SWWC Southwest Water (MM)

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Dear SouthWest Water Stockholder:

We cordially invite you to attend the 2009 Annual Meeting of Stockholders of SouthWest Water Company (NASDAQ: SWWC) to be held on Friday, October 23, 2009, at 10:00 a.m., Pacific Time, at the Millennium Biltmore Hotel located at 506 So. Grand Ave, Los Angeles, California 90071 (see map on page 38).

Details of the business to be conducted at the Annual Meeting are provided in the accompanying Notice of Annual Meeting and Proxy Statement.

Included with this Proxy Statement is a copy of the Annual Report on Form 10-K for fiscal year 2008. We encourage you to read the enclosed materials.

Thank you for your ongoing support and continued interest in SouthWest Water Company.

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SOUTHWEST WATER COMPANY

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held on October 23, 2009

Dear SouthWest Water Stockholder:

The Annual Meeting of Stockholders of SouthWest Water Company, a Delaware corporation, will be held on Friday, October 23, 2009, at 10:00 a.m., Pacific Time, at the Millennium Biltmore Hotel Los Angeles, 506 South Grand Avenue, Los Angeles, California 90071 for the following purposes:

Only Stockholders of Record at the close of business on September 11, 2009 are entitled to notice of, and to vote at, this meeting.

YOUR VOTE IS IMPORTANT: Whether or not you plan to attend the Annual Meeting of Stockholders, we urge you to submit your proxy by telephone or our website  http://www.proxyvoting.com/swwc . These are quick and cost effective ways for you to submit your proxy. If you would prefer to vote by mail, please sign, date and return the enclosed proxy card in the postage-paid envelope provided. Please review the instructions on the proxy card for each of these voting options. If you return an executed proxy, and then attend the meeting, you may revoke your proxy and vote in person. Attendance at the meeting will not by itself revoke a proxy.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON OCTOBER 23, 2009

This proxy statement and the accompanying annual report are available at  www.swwc.com

Among other things, the proxy statement contains information regarding:

·                  The date, time and location of the meeting;

·                  A list of the matters being submitted to the Stockholders; and

·                  Information concerning voting in person.

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2009 ANNUAL MEETING OF STOCKHOLDERS

PROXY STATEMENT

This proxy statement (“Proxy Statement”) is furnished by and on behalf of the Board of Directors (the “Board” or “Directors”) of SouthWest Water Company, a Delaware corporation (“SouthWest Water,” “the Company,” “we,” or “us”), in connection with its solicitation of proxies to be voted at the Annual Meeting to be held on Friday, October 23, 2009 (the “Annual Meeting”), beginning at 10:00 a.m., Pacific Time, at the Millennium Biltmore Hotel Los Angeles, 506 South Grand Avenue, Los Angeles, California 90071 for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. This Proxy Statement and enclosed proxy card will be mailed on or about September 18, 2009 to the Company’s Stockholders of Record (the “Stockholders”) as of September 11, 2009 (the “Record Date”).

Q:                                   What is the purpose of the Annual Meeting?

A:                                   At our Annual Meeting, we are asking Stockholders to consider and vote upon matters described in the Notice of Annual Meeting of Stockholders. In addition, management will report on the performance of the Company and respond to questions from Stockholders.

Q:                                   Who can attend the Annual Meeting?

A:                                   Our Stockholders, Company representatives and Company guests can attend our Annual Meeting. Admission to the meeting depends on how your stock ownership is recorded. If your stock is held in the name of a bank, broker or other holder of record and you plan to attend the Annual Meeting, please obtain proof of ownership, such as a current brokerage account statement or certification from your broker. If your stock is registered with our transfer agent, The Bank of New York Mellon Corporation (“BNY Mellon” and/or “transfer agent”), all you need is proof of identify; no proof of ownership is needed.

Q:                                   Who can vote at this Annual Meeting?

A:                                   Owners of SouthWest Water common stock or Series A preferred stock at the close of business on the Record Date are entitled to receive this notice and to vote their shares at the Annual Meeting. As of that date, there were 24,878,029 shares of common stock outstanding and 9,156 shares of Series A preferred stock outstanding. On each matter properly brought before the Annual Meeting, common shares will be entitled to one vote per share, and Series A Preferred shares will be entitled to five votes per share. The combined total number of eligible votes is 24,923,809 shares.

Q:                                   What is the quorum requirement for the Annual Meeting?

A:                                   The presence at the meeting, in person or by proxy, of the holders of a majority of the eligible votes on the Record Date will constitute a quorum, permitting business to be conducted at the Annual Meeting. Proxies received, but marked as abstentions, and broker non-votes ( i.e. , shares that are not voted by the broker who is the record holder of the shares because the broker is not instructed to vote by the actual owner of the shares and does not have discretionary authority to vote such shares) will be included in the calculation of the number of votes considered to be present at the meeting. Abstentions and broker non-votes will not be counted “for” or “against” any matter.  Under the rules that govern brokers who are voting shares held in street name, brokers have discretion to vote those shares on routine matters but not on non-routine matters.  Routine matters include the election of Directors and ratification of independent public accountants.  Non-routine matters include actions on stock plans.

Q:                                   What are the costs of proxy distribution and solicitation and who pays for them?

A:                                   SouthWest Water will bear the entire cost of this solicitation of proxies, including the preparation, assembly, printing and mailing of this Proxy Statement, the proxy card and any additional solicitation material that SouthWest Water may provide to Stockholders. Copies of solicitation material will be provided to brokerage firms, fiduciaries and custodians holding shares in their names that are beneficially owned by others so that they may forward the solicitation material to beneficial owners. In addition, SouthWest Water has retained Morrow and Company (“Morrow”) to act as a proxy solicitor for the Annual

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Meeting. SouthWest Water has agreed to pay Morrow $5,000, plus reasonable out-of-pocket expenses, for proxy solicitation services. The original solicitation of proxies by mail may be supplemented by solicitation by telephone, facsimile and other means by Directors, officers and employees of SouthWest Water. No additional compensation will be paid to these individuals for their services.

Q:                                   What information is contained in these materials?

A:                                   The information included in this Proxy Statement relates to the proposals to be voted on at the Annual Meeting, the voting process, the compensation of Directors and our most highly paid officers or named executive officers, and certain other required information. SouthWest Water’s 2008 Annual Report, proxy card and a return envelope are also enclosed.

Q:                                   What proposals will be voted on at the Annual Meeting?

A:                                   There are two proposals to be voted on at the Annual Meeting:

If any other matters are properly presented at the Annual Meeting for consideration, including, among other things, consideration of a motion to adjourn the Annual Meeting to another time or place, the persons named in the proxy will have discretion to vote on these matters in accordance with their best judgment.

