Certain matters within this Quarterly Report on Form 10-Q include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included in this Form 10-Q, other than statements of historical fact, may constitute forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future" and "intends" and similar expressions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance to differ from those projected in the forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those items discussed in the "Risk Factors" section or other sections in the Company's Form 424(b)(4) prospectus filed April 24, 2008 with the Securities and Exchange Commission, as well as in Item IA of Part II of this Quarterly Report. All forward-looking statements are expressly qualified in their entirety by such risk factors. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

GENERAL

American Water Works Company, Inc. (herein referred to as "American Water" or the "Company") is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served. Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial and industrial customers. The businesses that provide these services are generally subject to economic regulation by state regulatory agencies in the states in which they operate. We report these results in our Regulated Businesses segment. We also provide services that are not subject to regulation by the state commissions. We report these results in our Non-regulated Businesses segment. For further description of our businesses see the "Business" section found in our Form 424(b)(4) prospectus filed on April 24, 2008 with the Securities and Exchange Commission.

You should read the following discussion in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Prospectus filed with the SEC on April 24, 2008, with the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 424(b)(4) prospectus filed with the Securities and Exchange Commission on April 24, 2008.

OVERVIEW

Financial Results American Water's net income was $45.5 million for the three months ended June 30, 2008 as compared to $49.2 million for the three months ended June 30, 2007. Income from continuing operations was $45.5 million for the three months ended June 30, 2008, compared to $50.0 million for the three months ended June 30, 2007. Diluted earnings per average common share were $0.28 for the three months ended June 30, 2008 as compared to $0.31 for the three months ended June 30, 2007.

American Water's net loss, which includes an impairment charge, net of tax of $738.5 million, was $687.0 million, for the six months ended June 30, 2008 as compared to net income of $51.9 million for the six months ended June 30, 2007. Loss from continuing operations was $687.0 million for the six months ended June 30, 2008, compared to income from continuing operations of $52.4 million for the six months ended June 30, 2007. Diluted earnings (loss) per average common share were ($4.29) for the six months ended June 30, 2008 as compared to $0.32 for the six months ended June 30, 2007.

Revenues for the three months ended June 30, 2008 increased by $30.6 million compared to the same period in the prior year primarily due to increased revenues in our Regulated Businesses of $17.6 million which is largely attributable to rate increases and revenues in our Non-regulated Businesses which increased by $11.6 million due to increased Contract Operations Group and Homeowner Services Group revenues, partially offset by decreased revenues in our Applied Water Group. Offsetting the increased revenues were $39.5 million higher operating expenses for the three months ended June 30, 2008. The increase in operating expenses primarily resulted from increased operating expenses in our Regulated Businesses of $23.7 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. This increase was

mainly driven by higher employee related costs of $9.5 million due to $3.3 million of wages related to job reclassification of certain hourly employees for services performed, stock based compensation expense of $2.1 million primarily attributable to the issuance of awards granted in connection with the IPO, an increase in the number of employees and wage rate increases and higher pension expense in 2008. In addition, the Regulated Businesses' maintenance costs increased by $6.3 million primarily due to higher removal costs, increased tank painting expenses as well as higher costs of $0.9 million associated with a project in our Illinois subsidiary to maintain valves. Operating expenses in our Non-regulated Businesses also increased by $16.0 million for the three months ended June 30, 2008 compared to three months ended June 30, 2007 as a result of higher operating and maintenance expenses of $10.6 million which corresponds with their increased revenues as well as a gain on sale of assets of $6.3 million recognized in 2007.

Other items affecting income from continuing operations for the three months ended June 30, 2008 as compared to the same period in the prior year include increased allowance for funds used during construction ("AFUDC") of $3.2 million attributable to the increase in the construction work in progress primarily in New Jersey and Missouri and lower income tax expense of $2.5 million.

Revenues for the six months ended June 30, 2008 increased by $68.9 million compared to the same period in the prior year primarily due to increased revenues in our Regulated Businesses of $47.9 million which is largely attributable to rate increases and revenues in our Non-regulated Businesses increased by $19.4 million due to increased Contract Operations and Homeowner Services Group revenues, partially offset by decreased revenues in our Applied Water Group. Offsetting the increased revenues were $821.4 million higher operating expenses for the six months ended June 30, 2008. These expenses primarily resulted from the impairment charge of $750.0 million which is discussed below, and increased expenses in our Regulated Businesses of $50.8 million in the six months ended June 30, 2008 compared to six months ended June 30, 2007. This increase was mainly driven by higher employee related costs of $25.1 million due to $3.3 million of wages related to job reclassification of certain hourly employees for services performed, stock based compensation expense of $2.3 million primarily attributable to the issuance of awards granted in connection with the IPO, an increase in the number of employees and wage rate increases in 2008 and higher pension expense in 2008. In addition, the Regulated Businesses' maintenance costs increased by $10.8 million primarily due to higher removal costs, increased expenses of $3.6 million associated with a project in Illinois to maintain valves as well as increased tank painting expenses. Operating expenses in our Non-regulated Businesses also increased by $22.7 million for the six months ended June 30, 2008 compared to six months ended June 30, 2007 as a result of higher operating and maintenance expenses of $18.7 million which corresponds with their increased revenues as well as a gain on sale of assets of $6.1 million recognized in the six months ended June 30, 2007.

