		Construction fees, and
	3.		Monthly service fees.

We negotiate the payment terms for tap fees, construction fees, and other water and wastewater service fees with each developer, builder or municipality before we commit to providing service and before construction of the project begins.

Water and Wastewater Tap Fees

Tap fees are paid by the developer in advance of construction activities. Tap fees are designed to fund construction of the “Wholesale Facilities” and defray the acquisition costs of obtaining water rights. Wholesale Facilities are facilities we design, construct, operate, maintain and repair. Wholesale Facilities serve our entire service area or major regions or portions thereof. Wells, treatment plants, pumping stations, tanks, reservoirs, transmission pipelines, and major sewage lift stations are typical examples of Wholesale Facilities. We own the Wholesale Facilities we construct off the Lowry Range. The District owns the Wholesale Facilities constructed on the Lowry Range.

Pursuant to our Rangeview Water Agreements with the District and the Land Board, pricing for water tap fees (as well as water usage charges described further below) is controlled through a market-driven pricing mechanism in which our rates and charges may not exceed the average of similar rates and charges of three nearby communities (referred to as the “rate-based districts”). Due to increases in tap fees at the rate-based districts, effective July 1, 2007, water tap fees increased to $20,000 per tap, which is an increase of 18.8% over the 2006 water tap fee of $16,840 per SFE. Wastewater tap fees remained unchanged at $4,883.

Table A provides a summary of our water tap fees since 2002:

Table A — Water System Tap Fees

		2007				2006				2005				2004				2003				2002
Water tap fees per SFE		$	20,000			$	16,840			$	14,740			$	12,420			$	11,150			$	10,500
Percentage Increase			18.8	%			14.2	%			18.7	%			11.4	%			6.2	%			—

Developers owning rights to either surface water or groundwater underlying their properties can receive a credit against a portion of their water tap fees if they elect to sell their water to us, which is negotiated at the time of the service agreement.

Construction Fees

The development of water and wastewater systems typically requires the construction of facilities to extend services to an individual development. In cases where these facilities are not available for use by any other developments, these facilities are classified as “Special Facilities.” Special Facilities can include items such as infrastructure required during the construction of the permanent water and wastewater systems, transmission pipelines to transfer water from one location to another, temporary storage facilities, etc. Generally we are not responsible for the design and construction of the Special Facilities; this is typically the developer’s responsibility. However, we are typically responsible for the operation and maintenance of the Special Facilities upon completion. We will accept responsibility for the budgeting, design and construction of the Special Facilities if the developer provides the funding. If the developer constructs the Special Facilities, the facilities must be constructed to our design standards, and the developer is required to dedicate the Special Facilities to us at no charge upon completion. If we construct the Special Facilities, we capitalize the construction costs, and upon completion, we own the Special Facilities.

If we agree to build the Special Facilities, the funding received from the developer is deferred until construction is completed and the assets are placed into operation. At that time, the funding from the developer is recorded as income over the estimated service period, which is the estimated useful life of the assets constructed with those funds. The depreciation charges for the Special Facilities are recorded as costs of revenue over the estimated useful life of the assets.

Developers are usually responsible for the design and construction of “Retail Facilities,” which are facilities that transport water throughout an individual subdivision or community. Retail Facilities are constructed pursuant to our design standards and are inspected by our engineers prior to completion. Once we certify that the Retail Facilities have been constructed in accordance with our design criteria, the developer dedicates the Retail Facilities to us or to a quasi-municipal political subdivision of the State of Colorado, such as the District, at no cost. At Sky Ranch, the developer is required to dedicate the Retail Facilities to the District. We, through our agreements with the District, are then responsible for the operation and maintenance of the Retail Facilities.

“Customer Facilities” consist of water service pipelines, plumbing, meters and other components that carry potable water and reclaimed water from the street to the customer’s house and collect wastewater from the customer’s house and transfer it to the collection system. In many cases, portions of the Customer Facilities are constructed by the developer, again pursuant to our design standards, but are owned and maintained by the customer.

Monthly Service Fees

Monthly water usage charges are assessed to customers connected to our water system. The charges are based on actual metered usage each month. Water usage pricing is based on a tiered pricing structure which is based on our rate-based districts. Due to increases at our rate-based districts, the tiered pricing structure has increased over the past several years as noted in Table B below:

Table B — Tiered Pricing Structure

		Price ($ per thousand gallons)
Consumption
(1,000 gallons / month)		2007				2006				2005				2004
Base charge per SFE		$	25.11			$	20.44			$	20.28			$	19.80
Zero to 10		$	2.55			$	2.58			$	2.46			$	2.40
more than 10 to 20		$	3.35			$	3.34			$	3.17			$	3.10
more than 20		$	5.96			$	5.90			$	5.54			$	5.40

Revenues are sensitive to timing and volume of water use, meaning the more water used by a customer in a given month, the higher the cost of additional incremental water deliveries to the customer. Based on this, for a typical residential customer using approximately 0.4 acre-feet of water annually, during a typical weather year, water usage fees would approximate $600 per year.

Wastewater customers are charged a flat monthly fee of $39.50 per SFE, or $474 per year per SFE, which was increased on July 1, 2007 from $34.80 per SFE, an increase of 13.5%.

We also collect other relatively small fees and charges from residential customers and other end users to cover miscellaneous administrative and service expenses, such as application fees, review fees and permit fees.

Land Board Royalties and District Fees

Pursuant to the Rangeview Water Agreements, the Land Board is entitled to royalty payments based on a percentage of revenues earned from water sales that utilize water dedicated for use on the Lowry Range or Export Water. The calculation of royalties depends on whether the customer is located on the Lowry Range, or elsewhere, and whether the customer is a public or private entity. In addition, for water sales to customers located on the Lowry Range, the District is entitled to a 5% fee, which is calculated after the royalty payment to the Land Board, and the District is entitled to a fee of 10% of our wastewater fees (not including wastewater tap fees) from customers on the Lowry Range. The Land Board does not receive a royalty from wastewater services.

The Rangeview Water Agreements were written prior to any development of the Lowry Range or areas outside of the Lowry Range that could utilize our Export Water. The terms of the Rangeview Water Agreements did not fully anticipate the specific circumstances of development that have arisen and might arise in the future as we enter into and negotiate agreements for the sale of Export Water and the provision of service to the Lowry Range. Therefore, the Rangeview Water Agreements may not clearly delineate the rights and responsibilities for the forms of transactions that may arise. We anticipate that we will be required to enter into negotiations with the Land Board from time to time to clarify the applicability of contract terms to circumstances that were not anticipated at the time we entered into the Rangeview Water Agreements. We cannot assure you that the outcome of such negotiations will be favorable to us.

Lowry Range Customers

For services to customers located on the Lowry Range, the District collects fees from customers, pays the royalties to the Land Board, retains its own fee, and remits the remainder to us. Payments from customers who are on the Lowry Range generate royalties to the Land Board at a rate of 12% of gross revenues. When either (i) metered production of water used on the Lowry Range in any calendar year exceeds 13,000 acre-feet or (ii) 10,000 surface acres on the Lowry Range have been rezoned to non-agricultural use, finally platted and water tap agreements have been entered into with respect to all improvements to be constructed on such acreage, the Land Board may elect, at its option, to receive, in lieu of its 12% royalty payments, 50% of the aggregate net profits generated derived by the District and Pure Cycle from the sale or other disposition of water on the Lowry Range. To date neither of these conditions has been met.

Export Water Customers

Payments for Export Water also generate royalty payments to the Land Board. These royalties vary depending on a number of factors including whether the customer is a public or private entity.

When we withdraw, treat and deliver the water to the user and incur the costs related to this process, the royalty to the Land Board is based on our “Net Revenues,” which are our gross revenues less costs, including reasonable overhead allocations, incurred as a direct or indirect result of incremental activity associated with the withdrawal, treatment and delivery of Export Water. Royalties payable to the Land Board for Export Water sold escalate based on the amount of Net Revenue we receive and are lower for sales to a water district or similar municipal or public entity than for sales to a private entity as noted in Table C:

Table C — Royalties for Export Water Sales

		Royalty Rate
		Private				Public
Net Revenues		Entity				Entity
$0 - $45,000,000			12	%			10	%
$45,000,001 - $60,000,000			24	%			20	%
$60,000,001 - $75,000,000			36	%			30	%
$75,000,001 - $90,000,000			48	%			40	%
Over $90,000,000			50	%			50	%

Our Current Operations

We operate and maintain a water system that provides water and wastewater services to our customers on the Lowry Range. We also designed and constructed a water system that provides Export Water to the Fairgrounds. During fiscal 2007 we delivered approximately 44.4 million gallons of potable water to our customers, which equates to approximately 2 million gallons per month during the winter and over 6.5 million gallons per month during the summer.

We also operate a wastewater treatment plant, which we designed and built, that currently has a permitted capacity of 130,000 gallons per day and receives about 20,000 gallons per day.

We operate and maintain all our water and wastewater facilities with limited assistance from third party contractors. We design, construct and operate the facilities serving customers on the Lowry Range and plan to operate this system, together with facilities serving customers in areas outside the Lowry Range, in a unified manner to capitalize on economies of scale and ensure the most efficient use of our water.

In August 2005, we entered into the County Agreement to provide water services to the Fairgrounds. We commenced service to the Fairgrounds in July 2006.

In 1998, we entered into a water service agreement with the State of Colorado Department of Human Services to provide water and wastewater services to a juvenile correction facility on the northwestern edge of the Lowry Range known as the Ridge View Youth Services Center. This system is designed to provide water and wastewater services for approximately 200 SFEs. We commenced service to the Ridge View Youth Services Center in 2001.

Significant Customers

Ridge View Youth Services Center and Schmidt Aggregates provided approximately 91%, 96% and 98% of our total water and wastewater treatment revenues during the years ended August 31, 2007, 2006 and 2005, respectively.

Our Projected Operations

We design, construct and operate our water and wastewater facilities using advanced cleaning and treatment technologies. We also design our systems to use our water supplies in an efficient manner. We plan to develop our water and wastewater systems in stages to meet incremental demands in our service areas. We will use third party contractors to construct our facilities as needed. We employ licensed water and wastewater operators to operate our water and wastewater systems. At full build-out, we expect to employ professionals that will operate our systems, read meters, bill customers, and manage our operations. We plan to take advantage of advanced technologies to keep personnel requirements and operating costs low, such as systems that enable meter readings and billings to be done remotely, reducing associated handling and labor costs.

We plan to provide an environmentally responsible integrated water management system, as depicted in Table D below, that combines conservation efforts with effective water reuse planning and balanced water supply management. We plan to jointly utilize our surface water rights in the Arkansas River, our two surface water streams that flow through the Lowry Range, deep-well waters from our non-tributary water supplies and our stored reuse water in our irrigation water system, to provide an efficient, environmentally sound, long-term water solution for our customers.

Table D – Our Balanced Water Plan

We anticipate initially developing our Denver based water supplies located on the Lowry Range and phasing the development of our Arkansas River water as connections are added to our system. In order to deliver the Arkansas River water to the Front Range market, a 130 mile pipeline will have to be constructed with an estimated cost of over $400 million (this includes estimated costs of water treatment facilities). We are currently reviewing physical alignments and potential partnerships for construction of this pipeline. Converting the Arkansas Water to municipal use and constructing the pipeline will be a long-term process, which will give us the opportunity to work closely with those who might be impacted by any water transfers. The development of this water will require us to apply for a change of use in the Colorado water court which could take many years and require a significant amount of capital. However, we do not anticipate starting this process in the near term and anticipate that the tap fees and usage fees from taps sold utilizing our Rangeview Water Supply will be sufficient to fund these requirements. We ultimately anticipate being able to service over 100,000 SFE’s with the Arkansas River water.