Q:                                   Have there been any changes to corporate governance since the last annual meeting?

A:                                 On August 10, 2009, the Board voted to amend its bylaws to increase its size to 10 Directors and elected Kimberly Alexy and Bruce Edwards to the Board.  The Board also voted to amend the corporate governance guidelines lowering the mandatory Board retirement age to 72, from the current 75.  Based on this guideline change, four incumbent directors will reach mandatory retirement age by the time of the 2010 annual meeting. In addition, the Board elected to separate the role of chairman and chief executive officer.  The two latter changes will go into effect immediately following the 2009 annual shareholder’s meeting, with the new chair to be named at that time.

Q:                                   What shares owned by me can be voted?

A:                                   Each share of SouthWest Water stock issued and outstanding as of the close of business on the Record Date is entitled to vote on all items being voted upon at the Annual Meeting. You may cast one vote per share of common stock that you held on the Record Date. Holders of Series A preferred stock may cast five votes per share of preferred stock owned by them on the Record Date. You may vote all shares owned by you as of the Record Date, including shares that are: (1) held directly in your name as the Stockholder of Record; or (2) held for you as the beneficial owner through a stockbroker, bank or other nominee.

Q:                                   What is the difference between holding shares as a Stockholder of Record and as a beneficial owner?

A:                                   Most Stockholders of SouthWest Water hold their shares through a stockbroker, bank or other nominee rather than directly in their own name. As summarized below, there are some distinctions between shares held of record and those owned beneficially.

Stockholder of Record

If your shares are registered directly in your name with BNY Mellon, you are considered the Stockholder of Record, and these proxy materials are being sent directly to you by SouthWest Water. As the Stockholder of Record, you have the right to grant your voting proxy directly to SouthWest Water or to vote in person at the Annual Meeting. SouthWest Water has enclosed a proxy card for your use. You may also vote by Internet or the telephone as described below under “How can I vote my shares without attending the Annual Meeting?”

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Beneficial Owner of Shares Held in Street Name

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name, and these proxy materials are being forwarded to you by your broker or nominee who is considered, with respect to those shares, the Stockholder of Record. As the beneficial owner, you have the right to direct your broker on how to vote and are also invited to attend the Annual Meeting. Because you are not the Stockholder of Record, you may not vote these shares in person at the Annual Meeting unless you obtain a signed proxy from the record holder (e.g. your broker) giving you the right to vote the shares in person. Your broker or nominee has enclosed a voting instruction card for you to use in directing the broker or nominee how to vote your shares. Most Stockholders may also vote by Internet or by the telephone, as described below under “How can I vote my shares without attending the Annual Meeting?”

Q:                                   How can I vote my shares in person at the Annual Meeting?

A:                                   Shares held directly in your name as the Stockholder of Record may be voted in person at the Annual Meeting. If you choose to do so, please bring the enclosed proxy card or proof of identification. Even if you plan to attend the Annual Meeting, SouthWest Water recommends that you vote your shares in advance as described below so that your vote will be counted if you later decide not to attend the Annual Meeting. Shares held beneficially in a street name may be voted in person by you only if you obtain a signed proxy from the record holder (e.g. your broker) giving you the right to vote the shares in person.

Q:                                   How can I vote my shares without attending the Annual Meeting?

A:                                   If you are a Stockholder of Record, you may vote by Internet or telephone, by following the instructions included with your proxy card. You may also complete and properly sign the accompanying proxy card and return it to BNY Mellon and it will be voted according to your instructions. If you hold shares beneficially in street name, you may vote by submitting voting instructions to your broker, trustee or nominee. A large number of banks and brokerage firms are participating in the ADP Investor Communications Services online program, which provides eligible Stockholders who hold their shares in street name to vote by the Internet or telephone. If your bank or brokerage firm is participating in ADP’s program, your voting form will provide instructions. Please refer to the voting instructions below and those included on your proxy card or, for shares held beneficially in street name, the voting instruction card provided by your broker, trustee or nominee. The deadline for voting by Internet and the telephone is 11:59 p.m., Eastern Time, on October 22, 2009. If you vote by Internet or telephone, do not return your proxy card.

By the Internet – The website for Internet voting for Stockholders of Record is http://www.proxyvoting.com/swwc . As with telephone voting, you can confirm that your instructions have been recorded. You can also request electronic delivery of future proxy materials with Internet voting. Most SouthWest Water Stockholders who hold shares beneficially in street name and live in the United States or Canada may vote by going to the site specified on the voting instruction card provided by their brokers, trustees or nominees.

By Telephone – Stockholders of Record of SouthWest Water stock who live in the United States or Canada may submit proxies by following the “Vote by Phone” instructions on their proxy card. Most SouthWest Water Stockholders who hold shares beneficially in street name and live in the United States or Canada may vote by phone by calling the number specified on the voting instruction card provided by their brokers, trustees or nominees.

By Mail – Stockholders of Record of SouthWest Water stock may submit proxies by completing, signing and dating their proxy card and mailing it in the accompanying pre-addressed envelope. SouthWest Water Stockholders who hold shares beneficially in street name may vote by mail by completing, signing and dating the voting instruction card provided by their brokers, trustees or nominees and mailing it in the accompanying pre-addressed envelope.

Q:                                   Can I change my vote after I submit a proxy?

A:                                   As a Stockholder of Record, you may revoke your proxy at any time before it is voted at the Annual Meeting by doing any of the following:

·                      Granting a new proxy, relating to the same shares and bearing a later date;

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·                      Attending the Annual Meeting and voting in person. Attendance at the Annual Meeting will not, by itself, revoke your proxy. In order to revoke your proxy you must vote at the meeting; or

·                      If your shares are held in the name of a broker, bank or other nominee, you may change your vote by submitting new voting instructions to your bank, broker or other record holder. You must contact your bank, broker or other record holder to find out how to do so.

Q:                                   How are votes cast?

A:                                   In the election of Directors, you may vote “FOR” one or more of the nominees or your vote may be cast “AGAINST”  one or more of the nominees. For all other proposals, you may vote “FOR,” “AGAINST” or “ABSTAIN” on each such proposal. If you vote “ABSTAIN” it has the same effect as a vote “AGAINST.”

Q:                                   What is the voting requirement to approve each of the proposals?

A:                                   For Proposal 1 , each nominee who receives the affirmative vote of a majority of votes cast by the holders of shares entitled to vote, voting in person or by proxy at the Annual Meeting, shall be elected a Director to serve until the Annual Meeting held in 2010 and until each successor has been elected and qualified. Brokers are authorized to vote on this proposal.

