THE CORPORATE LIBRARY

Related Party Transactions and Outside Related Director Information

Basin Water, Inc. (BWTR)

5/12/2006 424B4 Information

We describe below transactions and series of similar transactions, since January 1, 2003, to which we were a party or will be a party, in which:

• the amounts involved exceeded or will exceed $60,000; and

• a director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

We also describe below certain other transactions with our directors, executive officers and stockholders. We believe that the terms obtained or consideration paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions. It is our intention to ensure that all future transactions between us and our directors, officers, holders of more than 5% of our common stock or any members of their immediate families and their affiliates are approved by a majority of our board of directors, including a majority of the disinterested directors, and are on terms no less favorable to us than those that we may obtain from unaffiliated third parties. The information set forth in this section assumes conversion of all outstanding shares of preferred stock into shares of common stock.

Preferred Stock Issuances

We have 627,500 shares of Series A preferred stock outstanding that were issued at a per share price of $4.00 for an aggregate consideration of $2,510,000. From January 1, 2003 through the date of this prospectus, we issued in private placements an aggregate of 1,250,875 shares of Series B preferred stock at a per share price of $4.00 for an aggregate consideration of $5,003,500. The price for the Series A and Series B preferred stock was based on the good faith determination of our board of directors of the fair market value of such stock, reflecting a variety of factors such as the stage of our development and general market conditions at the time of each financing.

The following table sets forth the aggregate number of shares of our preferred stock and warrants to purchase shares of our preferred stock acquired by the listed directors, executive officers or holders of more than 5% of our common stock, or their affiliates: (See page 84 for table).

Common Stock Issuances

From January 1, 2003 through the date of this prospectus, we issued in private placements an aggregate of 717,000 shares of our common stock at a per share price of $5.00 for an aggregate consideration of $3,585,000. The price for the common stock was based on the good faith determination of our board of directors of the fair market value of such stock, reflecting a variety of factors such as the stage of our development and general market conditions at the time of such financing.

The following table sets forth the aggregate number of shares of common stock acquired by the listed directors, executive officers or holders of more than 5% of our common stock, or their affiliates: (See page 85 for table).

BWCA Loan

Pursuant to the BWCA loan, we owe BWCA I, LLC indebtedness of $4.0 million. We intend to use $4.2 million of the net proceeds of this offering to repay our outstanding indebtedness under the BWCA loan, including a prepayment penalty of $0.2 million. In addition, in connection with the consent granted by BWCA I, LLC with respect to our issuance of the Aqua note, we issued to BWCA I, LLC in February 2006 a warrant to purchase 50,000 shares of our common stock at an exercise price of $8.00 per share. This warrant may be exercised for five years after the date of the grant.

Subordinated Notes and Warrants Transaction

Mr. Ball is Chief Executive Officer of Wind River Holdings, L.P., which manages trusts that indirectly own a 3.3% partnership interest in The Co-Investment 2000 Fund, L.P., through a one-third ownership interest of the limited partnership interests of Co-Invest Management L.P., which is the general partner of The Co-Investment 2000 Fund, L.P. The Co-Investment 2000 Fund, L.P. acquired $2.25 million of the XACP notes and warrants to purchase 337,500 shares of our common stock at an exercise price of $5.50 per share and 112,500 shares of common stock at an exercise price of $7.00 per share. The XACP notes bear interest at an annual rate of 7.0% and will be due and payable on the earlier of an underwritten public offering of our common stock resulting in gross proceeds to us of at least $15.0 million and October 14, 2008. So long as we have not closed an underwritten public offering of our common stock resulting in gross proceeds of at least $15.0 million and there is no event of default under the purchase agreement relating to the XACP notes, we may, at our option, extend the maturity of the XACP notes to September 1, 2010. We intend to, and are required under the terms of the XACP notes to, repay all of our indebtedness outstanding under the XACP notes with a portion of the net proceeds of this offering. We have entered into a registration rights agreement with The Co-Investment 2000 Fund, L.P., pursuant to which this fund has registration rights with respect to the common stock issuable upon exercise of their warrants. See “Description of Capital Stock—Registration Rights” for additional information.