We expect the development of our Rangeview Water Supply to require between 250 and 300 high capacity water wells ranging in depth from 800 feet to over 2,500 feet. We anticipate drilling separate wells into each of the three principal aquifers located beneath the Lowry Range. Each well is intended to deliver water to central water treatment facilities for treatment prior to delivery to customers. We also intend to build structures to divert surface water to storage reservoirs to be located on the Lowry Range. Our plan is to divert the surface water when available and, prior to distribution to our customers, to treat the surface water with a separate water treatment facility built specifically to treat surface water. Based on preliminary independent engineering estimates, the full build-out of water facilities on the Lowry Range will cost in excess of $340 million and will accommodate water service from the Rangeview Water Supply for up to 80,000 SFE units, which includes both customers located in and outside the Lowry Range service area.

Rangeview Metropolitan District

The District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of providing water and wastewater service to the Lowry Range. The District will utilize the 15,050 acre-feet of water leased to it by the Land Board located on the Lowry Range for service to customers on the Lowry Range.

The District is run by an elected board of directors. The only eligible voters and the only persons eligible to serve as directors are the owners of property within the boundaries of the District. We own certain rights to the real property which encompasses the current boundaries of the District. The current directors of the District are Mark W. Harding and Scott E. Lehman (employees of Pure Cycle), Ryan T. Clark (by reason of his role as manager of TPC Ventures, LLC, Ryan Clark is deemed an indirect beneficial owner of more than 5% of Pure Cycle common stock) and Tom Lamm.

We are party to a Right of First Refusal Agreement with the owners of the property comprising the District. Pursuant to a tenancy in common agreement, in the event of death, bankruptcy or incompetence of any tenant, that tenant’s estate or representative must offer the property interest of that tenant to the remaining tenants for purchase. If the remaining tenants do not purchase all of such person’s interest, the property must be offered to us pursuant to the Right of First Refusal Agreement. In addition, if any tenant wants to sell his interest in the parcel, such tenant must find a bona fide buyer and then offer the property to us. We have the right, at our option, to buy the property by matching the terms of the bona fide third party offer or by paying the appraised value of the property as determined by independent appraisers. A tenant may also negotiate a sale directly with us if he elects not to locate a bona fide buyer. Each of the directors listed above, as well as Pure Cycle, currently own an undivided interest in the land comprising the District. Under applicable Colorado law, entities are not qualified to serve as directors of municipal districts and may not vote. Our President and Corporate Secretary serve as elected members of the board of directors of the District. Pursuant to Colorado law, directors receive $75 for each board meeting or a maximum of $1,200 per year.

We and the board of directors of the District transact business on an arms-length basis. The conflicts of interest of the directors in transactions between us and the District are disclosed in filings with the Colorado Secretary of State. The District and we were each represented by separate legal counsel in negotiating the water service agreement and wastewater service agreement between the parties. The agreements were also approved by the two members of the District’s board who were not our employees and by the Land Board.

It is likely that at some point in the future, the board of directors of the District will be comprised entirely of directors independent from us. As the Land Board develops the Lowry Range, landowners on the Lowry Range may petition to include their land within the District’s boundaries. Provided such petition complies with applicable law, the District is required by its lease with the Land Board to proceed with due diligence to include the area designated in such petition within the District’s boundaries. As the District’s boundaries expand, the base of persons eligible to serve as directors and eligible to vote will also increase.

Water and Growth in Colorado

As the population in Colorado continues to grow, so does the need for obtaining new water sources. Despite the softening housing market that Colorado and the nation have experienced, the US Census Bureau estimated Colorado’s 2006 population at nearly 4.8 million, a 10.5% increase from the census taken in 2000. The Denver Regional Council of Governments (“DRCOG”), a voluntary association of over 50 county and municipal governments in the Denver metropolitan area, estimates the Denver metropolitan area is expected to increase from 2.5 million people to 3.9 million people by the year 2030. With this estimated population increase comes increased demand for water services beyond what the municipal service providers are currently capable of providing. It is estimated that the population growth in the Denver metropolitan area will require an additional 140,000 acre-feet of water annually. This is why the U.S. Department of the Interior has identified the Denver metropolitan area as one region that is ‘highly likely’ to experience a ‘water supply crisis’ by 2025.

With these projected levels of growth, with interest heightened by droughts in Colorado, with most of Colorado’s water being located in the western half of the state while the majority of the population is in the eastern half of the state, water is one of the largest influences on development in Colorado. Due to wide fluctuations in snowfall from year to year and area to area, the amount of surface water that can be captured for use varies greatly. This has lead most water providers in Colorado to actively pursue additional water supplies, including the use of reclaimed wastewater for irrigation and other non-potable uses. Having participated in the Department of Public Health’s regulatory rule making process defining water quality standards for reuse water, we have helped lead the effort in the metropolitan area to design water reuse systems and set reuse water quality standards. In August 2005, the Colorado Department of Public Health and Environment adopted rules defining water quality standards for raw and reclaimed water uses for residential irrigation customers. These rules, as applicable, will be incorporated into our rules and regulations.

Our master plan for our service area, which includes the Lowry Range and all other areas in which we will provide services, calls for the installation of a dual pipe water distribution and reclamation system. A dual pipe distribution system is a system in which one pipe supplies the customer with high quality potable drinking water and a second pipe supplies raw or reclaimed water to homes for irrigation uses. About one-half of the water needed to meet Denver-area residential water demands is used for landscaping and outdoor irrigation of lawns. We, along with most major water providers, believe that raw or reclaimed water supplies provide the lowest cost water for irrigation purposes for customers. We expect to implement an extensive water reclamation system, in which essentially all wastewater treatment plant effluent water will be re-used to meet non-potable water demands. This will enhance our ability to provide quality water service and reinforce our philosophy that emphasizes the importance of water recycling and our commitment to environmentally responsible water management policies.

Competition

Although we have exclusive long term water and wastewater service contracts for the majority of the Lowry Range (we currently have the exclusive rights to serve two of the six initial development sections at the Lowry Range, but are negotiating with the developer to provide services to the entire initial development), providing water service using our Export Water and Arkansas River water is subject to competition. Alternate sources of water are available, principally from other private parties, such as farmers owning senior water rights that are no longer being economically used in agriculture, and municipalities seeking to annex newly developed areas in order to increase their tax base. Our principal competition in areas close to the Lowry Range is the neighboring City of Aurora. The principal factors affecting competition for potential purchasers of our Arkansas River water and Export Water include the availability of water for the particular purpose, the cost of delivering the water to the desired location and the reliability of the water supply during drought periods. We believe the water assets we own and have the exclusive rights to use, which have a supply capacity of over 180,000 SFE units (or roughly 720,000 people), provide us a significant competitive advantage along the Front Range because our legal rights to the assets have been confirmed for municipal use (for our Rangeview Water Supply), a significant portion of our water supply is close to Denver area water users, our pricing structure is competitive and our water portfolio is well balanced with senior surface rights, groundwater rights, storage capacity and reclamation water. Further, the size of the Lowry Range and the amount of property that can be served by the Arkansas River water and Export Water will provide us with economies of scale that should give us advantages over our competitors.

Employees

We currently have three full-time employees.

Available Information and Website Address

Our website address is www.purecyclewater.com. We make available free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after filing with the SEC. They also may be obtained directly from the SEC’s website, www.sec.gov/edgar/searchedgar/companysearch.html, under CIK code 276720. The contents of our website are not incorporated by reference into this report.

Item 1A. Risk Factors

Our business, operations, and financial condition are subject to significant risks. These risks include those listed below and may include additional risks of which we are not currently aware or which we currently do not believe are material. If any of the events or circumstances described in the following risk factors actually occurs, our business could be materially adversely affected. These risks should be read in conjunction with the other information set forth in this report.

We are dependent on the development of Sky Ranch, the Lowry Range and other areas near our Rangeview Water Supply that are potential markets for our Export Water.

Our Rangeview Water Supply is one of our principal sources of future revenue. The timing and amount of these revenues will depend significantly on the development of the Lowry Range and Sky Ranch. The development of these areas is not within our control. The Lowry Range is owned by the Land Board, which has been considering various development alternatives, including proposals for conservation. In June 2007, the Land Board finalized an agreement with Lend Lease Communities LLC to develop approximately 3,900 acres of the Lowry Range. Of this, we have the right to provide water service to approximately 1,300 acres. The Land Board does not have any development proposals for the remaining approximately 23,100 acres. There is currently no development at Sky Ranch and it is our understanding that the developer of Sky Ranch is attempting to sell the property. There can be no assurance that development will occur or that water sales will occur on acceptable terms or in the amounts or time required for us to support our costs of operation. Because of the prior use of the Lowry Range as a military facility, environmental clean-up may be required prior to development, including the removal of unexploded ordnance. There is often significant delay in adoption of development plans, as the political process involves many constituencies with differing interests. In the event water sales are not forthcoming or development of the Lowry Range is delayed, we may incur additional short or long-term debt obligations or seek to sell additional equity to generate operating capital. If the Land Board determines to limit the use of significant portions of the Lowry Range for conservation, it may limit our ability to fully develop our Rangeview Water Supply.

Our operations are significantly affected by the general economic conditions for real estate development and the pace and location of real estate development activities in the greater Denver metropolitan area, most particularly areas which are close to our Rangeview Water Supply. During 2006 and through August 31, 2007, the Colorado housing market has continued to see declines in new construction, which could continue for some time. Increases in the number of our water and wastewater connections, our connection fees and our billings and collections will depend on real estate development in this area. We have no ability to control the pace and location of real estate development activities which affect our business.

We expect to be involved in on-going negotiations with the Land Board to clarify our rights and obligations with respect to our Rangeview Water Supply and such negotiations may not be successful.

Our Rangeview Water Supply rights derive principally from the Lease between the Land Board and the District which was entered into in 1996 prior to any development of the Lowry Range or of areas outside the Lowry Range that utilize our Export Water. The terms of the Lease did not fully anticipate the specific circumstances of development that have arisen and may not clearly delineate rights and responsibilities for the forms of transactions that may arise in the future as we enter into and negotiate agreements for sale of water and the provision of service to the Lowry Range. We anticipate engaging in negotiations with the State Land Board from time to time to clarify the applicability of contract terms to circumstances that were not anticipated at the time the agreements were entered into. An unfavorable outcome in such negotiations could have a material adverse effect on our financial results. We cannot assure you that such negotiations will be successful.

In order to utilize the Arkansas River water acquired in fiscal 2006, we must apply for a change of use with the Colorado water court and this may take several years to complete.

The change of use of our Arkansas River water requires a ruling by the Colorado water courts, which could take several years and be a costly and contentious effort since it is anticipated that many parties will oppose the transfer of the water. There are several conditions which must be satisfied prior to our receiving a change of use decree for transfer of our Arkansas River water. One condition that we must satisfy is a showing of anti-speculation in which we, as the applicant must demonstrate that we have contractual obligations to provide water service to customers prior to the water court ruling on the transfer of a water right. The water court is also expected to limit the transfer to the “consumptive use” portion of the water right and to address changing the historic use of the water from agricultural uses to other uses such as municipal and industrial use. We expect to face opposition to any consumptive use calculations of the historic agricultural uses of this water. The water court may impose conditions on our transfer of the water rights such as requiring us to mitigate the loss of the farming tax base, imposing re-vegetation requirements to convert soils from irrigated to non-irrigated, and imposing water quality measures. Any such conditions will likely increase the cost of transferring the water rights.