For Proposal 2 , the affirmative vote of a majority of votes cast by the holders of shares entitled to vote, voting in person or by proxy at the Annual Meeting is required for approval. Abstentions on this proposal will have the effect of a vote against such proposal. Brokers are authorized to vote on this proposal.

Q:                                   What does it mean if I receive more than one proxy or voting instruction card?

A:                                   It means your shares are registered differently or are in more than one account. Please provide voting instructions for each proxy and voting instruction card you receive.

Q:                                   Who will count the votes?

A:                                   The inspector of election, a representative of BNY Mellon, will be present at the meeting and will count the votes.

Q:                                   Where can I find the voting results of the Annual Meeting?

A:                                   SouthWest Water intends to announce preliminary voting results at the Annual Meeting and publish final results in its quarterly report on Form 10-Q for the third quarter of fiscal 2009.

Q:                                   How would my shares be voted if I do not specify how they should be voted?

A:                                   If you sign and return your proxy card without indicating how you want your shares to be voted, the person who is named on the proxy card as the proxy holder appointed by you, will vote your shares in accordance with the recommendations of the Board as follows:

Proposal 1:  For the election of all eight nominees for Directors.

Proposal 2: For the ratification of PricewaterhouseCoopers, as the Company’s independent public accountants for the fiscal year ending December 31, 2009.

As of September 4, 2009 the Company’s records and other information available from outside sources indicated that there are no beneficial owners of more than five percent of the outstanding shares of the Company’s common stock.

The following table provides information concerning the beneficial ownership of our common stock as of September 11, 2009, for: (i) each Director and nominee for Director of the Company, (ii) each executive officer named in the Summary Compensation Table on page 22, and (iii) all Directors (including nominees) and executive officers as a group. Except as otherwise noted, to our knowledge, the named individual or their family

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members have sole voting and investment power with respect to the securities beneficially owned by the Stockholder.

We calculate beneficial ownership by including shares owned in each Director’s or named executive officer’s name (or by any member of his or her immediate family).  Also, in calculating the percentage ownership, we count securities which the Director or named executive officer could purchase within 60 days of September 11, 2009, (such as exercisable stock options that are listed in a separate column as outstanding securities).  No Director or named executive officer owns shares of our preferred stock.

General

On August 10, 2009, the Board voted to amend its bylaws to increase its size to 10 Directors and elected Kimberly Alexy and Bruce Edwards to the Board.  The Board also voted to amend the corporate governance guidelines lowering the mandatory Board retirement age to 72, from the current 75.  Based on this guideline change, four incumbent directors will reach mandatory retirement age by the time of the 2010 annual meeting. In addition, the Board elected to separate the role of chairman and chief executive officer.  The two latter changes will go into effect immediately following the 2009 annual shareholder’s meeting, with the new chair to be named at that time.

Prior to the 2008 Annual Meeting of Stockholders, our Board was divided into three classes consisting of three Directors each (Class I, Class II and Class III). Directors in each class were elected to serve for three-year terms that expired in successive years so that the Stockholders elected one class of Directors at each annual meeting. At the 2008 Annual Meeting, a Stockholder proposal was approved eliminating the classified Board.  The Board has nominated Kimberly Alexy, Bruce C. Edwards, Thomas Iino, William D. Jones, Maureen A. Kindel, Donovan D. Huennekens, Richard G. Newman and Mark A. Swatek for election to the Board of Directors to serve

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until 2010 or until his or her successor has been elected and qualified.  Linda Griego’s and H. Frederick Christie’s terms expire at the 2010 meeting.  Our Board of Directors is now de-classified and, beginning with the 2010 Annual Meeting, all Directors will be elected for one-year terms at each Annual Meeting.

Geoffrey C. Ketcham, 58, joined our Board of Directors in October 2008.  He retired in December 2006 as Executive Vice President and CFO of Energen Corporation, a position he had held since 1991.  Mr. Ketcham resigned from our Board in January 2009 for personal reasons.

Each nominee has consented to being named in this Proxy Statement and has agreed to serve if elected. The affirmative vote of a majority of the votes cast at the Annual Meeting is required to elect the nominees as Directors. This means that the nominees will be elected if they receive more affirmative votes than any other person. Beginning on the next page, the principal occupation and certain other information is provided on the nominees and the Directors whose terms of office will continue after the Annual Meeting.

Nominees and Continuing Directors

The following table provides information on the people who serve as Directors as of September 11, 2009:

Approval of this proposal requires the affirmative vote of a majority of votes cast by the holders of shares outstanding as of the Record Date entitled to vote, voting in person or by proxy at the Annual Meeting. Abstentions and broker non-votes will be counted as present for purposes of determining if a quorum is present, but will have the same effect as a negative vote on the outcome of this proposal. Brokers are authorized to vote on this proposal.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR KIMBERLY ALEXY, BRUCE C. EDWARDS, DONOVAN D. HUENNEKENS, THOMAS IINO, WILLIAM D. JONES, MAUREEN A. KINDEL, RICHARD G. NEWMAN AND MARK A. SWATEK AS DIRECTORS.  THE PERSONS NAMED IN THE ENCLOSED PROXY WILL VOTE YOUR PROXY IN FAVOR OF THESE NOMINEES UNLESS YOU SPECIFY A DIFFERENT CHOICE IN YOUR PROXY.

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Corporate General Guidelines

SouthWest Water is committed to having sound corporate governance principles. Our Board believes that the purpose of corporate governance is to ensure we maximize Stockholder value while meeting applicable legal requirements with the highest standards of integrity. The Board has adopted and adheres to corporate governance practices, which the Board and senior management believe promotes this purpose. We continually review these governance practices, Delaware law (the state in which we are incorporated), the rules and listing standards of The NASDAQ Stock Market, LLC. (“NASDAQ”) and SEC regulations, as well as best practices suggested by recognized governance authorities.

SouthWest Water maintains a corporate governance page on its website, which includes key information about its corporate governance initiatives, including SouthWest Water’s Corporate Governance Guidelines and charters for each of the Committees of the Board. The corporate governance page of the Company can be found at  www.swwc.com by clicking on Investor Relations then Governance & Management.

Code of Ethics

Our Code of Business Conduct and Ethics for all employees and our Code of Ethics for Directors and Executive Officers (“Code of Ethics”) can also be found on our website  www.swwc.com by clicking on Investor Relations then Governance & Management. The Code of Ethics is intended to comply with the requirements of the Sarbanes Oxley Act of 2002 and applies to our Directors and named executive officers, including our Chief Executive Officer, senior financial officers and other members of the Company’s senior management team. We will provide without charge to any person, by written or oral request, a copy of our Code of Ethics . Requests should be directed to Shareholder Services, SouthWest Water Company, One Wilshire Building, 624 South Grand Avenue, Suite 2900, Los Angeles, California 90017.

