The following discussion should be read in conjunction with the accompanying unaudited financial statements and related notes thereto and the audited financial statements and the notes thereto contained in our 2007 Annual Report on Form 10-K.

Regulatory Matters and Inflation

During the nine months ended September 30, 2008, there were no material changes under this subheading to any items previously disclosed by the Company in its Annual Report on Form 10-K for the period ended December 31, 2007.

In April 2006, the Connecticut Department of Utility Control (DPUC) approved the Company's application to merge Unionville Water Company (Unionville) and Crystal Water Company (Crystal) into The Connecticut Water Company (Connecticut Water). The Company completed these mergers on May 31, 2006. In July 2006, the Company filed a rate application with the DPUC for the newly merged Connecticut Water requesting an increase in rates of approximately $14.6 million, or 30%. On January 16, 2007, the DPUC issued its final decision and approved a Settlement Agreement; negotiated with the Office of Consumer Counsel and the DPUC's Prosecutorial Staff; that allowed Connecticut Water an increase of revenues of approximately $10,940,000, or 22.3%. The Settlement Agreement allowed Connecticut Water to defer a portion of the approved rate increase. The Company recognized that increase through recording deferred revenues and a corresponding regulatory asset, as required by the decision. From January 1, 2007 through March 31, 2008, the Company has recorded approximately $4.8 million in deferred revenues. On January 31, 2008, the Company filed to reopen the case, a procedure required by the Settlement Agreement, to implement the second phase. In addition to the approval for the inclusion in current rates of the previously approved deferred revenues of $4.8 million, the filing included requested recovery of the costs associated with $15.5 million of additional capital investments made in 2007. This portion of the second phase of the increase ("re-opener") was also called for in the Settlement Agreement.

The total increase associated with the re-opener was a request of 12.6%, of which approximately 8.2% was for deferred revenues and 4.4% for the investment in additional capital in 2007. Additionally, Connecticut Water agreed not to apply for a general rate increase that would become effective prior to January 1, 2010.

The final decision on the re-opener was issued on March 28, 2008. The decision allowed an increase of water rates charged to customers of 11.95% or $6.7 million, effective April 1, 2008. The Company began to see the effects of this increase in the second quarter of 2008.

Acquisition of the assets of Eastern Connecticut Regional Water Company and Birmingham H20 Services
On January 16, 2008, the Company, through two of its wholly owned subsidiaries, Connecticut Water and New England Water Utility Services, Inc. (NEWUS), completed the acquisition of the regulated water utility assets of Eastern Connecticut Regional Water Company, Inc. (Eastern) and the unregulated assets of Birmingham H2O Services, Inc. (H20) for aggregate cash consideration of $3.5 million. The acquisition has added approximately 2,300 customers in 14 Connecticut towns to the Company.

Pending Acquisition of Ellington Acres Company On July 23, 2008, the Company announced that it had reached a definitive agreement with Ellington Acres Company (EAC) to purchase all of EAC's outstanding stock for approximately $1.5 million. EAC is a regulated water company serving approximately 750 customers in Ellington, Connecticut. EAC is situated between two systems in the Company's Northern Region that the Company had planned to interconnect. With this acquisition, the Company will be able to interconnect the two current systems with EAC, saving the ratepayers of Connecticut Water and EAC significant capital expenditures. The acquisition of EAC is dependent upon regulatory approval from the DPUC, which began its review and approval process of the acquisition in the third quarter. A decision from the DPUC is expected late in the fourth quarter of 2008 or early in the first quarter of 2009.

Water Infrastructure and Conservation Adjustment Filing On October 10, 2008, the Company filed its Infrastructure Assessment Report (IAR) under the Water Infrastructure and Conservation Adjustment (WICA) Act which was passed into law in 2007. WICA allows the Company to add a surcharge to customers' bills, subject to DPUC approval, to reflect the replacement of certain types of aging utility plant without a full rate proceeding. The purpose of the IAR is to clearly define the criteria for determining the priority of future replacement projects. The first public hearing on the Company's IAR is scheduled for January 16, 2009. The Company expects a ruling from the DPUC on its IAR in the first quarter of 2009, after which the Company would be eligible to file for its first surcharge under WICA.