Other items affecting income from continuing operations for the six months ended June 30, 2008 as compared to the same period in the prior year include lower interest expense of $2.9 million, as a result of the repayment of outstanding debt, increased AFUDC of $4.3 million attributable to the increase in the construction work in progress primarily in New Jersey and Missouri and lower income tax expense of $8.3 million.

Regulatory Developments During the three months ended June 30, 2008, we received authorizations for additional annualized revenues from general rate cases in California and Arizona amounting to $19.2 million. California's rates were retroactive to January 1, 2008, while Arizona's rates were effective in the second quarter of 2008. In the first six months of 2008 we received authorizations for additional annualized revenues from general rate cases of $47.2 million. As of June 30, 2008, we were awaiting final orders for three general cases that were filed in 2007, requesting $39.6 million in total additional annual revenues. In July 2008, the Illinois rate case filed in 2007 for $32. 8 million was approved and received authorization to increase rates which will provide additional annualized revenues of $24.9 million. In the first six months of 2008, we filed general rate cases in ten additional states that would provide $271.0 million of additional revenues, if approved as filed. Of the rate cases filed in 2008, one state's rates were effective in 2008 with an annualized increase of $0.2 million and is included in the $47.2 million of annualized revenue outlined above. The remaining amount of $270.8 million remains under consideration by state public utility commissions at this time. There is no assurance that the filed amount, or any portion thereof, of any requested increases will be granted.

Financing Activities During the six months ended June 30, 2008, we met our capital resource requirements with internally generated cash as well as funds from external sources primarily through commercial paper and the issuance of $200.0 million of private placement debt. In addition, as a result of the impairment charge, RWE made a capital contribution in the second quarter of 2008 of $245.0 million. The cash was used to reduce short-term borrowings.

Initial Public Offering Our common stock began trading on the New York Stock Exchange on April 23, 2008. On April 28, 2008, the Company completed its initial public offering ("IPO"). RWE Aqua Holdings GmbH, the Company's selling stockholder, sold 58.0 million shares of the Company's common stock at a price of $21.50 per share. The selling stockholder granted the underwriters a 30 day option to purchase up to an additional 8.7 million shares of the Company's

stock at a price of $21.50. On May 27, 2008, the Company announced the underwriters' partial exercise of their option to purchase 5.2 million shares to cover over allotments. The Company did not receive any proceeds from the sale of shares. Prior to the IPO, the Company was a wholly-owned subsidiary of RWE. After the IPO, and the exercise of the underwriters' over-allotment option, RWE owns approximately 60% of the Company's common shares.

On April 22, 2008, RWE contributed approximately 89.9 thousand shares of the Company's common stock to the Company and the Company granted approximately 89.9 thousand restricted stock awards, 269.3 thousand restricted stock units and 2.1 million stock options. The awards were issued to the Company's employees and certain non-employee directors under our 2007 Omnibus Equity Compensation Plan (the "2007 Plan"). The total aggregate number of shares of common stock that may be issued under the 2007 Plan is 6.0 million. The restricted stock units and the stock options were granted in two grants with "Grant 1" vesting on January 1, 2010 and "Grant 2" vesting on January 1, 2011.

Effective the first quarter of 2008, the Company's Board of Directors' authorized 50.0 million shares of par value $0.01 per share preferred stock. As of June 30, 2008 there are no shares outstanding.

Impairment Charge As previously disclosed in our free writing and final prospectuses, filed April 22, 2008 and April 24, 2008, respectively, the Company determined that it was reasonably likely based in large part on an initial public offering price of our common stock of $21.50, that the current carrying value of our goodwill which the Company recorded as a result of the 2003 acquisition of American Water by RWE and acquisition of E'Town Corporation in 2001, was impaired. At the time the Company's initial public offering price of $21.50 was established, we were unable to determine if there was any goodwill impairment or to provide a reliable estimate of the amount of any goodwill impairment, if any.

In light of the initial public offering price and trading levels in our stock since the date of IPO, we performed an interim impairment test and on May 9, 2008, concluded that the current carrying value of our goodwill was impaired as a result of the current market price at that time and trading levels of our common stock. Based on that assessment, we recorded an impairment charge to goodwill related to our Regulated Businesses of $750.0 million in our financial statements as of and for the fiscal quarter ended March 31, 2008. The impairment charge was primarily due to the market price of our common stock (both the initial public offering price and the price during subsequent trading) being less than what was anticipated during our 2007 annual test. Also contributing to the impairment was a decline in the fair value of our debt (due to increased market interest rates).

