The following discussion of the Company's historical results of operations and financial condition should be read in conjunction with the Company's consolidated financial statements and related notes.

Overview

Middlesex Water Company has operated as a water utility in New Jersey since 1897, and in Delaware, through our wholly-owned subsidiary, Tidewater, since 1992. We are in the business of collecting, treating and distributing water for domestic, commercial, municipal, industrial and fire protection purposes. We also operate a New Jersey municipal water and wastewater system under contract and provide wastewater services in New Jersey and Delaware through our subsidiaries. We are regulated as to rates charged to customers for water and wastewater services, as to the quality of water service we provide and as to certain other matters in New Jersey and in Delaware. Only our USA, USA-PA and White Marsh subsidiaries are not regulated utilities.

In the design of water and wastewater systems that we ultimately intend to construct, own and operate, we invest capital in Preliminary Survey and Investigation (PS&I) activities. These costs are recorded as a deferred asset on the balance sheet in anticipation of recovery of and a return on, these costs through future rates charged to customers, as these investments are placed into service as utility plant. Our future capital expenditures are discussed in more detail in the Liquidity and Capital Resources Section below.

Our New Jersey water utility system (the Middlesex System) provides water services to approximately 59,700 retail customers, primarily in central New Jersey. The Middlesex System also provides water service under contract to municipalities in central New Jersey with a total population of approximately 303,000. In partnership with our subsidiary, USA-PA, we operate the water supply system and wastewater system for the City of Perth Amboy, New Jersey. Our other New Jersey subsidiaries, Pinelands Water and Pinelands Wastewater, provide water and wastewater services to residents in Southampton Township, New Jersey.

Our Delaware subsidiaries, Tidewater and Southern Shores, provide water services to approximately 35,500 retail customers in New Castle, Kent and Sussex Counties, Delaware. Our TESI subsidiary provides wastewater services to approximately 1,800 residential retail customers. Our other Delaware subsidiary, White Marsh, services an additional 7,200 customers in Kent and Sussex Counties through 68 operations and maintenance contracts.

The majority of our revenue is generated from retail and contract water services to customers in our service areas. We record water service revenue as such service is rendered and include estimates for amounts unbilled at the end of the period for services provided after the last billing cycle. Fixed service charges are billed in advance by our subsidiary, Tidewater, and are recognized in revenue as the service is provided.

We expect the growth of our regulated wastewater operations in Delaware will eventually become a more significant component of our operations.

In September 2008, we entered into an agreement to own and operate a water and wastewater facility system that is expected to serve 1,500 people in North Carolina. Planning is under way to gain approval from the North Carolina Public Service Commission to operate these systems as regulated public utilities, which are expected to be ready to serve customers during the third quarter of 2009.

On January 26, 2009 Tidewater filed an application with the PSC seeking permission to increase its base rates by 32.54%. Approximately 5.25% of the requested increase is already collected from customers through a separately PSC approved rate called a Distribution System Improvement Charge (DSIC). The request was made necessary by increased costs of operations, maintenance and taxes, as well as capital investment of approximately $26.7 million since its last rate filing in April of 2006. We cannot predict whether the PSC will ultimately approve, deny, or reduce the amount of the request. Concurrent with the rate filing, Tidewater also submitted a request for a 12.79% interim rate increase subject to refund as allowed under PSC regulations. The interim rate increase includes the 5.25% DSIC rate. If approved by the PSC, the interim rates of 12.79% will go into effect on March 27, 2009 and the DSIC rate will be set to zero.

Our ability to increase operating income and net income is based significantly on four factors: weather, adequate and timely rate relief, effective cost management, and customer growth. These factors are evident in the discussions below which compare our results of operations from prior years.

Operating Results by Segment

The Company has two operating segments, Regulated and Non-Regulated. Our Regulated segment contributed 89%, 90% and 89% of total revenues, and 90%, 94% and 94% of net income for the years ended December 31, 2008, 2007 and 2006, respectively. The discussion of the Company's results of operations is on a consolidated basis, and includes significant factors by subsidiary. The segments in the tables included below are comprised of the following companies:
Regulated- Middlesex, Tidewater, Pinelands, Southern Shores, and TESI; Non-Regulated- USA, USA-PA, and White Marsh.