Critical Accounting Policies and Estimates

The Company maintains its accounting records in accordance with accounting principles generally accepted in the United States of America and as directed by the DPUC to which Connecticut Water, the Company's regulated water utility subsidiary, is subject. Significant accounting policies employed by the Company, including the use of estimates, were presented in the Notes to Consolidated Financial Statements of the Company's Annual Report on Form 10-K.

Critical accounting policies are those that are the most important to the presentation of the Company's financial condition and results of operations. The application of such accounting policies requires management's most difficult, subjective, and complex judgments and involves uncertainties and assumptions. The Company's most critical accounting policies pertain to public utility regulation related to Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulations" (SFAS 71), revenue recognition, and pension plan accounting. Each of these accounting policies and the application of critical accounting policies and estimates was discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. There were no significant changes in the application of critical accounting policies or estimates during the first nine months of 2008. Please see Note 4 of the financial statements for newly adopted and recently announced accounting standards.

Management must use informed judgments and best estimates to properly apply these critical accounting policies. Because of the uncertainty in these estimates, actual results could differ from estimates used in applying the critical accounting policies. The Company is not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect its financial condition or results of operations.

Outlook

The following modifies and updates the "Outlook" section of the Company's 2007 Annual Report on Form 10-K filed on March 17, 2008 and first and second quarterly filings on Form 10-Q filed on May 12, and August 8, 2008, respectively.

The Company's earnings and profitability are primarily dependent upon the sale and distribution of water, the amount of which is dependent on seasonal weather fluctuations, particularly during the summer months when water demand will vary with rainfall and temperature levels. During the 2008 summer season, Connecticut experienced abnormally high rainfalls, which significantly decreased our water sales to our residential customers. The Company's earnings and profitability in future years will also depend upon a number of other factors, such as the ability to maintain our operating costs at or near historical levels, customer growth in the Company's core regulated water utility business, additional growth in revenues attributable to non-water sales operations, and the timing and adequacy of rate relief when requested, from time to time, by our regulated water company.

The Company believes that these factors and those described in detail in "Commitments and Contingencies" in Item 7 of its Annual Report on Form 10-K may have significant impact, either alone or in the aggregate, on the Company's earnings and profitability in fiscal years 2008 and beyond. Please also review carefully the risks and uncertainties described below under the heading "Forward-Looking Information."

Based on the Company's current projections, the Company believes that its Net Income for the year 2008 will increase from the levels reported for 2007, primarily as a result of the second phase of Connecticut Water's rate increase that was approved by the DPUC effective April 1, 2008. During 2008 and subsequent years, the ability of the Company to maintain and increase its Net Income will principally depend upon the effect on the Company of the factors described above in this "Outlook" section, those factors described in the section entitled "Commitments and Contingencies" in Item 7 of the Company's Annual Report on Form 10-K and the risks and uncertainties described in "Forward-Looking Information" sections below.

Liquidity and Capital Resources

The Company is not aware of demands, events, or uncertainties that will result in a decrease of liquidity or a material change in the mix or relative cost of its capital resources.

The Company has three variable rate bonds with principle values totaling $22.05 million. They are secured by irrevocable direct pay letters of credit issued by a financial institution. These bonds are currently remarketed on a weekly basis. On October 7, 2008, the Company was notified that there was a combined remarketing failure of $2.6 million on two of these bonds. We believe the increased volatility of the credit markets during the last several months was the primary cause.

As a result of the remarketing failure, the remarketing agent drew upon the letters of credit issued by the financial institution in the amount of $2.6 million. These loan amounts are subject to interest rates at 5.09%, which is 100 basis points over the one month LIBOR rate. In addition, the letters of credit are reduced by the amounts of these loans, until such time as the bonds can be successfully remarketed. As of the filing of this Form 10-Q, these bonds have yet to be remarketed and the bonds remain held by the financial institution that issued the letter of credit.