Pursuant to the subordinated notes purchase agreement, the purchasers of the XACP notes have the right to designate one of the members of our board of directors. Mr. Ball is the designee of the purchasers of the XACP notes. We have the obligation to take all such actions to cause the election of the purchasers’ designee until the XACP notes are repaid in full. We intend to use a portion of the net proceeds of this offering to repay the XACP notes in full, which will terminate the purchasers’ right to designate a member of our board of directors. After completion of this offering, Mr. Ball will continue to serve as a member of our board of directors until the annual meeting of stockholders to be held in 2008 and until his successor is duly elected and qualified.

Option Grants

From January 1, 2003 through the date of the prospectus, we have granted options to purchase an aggregate of 919,333 shares of common stock to our current directors, executive officers and other employees, with exercise prices ranging from $4.00 to $9.00 per share.

We have granted the following options to certain non-employee directors:

• In September 2003, we granted Mr. Fryling an option to purchase 28,333 shares of our common stock at an exercise price of $4.00 per share, which vested completely on September 1, 2004.

• In September 2003, we granted Mr. Katzmann an option to purchase 20,000 shares of our common stock at an exercise price of $4.00 per share, which vested completely on September 1, 2004.

• In September 2003, we granted Mr. Solar an option to purchase 20,000 shares of our common stock at an exercise price of $4.00 per share, which vested completely on September 1, 2004.

• In September 2003, we granted Mr. Watt an option to purchase 20,000 shares of our common stock at an exercise price of $4.00 per share, which vested completely on September 1, 2004.

• In April 2005, we granted Mr. Fryling an option to purchase 20,000 shares of our common stock at an exercise price of $5.00 per share, which vested completely on January 27, 2006.

• In April 2005, we granted Mr. Katzmann an option to purchase 20,000 shares of our common stock at an exercise price of $5.00 per share, which vested completely on January 27, 2006.

• In April 2005, we granted Mr. Solar an option to purchase 20,000 shares of our common stock at an exercise price of $5.00 per share, which vested completely on January 27, 2006.

• In April 2005, we granted Mr. Watt an option to purchase 20,000 shares of our common stock at an exercise price of $5.00 per share, which vested completely on January 27, 2006.

We have granted the following options to our executive officers:

• In September 2004, we granted Mr. Tekulve, our chief financial officer, an option to purchase 110,000 shares of our common stock at an exercise price of $4.00 per share, as to which one-third of the shares vested on the first anniversary of the grant date, and one-third of the remaining shares shall vest on each of the second and third anniversaries of the grant date.

• In June 2005, we granted Mr. Tekulve an option to purchase 60,000 shares of our common stock at an exercise price of $5.00 per share, as to which one-third of the shares shall vest on each of the first, second and third anniversaries of the grant date. Mr. Tekulve accepted these options in lieu of a cash bonus payment owed to him.

• In December 2005, we granted Mr. Tekulve an option to purchase 50,000 shares of our common stock at an exercise price of $5.00 per share, as to which one-third of the shares shall vest on each of the first, second and third anniversaries of the grant date.

All of the options granted to Mr. Tekulve described above will become fully vested and immediately exercisable upon completion of this offering.

Registration Rights

We have provided registration rights to holders of our preferred stock and certain holders of warrants to purchase shares of our preferred stock and common stock that provide for certain rights relating to registration of their shares of common stock issuable upon conversion of their preferred stock or exercise of their warrants. These rights will continue following the completion of this offering, and all of these rights will terminate three years following the completion of this offering, or for any particular holder with registration rights, at such earlier time following this offering when all securities held by that stockholder entitled to registration rights may be sold pursuant to Rule 144 of the Securities Act in any three-month period. Holders of our preferred stock and warrants to purchase shares of our preferred stock and common stock, including the directors and 5% stockholders listed in the table under “Principal Stockholders,” are entitled to these registration rights. The purchasers of the XACP notes have all waived their registration rights in connection with this offering. See “Description of Capital Stock—Registration Rights” for additional information.