In developing our estimated fair value of the Company's reporting units, significant judgment was required. We determined the estimated fair value of the reporting units utilizing a methodology consistent with its 2007 annual test. Whenever possible, market information including the initial public offering price of the Company's common stock and subsequent trading price was used to update our modeling assumptions. Our methodology utilized a combination of the trading price of the Company's common stock, an estimated control premium, trading price market multiples of peer companies (regulated water utilities) and the Company's discounted cash flow analysis based on our five-year business plan were used, each of which has differing weights. The majority of the weighting is applied to the traded price as this represents the market objective evidence of fair value with minimal weight applied to the discounted cash flow analysis.

We may be required to recognize additional impairments in the future, depending on, among other factors, a decline over a period of time in valuation multiples of comparable water utilities, a decline over a period of time of the Company's stock price or the lack of appreciation of the Company's stock price to a level consistent with peer companies or increases in equity value. A decline in the forecasted results in our business plan, such as changes in rate case results or capital investment budgets or changes in our interest rates, may also result in an incremental impairment charge.

As a result of the impairment and in accordance with certain regulatory commitments, RWE transferred $245.0 million to us on May 13, 2008. RWE is not obligated to make any additional capital contributions.

Other Matters In May 2008, our California subsidiary reached an agreement with the San Lorenzo Valley Water District to sell ownership of our Felton operating assets for consideration of $13.4 million. The district's payment will consist of $10.5 million in cash and the acquirer's assumption of $2.9 million in debt, pending regulatory approval. The Felton water system serves approximately 1,330 customers.

On July 28, 2008, our Board of Directors declared a quarterly cash dividend payment of $0.20 per share payable on September 2, 2008 to all shareholders of record as of August 15, 2008.

Results of Operations

Three Months Ended June 30, 2008 Compared To Three Months Ended June 30, 2007




                                                   For the three months ended            Favorable
                                                            June 30,                   (Unfavorable)
(Dollars in thousands)                                2008               2007             Change
Operating revenues                               $      589,369       $  558,733      $        30,636

Operating expenses
Operation and maintenance                               330,575          299,385              (31,190 )
Depreciation and amortization                            67,307           68,137                  830
General taxes                                            49,629           45,940               (3,689 )
Gain on sale of assets                                     (800 )         (6,219 )             (5,419 )
Impairment charge                                            -                -                    -

Total operating expenses, net                           446,711          407,243              (39,468 )

Operating income (loss)                                 142,658          151,490               (8,832 )

Other income (deductions)
Interest, net                                           (70,066 )        (70,763 )                697
Allowance for other funds used during
construction                                              3,387            1,511                1,876
Allowance for borrowed funds used during
construction                                              1,725              419                1,306
Amortization of debt expense                             (1,441 )         (1,178 )               (263 )
Preferred dividends of subsidiaries                         (56 )            (56 )                 -
Other, net                                                 (543 )          1,210               (1,753 )

Total other income (deductions)                         (66,994 )        (68,857 )              1,863

Income (loss) from continuing operations
before income taxes                                      75,664           82,633               (6,969 )
Provision for income taxes                               30,166           32,648                2,482

Income (loss) from continuing operations                 45,498           49,985               (4,487 )
Income (loss) from discontinued operations,
net of tax                                                   -              (807 )                807

Net income (loss)                                $       45,498       $   49,178      $        (3,680 )

The following table summarizes certain financial information for our Regulated and Non-regulated Businesses for the periods indicated (without giving effect to inter-segment eliminations):

                                      For the three months ended June 30,
                                       2008                         2007
                                              Non-                          Non-
                             Regulated     regulated      Regulated      regulated
                            Businesses     Businesses     Businesses     Businesses
                                                 (In thousands)
       Operating revenues   $   526,248   $     67,038   $    508,634   $     55,480
       Adjusted EBIT1       $   134,213   $      4,681   $    140,938   $     10,330

(1) Adjusted EBIT is defined as earnings before interest and income taxes from continuing operations. Management evaluates the performance of its segments and allocates resources based on several factors, of which the primary measure is Adjusted EBIT. Adjusted EBIT does not represent cash flow for the periods presented and should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a source of liquidity. Adjusted EBIT as defined by the Company may not be comparable with Adjusted EBIT as defined by other companies.

Operating revenues Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial and industrial customers. As such, our results of operations are significantly impacted by rates authorized by the state regulatory commissions in the states in which we operate. The table below details the annualized revenues resulting from rate authorizations, including infrastructure charges, which were granted and became effective in the second quarter of 2008.