As of September 30, 2008, the Company had approximately $3.4 million in restricted cash related to the issuance by Connecticut Water of its 2007 A Series Revenue Bonds, due 2037. This amount represents cash that has not yet been spent on approved projects as part of the issuance of the debt in December 2007. The Company expects to spend all of the restricted cash on approved projects by the end of 2008.

Interim Bank Loans Payable at September 30, 2008 were approximately $15.4 million. The Company currently maintains an aggregate of $21 million in lines of credit with three banks. During 2007, the Company increased these lines because of expected increased construction spending and recently completed acquisitions. The largest line was renewed and increased in the fourth quarter of 2007 and does not have an expiration date. The two other lines of credit, of which one renewed in the second quarter of 2008, the other in the third quarter of 2007, have terms of 12 and 24 months, respectively. Interest expense charged on interim bank loans will fluctuate based on market interest rates. The Company is currently defining its expected 2009 capital expenditures and additional short term access to capital may be needed. The Company is currently discussing these needs with the banks providing the existing lines of credit. The Company also anticipates a permanent long term bond financing in 2009 or 2010.

Standard and Poor's recently affirmed their 'A' corporate credit rating on the Company with a stable outlook. The affirmation of the corporate credit rating follows their annual review of the Company and incorporates their expectation of adequate and timely rate relief and maintenance of our current financial risk profile. The stable outlook reflects improving regulation and timely rate relief in Connecticut.

The Company offers a dividend reinvestment plan (DRIP) to all registered shareholders, whereby shareholders can opt to have dividends directly reinvested into additional shares of the Company.

During the nine months ended September 30, 2008 and 2007, shareholders reinvested $728,000 and $911,000, respectively, as part of the DRIP.

From 1999 through 2003, the Company issued stock options to certain employees of the Company. No stock options have been issued by the Company since 2003. During the nine months ended September 30, 2008, 11,775 options were exercised resulting in approximately $218,000 in proceeds to the Company. For the same period in 2007, the Company received approximately $729,000 in proceeds from exercised stock options.

Results of Operations

Three Months Ended September 30
Net Income for the three months ended September 30, 2008 decreased from that of
the prior year by $1,064,000, which decreased earnings per basic and diluted
average common share by $0.13, to $0.34.

This decrease in Net Income is broken down by business segment as follows:

                                                      September        September
                 Business Segment                      30, 2008         30, 2007        Increase/(Decrease)
Water Activities                                     $  2,699,000     $  3,730,000     $          (1,031,000 )
Real Estate Transactions                                       --           20,000                   (20,000 )
Services and Rentals                                      136,000          149,000                   (13,000 )
Total                                                $  2,835,000     $  3,899,000     $          (1,064,000 )

The decrease in the Water Activity segment's Net Income was primarily due to the net effects of the variances listed below:

- An increase of approximately $89,000 in Operating Revenue primarily due to increased fire protection charges and revenues from its Eastern acquisition in January of 2008, which includes payments received from the South Central Regional Water Authority. In addition, new rates approved by the DPUC that became effective April 1, 2008 also added to the increase in the third quarter. Off-setting these increases was a significant decrease in residential revenues directly related to the unusually wet weather in the third quarter of 2008 versus the same period in 2007. In the Company's northern service area, which is its largest service area, at least a trace of rain was recorded on 43 days during the quarter, including 10 of 13 weekends, and rainfall totaled 23.95 inches. In the same period in 2007, 6.69 inches of rain were recorded, while normal rainfall is 11.8 inches. The additional rainfall led to a nearly 10 percent reduction in billed water consumption per customer for the third quarter of 2008 versus the same period in 2007.