Board Membership Criteria

SouthWest Water’s Corporate Governance Guidelines contain Board membership criteria that apply to nominees for a position on SouthWest Water’s Board. Under these criteria, members of the Board must have professional and personal ethics and values consistent with longstanding SouthWest Water values and standards. They should have broad experience at the policy-making level in business, government, education, technology or public interest. They should be committed to enhancing Stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other Boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform all Director duties responsibly. Each Director must represent the interests of all Stockholders of the Company.

Nominations for Directors

The Nominating and Governance Committee uses a variety of methods to identify and evaluate nominees for Director, including materials provided by professional search firms or other parties. In the event that Board vacancies are anticipated, or otherwise arise, the Nominating and Governance Committee considers various potential candidates for Director. Candidates may come to the attention of the Nominating and Governance Committee through current Board members, professional search firms, Stockholders or other persons. These candidates are evaluated at meetings of the Nominating and Governance Committee, and may be considered at anytime during the year. In evaluating such nominations, the Nominating and Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board.

In evaluating Director nominees, the Nominating and Governance Committee considers the following:

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The Nominating and Governance Committee’s goal is to assemble a Board that brings to us a variety of perspectives and skills derived from high quality business and professional experience. In doing so, the Nominating and Governance Committee also considers candidates with appropriate non-business backgrounds.

Other than the foregoing, there are no stated minimum criteria for Director nominees, although the Nominating and Governance Committee may also consider such other factors as it may deem are in the best interest of us and our Stockholders. The Nominating and Governance Committee does, however, believe it appropriate for at least one, and preferably several, members of the Board to meet the criteria for an “audit committee financial expert” as defined by SEC rules, and that a majority of the members of the Board meet the definition of “independent director” under NASDAQ rules.  The Nominating and Governance Committee identifies nominees by first evaluating the current members of the Board willing to continue in service. Current members of the Board with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new perspective. If any member of the Board does not wish to continue in service or if the Nominating and Governance Committee or the Board decides not to re-nominate a member for re-election, the Nominating and Governance Committee identifies the desired skills and experience of a new nominee based on the criteria above.

The Board nominates the Director candidates it deems most qualified for election by the Stockholders after consideration of the recommendation by the Nominating and Governance Committee. In accordance with the bylaws of the Company, the Board will be responsible for filling vacancies or newly created Directorships on the Board that may occur between annual meetings of Stockholders.  On August 10, 2009, the Board voted to amend its bylaws to increase its size to 10 Directors and elected Kimberly Alexy and Bruce Edwards to the Board, granting each of them a 10,000 share non-qualified stock option upon their appointment.  The Board also voted to amend the corporate governance guidelines lowering the mandatory Board retirement age to 72, from the current 75.  Based on this guideline change, four incumbent directors will reach mandatory retirement age by the time of the 2010 annual meeting.  In addition, the Board elected to separate the role of chairman and chief executive officer.  The two latter changes will go into effect immediately following the 2009 annual shareholder’s meeting, with the new chair to be named at that time.

Stockholder Recommendations

The Company’s Corporate Governance Guidelines allow Stockholders to recommend Director nominees for consideration by the Nominating and Governance Committee by writing to the Corporate Secretary at least 90 days before the Annual Meeting, specifying the nominee’s name and qualifications for Board membership. Following verification of the Stockholder status of the person submitting the recommendation and review of minimum qualifying standards, all properly submitted recommendations are brought to the attention of the Nominating and Governance Committee at the next Committee meeting. Candidates recommended by a Stockholder will be evaluated in the same manner as any candidate identified by the Nominating and Governance Committee.

The Company’s Amended and Restated Bylaws (“Bylaws”) allow Stockholders to recommend business, including recommending Director nominees, to come before a special meeting or Annual Meeting of the Company by providing notice to the Corporate Secretary at least 90 days before the Annual Meeting. Such notice must comply with the requirements of our Bylaws.

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Director Independence

Based on information solicited from each Director in the form of an annual questionnaire and upon the advice and recommendation of the Company’s Nominating and Governance Committee, the Board has determined that each of the current Directors, except the Chairman of the Board and Chief Executive Officer (Mr. Swatek), has no material relationship with SouthWest Water (either directly or as a partner, Stockholder or officer of an organization that has a relationship with the Company) and is “independent” within the meaning of the Director independence standards, as currently in effect. The NASDAQ independence definition includes a series of objective tests, such as the Director is not an employee of the Company and not engaged in various types of business dealings with the Company. Furthermore, the Board has determined that each of the members of the Audit, Compensation and Organization, and Nominating and Governance Committees has no material relationship with SouthWest Water (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company), and is “independent” within the meaning of NASDAQ’s Director independence standards.

Independent Director sessions of non-employee Directors are held at each regularly scheduled Board meeting. The sessions are chaired by an independent Director selected by the Board from time to time. Any Director can request that an additional independent Director session be scheduled.

Certain Relationships and Related Transactions

The Company is required by law and generally accepted accounting principles to disclose to investors certain transactions between the Company and a related party. A related party would include a Director, nominee for Director, executive officer, certain Stockholders, and certain others. As a part of the process in determining its disclosure obligations, the Company circulates a questionnaire to each Director, nominee for Director, executive officer, and other persons who the Company believes could be a related party containing questions calculated to discover the existence of a related party transaction. The Company also conducts such other investigations as it deems appropriate under the circumstances.

Our Code of Ethics for Directors and Executive Officers states that our executive officers and Directors, including their family members, are charged with avoiding situations in which their personal, family or financial interests conflict with those of the Company. The Board is responsible for reviewing and approving all related person transactions between the Company and any Directors or executive officers. The Compensation and Organization Committee reviews compensation related transactions with Directors or executive officers (such as salary and bonus). Any request for us to enter into a transaction with an executive officer or Director, or any such persons’ immediate family members or affiliates, must be presented to the Board for review and approval. In considering the proposed agreement, the Board will consider the relevant facts and circumstances and the potential for conflicts of interest or improprieties.

No Director, nominee, executive officer or any member of their family had any indebtedness to the Company, any business relationship with the Company or any transaction with the Company in 2008. No Director, nominee, executive officer or any member of their family, at any time during the past three years, has been employed by any entity, including a charitable organization, that has made payments to, or received payments from, including charitable contributions, the Company for property or services in an amount which, in any single fiscal year, exceeded the greater of $1 million or 2% of the other entities consolidated gross revenues reported for that fiscal year.