Our Valuation of the Tap Participation Fee payable to HP A&M contains estimates and management assumptions. The actual results could differ significantly from those estimates.

As part of our acquisition of the Arkansas River water rights from HP A&M, we granted HP A&M a Tap Participation Fee entitling HP A&M to receive ten percent (10%) of the gross proceeds of our sales of forty thousand (40,000) water taps. We have estimated the fair value of the Tap Participation Fee payable to HP A&M using available historic market information and estimated future market information. We believe the estimates we used reasonably reflect the fair value of the Tap Participation Fee. Estimates involve matters of uncertainty and judgment and interpreting relevant market data is inherently subjective in nature. Many factors are necessary to estimate future market conditions, including but not limited to, supply and demand for new homes, population growth along the Front Range, cash flows, tap fee increases at our rate-based districts, and other market forces beyond our control. The actual results could differ materially from our estimates which would result in significantly higher fees being paid to HP A&M than what are reflected in our balance sheet and significantly higher imputed interest being reflected on our future statements of operations associated with the Tap Participation Fee.

In the event of default by HP A&M on promissory notes secured by deeds of trust on our properties, we would be required to cure the defaults or lose the properties.

Certain of the properties we acquired from HP A&M are subject to promissory notes, aggregating $13.9 million in principal and interest as of August 31, 2007. The notes are secured by deeds of trust on the properties we own, but are the responsibility of HP A&M. Because the likelihood of HP A&M defaulting on the notes is deemed remote, these promissory notes are not reflected on our balance sheet. However, if HP A&M were to default on the notes, and we did not cure the defaults, we would lose approximately 60 of the 80 real property interests we acquired and the water rights associated with those properties.

Our net losses may continue and we may not have sufficient liquidity to pursue our business objectives.

We have experienced significant net losses and could continue to incur net losses. For the years ended August 31, 2007, 2006 and 2005, we had net losses of approximately $6.9 million, $793,000 and $1,051,000, respectively, on revenues of approximately $265,700, $271,700 and $234,700, in the respective periods. Our cash flows from operations have not been sufficient to fund our operations in the past, and we have been required to raise debt and equity capital to remain in operation. Since 2004, we have raised approximately $21.5 million through the issuance of common stock to support our operations. Our ability to fund our operational needs and meet our business objectives will depend on our ability to generate cash from future operations. If our future cash flows from operations and other capital resources are not sufficient to fund our operations and the significant capital expenditure requirements to build our water delivery systems, we may be forced to reduce or delay our business activities, or seek to obtain additional debt or equity capital, which may not be available on acceptable terms, or at all.

The rates we are allowed to charge customers on the Lowry Range are limited by the Lease with the Land Board and our contract with the District and may not be sufficient to cover our costs of construction and operation.

The prices we can charge for our water and wastewater services on the Lowry Range are subject to pricing regulations set in the Lease with the Land Board. Both the tap fees and our usage rates and charges are based on the average of the rates of our rate-based districts. Annually we survey the tap fees and rates of our rate-based districts and set our tap fees and rates and charges based on the average of those charged by this group. Our costs associated with the construction of water delivery systems and the production, treatment and delivery of our water are subject to market conditions and other factors, which may increase at a significantly greater rate than the prices charged by our rate-based districts. Factors beyond our control and which cannot be predicted, such as drought, water contamination and severe weather conditions, like tornadoes and floods, may result in additional labor and material costs that may not be recoverable under our operations and maintenance contracts, creating additional differences from the costs of our rate-based districts. Increased customer demand may also increase the overall cost of our operations. If the costs for construction and operation of our water services, including the cost of extracting our groundwater, exceed our revenues, we may petition the Land Board for rate increases. There can be no assurance that the Land Board would approve a rate increase request beyond the average of the rate-based districts. Our profitability could be negatively impacted if we experience an imbalance of costs and revenues and are not successful in receiving approval for rate increases.

We only have three employees and may not be able to manage the increasing demands of our expanding operations.

We currently have only three employees to administer our existing assets, interface with applicable governmental bodies, market our services and plan for the construction and development of our future assets. We may not be able to maximize the value of our water assets because of our limited manpower. We depend significantly on the services of Mark W. Harding, our President. The loss of Mr. Harding would cause a significant interruption of our operations. The success of our future business development and ability to capitalize on growth opportunities depends on our ability to attract and retain additional experienced and qualified persons to operate and manage our business. State regulations set the training, experience and qualification standards required for our employees to operate specific water and wastewater facilities. Failure to find state-certified and qualified employees to support the operation of our facilities could put us at risk, among other things, for operational errors at the facilities, for improper billing and collection processes, and for loss of contracts and revenues. We cannot assure you that we can successfully manage our assets and our growth.

We may be adversely affected by any future decision by the Colorado Public Utilities Commission to regulate us as a public utility.

The Colorado Public Utilities Commission (“CPUC”) regulates investor-owned water companies operating for the purpose of supplying the public. The CPUC regulates many aspects of public utilities’ operations, including the location and construction of facilities, establishing water rates and fees, initiating inspections, enforcement and compliance activities and assisting consumers with complaints.

We do not believe we are a public utility under Colorado law. We currently provide services by contract to the District, which supplies the public. Quasi-municipal metropolitan districts, such as the District, are exempt by statute from regulation by the CPUC. However, the CPUC could attempt to regulate us as a public utility. If this were to occur, we might incur significant expense challenging the CPUC’s assertion of jurisdiction, and we may be unsuccessful. In the future, existing regulations may be revised or reinterpreted, and new laws and regulations may be adopted or become applicable to us or our facilities. If we become regulated as a public utility, our ability to generate profits could be limited and we might incur significant costs associated with regulatory compliance.

There are many obstacles to our ability to sell our Paradise Water Supply.

We currently earn no revenues from our Paradise Water Supply, which as of August 31, 2007 has a recorded cost of approximately $5.5 million. Our ability to convert our Paradise Water Supply into an income generating asset is limited. Due to the nature of the Paradise Water rights and agreements with other western slope water interests, our use of the Paradise Water Supply is limited to opportunities along the western slope. As part of our water court decree for the Paradise Water Supply, we are permitted to construct a storage facility on the Colorado River. However, pursuant to a stipulation entered into with various objectors to our Paradise Water rights, and the strict regulatory requirements for constructing a reservoir on the main stem of the Colorado River, completing the storage facility at its decreed location will be difficult. We cannot assure you that we will ever be able to make use of this asset or sell the water profitably.

Our Paradise Water Supply is also conditioned on a Finding of Reasonable Diligence from the water court every six years. To arrive at that finding, the water court must determine that we continue to diligently pursue the development of the water rights, either directly or indirectly through a third party who has a contractual commitment for its use. If the water court is unable to make such a finding, our right to the Paradise Water Supply would be lost and we would be required to impair the Paradise Water Supply asset and incur a $5.5 million charge against earnings. The fiscal 2005 review was completed in 2007 but not without objectors and not without us having to agree to certain stipulations to remove the objections.

Conflicts of interest may arise relating to the operation of the District.

Our officers, employees and a majority shareholder constitute a majority of the directors of the Rangeview Metropolitan District. In addition, Pure Cycle, along with our officers and employees and one unrelated individual, own, as tenants in common, the 40 acres that form the District. Pursuant to State law, directors receive $75 for each board meeting or a maximum compensation of $1,200 per year. We have made loans to the District to fund its operations. At August 31, 2007, total principal and interest owed to us by the District was approximately $475,700. The District is a party to our agreements with the Land Board and receives fees of 5% of the revenues from the sale of water on the Lowry Range. Proceeds from the fee collections will initially be used to repay the District’s obligations to us, but after these loans are repaid, the District is not required to use the funds to benefit Pure Cycle. We have received benefits from our activities undertaken in conjunction with the District, but conflicts may arise between our interests and those of the District, and with our officers who are acting in dual capacities in negotiating contracts to which both we and the District are parties. We expect that the District will expand when more properties are developed and become part of the District, and our officers acting as directors of the District will have fiduciary obligations to those other constituents. There can be no assurance that all conflicts will be resolved in the best interests of Pure Cycle and its stockholders. In addition, other landowners coming into the District will be eligible to vote and to serve as directors of the District. There can be no assurances that our officers and employees will remain as directors of the District or that the actions of a subsequently elected board would not have an adverse impact on our operations.

We are required to maintain stringent water quality standards and are subject to regulatory and environmental risks.

We must provide water that meets all federal and state regulatory water quality standards and operate our water and wastewater facilities in accordance with these standards. We face contamination and pollution issues regarding our water supplies. Improved detection technology, increasingly stringent regulatory requirements, and heightened consumer awareness of water quality issues contribute to an environment of increased focus on water quality. We cannot assure you that in the future we will be able to reduce the amounts of contaminants in our water to acceptable levels. In addition, the standards that we must meet are constantly changing and becoming more stringent. Future changes in regulations governing the supply of drinking water and treatment of wastewater may have a material adverse impact on our financial results.

We handle certain hazardous materials at our water treatment facilities, primarily sodium hypochlorite. Any failure of our operation of the facilities in the future, including sewage spills, noncompliance with water quality standards, hazardous materials leaks and spills, and similar events could expose us to environmental liabilities, claims and litigation costs. We cannot assure you that we will successfully manage these issues, and failure to do so could have a material adverse effect on our future results of operations by increasing our costs for damages and cleanup.

Our contracts for the construction of water and wastewater projects may expose us to certain completion and performance risks.

We intend to rely on independent contractors to construct our water and wastewater facilities. These construction activities may involve risks, including shortages of materials and labor, work stoppages, labor relations disputes, weather interference, engineering, environmental, permitting or geological problems and unanticipated cost increases. These issues could give rise to delays, cost overruns or performance deficiencies, or otherwise adversely affect the construction or operation of our water and wastewater delivery systems.

In addition, we may experience quality problems in the construction of our systems and facilities, including equipment failures. We cannot assure you that we will not face claims from customers or others regarding product quality and installation of equipment placed in service by contractors.

Certain of our contracts may be fixed-price contracts, in which we may bear all or a significant portion of the risk for cost overruns. Under these fixed-price contracts, contract prices are established in part based on fixed, firm subcontractor quotes on contracts and on cost and scheduling estimates. These estimates may be based on a number of assumptions, including assumptions about prices and availability of labor, equipment and materials, and other issues. If these subcontractor quotations or cost estimates prove inaccurate, or if circumstances change, cost overruns may occur, and our financial results would be negatively impacted. In many cases, the incurrence of these additional costs would not be within our control.

We may have contracts in which we guarantee project completion by a scheduled date. At times, we may guarantee that the project, when completed, will achieve certain performance standards. If we fail to complete the project as scheduled, or if we fail to meet guaranteed performance standards, we may be held responsible for cost impacts and/or penalties to the customer resulting from any delay or for the costs to alter the project to achieve the performance standards. To the extent that these events occur and are not due to circumstances for which the customer accepts responsibility or cannot be mitigated by performance bonds or the provisions of our agreements with contractors, the total costs of the project could exceed our original estimates and our financial results would be negatively impacted.