- Operation and Maintenance expense increased by $1,064,000 primarily due to the following components:

                                                      September        September
                Expense Components                     30, 2008         30, 2007        Increase/(Decrease)
Labor                                                $  3,045,000     $  2,637,000     $             408,000
Water treatment (including chemical costs)                665,000          535,000                   130,000
Utility costs                                             945,000          816,000                   129,000
Outside Services                                          420,000          323,000                    97,000
Vehicles                                                  399,000          318,000                    81,000
Maintenance                                               448,000          370,000                    78,000
Employee benefit costs                                  1,209,000        1,146,000                    63,000
Customer                                                  120,000          146,000                   (26,000 )
Purchased water                                           390,000          494,000                  (104,000 )
Other                                                     887,000          679,000                   208,000
Total                                                $  8,528,000     $  7,464,000     $           1,064,000

- Labor costs increased in 2008 by approximately $408,000 due to an increase in employee levels due to the Eastern acquisition and regular wage increases effective as of April 1, 2008. Water treatment costs increased primarily due to an increase in the cost of key chemicals. Utility costs increased over the prior year, primarily due to an upgrade to our communication networks and higher costs for power and partially due to the acquisition of Eastern. Outside services have increased primarily due to audit, human resources and information technology consulting fees, and higher legal costs. Employee benefits costs increased due to higher medical and post-retirement medical costs associated with the Company's health and welfare plan, partially off-set by pension and other benefit cost decreases. The decrease in purchased water costs stemmed from a negotiated reduction in the Company's purchased water rate from a neighboring water utility.

- Despite an increase in Utility Plant, the Company saw a slight decrease in its Depreciation expense due to the amortization of the acquisition adjustment resulting from the Eastern acquisition.

                CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

Nine Months Ended September 30
Net Income for the nine months ended September 30, 2008 increased from that of
the prior year by $255,000, which increased earnings per basic and diluted
average common share by $0.02, to $0.89.

This increase in Net Income is broken down by business segment as follows:

                                                      September        September
                 Business Segment                      30, 2008         30, 2007        Increase/(Decrease)
Water Activities                                     $  6,961,000     $  6,703,000     $             258,000
Real Estate Transactions                                       --           61,000                   (61,000 )
Services and Rentals                                      530,000          472,000                    58,000
Total                                                $  7,491,000     $  7,236,000     $             255,000

The increase in the Water Activity segment's Net Income was primarily due to the net effects of variances listed below:

- An increase of approximately $2,070,000 in Operating Revenue primarily due to increases in fire protection charges, unmetered revenues due to the acquisition of Eastern in January 2008 and payments received from the South Central Regional Water Authority. Additionally, the Company saw modest gains in residential revenues primarily due to new rates approved by the DPUC that became effective on April 1, 2008, partially off-set by weather-related decreases in per-customer consumption. In addition to the fire protection and residential revenue increases, there were minor increases from commercial, industrial and public authority customers, due primarily to the April 2008 rate increase.

- Operation and Maintenance expense increased by $1,458,000 primarily due to the following components:

                                                     September 30,     September 30,
                Expense Components                       2008              2007           Increase/(Decrease)
Labor                                                $   8,858,000     $   8,033,000     $             825,000
Water treatment (including chemical costs)               1,520,000         1,319,000                   201,000
Outside services                                         1,072,000           900,000                   172,000
Utility costs                                            2,662,000         2,492,000                   170,000
Customer                                                   587,000           453,000                   134,000
Vehicles                                                 1,027,000           951,000                    76,000
Maintenance                                              1,195,000         1,152,000                    43,000
Employee benefit costs                                   3,562,000         3,549,000                    13,000
Purchased water                                            693,000         1,099,000                  (406,000 )
Other                                                    2,573,000         2,343,000                   230,000
Total                                                $  23,749,000     $  22,291,000     $           1,458,000

- Labor and employee benefit costs increased in 2008 by a combined $838,000 due to an increase in employee levels due to the Eastern acquisition, regular wage increases effective as of April 1, 2008 and higher medical costs associated with the Company's health and welfare plan. These increases in labor and employee benefit costs were partially off-set by reduced pension costs. Customer costs increased over the prior year primarily due to an increase in uncollectible accounts and communication with customers, including postage. Outside services have increased primarily due to increased audit fees, consultants related to information technology and human resources projects, and higher legal costs, partially off-set by decreased actuarial fees. The decrease in purchased water costs stemmed from a negotiated reduction in the Company's purchased water rate from a neighboring water utility.