Confidential Rights, Complaints and Communication with the Board

The Board has established a procedure which enables the Company’s employees and Stockholders to submit anonymous and confidential reports of suspected or actual violations of the Company’s Code of Ethics or any of the following: violations of law, illegal or unsound accounting practices; internal accounting controls; theft or fraud; insider trading; or conflicts of interest.  All employees are informed on a regular basis of the toll-free number available to them to submit a report 24 hours a day, seven days a week.

Stockholders may communicate with the Board by writing to the Secretary, SouthWest Water Company, One Wilshire Building, 624 South Grand Avenue, Suite 2900, Los Angeles, California 90017. The Secretary will forward all communications to the full Board or the appropriate committee with a copy to the Chairperson of the Nominating and Governance Committee.

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The Board met eleven (11) times during fiscal 2008. Each Director attended at least 75% of all Board and applicable Committee meetings. The Board also encourages attendance at the Annual Meeting of Stockholders by all nominees for election as Directors and all Directors whose term of office will continue after the meeting. Last year all Directors attended the Annual Meeting. Under the Company’s Corporate Governance Guidelines , each Director is expected to dedicate sufficient time, energy and attention to ensure the diligent performance of his or her duties, including attending the Annual Meeting of Stockholders of the Company, meetings of the Board and Committee meetings of which he or she is a member.

The Board is comprised of a lead director and four standing committees: (i) Audit; (ii) Compensation and Organization; (iii) Financial Planning and Investment; and (iv) Nominating and Governance. Each of the Committees operates under a written charter adopted by the Board. The Committee charters are available on SouthWest Water’s website at  www.swwc.com under the Investor Relations tab, Governance and Management.

The Committees of the Board on which certain Directors served during 2008, and the number of meetings held in 2008 by the Committees are identified below.

X = Committee member

Audit Committee

The Audit Committee of SouthWest Water’s Board of Directors consists of four independent Directors, in compliance with the listing standards of NASDAQ and the SEC rules. The Audit Committee operates under a written charter adopted by the Board of Directors that sets forth its responsibilities and authority, and met ten times in 2008. The Audit Committee Charter is available on SouthWest Water’s website at  www.swwc.com .

The Audit Committee has the duties prescribed in its Charter and is responsible for overseeing the Company’s financial reporting and disclosure process on behalf of the Board of Directors. It reviews, acts on and reports to the Board of Directors with respect to (among other things) auditing performance and practices, accounting policies, financial reporting, and disclosure practices of the Company.

The Board of Directors has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on this Committee. In addition, the Board has determined that at least one member of the Audit Committee, Donovan D. Huennekens, qualifies as an “Audit Committee Financial Expert” as defined by the SEC rules. The Board has also determined that each of the Audit Committee members satisfies the SEC rules regarding independence and the NASDAQ requirements for Audit Committee membership including financial sophistication. Stockholders should understand that the “financial expert” designation is a disclosure

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requirement of the SEC related to Mr. Huennekens’ experience and understanding with respect to certain accounting and auditing matters. The designation does not impose upon Mr. Huennekens any duties, obligations or liabilities that are greater than are generally imposed on him as a member of the Audit Committee and the Board. His designation as an Audit Committee Financial Expert pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board. The Committee reviews and evaluates annually its performance and charter.

Compensation and Organization Committee

The Compensation and Organization Committee assists the Board in reviewing the performance and approving the compensation of SouthWest Water’s executives. The Committee provides general oversight of SouthWest Water’s equity compensation plans and benefits programs and approves grants of equity compensation under the Company’s equity incentive plans. The Committee reviews and evaluates annually its performance and charter, and met nine times in 2008.

Financial Planning and Investment Committee

The Financial Planning and Investment Committee assists the Board in overseeing the Company’s long-term strategic planning, new business development, acquisitions, mergers and overall investment policy. The Committee reviews and analyzes significant financial matters, such as assisting in the evaluation of proposed merger and acquisition transactions and other financial investment activities. It also reviews SouthWest Water’s capitalization, including credit management, risk concentration and return on invested capital. The Committee reviews and evaluates annually its performance and charter and met three times in 2008.

Nominating and Governance Committee

The Nominating and Governance Committee identifies individuals qualified to become Board members; recommends Director candidates to the Board for election and re-election; and develops and recommends corporate governance principles, including giving proper attention and making effective responses to Stockholder concerns regarding corporate governance. Please refer to our section on “Governance of the Company” for more information on the Company’s governance guidelines. The Committee reviews and evaluates annually its performance and charter, and met four times in 2008.

Overview

This Compensation Discussion and Analysis describes how we compensated the persons who served as the Company’s Chief Executive Officer and Chief Financial Officer and the other persons included in the Summary Compensation Table on page 22 during fiscal year 2008. Collectively, this group of executive officers is referred to as the named executive officers (the “NEO or NEO’s”).

The Compensation and Organization Committee (the “Committee”) of our Board of Directors is responsible for determining the compensation of the named executive officers and the other members of the Company’s senior management team. The Committee also reviews and oversees all long-term incentive and equity-based plans, defined contribution plans, our deferred compensation plan and change-of-control agreements.

Objectives

Our executive compensation programs are designed with the intent of attracting, motivating and retaining experienced executives and rewarding them for their contributions to the Company’s achievement of its annual and long-term goals. We believe that in this way we can align the interests of our executives with those of our stockholders. We put a greater relative emphasis on at risk, performance based incentives to increase the relationship of pay to Company performance and offer greater compensation potential for superior performance.

Role of Executive Officers in Compensation Decision

Our Chief Executive Officer, other members of management and outside advisors may be invited to attend Committee meetings from time to time depending on the matters to be discussed. The Committee may solicit the input of the Chief Executive Officer as it relates to the compensation of other named executive officers. However, neither the Chief Executive Officer nor any other member of management votes on items before the Committee.

Setting Executive Compensation

The Committee has structured base salary, non-equity incentive plan awards, and long-term equity based

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incentive awards to motivate named executive officers to achieve goals set by the Company and to reward achievement of those goals. From time to time the Committee engages independent compensation consultants to assist with the review and development of the total compensation provided to its named executive officers. The Committee engaged Compensation Design Group (“CDG”), a nationally recognized compensation consulting firm, to assist with the review of total compensation evaluations conducted in 2008.