In addition, BWCA I, LLC has certain registration rights set forth in its warrants to purchase shares of our common stock. Under the terms of these warrants, if we propose to register any of our securities under the Securities Act, BWCA I, LLC is entitled to notice of such registration and is entitled to include the shares issuable upon exercise of the warrants in our registration. BWCA I, LLC has waived these registration rights in connection with this offering.

Employment Agreements

We have entered into employment agreements with Peter L. Jensen, our President and Chief Executive Officer, and Thomas C. Tekulve, our Chief Financial Officer. See “Management—Employment Agreements” for further information.

Indemnification Agreements and Directors’ and Officers’ Liability Insurance

Our amended and restated certificate of incorporation and bylaws will provide that we will indemnify each of our directors and officers to the fullest extent permitted by the Delaware General Corporate Law. A description of these provisions is contained under the heading “Description of Capital Stock—Limitations of Liability and Indemnification Matters.” In addition, in connection with this offering, we intend to enter into indemnification agreements with each of our executive officers and directors. The indemnification agreements generally will require us to indemnify these individuals to the fullest extent permitted by Delaware law. Furthermore, we have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances.

Legal Services

We paid legal fees in the amount of approximately $97,000, $66,000 and $154,000 in the years ended December 31, 2003, 2004 and 2005, respectively, to Alhadeff & Solar LLP, a law firm whose partner, Keith Solar, is one of our directors.

Investment Advisory Services

We paid commissions and related expenses to Paramount BioCapital, Inc. (formerly Paramount Capital, Inc.), an investment banking firm of which one of our directors, Mr. Katzmann, is a managing director, and to SCCOT Financial Group, Inc., an investment advisory firm of which one of our directors, Mr. Watt, is a principal, for services rendered in connection with our private placement offerings of Series A preferred stock and Series B preferred stock and the consummation of the BWCA loan. Payments to Paramount BioCapital, Inc. during the years ended December 31, 2003 and 2004, respectively, were approximately $92,000 and $33,000. Payments to SCCOT Financial Group, Inc. during the years ended December 31, 2003 and 2004, respectively, were approximately $89,000 and $33,000. We made no payments to Paramount BioCapital, Inc. or SCCOT Financial Group, Inc. during the year ended December 31, 2005.

In addition, in connection with the services rendered by Paramount BioCapital, Inc. and SCCOT Financial Group, Inc., Mr. Katzmann was granted warrants to purchase 11,138 shares of our Series A preferred stock at an exercise price of $4.40 per share and 15,462 shares of our Series B preferred stock at an exercise price of $4.40 per share, and Mr. Watt was issued warrants to purchase 31,375 shares of our Series A preferred stock at an exercise price of $4.40 per share and 39,244 shares of our Series B preferred stock at an exercise price of $4.40 per share. The warrants granted to Mr. Katzmann and Mr. Watt had an aggregate fair value of approximately $21,000 and $54,000, respectively.

Dr. Rosenwald, one of our 5% stockholders listed in the above table, is also Chairman and Chief Executive Officer of Paramount BioCapital, Inc. Dr. Rosenwald was granted warrants to purchase 15,697 shares of our Series B preferred stock at an exercise price of $4.40 per share. The warrants granted to Dr. Rosenwald had an aggregate fair value of approximately $22,000.

Voting Trust Agreement

On September 20, 2005, Mr. Jensen and his wife entered into a voting trust agreement whereby Mr. Jensen acts as trustee for a voting trust that holds 1,320,000 shares for the benefit of his wife. The voting trust terminates on September 20, 2008, or earlier upon written agreement of the trustee and the beneficiary. During the term of the voting trust, the trustee will have sole and exclusive right to vote the shares in the voting trust. Until September 20, 2008, the beneficiary may not sell her beneficial interest in the shares unless the trustee otherwise consents. From September 20, 2008 to September 20, 2011, if the beneficiary desires to sell or pledge her beneficial interest in the shares, she must first give the trustee written notice of such desire, whereupon the trustee will have the right to purchase such shares at the price offered by the beneficiary. If the trustee declines to purchase such shares, then the beneficiary may sell the shares to a third party at a price no lower than that offered to the trustee.