- Despite an increase in Utility Plant, the Company saw a slight decrease in its Depreciation expense due to the amortization of the acquisition adjustment resulting from the Eastern acquisition.

- An increase in operating income tax expense of $220,000 primarily due to higher pretax income.

Commitments and Contingencies

There were no material changes under this subheading to any of the other items previously disclosed by the Company in its Annual Report on Form 10-K for the period ended December 31, 2007.

19 Perry Street Litigation
Connecticut Water's Unionville division has for many years operated a well field located at 19 Perry Street, Farmington, Connecticut, pursuant to a 99-year lease entered into in 1975 with the property owner. This well field provides approximately half of the daily water supply requirements to the customers of the Unionville division. In 2004, the original property owner ceased business operations. The property is now owned by 19 Perry Street, LLC, which obtained the property through a foreclosure proceeding. In June 2007, the new owner commenced a lawsuit in Hartford Superior Court (Housing Section), asserting that Connecticut Water is in unlawful possession of the property under several theories, including that the lease is invalid and that Connecticut Water has failed to pay rent when due. A trial before a judge was held in November 2007, and a decision was issued on April 30, 2008. In its decision, the Court ruled that the lease is valid. However, in deciding the parties' contentions regarding the proper form and amount of rental payments due, the Court ruled that Connecticut Water was in breach of its obligation to pay rent on the property and therefore entered an order of eviction.

On May 5, 2008, Connecticut Water filed a timely appeal of the decision in the Connecticut Appellate Court. This appeal stays the eviction order until the Appellate Court rules on Connecticut Water's claims that the trial court erred. At this time, the outcome of the appeal is uncertain. On August 5, 2008, Connecticut Water was served with a related lawsuit in which 19 Perry Street, LLC seeks the payment of back rent with respect to the property. The Company intends to maintain its use of the property to provide water to customers of its Unionville division while the appeal is pending. In addition, Connecticut Water will consider all other options with respect to its well field use of the property, including the outright purchase of the property or the exercise of Connecticut Water's right to take the property by initiating eminent domain proceedings under applicable law.

Forward-Looking Information

This report, including management's discussion and analysis, contains certain forward-looking statements regarding the Company's results of operations and financial position. These forward-looking statements are based on current information and expectations, and are subject to risks and uncertainties, which could cause the Company's actual results to differ materially from expected results.

Regulated water companies, including The Connecticut Water Company, are subject to various federal and state regulatory agencies concerning water quality and environmental standards. Generally, the water industry is materially dependent on the adequacy of approved rates to allow for a fair rate of return on the investment in utility plant. The ability to maintain our operating costs at the lowest possible level, while providing good quality water service, is beneficial to customers and stockholders. Profitability is also dependent on the timeliness of rate relief to be sought from, and granted by, the DPUC, when necessary, and numerous factors over which we have little or no control, such as the quantity of rainfall and temperature, customer demand and related conservation efforts, financing costs, energy rates, tax rates, and stock market trends which may affect the return earned on pension assets, compliance with environmental and water quality regulations and the outcome of litigation matters, including the Unionville division well field dispute. From time to time, the Company may acquire other regulated and/or unregulated water companies. Profitability on these acquisitions is often dependent on the successful integration of these companies, including the January 2008 acquisition of Eastern Connecticut Regional Water Company, Inc. and Birmingham H20 Services Inc. The profitability of our other revenue sources is subject to the amount of land we have available for sale and/or donation, the demand for the land, the continuation of the current state tax benefits relating to the donation of land for open space . . .