Our customers may require us to secure performance and completion bonds for certain contracts and projects. The market environment for surety companies has become more risk averse. We secure performance and completion bonds for our contracts from these surety companies. To the extent we are unable to obtain bonds, we may not be awarded new contracts. We cannot assure you that we can secure performance and completion bonds where required.

We may operate engineering and construction activities for water and wastewater facilities where design, construction or system failures could result in injury to third parties or damage to property. Any losses that exceed claims against our contractors, the performance bonds and our insurance limits at facilities so managed could result in claims against us. In addition, if there is a customer dispute regarding performance of our services, the customer may decide to delay or withhold payment to us.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

We currently occupy approximately 1,800 square feet of office space at a cost of $1,000 per month, which is leased from Ryan Clark, an indirect beneficial owner of greater than 5% of Pure Cycle common stock, at the address shown on the cover page. The lease is a month-to-month agreement that can be cancelled by either party at any time.

We own the following amounts of water and other items associated with the water rights – see “Item 1. Description of Our Water Assets and Related Service Agreements”:

•

We own the following assets in the Arkansas River valley in southeastern Colorado:

	a.		Approximately 60,000 acre-feet of Arkansas River water represented by over 21,600 shares of the FLCC,
	b.		Approximately 17,500 acres of real property land located in the counties of Bent, Otero and Prowers, Colorado, and mineral rights and personal property associated with the real property.

•

We own the following assets located on the Lowry Range:

	a.		We own a total gross volume of 1,165,000 acre-feet (approximately 11,650 acre-feet per year) of non-tributary groundwater, an option to substitute 1,650 acre-feet of tributary surface water in exchange for a total gross volume of 165,000 acre-feet of non-tributary groundwater, which we can export from the Lowry Range, and certain surface storage rights on the Lowry Range.
	b.		Pursuant to the Rangeview Water Agreements, we have the exclusive right, through 2081, to use approximately 15,050 acre feet of water located at the Lowery Range to serve customers within the District’s service area.

•		We own approximately 70,000 acre-feet of conditional water rights in the Colorado River, water wells and related assets in the State of Colorado by assignment and quitclaim deed.
•		We own 89.2 acre-feet of groundwater located in the Sky Ranch development. This represents 40% of the 223 acre-feet of groundwater we will own upon exercise of our rights under the Denver groundwater purchase agreement.
•		We own 27 acre-feet of groundwater located near the Arapahoe County Fairgrounds site.
•		We own an undivided 59.9% interest as a tenant-in-common in a 40-acre parcel of undeveloped land located in unincorporated Arapahoe County comprising the Rangeview Metropolitan District.

Item 3. Legal Proceedings

None

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of stockholders during the quarter ended August 31, 2007.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Information

Our common stock is traded on the NASDAQ Capital Market under the symbol PCYO. The high and low sales prices of our common stock, by quarter, for the fiscal years ended August 31, 2007 and 2006 are presented with the Selected Quarterly Financial Information in Item 8 below.

(b) Holders

On October 31, 2007, there were 3,400 holders of record of our common stock.

(c) Dividends

We have never paid any dividends on our common stock and expect for the foreseeable future to retain all of our earnings from operations, if any, for use in expanding and developing our business. Any future decision as to the payment of dividends will be at the discretion of our board of directors and will depend upon our earnings, financial position, capital requirements, plans for expansion and such other factors as our board of directors deems relevant. The terms of our Series B Preferred Stock prohibit payment of dividends on common stock unless all dividends accrued on the Series B Preferred Stock have been paid.

(d) Securities authorized for issuance under equity compensation plans

Number of securities

remaining available

Number of

for future issuance

securities to be

Weighted-

under equity

issued upon

average exercise

compensation plans

exercise of

price of

(excluding

outstanding

outstanding

securities

options, warrants

options, warrants

reflected in column

Plan category

and rights

and rights

(a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

140,092

$

8.60

1,460,000

Equity compensation plans not approved by security holders

—

—

—

Total

140,092

$

8.60

1,460,000

(e) Performance Graph ¹

(f) Recent Sales of Unregistered Securities

None.

Item 6. Selected Financial Data

Basic and diluted loss per share and weighted average shares outstanding for the year ended August 31, 2003 reflects a 10-for-1 reverse split that was effective April 26, 2004.

In thousands (except per share data)		August 31,
		2007				2006				2005				2004				2003
Summary of Statement of Operations items:
Total revenues		$	265.7			$	271.7			$	234.7			$	205.0			$	225.4
Gross margin		$	100.5			$	197.8			$	171.5			$	144.4			$	187.9
Net loss		$	(6,914.7	)		$	(792.9	)		$	(1,050.9	)		$	(1,975.7	)		$	(321.0	)
Basic and diluted loss per share		$	(0.37	)		$	(0.05	)		$	(0.08	)		$	(0.22	)		$	(0.04	)
Weighted average shares outstanding			18,590				14,694				13,674				8,880				7,844
Summary Balance Sheet Information:
Current assets		$	7,288.4			$	3,121.4			$	5,740.3			$	5,738.7			$	593.5
Total assets		$	111,891.9			$	108,833.9			$	26,046.5			$	25,625.6			$	20,413.4
Long-term liabilities		$	53,863.7			$	53,789.1			$	10,004.4			$	12,100.8			$	15,980.2
Total liabilities		$	54,047.1			$	54,169.2			$	10,693.7			$	12,302.1			$	16,032.0
Equity		$	57,844.8			$	54,664.7			$	15,352.7			$	13,323.5			$	4,381.5

The following items had a significant impact on our operations:

•		In fiscal 2006, we acquired water and real property interests in the Arkansas River Valley. The consideration for these assets consisted of equity valued at approximately $36.2 million, and a Tap Participation Fee agreement valued at approximately $45.6 million (at August 31, 2006), which is payable when we sell water taps. The total consideration of approximately $81.9 million was allocated to the acquired assets based on each asset’s relative fair value. During our fiscal 2007, we imputed approximately $4.7 million of accrued interest on the Tap Participation Fee. See Note 3 – Water, Water Systems and Service Agreements in the accompanying financial statements for more details.
•		In fiscal 2007, we recognized approximately $1.04 million of gain related to the acquisition of certain CAA interests, of which, approximately $765,000 was recorded as additional paid in capital because the CAA interests were acquired from parties that are deemed related to us. See Note 5 – Participating Interests in Export Water in the accompanying financial statements for more details.
•		In fiscal 2006, we recognized $390,900 of gain related to the extinguishment of debt and the acquisition of certain CAA interests. See Note 5 – Participating Interests in Export Water in the accompanying financial statements for more details.
•		In fiscal 2004, we recognized a $1.1 million dollar loss related to the acquisition of certain CAA interests.
•		We did not declare or pay any cash dividends in any of the five years presented.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Readers are cautioned that forward-looking statements contained in this Form 10-K should be read in conjunction with our disclosure under the heading: “SAFE HARBOR STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995” on page 3.

General

Pure Cycle is an investor owned water and wastewater service provider engaged in the design, operation and maintenance of water and wastewater systems. We operate primarily in the Denver metropolitan area and own nearly 12,000 acre-feet of groundwater and/or certain surface water rights in the Denver area. We also own approximately 60,000 acre-feet of Arkansas River water, we have the exclusive rights to use over 15,000 acre-feet of groundwater located at the Lowry Range through the year 2081, and we own 70,000 acre-feet of conditional Colorado River water rights on the western slope of Colorado. We plan to utilize our Denver assets and our Arkansas River water to provide large scale residential/commercial water and wastewater services to customers located along the Front Range of Colorado. We are also exploring ways to use our western slope water for commercial or agricultural purposes along the western slope of Colorado.

Critical Accounting Policies

Our financial statements are prepared in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”), which requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

We have identified certain key accounting policies on which our financial condition and results of operations are dependent. These key accounting policies most often involve complex matters and are based on subjective judgments or decisions. In the opinion of management, our most critical accounting policies are those related to revenue recognition, impairment of water assets and other long-lived assets, depletion and depreciation, accounting for Participating Interests in Export Water, Tap Participation Fees, royalty and other obligations, and income taxes. Management periodically reviews its estimates, including those related to the recoverability and useful lives of assets. Changes in facts and circumstances may result in revised estimates.

Revenue Recognition

Our revenues consist mainly of tap fees, construction fees and monthly service fees. Emerging Issues Task Force Issue No. 00-21 Revenue Arrangements with Multiple Deliverables (“EITF 00-21”), governs how to identify when goods or services, or both, that are separately delivered but included in a single sales arrangement should be accounted for individually. Based on the criteria of EITF 00-21, we account for each of the items contained in our service agreements individually. That is, we determine the proper revenue recognition for tap fees, construction fees and services fees independent of one another.

Proceeds from tap sales and construction fees are deferred upon receipt and recognized in income based on whether we own or do not own the facilities constructed with the proceeds. Tap fees and construction fees derived from agreements for which we construct infrastructure the customer will own are recognized in accordance with Statement of Position 81-1 Accounting for Performance of Construction-Type and Certain Production-Type Contracts, whereby we recognize tap fees and construction fees as revenue and costs of construction based on the percentage-of-completion method. Tap fees and construction fees derived from agreements for which we will own the infrastructure are recognized in accordance with Staff Accounting Bulletin No. 104 Revenue Recognition (“SAB 104”), whereby the up-front fees are recognized ratably over the estimated service life of the facilities constructed, starting at completion of construction. Because we own these facilities, we capitalize construction costs and amortize those as costs of revenue over the assets estimated useful life.

We recognize water and wastewater usage revenues upon delivery of water and collection of wastewater, in the month in which the services are performed. Water service fees are based upon metered water deliveries to customers plus base charges. Wastewater customers are charged flat monthly fees.

Impairment of Water Assets and Other Long-Lived Assets

In accordance with FASB Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), we review our long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by a comparison of the carrying amount of an asset to future undiscounted net cash flows we expect to be generated by the eventual use of the asset (the fair value). For our Denver based assets and the Arkansas River Valley assets, we determined the undiscounted cash flows to be generated by estimating tap sales related to new home development in our service area, less costs to provide water services, including estimated engineering costs, over an estimated development period. Actual new home development in our service area, as well as future tap fees and future operating costs, could vary materially from our estimates which would have a material impact on our financial statements. If such assets are considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets estimated as described above. For our Paradise Water Supply, we determined the undiscounted cash flows by estimating the proceeds we could derive from the leasing of the water rights to commercial and agricultural users along the western slope of Colorado. We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell.

Every six years the Paradise Water Supply is subject to a Finding of Reasonable Diligence review by the water court and the State Engineer to determine if we are diligently pursuing the development of the water rights. During fiscal 2005, the water court began this review. In fiscal 2006 we received objections from two parties to our Paradise Water rights. The objectors expressed concerns that we have not diligently pursued the development of the Paradise water rights and they sought additional assurances that we intend to develop this water in the future. In fiscal 2007, we reached an agreement with the objectors and agreed to various stipulations which are described in Note 3 – Water, Water Systems and Service Agreement in the accompanying financial statements. As a result, we received a Finding of Reasonable Diligence on our latest review.

Based on the SFAS 144 impairment analysis performed on our long-lived water assets, we believe there were no impairments in the carrying amounts of our investments in water and water systems at August 31, 2007.

