This report reviews the current status of payments for watershed services in developing countries. It highlights the main trends in the evolution of these schemes, synthesising the available evidence on their environmental and social impacts, and drawing lessons for the design of future initiatives. The interest in payments for watershed services (PWS) as a tool for watershed management in developing countries is growing, despite major setbacks. This review identified 50 ongoing schemes, 8 advanced proposals and 37 preliminary proposals for PWS. A previous review published by the International Institute for Environment and Development (IIED) on markets and payments for environmental services (Silver Bullet or Fools' Gold? (Landell-Mills and Porras 2002)) identified just 41 proposed and ongoing PWS schemes in developing countries, which suggests a considerable growth in interest in this approach.