The Committee reviews the base salaries of each of our named executive officers annually and the overall executive salary ranges periodically. The Committee determines the base salary of each named executive officer after considering the pay levels of our peer group, the executive’s individual performance, his or her long-term contributions, and the pay of others on the executive team. We target our executive base salary to be in the 50th percentile of our peer group. Adjustments may be made at the discretion of the Committee due to superior performance of the officer involved. Historically, our peer group consisted of four water utility companies and four services companies, which was recently expanded to eight utility companies and eight service companies that provide services in a market similar to that which we serve or to the same clients we serve. The peer group companies were reviewed with CDG and updated with respect to annual revenue, net income, number of employees and market capitalization.  These companies are:

To a lesser extent, the Committee also considers base salary for individuals in comparable positions based on general industry trends, the business requirements for certain skills, and the responsibilities of the executive.

Components of Executive Compensation

The basic elements of compensation for our named executive officers are:

·       Base salary;

·       Non-equity incentive plan awards;

·       Long-term equity based incentive awards; and

·       401(k), deferred compensation plan, and other benefits.

Our named executive officers are compensated with a mix of these key components of compensation. The Committee reviews each element separately and then considers all elements together to ensure that the goals and objectives of our total compensation philosophy are met.

Base Salary

Our objectives in setting, reviewing and adjusting base salary are twofold: to attract and retain executive talent and to meet competitive practices. Our base salary is intended to provide reasonable and competitive pay for services to the Company. The Committee, after considering similarly situated competitors and taking into consideration the performance history of the officers involved, seeks to annually establish the base salary for such affected officers. In using this methodology, the base salary adjustment has both quantitative and qualitative components.  For 2008, each officer’s base salary was the subject of a discretionary review by the Committee taking into account the officer’s personal performance for the prior year and factoring into consideration related cost of living adjustments. In February 2008, the Compensation Committee approved an increase of 3.4% for both Mr. Quinn and Ms. Clary and an increase of 5.9% for Mr. Swatek.  With Mr. Stanton’s promotion to COO, the Compensation Committee approved a 15.3% increase in his base pay.  Mr. Profilet received a 2.0% increase in base pay and received a second adjustment of 3.4% to replace a separate vehicle allowance that was eliminated.  These base salary increases were effective January 1, 2008.  In connection with taking on the additional role of CFO, Mr. Stanton received a 16.7% increase in pay in July 2009.  None of the other named executive officers received an increase in 2009.

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Non-Equity Incentive Plan Awards

Our objective in providing annual non-equity incentive compensation in the form of cash awards is to motivate executives to make improvements in individual and Company performance and to align the executive’s compensation with the Company’s performance and objectives; the greater the improvement in Company performance, the greater the incentive opportunity. We also believe annual non-equity incentive compensation is necessary to remain competitive with our peer group.

The Committee annually reviews non-equity incentives for executives generally in the first quarter of the fiscal year to determine award payments for the last completed fiscal year, as well as to set performance goals and incentive targets for the current fiscal year. Non-equity incentives (Short-Term Incentives or STI) are based on performance against both formulaic financial objectives and discretionary non-financial personal goals. The Committee approves the incentive level for the Chief Executive Officer and for each named executive officer taking into consideration the Chief Executive Officer’s recommendations at the beginning of the year as performance objectives are established. The performance objectives are a combination of both financial objectives and non-financial objectives established individually or collectively for the NEOs, and the weighting of each goal is established by the Committee taking into consideration Chief Executive Officer recommendations. The financial objectives may include objectives relating to EPS, Profit before Taxes, Group or Division Income, or other financial metric measures that are pertinent to the individual’s span of control. Non-financial goals are established to assure focus on activities that help the Company achieve its strategic incentives, such as critical acquisitions or realignment of individual operations. Individual operational performance achievement levels are determined at the discretion of the Committee, which is familiar with the individual performance that is expected for each unique job in question.  When these targets are met, the awards are paid in cash.

In early 2008, the Compensation Committee approved and paid cash bonuses for discretionary non-financial performance for fiscal year 2007 to Mr. Quinn, Ms. Clary, Mr. Stanton, and Mr. Profilet (who was not an NEO before 2008) in the amounts of $45,000, $55,000, $60,000 and $50,000, respectively.  Mr. Swatek recommended that he not be considered for a discretionary STI award for 2007.

For the 2008 STI plan, the Committee established threshold, target and maximum awards for plan participants that were based on a percentage of base salary as follows:

Each NEO shared a total Company EPS goal for 2008.  The goal was established at threshold, target, and maximum performance levels based on the Company’s approved 2008 budget.  All other performance objectives were tailored to each NEO and his or her specific objectives for 2008 and performance against these goals are summarized below:

Mr. Swatek

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Mr. Stanton

Ms. Clary

Mr. Profilet

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Mr. Quinn

·      EPS Goal (20% weighting): The Company did not achieve the goal.

·      Operational Unit Profitability Goal (40% weighting) : The Western Utilities did not meet its operational unit profit goals versus the approved budget, and the threshold level of performance was not achieved.

·      Safety Objectives (20% weighting) : The Western Utility did not meet the safety goal, and was below the threshold performance objective for Recordable Incident Rate.

·      Operating Margin Improvements (20% weighting) :  The Western Utility did not achieve the goals for improvement of the operating margins of the business.

·      Mr. Quinn did not receive a STI award for 2008 based on overall Company and individual operating unit financial performance.

The non-equity incentive awards granted to the named executive officers are detailed in the Grants of Plan-Based Awards table on page 24.

Long-Term Incentive Awards

The Company believes that stock-based long-term incentive awards align the interests of executives with those of stockholders. Both wish to see an increase in value. In addition, we believe stock ownership encourages executives to take a more entrepreneurial and longer term view of the Company and its business.  In 2008 the Committee established a multi-year long term incentive plan for the NEO’s and other management using non-qualified stock options and restricted stock awards as the form of long-term incentive as permitted under the Equity Incentive Plan. The amount of the option and stock awards are based on rewarding individual contributions and a target of competitive total compensation relative to our peers.  The NEO awards were based on analysis and guidance from CDG on market practices of our peer and industry group on long term incentives in relationship to total compensation market practices. Long term target values were set in accordance with the Company’s compensation strategy and based on results of an extensive compensation study by CDG. The result is the current year’s award, with the targeted amount expressed as a dollar value and then allocated among the different plan types for which the participant is eligible.  These awards are based on the SouthWest Water Company Long-term Performance Incentive Plan approved in 2008.

Long term incentives include Performance Accelerated Stock Options (“PASO’s”), Performance-Contingent Restricted Stock (“PCRS”) and Performance Shares.

PASO’s – Performance Accelerated Stock Options

PASO’s are options to buy SouthWest Water Company stock at a future date, at the closing fair market value the stock is trading at on the grant date.  PASO’s fully vest 5 years from the grant date, however, they may vest earlier in the 5 year period, based on meeting specific performance objectives. Vesting may be accelerated if SouthWest Water Company shares reach and maintain the target price thresholds listed in the table below for a minimum of 10 consecutive trading days.