Accounting for CAA Payments

The balance sheet liability captioned “Participating Interests in Export Water Supply” (the “Participating Interests”) represents an obligation which arose under the Water Commercialization Agreement (the “WCA”), as amended by the CAA.

Upon entering into the CAA, we recorded an initial liability of approximately $11.1 million, which represents the cash we received and used to purchase our Export Water Supply. In return we agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the Participating Interest holders. In accordance with EITF Issue No 88-18 Sales of Future Revenues, the obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million contingent liability is not reflected on our balance sheet because the obligation to pay this is contingent on sales of Export Water, the amounts and timing of which are not reasonably determinable.

As of August 31, 2007, the remaining Participating Interests liability reflected on our balance sheet totaled approximately $2.9 million, and the contingent liability not reflected on our balance sheet totaled approximately $5.3 million. For more information see Note 5 – Participating Interests in Export Water in the accompanying financial statements.

Tap Participation Fee

On August 31, 2006, we acquired 60,000 acre-feet of Arkansas River water along with real property and other associated rights from HP A&M. Along with common stock issued to HP A&M, we agreed to pay HP A&M 10% of our tap fees on the sale of the next 40,000 water taps, of which 38,965 water taps remain to be paid at August 31, 2007. During the due diligence period specified in the Arkansas River Agreement, HP A&M sold certain property rights which pursuant to the terms of the agreement were deemed to be Tap Participation Fee payments. The value of these payments equated to 530 taps under the tap participation section of the Arkansas River Agreement. During our fiscal 2007 we sold 509 shares in the Lower Arkansas Water Management Authority (the “LAWMA Shares”), acquired pursuant to the Arkansas River Agreement, for approximately $850,000. Pursuant to the Arkansas River Agreement, the payments were deemed to be Tap Participation Fee payments, the value of which equated to 505 taps. The Tap Participation Fee is payable when we sell water taps and receive the funds from such water tap sales. The Tap Participation Fee payable to HP A&M was valued based on a discounted cash flow model using highly subjective assumptions and estimates. We will assess the value of the liability whenever events or circumstances indicate the assumptions used to estimate the value of the liability have changed materially. The difference between the net present value and the estimated realizable value will be imputed as interest expense using the effective interest method over the estimated development period utilized in the valuation of the Tap Participation Fee beginning September 1, 2006.

Obligations Payable by HP A&M

Certain of the properties we acquired pursuant to the Arkansas River Agreement are subject to outstanding promissory notes with principal and accrued interest totaling approximately $13.9 million at August 31, 2007. These notes are secured by deeds of trust on the properties. We did not assume any of these promissory notes and are not responsible for making any of the required payments under these notes. This responsibility remains solely with HP A&M. In the event of default by HP A&M, we may make payments on any or all of the notes and cure any or all of the defaults. If we do not cure the defaults, we will lose the properties securing the defaulted notes. If HP A&M defaults on the promissory notes, we can foreclose on a defined amount of Pure Cycle stock issued to HP A&M being held in escrow and reduce the Tap Participation Fee by two times the amount of notes defaulted on by HP A&M. Although the likelihood of HP A&M defaulting on the notes is deemed remote, we will continue to monitor the status of the notes for any indications of default. We are not aware of any defaults by HP A&M as of August 31, 2007.

Royalty and other obligations

Revenues from the sale of Export Water are shown net of royalties payable to the Land Board. Revenues from the sale of water on the Lowry Range are shown net of the royalties to the Land Board and the fees retained by the District.

Depletion and depreciation of water assets

Water supplies that are being utilized are depleted on the basis of units produced divided by the total volume of water adjudicated in the water decrees. Water systems are depreciated on a straight line basis over their estimated useful lives.

Income taxes

We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets until realization is more likely than not.

Results of Operations

Executive Summary

The results of our operations for the years ended August 31, 2007, 2006 and 2005 were as follows:

Table E — Summary Results of Operations

		2007				2006				2005
Millions of gallons of water delivered			44.4				56.6				52.3
Water revenues generated		$	149,500			$	163,600			$	152,300
Water delivery operating costs incurred		$	54,600			$	48,500			$	43,900
Water delivery gross margin %			63	%			70	%			71	%
Wastewater treatment revenues		$	60,300			$	59,000			$	57,500
Wastewater treatment operating costs incurred		$	22,800			$	17,300			$	15,700
Wastewater treatment gross margin %			62	%			71	%			73	%
General and administrative expenses		$	2,476,500			$	1,544,500			$	1,315,300
Net losses		$	6,914,700			$	792,900			$	1,050,900

Water and Wastewater Usage Revenues

Water deliveries during fiscal 2007 dropped approximately 22% over water deliveries in fiscal 2006. This was a result of high precipitation experienced throughout the Front Range of Colorado starting in December 2006 and lasting into the spring of 2007. Increased precipitation results in our customers using less water for irrigation. Water usage fees in fiscal 2007 decreased 9% over fiscal 2006, despite the 22% decrease in gallons delivered. This is a result of increased usage fees on July 1, 2007.

Water deliveries in fiscal 2006 and 2005 were consistent, but usage fees in fiscal 2006 were much higher than fiscal 2005. This is due to increases in usage fees on July 1, 2006.

Our water service charges are based on a tiered pricing structure that provides for higher prices as customers use greater amounts of water. Our rates and charges are established based on the average of three surrounding communities, referred to as our rate-based districts. Table B included above in Item 1 – Description of Business, outlines our tiered pricing structure and changes during fiscal 2007, 2006 and 2005, respectively.

Our wastewater customers are charged flat monthly fees based on the number of tap connections they have. Wastewater usage fees increased July 1, 2007, from $34.80 to $39.50 per wastewater tap per month and before that they increased July 1, 2005, from $33.70 to $34.80 per wastewater tap per month, which accounts for the changes in revenues between the fiscal years.

Gross margins for water and wastewater services declined in fiscal 2007 over fiscal 2006 and fiscal 2005. This is due to declines in the amount of water delivered. Decreased water deliveries does not typically equate to a decrease in the energy usage within the systems, and therefore, in reduced delivery years, gross margins will typically be lower. The decline is also due to certain testing and compliance expenses incurred during fiscal 2007 not experienced in the previous two years presented. Gross margins for water and wastewater operations remained consistent in fiscal 2006 and 2005.

General and Administrative and Other Expenses

General and administrative (“G&A”) expenses for fiscal 2007 and 2006 were impacted by the adoption of SFAS No. 123 (revised 2004) Share Based Payment (“SFAS 123(R)”), as follows:

		Years ended August 31,
		2007				2006				Increase
G&A expenses as reported		$	(2,476,500	)		$	(1,544,500	)		$	(932,000	)
SFAS 123(R) expenses			287,300				209,600				77,700
G&A expenses less SFAS 123(R) expenses		$	(2,189,200	)		$	(1,334,900	)		$	(854,300	)

We adopted SFAS 123(R) on the first day of our fiscal 2006, so fiscal 2005 was not impacted by SFAS 123(R).

The increase in G&A expenses for the three fiscal years ended August 31, 2007, is mainly attributable to the following:

	•		Salaries and related expenses (including SFAS 123(R) expenses and healthcare costs) totaled approximately $1.12 million, $944,800 and $690,500 for the fiscal years ended August 31, 2007, 2006 and 2005, respectively. Without the effects of SFAS 123(R), salary and related expenses in fiscal 2007 and 2006 would have been $833,000 and $735,200, respectively, an increase of $97,800. This increase is mainly attributable to employee bonuses totaling $330,000 in fiscal 2007, paid upon completion of the equity offering in July 2007, which exceeded the $250,000 of bonuses paid in fiscal 2006. Salaries for 2007 (without the impact of SFAS 123(R)) exceeded fiscal 2005 salaries by $142,500, which is mainly attributable to pay raises and the fact that bonuses in fiscal 2005 totaled $150,000.
	•		During fiscal 2007, we expensed approximately $256,000 related to water assessment charges payable to the FLCC. This represents our share (based on the number of FLCC shares we own) of FLCC’s annual operating and maintenance expenditures. These charges were not incurred during fiscal 2006 or 2005 because we acquired the Arkansas Water Rights in the fourth quarter of fiscal 2006. Additionally, we expensed approximately $37,200 for work performed in the Arkansas River Valley on our behalf by HP A&M.
	•		Professional fees (legal and accounting) totaled approximately $470,300, $187,400 and $173,500, for the years ended August 31, 2007, 2006 and 2005, respectively. Approximately $190,000 of the increases from fiscal 2005 to fiscal 2007 was a result of services performed in connection with our consultations with the Staff of the Securities and Exchange Commission completed during fiscal 2007. The remaining increase was a result of the internal control audits as a result of the Sarbanes-Oxley Act of 2002 and related items.
	•		Franchise fees to the State of Delaware and NASDAQ listing fees increased approximately $113,500 since fiscal 2006 due to the increase in our total assets as a result of the Arkansas River water acquisition and the issuance of common stock as a result of the exercising of stock options.
	•		We paid approximately $40,000 in consulting fees related to our discussions with Lend Lease Communities LLC as it relates to the potential development of six sections of the Lowry Range.

Depreciation and depletion charges for the years ended August 31, 2007, 2006 and 2005 were approximately $366,100, $20,100 and $7,900, respectively. The year to year increases are mainly a result of depreciation charges associated with the water delivery fixtures acquired from HP A&M on August 31, 2006 (depreciation began on September 1, 2006) and depreciation of capitalized legal costs associated with the HP A&M asset acquisition. In addition, in late fiscal 2006 we began depreciating the costs incurred to extend the water system to the Arapahoe County Fairgrounds. We expect the depreciation and depletion charges going forward to remain consistent with the fiscal 2007 charges.

Interest income totaled approximately $155,700, $191,000 and $149,600 in fiscal 2007, 2006 and 2005, respectively. This represents interest earned on the temporary investment of capital in available-for-sale securities, interest accrued on the note payable by the District and interest accrued on the Special Facilities construction proceeds receivable from the County. The decrease for fiscal 2007 over 2006 is due to fewer funds being invested and earning interest as a result of the Arapahoe County construction project in fiscal 2006 and cash used in operations. Interest income in fiscal 2008 is expected to increase as we have increased our invested capital by approximately $4.0 million as a result of the equity offering in July 2007.

Imputed interest expense related to the Tap Participation Fee payable to HP A&M totaled approximately $4.7 million for the year ended August 31, 2007. This represents the expensed portion of the difference between the relative fair value of the liability and the net present value of the liability recognized under the effective interest method.

Interest expense – related parties was approximately $0, $7,100 and $21,400 in fiscal 2007, 2006 and 2005, respectively. All interest bearing debt – related parties, was paid off or extinguished as of August 31, 2006. The significant decrease from 2005 to 2006 was due to repayments of related party debt. In late fiscal 2004 we retired $3.6 million of related party debt (which included accrued interest) and in December 2005 we retired $558,800 of related party debt (which included accrued interest). See Note 7 – Long-Term Debt in the accompanying financial statements.

Interest expense – non-related parties was approximately $0, $19,300 and $12,600 in fiscal 2007, 2006 and 2005, respectively. All interest bearing debt was extinguished as of August 31, 2006. The increase from fiscal 2005 to fiscal 2006 was due to increases in interest rates.