                                               Annualized Rate
                                              Increases Granted
                                                (In millions)
                   State
                   General rate case:
                   California                $              13.0
                   Arizona                                   6.2
                   Infrastructure Charges:
                   Pennsylvania                              4.6
                   Indiana                                   3.9
                   Missouri                                  2.7

                   Total                     $              30.4

Operating revenues increased by $30.6 million, or 5.5% for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Regulated Businesses' revenues increased by $17.6 million, or 3.5% for the three months ended June 30, 2008 compared to the same period in the prior year. The Non-regulated Businesses' revenues for the three months ended June 30, 2008 increased by $11.6 million, or 20.8% compared to the three months ended June 30, 2007.

The increase in revenues from the Regulated Businesses for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 was primarily due to rate increases obtained through general rate cases in Pennsylvania, Missouri and Indiana (which were granted and became effective in 2007) as well as other states totaling approximately $25.0 million and a $1.4 million retroactive rate adjustment in California. These increases were offset by a $12.6 million decrease in revenues related to reduced customer consumption, mainly in our Midwestern and Mid-Atlantic state subsidiaries for the three months ended June 30, 2008 compared to the same period in the prior year.

The following table sets forth the percentage of Regulated Businesses' revenues and water sales volume by customer class:

                                       For the three months ended June 30,
                                 Operating Revenues          Water Sales Volume
         Customer Class          2008          2007           2008          2007
         Water service:
         Residential               57.5 %        58.0 %          53.1 %      52.8 %
         Commercial                19.5 %        19.1 %          22.0 %      21.8 %
         Industrial                 5.0 %         4.7 %          10.7 %      10.7 %
         Public and other          12.0 %        12.2 %          14.2 %      14.7 %
         Other water revenues       2.3 %         2.3 %            -           -

         Total water revenues      96.3 %        96.3 %         100.0 %     100.0 %

         Wastewater service         3.7 %         3.7 %

                                  100.0 %       100.0 %

The following discussion related to water services indicates the increase or decrease in the Regulated Businesses' revenues and associated water sales volumes in gallons by customer class.

Water Services-Water service operating revenues from residential customers for the three months ended June 30, 2008 totaled $302.6 million, a $7.9 million increase, or 2.7%, over the same period of 2007, mainly due to rate increases offset by a decrease in sales volume. The volume of water sold to residential customers decreased by 2.1% for the three months ended June 30, 2008 to 51.6 billion gallons, from 52.7 billion gallons for the same period in 2007, largely as a result of wetter weather conditions in California and our Midwestern states.

Water service operating revenues from commercial water customers for the three months ended June 30, 2008 increased by $5.3 million, or 5.4%, to $102.7 million mainly due to rate increases offset by decreases in sales volume compared to the same period in 2007. The volume of water sold to commercial customers decreased by 1.4% for the three months ended June 30, 2008, to 21.4 billion gallons, from 21.7 billion gallons for the three months ended June 30, 2007.

Water service operating revenues from industrial customers totaled $26.5 million for the three months ended June 30, 2008, an increase of $2.7 million, or 11.3%, over those recorded for the same period of 2007 mainly due to rate increases offset by decreased sales volume. The volume of water sold to industrial customers totaled 10.4 billion gallons for the three months ended June 30, 2008, a decrease of 2.8% from the 10.7 billion gallons for the three months ended June 30, 2007.

Water service operating revenues from public and other customers increased $0.9 million, or 1.5%, for the three months ended June 30, 2008 to $62.9 million from $62.0 million for the three months ended June 30, 2007 mainly due to rate increases. Revenues from municipal governments for fire protection services and customers requiring special private fire service facilities totaled $26.2 million for the three months ended June 30, 2008, an increase of $1.6 million over the same period of 2007. Revenues generated by sales to governmental entities and resale customers for the three months ended June 30, 2008 totaled $36.7 million, a decrease of $0.6 million from the three months ended June 30, 2007.

Wastewater services-Our subsidiaries provide wastewater services in 11 states. Revenues from these services increased by $0.8 million, or 4.2%, to $19.7 million for the three months ended June 30, 2008, from $18.9 million for the same period of 2007. The increase was attributable to increases in rates charged to customers principally in Arizona, Hawaii, and New Jersey.

Non-regulated Businesses' operating revenues increased by $11.6 million, or 20.8% for the three months ended June 30, 2008 compared to the same period in 2007. The net increase was primarily attributable to higher revenues of $12.1 million in our Contract Operations Group and $1.9 million in our Homeowner Services Group, partially offset by decreased revenues of $2.5 million in our Applied Water Group. The increase in Contract Operations Group revenues was primarily due to incremental revenues associated with design and build contracts, as well as increased military project revenues. The increase from our Homeowner Service Group represented expansion into new geographic markets. . . .