There is no limit on accelerated vesting in any plan year, provided that share price targets are met and held.  If performance objectives are not met, stock option awards vest five years from the date of award based on continued employment.  Vesting can be accelerated to an earlier date based on meeting pre-established and stated performance objectives.

PASO’s are issued at fair market value and the participant is entitled only to the appreciation in the value of the PASO from the date of the grant to the date of exercise.  The initial grant of options to individual

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participants is based on a “gain multiplier” (i.e., a multiple of a base salary that is derived from competitive practices and used to determine the target long-term incentive value for each participant) of base salary and an option pricing valuation.  PASO’s provide long-term focus on share-price performance and align the interests of participants with those of the Company.

The PASO performance objective is based on the Company’s stock maintaining the threshold price for a minimum of ten (10) consecutive trading days, at which point 25% of the options will undergo accelerated vesting.  There are four such share price thresholds, and there is no limit on the number of accelerated vesting occurrences in one year, provided that share price targets are met and held.  Un-accelerated options will vest fully five years after the grant date and have a term of seven years from the grant date.  The exercise price used was the final after-hours trading price of the Company’s stock on the date of grant.

During 2008, no thresholds were reached and therefore no acceleration of vesting occurred.

PCRS – Performance-Contingent Restricted Stock

PCRS are shares of SouthWest Water Company stock with performance-contingent vesting restrictions.  They have an initial value equal to the closing price of SouthWest Water Company stock on the grant date.  Any unvested awards, (i.e., where performance was not achieved) will be forfeited at the end of the five year performance period.  Vesting occurs if the Company achieves four quarter trailing pre-tax earnings objectives, as noted below.  Once a vesting target is achieved, the four quarter period is reset and the objective will become the next lowest vesting target.  Since shares are restricted, participants will not “own” the shares until they vest.  However, participants will receive dividends and have voting rights on unvested shares.

PCRS are restricted stock awards that are an “at-risk” form of compensation.  Vesting is entirely performance based with the potential for shares to be forfeited if the established objectives are not met over a five year performance period following the grant date.  The valuation of shares is based on fair market value at the time of grant.  The participant is entitled to the full value of the share, including the appreciation or “gain” in stock value over the original grant price, at the time of vesting.  The initial grant of shares to individual participants is based on a “gain multiplier” of base salary.  During the restriction period, the participant receives dividends, if any, and can vote the shares.  As restrictions lapse, the participant receives unrestricted shares which may be sold, transferred or pledged.  PCRS provides long-term focus on share price and Company performance and aligns the interests of participants with those of the Company.

PCRS requires the Company’s pre-tax earnings to be above a specified 4-quarter total value at the end of the 4-quarter period (not necessarily in a single fiscal year), at which point 25% of the restricted stock will undergo accelerated vesting and the 4 quarter period is reset. Any unvested restricted stock is forfeited at the end of the five year performance period.

During 2008, no pre-tax earnings objectives were met and therefore no acceleration of vesting occurred.

Performance Shares

Performance Shares are phantom stock designed to link to specific balance sheet performance of the Company.  They have a three year term and give a participant the right to receive a cash award at the end of three years, based on the achievement of predetermined performance objectives.  Performance

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share value is variable, and may payout at, above, or below target.  In the event of poor performance, if the minimum goals are not achieved, the Performance Shares will not have any value or payout.

Performance Share value will be measured at the end of the performance period based on improvement in the Company’s Return on Invested Capital (“ROIC”) as compared to 2007 levels.  Plan participants will be paid cash at the end of 2010 based on improvement in ROIC over the 2008-2010 plan percent as forecasted by the Company’s 2007 long range plan. If successful, the Company will improve its ROIC by the end of 2010 by 73% from 2007 year end levels and, if this level of improvement is achieved, the plan participants will be entitled to 100% of the target Performance Share award.  Actual awards will be made on the basis of the relative percentage of the achieved improvement.  If ROIC is improved by 50% over 2007 year end levels, then the plan participants will receive 50/73 or 68% of the target award.  Conversely, if ROIC improves by 100% over the 2007 year end levels, plan participants will receive 100/73 or 137% of the target award.  The target performance share award to individual participants is based on a multiplier of base salary.  Payments will be made in cash.  Performance Shares provide long-term focus on specific financial/ operational performance and aligns the interests of participants with those of the Company.

Most of the long-term incentive awards are made to named executive officers during the first quarter of the year. These awards are referred to as in-cycle awards. The process for these awards is structured. The Chief Executive Officer reviews the performance of the named executive officers and management against long-term goals of the organization, strategic initiatives and the role each individual may have in moving the Company toward those goals and initiatives. The Chief Executive Officer recommends long-term incentive awards to the Compensation Committee, and the Committee, after discussion and review, approves final awards.

Occasionally, out-of-cycle long-term incentives are made to named executive officers. The most typical out-of-cycle awards are made when an executive is first hired or is promoted. These out-of-cycle long-term incentive awards are made effective as of the date of hire or promotion. The Committee has delegated to the Chief Executive Officer the authority to make out-of-cycle long-term incentive awards of non-qualified stock options up to 2,500 shares, with the provision that the Committee is informed of the award at the next Committee meeting.

All options or restricted shares are granted at fair market value of the stock on the date of grant. Fair market value is determined as the closing price of the Company’s stock on the NASDAQ on the grant date.

During the second quarter of 2008, the Committee commissioned CDG to evaluate competitive practices associated with retention of key executives.  Subsequently, the Committee commissioned CDG to assist them in establishing a retention program for the Company’s two key executives, the CEO and COO, to assure that both executives remain focused on the Company’s development and performance.  In October 2008, the Committee granted a restricted stock award of 103,306 shares to Mr. Swatek, and 77,479 shares to Mr. Stanton to ensure their long term retention. These Restricted Stock Awards are scheduled to vest on the third anniversary of the grant date, contingent on the continued employment of Mr. Swatek and Mr. Stanton.  However, in the event that Mr. Swatek or Mr. Stanton terminates his employment prior to the third anniversary of the grant date for any other reason, except for termination without cause or change-in-control, he would not receive the restricted stock award.

All the grants awarded to the named executive officers, both in-cycle and out-of-cycle, are detailed in the Grants of Plan-Based Awards table on page 24.