Our net losses, as reported in our statements of operations in fiscal 2007, 2006 and 2005, were approximately $6.9 million, $792,900 and $1.05 million, respectively. Our reported net losses have been materially impacted by the imputed interest on the Tap Participation Fee and stock-based compensation expense recognized pursuant to SFAS 123(R). In the table below, we have presented a non-GAAP financial disclosure to provide a quantitative analysis of the impact of the imputed interest and stock-based compensation expenses on our reported net losses and loss per share. Because these items do not require the use of current assets, management does not include these items in its analysis of our financial results or how we allocate our resources. Because of this, we deemed it meaningful to provide this non-GAAP disclosure of the impact of these significant items on our financial results.

		Years ended August 31,												Change
		2007				2006				2005				2007-2006				2007-2005
Net loss as reported		$	(6,914,700	)		$	(792,900	)		$	(1,050,900	)		$	(6,121,800	)		$	(5,863,800	)
Interest imputed on Tap Participation Fees payable to HP A&M			4,669,700				—				—				4,669,700				4,669,700
SFAS 123(R) expenses			287,300				209,600				—				77,700				287,300
Net loss less imputed interest and SFAS 123’(R) expenses		$	(1,957,700	)		$	(583,300	)		$	(1,050,900	)		$	(1,374,400	)		$	(906,800	)
Net loss per common share as reported		$	(0.37	)		$	(0.05	)		$	(0.08	)		$	(0.32	)		$	(0.30	)
Interest imputed on Tap Participation Fees payable to HP A&M			0.25				—				—			$	0.25			$	0.25
SFAS 123(R) expenses			0.02				0.01				—			$	0.00			$	0.02
Net loss per common share less non-cash interest and SFAS 123’(R) expenses		$	(0.10	)		$	(0.04	)		$	(0.08	)
Weighted avererage common shares outstanding			18,589,737				14,693,585				13,674,156

Liquidity and Capital Resources

At August 31, 2007, our working capital, defined as current assets less current liabilities, was approximately $7.1 million, and we had cash and cash equivalents and marketable securities on hand totaling approximately $6.9 million. We believe that at August 31, 2007, we have sufficient working capital to fund our operations for the next year. However, there can be no assurance that we will be successful in marketing the water from our primary water projects in the near term. In the event increased revenues and cash flows from providing water and wastewater services are not achieved, we may incur additional short or long-term debt or seek to sell additional equity securities to generate working capital to support our operations.

Development of the water that we own, have rights to use, or may seek to acquire, will require substantial capital investments. We anticipate that capital required for the development of the water and wastewater systems will be financed through the sale of water taps to developers and water delivery charges to users. A water tap charge refers to a charge we impose to fund construction of Wholesale Facilities and permit access to a water delivery system (e.g., a single-family home’s tap into our water system), and a water service charge refers to a water customer’s monthly water bill, generally including a base charge and consumption charges per 1,000 gallons of water delivered to the customer. We anticipate tap fees will be sufficient to generate funds with which we can design and construct the necessary Wholesale Facilities. However, once we receive tap fees from a developer, we are contractually obligated to construct the Wholesale Facilities for the taps paid, even if our costs are not covered by the fees we receive. We cannot assure you that our sources of cash will be sufficient to cover all our capital costs.

On August 31, 2006, we finalized the Arkansas River Agreement whereby we purchased approximately 60,000 acre-feet of Arkansas River water, real property and certain other related assets. Pursuant to the Arkansas River Agreement we agreed to pay HP A&M 10% of our tap fees received on the sale of the next 40,000 water taps. We have estimated the Tap Participation Fee payable to HP A&M at approximately $45.6 million (as of August 31, 2006, which is $49.5 million as of August 31, 2007, including $4.7 million of imputed interest) based on a discounted cash flow valuation analysis. The actual amount to be paid could exceed our estimates. See Note 3 – Water, Water Systems and Service Agreements in the accompanying financial statements. Tap participation payments are not payable to HP A&M until we receive water tap fees.

We are obligated to pay the FLCC water assessment charges which are the charges assessed to the FLCC shareholders for the upkeep and maintenance of the Fort Lyon Canal. The calendar 2007 charges totaled approximately $270,000, which we expect to remain relatively consistent for calendar 2008.

On August 3, 2005, we entered into the County Agreement to provide water service to the Fairgrounds. Pursuant to the County Agreement, funding of $1.25 million for the construction of the Special Facilities will come from the County and will be provided as follows: (i) an initial payment of $397,000 (received in August 2005), and (ii) $848,000 paid over ten years, which includes interest at 6%, which based on currently scheduled payments will result in us receiving $286,000 in interest. Upon the delivery of a water rights warranty deed by the County to us for approximately 336 acre-feet of groundwater, the amount payable over ten years will be reduced by approximately $240,000, which is the value of groundwater. Since we have not received this water rights deed, the value of the water to be conveyed to us is currently included in the construction proceeds receivable account on our balance sheet. See Note 3 – Water, Water Systems and Service Agreements in the accompanying financial statements for additional information regarding the County Agreement and a proposed amendment.

In accordance with SAB 104, upon completion of construction of the Fairgrounds facilities and the initiation of water service to the Fairgrounds in July 2006, we began ratably recognizing tap fee revenue as income. The tap fees received from the County are being recognized in income over the estimate useful life of the constructed assets, or 30 years. For the year ended August 31, 2007, we recognized water tap fee revenues of approximately $14,300.

On October 31, 2003, and then on May 14, 2004, we entered into the Sky Ranch Agreements with the developer of Sky Ranch. Pursuant to the Sky Ranch Agreements we are required to provide water for all homes and buildings to be constructed at Sky Ranch, which could go as high as 4,850 SFE units. Pursuant to the Sky Ranch Agreements, the developer must purchase at least 400 water taps before occupancy of the first home. The Sky Ranch Agreements permit the developer to add additional taps annually, with at least 310 taps to be purchased each year after construction begins. This schedule is designed to provide us with adequate funds with which to construct the Wholesale Facilities needed to provide water service to the areas being developed. We do not currently have any information regarding when or if Sky Ranch will begin development. See also Item 1. Business — Sky Ranch Water Supply and Water Service Agreements above for information regarding the developer of Sky Ranch being in default on the Sky Ranch Agreements.

To the extent that water service is provided using Export Water, we are required to pay a royalty to the Land Board equal to 12% of the net revenue after deducting direct and indirect costs, including a reasonable charge for overhead, associated with the withdrawal, treatment and delivery of Export Water. The developer of Sky Ranch is currently in default on the option agreements. If the developer cures the defaults, we expect to dedicate approximately 1,200 acre-feet, or approximately 10%, of our Export Water supply (which is about 4.2% of our overall Rangeview Water Supply) for the Sky Ranch project. We estimate we will spend approximately $25.0 million for infrastructure costs related to the development and delivery of water to the Sky Ranch development.

At August 31, 2007, we had outstanding debt to one related party totaling approximately $26,500. All other interest bearing notes with scheduled maturities were repaid or extinguished during fiscal 2006 as described in the accompanying financial statements. The remaining note payable was paid in full in October 2007.

Operating Activities

Operating activities include revenues we receive from the sale of water and wastewater services to our customers, costs incurred in the delivery of those services, general and administrative expenses, and depletion/depreciation expenses.

Cash used by operating activities was approximately $2.4 million, $767,600 and $818,300 for the fiscal years ended August 31, 2007, 2006 and 2005, respectively. Cash used by operations in 2007 included the following significant cash payments:

•		Approximately $833,000 in wages and related employee expenses, which is $98,000 higher than 2006 due mainly to additional bonuses to management and employees following the equity offering;
•		Approximately $345,500 of FLCC water assessment charges since September 2006, this includes our fiscal 2007 assessments and a portion of the calendar 2006 assessments;
•		Approximately $470,000 of professional fees, which is significantly higher than fiscal 2006, mainly due to approximately $180,000 for professional fees related to consultations with the Staff of the Commission of the SEC;
•		Approximately $260,000 for Delaware franchise fees and NASDAQ listing fees, which is approximately $201,000 higher than the cash paid in 2006 mainly due to the increased assets and number of shares outstanding as a result of the Arkansas River water acquisition (the $260,000 paid in fiscal 2007 includes amounts expensed in fiscal 2007 and 2006);
•		Approximately $136,000 for directors fees and expenses, which includes approximately $50,000 for insurance.

Cash used by operations decreased from fiscal 2005 to 2006 due to lower salaries following the passing away of our former CEO and decreased health insurance costs for the same reason and because we switched to a new insurance provider, offset by an increase in management bonuses and increased board of director fees, annual retainers, and insurance.

During fiscal 2007, 2006 and 2005, we accrued interest on the note receivable from the District of approximately $23,500, $21,500 and $16,900, respectively. The increase is caused by increases in interest rates. These amounts were offset by decreases in accrued interest on notes payable of approximately $0, $26,400 and $34,000 in fiscal 2007, 2006 and 2005, respectively. The decreases in interest expense are due to the extinguishment of all interest bearing debt as of August 2006, with the extinguishment of $896,000 of principal and accrued interest in August 2006, the repayment of $558,800 of notes payable to a related party in December 2005 and the repayment of $1.6 million of debt along with approximately $2.0 million of accrued interest in fiscal 2004.

We will continue to provide domestic water and wastewater service to customers in our service area and we will continue to operate and maintain our water and wastewater systems with our own employees.

Investing Activities

We continue to invest in the acquisition, development and maintenance of our water systems. On August 31, 2006 we acquired the Arkansas River water, represented by the shares in the FLCC and certain other real and personal property, in exchange for equity and a Tap Participation Fee payable when we sell water taps. In total, we expended $288,600 related to legal and engineering costs associated with this acquisition, which have been capitalized as part of the costs of the acquired assets.

During fiscal 2006, we invested approximately $2.4 million in the construction of the facilities required to provide water service to the Fairgrounds which were completed in July 2006, with minimal construction related expenditures continuing into fiscal 2007, which were accrued at August 31, 2006.

We intend to exercise our rights to acquire the final 20% of the Sky Ranch groundwater pursuant to the agreement for the purchase of Denver Aquifer groundwater for $50,000 in fiscal 2008. In fiscal fiscal 2007 and 2006 we paid $100,000 for the purchase of 40% of the groundwater, but the purchases have not been capitalized as part of our water assets because the developer has not cashed the checks and we have not received the water rights deeds. Because we have been unable to obtain any response from the developer, we do not know when we will obtain these deeds.

We also continue to invest in legal and engineering fees associated with certain water rights, and we continue to invest in the right-of-way permit fees to the Department of Interior Bureau of Land Management and legal and engineering costs for our Paradise Water Supply.

Cash provided by (used in) investing activities for fiscal 2007, 2006 and 2005 was approximately $2.5 million, ($1.64) million and $197,900, respectively. The most significant investing activities that generated cash flows were the sale or maturity of approximately $2.0 million of investments, the sale of $850,000 of LAWMA shares and the sale of certain non-irrigated land in the Arkansas Valley. These were offset by approximately $208,100 of temporary investments in marketable securities, $84,600 of expenditures for fixed assets, and $40,000 of cash invested in Well Enhancement and Recovery Systems, LLC (see Note 4 – Investment in Well Enhancement and Recovery Systems, LLC, to the accompanying financial statements). The most significant investments in fiscal 2006 related to the construction of the Fairgrounds water system and costs incurred in connection with the acquisition of the Arkansas River water. During fiscal 2005, we maintained temporary investments of funds generated from the equity offering in fiscal 2004 and capitalized approximately $404,500 of costs related to our water assets, which included approximately $223,000 related to the start of construction of the Fairgrounds water system. During fiscal 2005, we received option payments totaling $60,400 from the developer of Sky Ranch related to the potential use of Export Water (which were not received in fiscal 2007 or 2006). As of August 31, 2007, Sky Ranch option payments totaling $120,800 are past due. We have been unable to collect these amounts from Sky Ranch and we have no assurances as to when these amounts will be paid.

Financing Activities

Cash provided by financing during fiscal 2007, 2006 and 2005 was approximately $5.6 million, $807,500 and $1.0 million, respectively. In July 2007, we finalized our equity offering of 1.2 million shares of common stock and raised approximately $9.0 million. Concurrent with the equity offering, we acquired approximately $10.5 million of CAA interests for cash payments totaling approximately $2.6 million. Also in 2007, we made a Tap Participation Fee payment of approximately $850,000 to HP A&M as a result of the sale of the LAWMA shares described above, and we received approximately $57,300 from the County related to the construction proceeds receivable. In fiscal 2006 the main financing item was $1.18 million received from persons exercising outstanding options and warrants offset by $195,600 of debt payments to retire debt with our former CEO and $174,900 paid to CAA holders related to the County Agreement. Fiscal 2005 cash provided by financing activities included the receipt of approximately $676,500 related to exercises of stock options and the receipt of $397,200 of special facilities funding from the County.

Impact of Recently Issued Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 allows companies the choice to measure many financial instruments and certain other items at fair value. This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 (September 1, 2008 for us). We are currently reviewing the impact of SFAS No. 159 on our financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurement, (“FAS 157”), which establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years, and the interim periods within those fiscal years, beginning after November 15, 2007 (September 1, 2008 for us). We are currently evaluating the impact of this standard on our financial statements.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 31, 2006 (September 1, 2007 for us). We do not expect the adoption of FIN 48 to have a material impact on our financial statements.

Total Contractual Cash Obligations

						Payments due by period
						Less than 1				1-3				3-5				More than 5
		Total				year				years				years				years
Contractual obligations
Long-term debt obligations		$	26,542			$	26,542			$	—			$	—			$	—
Operating lease obligations			12,000				12,000				(a	)			(a	)			(a	)
Investment in Well Enhancement and Recovery Systems, LLC			30,000				—				—				—				—
Participating Interests in Export Water			2,851,037				(b	)			(b	)			(b	)			(b	)
Tap Participation Fee payable to HP A&M			104,582,000				(c	)			(c	)			(c	)			(c	)
Total		$	107,501,579			$	38,542			$	—			$	—			$	—

7A. Quantitative and Qualitative Disclosures About Market Risk

General. Pure Cycle is exposed to market risks that may impact the Balance Sheets, Statements of Operations, and Statements of Cash Flows due primarily to changing interest rates and changes in tap fees and usage rates at our rate based districts. Additionally, due to the promissory notes on the land we acquired which we may elect to pay in the event of default by HP A&M, we are subject to market risks impacting the ability of HP A&M to make the required payments. The following discussion provides additional information regarding these market risks.

Interest Rates. The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in diversified short-term investments, consisting primarily of United States Treasury Obligations and other investment grade debt securities. As of August 31, 2007, the fair value of our marketable securities was approximately $800,000 with maturity dates through January 2008. A hypothetical 50 basis point change in interest rates would not result in a material decrease or increase in the fair value of our marketable securities . We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk.

Rates and Charges. Our rates and charges are based on the average of our rate based districts and could vary dramatically from year to year. The rates charged by our rate based districts might not provide us sufficient funds to support our operations and capital required to fund construction activities. Based on the increases in taps fees and usage charges at our rate based districts over the last several years as noted in Table A above, we expect rates and charges to continue to be sufficient to meet our operational and construction needs.

Item 8. Financial Statements and Supplementary Data

		Page
Reports of Independent Registered Public Accounting Firms			37
Balance Sheets			40
Statements of Operations			41
Statements of Stockholders’ Equity			42
Statements of Cash Flows			43
Notes to Financial Statements			44
Supplemental Data: Selected Quarterly Financial Information			66

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Pure Cycle Corporation

We have audited the accompanying balance sheet of Pure Cycle Corporation as of August 31, 2007, and the related statements of operations, stockholders’ equity, and cash flows for the year ended August 31, 2007. We also have audited Pure Cycle Corporation’s internal control over financial reporting as of August 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pure Cycle Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pure Cycle Corporation as of August 31, 2007, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Pure Cycle Corporation maintained, in all material respects, effective internal control over financial reporting as of August 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ GHP HORWATH, P.C.

Denver, Colorado
November 12, 2007

Report of Independent Registered Public Accounting Firm

The Board of Directors
Pure Cycle Corporation:

We have audited the accompanying balance sheet of Pure Cycle Corporation (the “Company”) as of August 31, 2006 and the related statements of operations, stockholders’ equity, and cash flows for the years ended August 31, 2006 and 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pure Cycle Corporation at August 31, 2006, and the results of its operations and its cash flows for the years ended August 31, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Pure Cycle Corporation’s internal control over financial reporting as of August 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated November 10, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of internal control over financial reporting and an adverse opinion on the effectiveness of internal control over financial reporting because of the existence of a material weakness.

As discussed in Note 1 to the financial statements included within the Form 10-K/A filed by the Company on April 16, 2007, the 2006 financial statements have been restated.

As discussed in Note 2, effective September 1, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R) “Share—Based Payment.”

/s/ Anton Collins Mitchell LLP

Denver, Colorado
November 10, 2006, except for the
effect of the restatement discussed in
Note 1 to the financial statements included
within the Form 10-K/A filed by the
Company on April 16, 2007, which is
dated April 10, 2007.

PURE CYCLE CORPORATION

BALANCE SHEETS

		August 31,
		2007				2006
ASSETS:
Current assets:
Cash and cash equivalents		$	6,095,075			$	374,069
Marketable securities			799,802				2,529,406
Trade accounts receivable			70,217				65,420
Interest receivable			11,585				36,880
Prepaid expenses			246,968				50,825
Current portion of construction proceeds receivable			64,783				64,783
Total current assets			7,288,430				3,121,383
Investments in water and water systems, net			103,248,427				104,455,868
Construction proceeds receivable, less current portion, including $240,075 expected to be paid with water rights			792,719				800,172
Note receivable – Rangeview Metropolitan District, including accrued interest			475,734				452,230
Assets held for sale			77,940				—
Investment in Well Enhancement and Recovery Systems, LLC			4,431				—
Property and equipment, net			4,210				4,287
Total assets		$	111,891,891			$	108,833,940
LIABILITIES:
Current liabilities:
Accounts payable		$	15,056			$	34,650
Accrued liabilities			85,919				289,596
Deferred revenues			55,800				55,800
Current debt – related party			26,542				—
Total current liabilities			183,317				380,046
Long-term debt – related party			—				26,542
Deferred revenues, less current portion			1,557,711				1,613,515
Participating Interests in Export Water Supply			2,851,037				6,514,116
Tap Participation Fee payable to HP A&M, net of discount of $55.1 million and $59.0 million			49,455,000				45,635,000
Total liabilities			54,047,065				54,169,219
Commitments and Contingencies
STOCKHOLDERS’ EQUITY:
Preferred stock:
Par value $.001 per share, 25 million shares authorized; Series B – 432,513 shares issued and outstanding (liquidation preference of $432,513)			433				433
Common stock:
Par value 1/3 of $.01 per share, 40 million shares authorized; 19,995,338 and 18,348,834 shares outstanding			67,512				61,602
Additional paid-in capital			91,650,897				80,609,875
Treasury stock, at cost, 256,800 and 130,279 shares of common stock			(1,979,447	)			(1,009,534	)
Accumulated comprehensive income (loss)			7,168				(10,654	)
Accumulated deficit			(31,901,737	)			(24,987,001	)
Total stockholders’ equity			57,844,826				54,664,721
Total liabilities and stockholders’ equity		$	111,891,891			$	108,833,940

See accompanying Notes to Financial Statements

PURE CYCLE CORPORATION

STATEMENTS OF OPERATIONS

		For the Years Ended August 31,
		2007				2006				2005
Revenues:
Metered water usage		$	149,539			$	163,560			$	152,247
Wastewater treatment fees			60,335				59,008				57,453
Special facility funding			41,508				3,494				—
Water tap fees			14,294				1,191				—
Sky Ranch options			—				44,416				21,619
Other			—				—				3,335
Total revenues			265,676				271,669				234,654
Expenses:
Water service operations			(54,631	)			(48,508	)			(43,873	)
Wastewater service operations			(22,817	)			(17,312	)			(15,684	)
Depletion and depreciation			(87,739	)			(8,078	)			(743	)
Other			—				—				(2,858	)
Total cost of revenues			(165,187	)			(73,898	)			(63,158	)
Gross margin			100,489				197,771				171,496
General and administrative expenses			(2,476,462	)			(1,544,516	)			(1,315,320	)
Depreciation			(278,360	)			(12,004	)			(7,148	)
Operating loss			(2,654,333	)			(1,358,749	)			(1,150,972	)
Other income (expense):
Interest income			155,712				190,987				149,611
Gain on extinguishment of contingent obligations and debt			271,127				390,866				—
Gain on sale of land			17,927				—				—
Gain (loss) on sales of marketable securities			142				10,414				(15,563	)
Share of losses of Well Enhancement and Recovery Systems, LLC			(35,569	)			—				—
Imputed interest expense related to the Tap Participation Fees payable to HP A&M			(4,669,742	)			—				—
Interest expense — related parties			—				(7,120	)			(21,359	)
Interest expense			—				(19,258	)			(12,598	)
Net loss		$	(6,914,736	)		$	(792,860	)		$	(1,050,881	)
Net loss per common share – basic and diluted		$	(.37	)		$	(.05	)		$	(.08	)
Weighted average common shares outstanding – basic and diluted			18,589,737				14,693,585				13,674,156

See accompanying Notes to Financial Statements

PURE CYCLE CORPORATION

STATEMENTS OF STOCKHOLDERS’ EQUITY

																										Additional				Accumulated
		Preferred Stock								Common Stock								Treasury Stock								Paid-in				Comprehensive				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Income (loss)				Deficit				Total
August 31, 2004 balance:			432,513			$	433				13,316,135			$	44,387				—			$	—			$	36,407,105			$	14,834			$	(23,143,260	)		$	13,323,499
Reimbursement to former CEO			—				—				300,000				1,000				—				—				2,414,000				—				—				2,415,000
Warrants exercised			—				—				29,714				99				—				—				(99	)			—				—				—
Stock options exercised			—				—				684,132				2,284				(73,154	)			(554,939	)			1,229,153				—				—				676,498
Unrealized loss on investments			—				—				—								—				—				—				(11,381	)			—				(11,381	)
Net loss			—				—				—								—				—				—				—				(1,050,881	)			(1,050,881	)
Comprehensive loss																																							(1,062,262	)
August 31, 2005 balance:			432,513				433				14,329,981				47,770				(73,154	)			(554,939	)			40,050,159				3,453				(24,194,141	)			15,352,735
Related party debt extinguishment gain			—				—				—				—				—				—				363,208				—				—				363,208
CAA acquired and debt extinguished			—				—				242,169				807				—				—				2,127,389				—				—				2,128,196
Arkansas River water acquisition			—				—				3,000,000				10,000				—				—				36,230,000				—				—				36,240,000
Warrants exercised			—				—				15,520				52				—				—				27,884				—				—				27,936
Stock options exercised			—				—				891,443				2,973				(57,125	)			(454,595	)			1,601,624				—				—				1,150,002
Stock based compensation			—				—				—				—				—				—				209,611				—				—				209,611
Unrealized loss on investments			—				—				—				—				—				—				—				(14,107	)			—				(14,107	)
Net loss			—				—				—				—				—				—				—				—				(792,860	)			(792,860	)
Comprehensive loss																																							(806,967	)
August 31, 2006 balance:			432,513				433				18,479,113				61,602				(130,279	)			(1,009,534	)			80,609,875				(10,654	)			(24,987,001	)			54,664,721
CAA acquired			—				—				—				—				—				—				765,071				—				—				765,071
Equity offering (net of $275,000 expenses)			—				—				1,200,000				4,000				—				—				9,020,608				—				—				9,024,608
Stock options exercised			—				—				538,836				1,796				(126,521	)			(969,913	)			968,117				—				—				—
Restricted stock grant			—				—				34,189				114				—				—				(114	)			—				—				—
Stock based compensation			—				—				—				—				—				—				287,340				—				—				287,340
Unrealized gain on investments			—				—				—				—				—				—				—				17,822				—				17,822
Net loss			—				—				—				—				—				—				—				—				(6,914,736	)			(6,914,736	)
Comprehensive loss							—																																(6,896,914	)
August 31, 2007 balance:			432,513			$	433				20,252,138			$	67,512				(256,800	)		$	(1,979,447	)		$	91,650,897			$	7,168			$	(31,901,737	)		$	57,844,826