Retirement and Other Benefits

•       Profit Sharing/Savings Plans.   All employees, including named executive officers, may participate in one of two 401(k) Plans depending on the subsidiary in which they work. The contract services business employees typically participate in the Profit Sharing 401(k) Plan, established in 1988 and the owned utility business employees typically participate in the 401(k) Retirement and Savings Plan, established in 1994.

In both plans, employees may elect to make before-tax contributions of up to 60% of their base salary, subject to current Internal Revenue Service limits. Neither 401(k) Plan permits an investment in our stock. The Company matches employee contributions up to a set percentage of the employee’s contribution depending on the specific plan and the Company contributed portion has a specific

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vesting period. For the Profit Sharing 401(k) Plan, the Company matches 50% of the first 2% of the employee’s contribution. The Company’s contribution vests 100% after one year of service. For the 401(k) Retirement and Savings Plan, the Company matches 100% of the first 2% of the employee’s contribution and 50% of the next 4%. The Company match vests at a graduated rate over 6 years.

•       Employee Stock Purchase Plan.   All employees, including named executive officers, may participate in the Employee Stock Purchase Plan (the “ESPP”), established in 1989, when they meet the eligibility requirements.  Eligible employees are those who work more than 20 hours a week and are employed at least 90 days. The ESPP provides eligible employees an option to purchase the Company stock at a discounted price at the end of a set offering period. Our offering period is quarterly. The discount in the ESPP is 10% off the lesser of the Company’s stock price based on the average of the high and low price for the last or first three (3) days of the offering period. Employees can participate through payroll deduction and there is a 1,000 share limit per purchase, as well as an annual Internal Revenue Service limit of $25,000 in value of stock that can be purchased through the ESPP.  In November of 2008, the Company temporarily suspended the Employee Stock Purchase Plan due to our ineligibility to use Registration Statements on Form S-8 until we are current in all SEC filings.

•      Deferred Compensation Plan.   The Company offers highly compensated employees and Directors an opportunity to participate in a nonqualified, unfunded Deferred Compensation Plan, established in 2002. In 2008, twelve employees and one (1) Director elected to participate in the Deferred Compensation Plan. The named executive officers who participated in the Deferred Compensation Plan are identified in the Nonqualified Deferred Compensation table. In the Summary Compensation Table and the Director Compensation Table, the base salary, non-equity plan award or fees to each named executive officer and Director who participated in the Deferred Compensation Plan have not been reduced by the amount of their deferral. In other words, base salary is base salary before any deferrals.  Director fees reflect fees before any deferrals.

•       Pension Plan.   The Company does not provide a pension plan for any of the named executives as outlined in the Pension Benefits section on page 28.

Health and Welfare Benefits

All full-time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical and dental coverage, disability insurance, life insurance and long-term care. All employees may elect to purchase additional life and disability insurance through payroll deductions. The additional benefit of the Company paid premium is taxable income and is included in the employee’s W-2.

Perquisites

We provide additional benefits to named executive officers that match competitive market practice or are relevant to the business we conduct. All such payments are reflected in the Summary Compensation Table on page 22. Our Chief Executive Officer and certain named executive officers receive a car allowance, which is included as taxable income in the base salary. Additionally, the Company pays the monthly parking fees for named executive officers located in downtown Los Angeles.

The Chief Executive Officer is reimbursed for tax preparation up to an annual maximum of $5,000.

Club membership is provided or reimbursed for select named executive officers. The clubs to which certain named executives belong benefit the Company in the conduct of our business, through establishing or maintaining business connections and the conducting of business meetings.

Severance Agreements; Change of Control Agreements

Businesses face a number of risks, including the risk of losing executive talent when a new Chief Executive Officer joins the Company or there is a change in ownership of the Company. We believe that severance arrangements and change of control agreements with certain of our named executive officers has helped us attract and retain our executives.

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Change of Control Severance Agreements

The Company has a Change of Control Severance Agreement (“CCSA”) into which certain named executive officers and other key executive officers have entered. All except one of these agreements have a term of three years subject to automatic renewal for three-year terms, unless a 90-day notice of non-renewal is given prior to the expiration of a current term. One agreement was entered into in 1999 and has no expiration or renewal date. The CCSA ends if a named executive officer’s employment has terminated before the change of control has occurred. Named executive officers who have entered into CCSA’s are Messrs. Swatek, Stanton, Quinn, Profilet and Ms. Clary. Additionally, other executive officers have CCSA’s with similar terms as those for the named executive officers.

The CCSA provides that the executive officer will, upon a change of control as defined in the agreement, be entitled for a period of two (2) years after the change of control, to a severance payment if the executive officer’s employment is terminated by the Company for other than good cause. The severance consists of up to 2.99 times the sum of the executive’s most recent base salary plus the average bonus (or Non-Equity Incentive Plan compensation) for the prior three full years. The severance benefits may also include an acceleration of vesting of previously granted stock options or non-vested restricted shares held as of the date of the change of control. Total benefits may not exceed the limits imposed by Section 280G of the Internal Revenue Code. Details on the payments that each of the above named executive officers would receive in the event their employment terminates are shown on the Potential Payments Upon Post Termination tables specific to each named executive officer on pages 29 to 31.

Stock Ownership Guidelines

Stock ownership guidelines have not been implemented by the Committee for our named executive officers.  We will continue to periodically review and evaluate our position with respect to stock ownership guidelines for executive officers.

Trading policy

Our trading policy states that covered individuals, including the named executive officers and Directors, may not buy or sell Company securities or engage in any other action to take advantage of, or pass on to others, material non-public information about the Company.  This policy also applies to information obtained in the course of employment relating to any other company, including our customers or suppliers.

The purchase or sale of stock by our officers and Directors may only be made during a window of time when all material information has been publicly disseminated as set by our Chief Financial Officer and reviewed by the Board of Directors.

Tax and Accounting Considerations of Executive Compensation

Section 162(m) of the Internal Revenue Code limits the deductibility of compensation in excess of $1 million paid by a public company to its chief executive officer and four other highest-paid executive officers unless certain specific and detailed criteria are satisfied. The Committee takes into consideration the economic effect on the Company of compensation, which would not be deductible under Section 162(m) or otherwise and therefore considers the anticipated tax treatment to the Company and our executive officers when we review and establish compensation programs and payments. In the future, compensation may be set, for competitive or other reasons, which will not be fully deductible. The Company believes that for fiscal year 2008 there were no compensation amounts paid to any named executive officer, which were not deductible by reason of Section 162(m).

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The following table summarizes the compensation paid or earned by each of the named executive officers for the fiscal year ended December 31, 2008.

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The following table provides information on grants of all plan-based awards to the named executive officers during fiscal 2008. The fair market value of these options and awards is the after-hours closing price on the date of grant.

  See notes on following page

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