See accompanying Notes to Financial Statements

PURE CYCLE CORPORATION

STATEMENTS OF CASH FLOWS

		For the years ended August 31,
		2007				2006				2005
Cash flows from operating activities:
Net loss		$	(6,914,736	)		$	(792,860	)		$	(1,050,881	)
Adjustments to reconcile net loss to net cash used for operating activities:
Imputed interest on Tap Participation Fees payable to HP A&M			4,669,742				—				—
Depreciation, depletion and other non-cash items			368,960				20,082				7,891
Stock based compensation expense included with general and administrative expenses			287,340				209,611				—
Share of losses of Well Enhancement and Recovery Systems, LLC			35,569				—				—
(Gain) loss on sales of marketable securities			(142	)			(10,414	)			15,563
Gain on sale of fixed assets			(17,927	)			—				—
Interest added to note receivable –
Rangeview Metropolitan District			(23,504	)			(21,508	)			(16,917	)
Interest added to construction proceeds receivable			(49,877	)			—				—
Extinguishment of contingent obligations and debt			(271,127	)			(390,866	)			—
Interest accrued on long-term debt – related parties			—				7,120				21,360
Interest accrued on long-term debt			—				19,258				12,597
Changes in operating assets and liabilities:
Export water proceeds to be remitted to escrow agent			—				174,890				(174,890	)
Trade accounts receivable			(4,797	)			(15,361	)			179
Interest receivable and prepaid expenses			(170,849	)			(27,250	)			(1,862	)
Accounts payable and accrued liabilities			(223,271	)			19,957				(124,235	)
Deferred revenues			(55,804	)			39,754				492,933
Net cash used for operating activities			(2,370,423	)			(767,587	)			(818,262	)
Cash flows from investing activities:
Sales and maturities of marketable securities			1,955,669				4,833,174				5,971,735
Sale of LAWMA shares			849,742				—				—
Sale of property and equipment			19,250				—				—
Purchase of property and equipment			(3,003	)			(2,781	)			(5,660	)
Capitalized acquisition costs			(37,600	)			(173,110	)			—
Investment in Well Enhancement and Recovery Systems LLC			(40,000	)			—				—
Investments in water and water systems			(46,983	)			(2,411,746	)			(404,519	)
Purchase of marketable securities			(208,101	)			(3,885,238	)			(5,424,071	)
Sky Ranch option payments received			—				—				60,400
Net cash provided (used) by investing activities			2,488,974				(1,639,701	)			197,885
Cash flows from financing activities:
Proceeds from the sale of common and preferred stock, net			9,024,608				1,177,938				676,498
Payments received on construction proceeds receivable			57,330				—				—
Payments to contingent liability holders			(4,516	)			(174,890	)			(3,120	)
Tap Participation Fee payments to HP A&M			(849,742	)			—				—
Payments to purchase contingent liabilities			(2,625,225	)			—				—
Payments on long-term debt – related parties			—				(195,573	)			—
Construction funding			—				—				397,235
Reimbursement to former CEO			—				—				(50,555	)
Net cash provided by financing activities			5,602,455				807,475				1,020,058
Net change in cash and cash equivalents			5,721,006				(1,599,813	)			399,681
Cash and cash equivalents – beginning of year			374,069				1,973,882				1,574,201
Cash and cash equivalents – end of year		$	6,095,075			$	374,069			$	1,973,882

See accompanying Notes to Financial Statements

PURE CYCLE CORPORATION

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 2007, 2006 AND 2005

NOTE 1 — ORGANIZATION

Pure Cycle Corporation (the “Company”) was incorporated in Delaware in 1976. The Company owns water assets in the Denver, Colorado metropolitan area, in the Arkansas River Valley in southern Colorado, and the Colorado River on the western slope of Colorado. The Company is currently using its water assets located in the Denver metropolitan area to provide water and wastewater services to customers located in and around its service area. The Company is a vertically integrated service provider owning water supplies and providing a full line of water and wastewater services including the design and construction of water and wastewater systems as well as the operation and maintenance of such systems. The Company’s business focus is to provide water and wastewater service to customers within its service area and other areas throughout the Denver metropolitan area and the Front Range of Colorado.

The Company believes that at August 31, 2007, it has sufficient working capital and financing sources to fund its operations for at least the next year. However, there can be no assurances that the Company will be successful in marketing its water on terms that are acceptable to the Company. The Company’s ability to generate working capital from its water and wastewater projects is dependent on its ability to successfully market the water, or in the event it is unsuccessful, to sell the underlying water assets. In the event increased sales are not achieved, the Company may incur additional short or long-term debt or seek to sell additional shares of the Company’s common or preferred stock, as deemed necessary by the Company, to generate sufficient working capital.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition. The Company generates revenues mainly from three sources; (i) water and wastewater tap fees, (ii) construction fees, and (iii) monthly water usage fees and wastewater service fees. Emerging Issues Task Force Issue No. 00-21 Revenue Arrangements with Multiple Deliverables (“EITF 00-21”), governs how to identify when goods or services, or both, that are separately delivered but included in a single sales arrangement should be accounted for separately. Based on the criteria of EITF 00-21, the Company accounts for each of the items addressed in its service agreements separately.

Proceeds from tap fees and construction fees are deferred upon receipt and recognized in income based on whether or not the Company owns the infrastructure constructed with the proceeds. Tap fees and construction fees derived from agreements in which the customer will own the assets constructed with the fees (for example the assets constructed for use on the Lowry Range pursuant to the Company’s service agreement with the Rangeview Metropolitan District (the “District”)) are recognized in accordance with Statement of Position 81-1 Accounting for Performance of Construction-Type and Certain Production-Type Contracts, whereby the Company recognizes revenue and costs of construction using the percentage-of-completion method. Tap fees and construction fees derived from agreements for which the Company will own the infrastructure (for example the assets constructed for use at the Arapahoe County Fairgrounds (the “Fairgrounds”)) are recognized in accordance with Staff Accounting Bulletin No. 104 Revenue Recognition (“SAB 104”), whereby the up-front fees are recognized ratably over the estimated service life of the facilities constructed, starting at completion of construction.

The Company recognizes water usage revenues upon delivering water to customers. The Company recognizes wastewater processing revenues monthly based on flat fees assessed per single family equivalent (“SFE”) unit served. An SFE is defined in the Company’s Rules and Regulations as the amount of water required each year by a family of four persons living in a single family house on a standard sized lot which is equivalent to the use of approximately 0.4 acre-feet of water per year.

The Company recognized approximately $14,300 and $1,200 of water tap fee revenues in fiscal 2007 and 2006, respectively, related to the Agreement for Water Services (the “County Agreement”) signed with Arapahoe County (the “County”) in August 2005. The Wholesale Facilities required to provide water service to the Fairgrounds were completed in fiscal 2006 in time for the Fairgrounds opening date on July 21, 2006. In accordance with SAB 104 and Accounting Principles Generally Accepted in the United States of America (“GAAP”), the Company began recognizing the water tap fees as revenue ratably over the estimated service period upon completion of the Wholesale Facilities. The water tap fees to be recognized over this period are net of the royalty payments to the State of Colorado Board of Land Commissioners (the “Land Board”) and amounts paid to third parties pursuant to the Comprehensive Amendment Agreement No. 1 (the “CAA”) as further described in Note 5 below.

PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2007, 2006 AND 2005

The Company recognized approximately $41,500 and $3,500 of Special Facilities funding as revenue in fiscal 2007 and 2006, respectively. This is the ratable portion of the Special Facilities funding paid and payable by the County as more fully described in Note 3 below.

No water tap fees or construction revenues were recognized during the year ended August 31, 2005.

As of August 31, 2007, the Company has deferred recognition of approximately $1.6 million of tap fee and construction fee revenue, which will be recognized as revenue ratably over the estimated life of the assets constructed with the construction proceeds as described above.

If costs meet the Company’s capitalization criteria, costs to construct “Wholesale Facilities” and “Special Facilities” are capitalized as incurred, including interest, and depreciated over their estimated useful lives. Costs of delivering water and providing wastewater service to customers are recognized as incurred.

Use of Estimates. The preparation of financial statements in conformity with GAAP 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.

Cash and Cash Equivalents. Cash and cash equivalents include all highly liquid debt and equity instruments with original maturities of three months or less. The Company’s cash equivalents are comprised of money market funds, investments in debt securities and investments in commercial paper. As of August 31, 2007 and 2006, the Company has no investments in equity instruments.

Financial Instruments. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and investments in marketable securities. The Company places its cash equivalents and investments with a high quality financial institution. At various times throughout fiscal 2007, cash deposits have exceeded federally insured limits. The Company invests its excess cash primarily in money market instruments, commercial paper obligations, corporate bonds and US government treasury obligations. To date, the Company has not experienced significant losses on any of these investments.

Cash Flows. The Company did not pay any interest or income taxes during the three years ended August 31, 2007.

Marketable Securities. Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations each reporting period.

Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. The Company had no investments classified as held-to-maturity at August 31, 2007 or 2006.   Debt securities for which the Company does not have the positive intent or ability to hold to maturity are classified as available-for-sale, along with any investments in equity securities. Securities classified as available-for-sale are marked-to-market at each reporting period. Changes in value on such securities are recorded as a component of Accumulated comprehensive income. The cost of securities sold is based on the specific identification method.

PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2007, 2006 AND 2005

The following is a summary of marketable securities at August 31, 2007:

						Gross				Gross
						Unrealized				Unrealized				Estimated
		Cost Basis				Gains				Losses				Fair Value
Commercial paper		$	95,500			$	—			$	—			$	95,500
U.S. government debt securities with unrealized gains			597,984				2,197				—				600,181
U.S. corporate debt securities with unrealized gains			194,650				4,971				—				199,621
Total investments			888,134				7,168				—				895,302
Less cash equivalents			95,500				—				—				95,500
Total marketable securities		$	792,634			$	7,168			$	—			$	799,802