Results of Operations in 2008 Compared to 2007

                                                           Years ended December 31,
                                                             (Millions of Dollars)
                                               2008                                        2007
                                                 Non-                                        Non-
                               Regulated       Regulated       Total       Regulated       Regulated       Total
Revenues                      $      81.1     $       9.9     $  91.0     $      77.1     $       9.0     $  86.1
Operations and maintenance           41.2             7.7        48.9            38.8             7.4        46.2
Depreciation                          7.8             0.1         7.9             7.4             0.1         7.5
Other taxes                          10.0             0.2        10.2             9.5             0.2         9.7
 Operating income                    22.1             1.9        24.0            21.4             1.3        22.7

Other income (expense)                0.9             0.4         1.3             1.5               -         1.5
Interest expense                      7.0             0.1         7.1             6.6               -         6.6
Income taxes                          5.0             1.0         6.0             5.2             0.6         5.8
 Net income                   $      11.0     $       1.2     $  12.2     $      11.1     $       0.7     $  11.8

Operating revenues for the year rose $4.9 million, or 5.7% over the same period in 2007. Revenues in our Middlesex system increased $4.2 million as a result of a 9.1% base rate increase implemented October 26, 2007. Middlesex revenues decreased $1.1 million due to lower consumption by our customers during 2008. Water sales improved $0.8 million in our Delaware water systems. We recorded additional revenue of $1.2 million as a result of an additional 12% base rate increase that was granted to Tidewater February 28, 2007, and Distribution System Improvement Charge (DSIC) rate increases of 1.62% and 2.94% that went into effect January 1, 2008 and July 1, 2008, respectively. DSIC is a PSC approved rate that allows water utilities to recover their investment in non-revenue producing capital improvements to the water system in between base rate increase requests. Fees charged for initial connection to our Delaware Water system were $0.4 million lower in 2008 as new residential and commercial development has slowed in our Delaware service territories. USA-PA's fees for managing the Perth Amboy water and wastewater systems were $0.5 million higher than the same period in 2007, due mostly to scheduled increases in the fixed fee component of the contract. Revenues from our regulated wastewater operations in Delaware increased $0.2 million due to customer growth. All other operations accounted for $0.3 million of additional revenues.

While we anticipate continued organic customer and consumption growth among our Delaware systems, such growth and increased consumption cannot be guaranteed. The impact of the national economic recession has been to reduce the level of activity in the new residential housing market in our Delaware service territories. In addition, our water systems are highly dependent on the effects of weather, which may adversely impact future consumption despite customer growth. Appreciable organic customer and consumption growth is less likely in our New Jersey systems due to the extent to which our service territory is developed. The Company expects its 2009 Tidewater operating revenues to reflect the benefit of the DSIC rate increase effective January 1, 2009 and interim rate increase expected to be go into effect in late March 2009. There can be no assurances that the PSC will accept, reject or amend the level of the interim rate increase request.

Operation and maintenance expenses increased $2.7 million, or 5.8%. Even though 2008 water production was lower than 2007 in our Middlesex and Tidewater systems, our expenses increased $0.3 million due to higher costs for water, electric power and chemicals. Labor and benefits costs increased $1.3 million, which includes $0.7 million recognized for employee benefits due to market fluctuations in the cash surrender value of life insurance policies. The costs to operate our regulated wastewater facilities in Delaware increased $0.3 million due to acquisition of the Milton, Delaware municipal wastewater system during 2007 and an increased number of wastewater treatment facilities in operation in Delaware. Costs for service claims under our LineCareSM program were $0.1 million higher due in part to a 9.4% increase in the number of subscribers in the program during 2008. Operating costs for USA-PA increased $0.3 million due to higher pass-through charges. All other expense categories increased $0.4 million.

Depreciation expense for 2008 increased by $0.4 million, or 5.1%, due to a higher level of utility plant in service.

Other taxes increased by $0.5 million generally reflecting additional taxes on higher taxable gross revenues, payroll and real estate.

Other income was $0.2 million lower than 2007, primarily due to one-time gains recorded in 2007 on two transactions related to assets no longer used in our operations.

Interest expense increased by $0.4 million, or 6.6%, as a result of a higher level of average short-term debt outstanding when compared to 2007.

Income tax expense based on our current year operating results was $0.2 million higher than 2007 and reflects increased revenues due to higher water rates in New Jersey and Delaware.

Net income increased to $12.2 million from $11.8 million in the prior year, and basic earnings per share increased from $0.88 to $0.90. Diluted earnings per share increased from $0.87 to $0.89.

Results of Operations in 2007 Compared to 2006

                                                           Years ended December 31,
                                                             (Millions of Dollars)
                                               2007                                        2006
                                                 Non-                                        Non-
                               Regulated       Regulated       Total       Regulated       Regulated       Total
Revenues                      $      77.1     $       9.0     $  86.1     $      71.9     $       9.2     $  81.1
Operations and maintenance           38.8             7.4        46.2            35.7             7.7        43.4
Depreciation                          7.4             0.1         7.5             7.0             0.1         7.1
Other taxes                           9.5             0.2         9.7             9.1             0.2         9.3
 Operating income                    21.4             1.3        22.7            20.1             1.2        21.3

Other income (expense)                1.5               -         1.5             0.9            (0.1 )       0.8
Interest expense                      6.6               -         6.6             7.0              --         7.0
Income taxes                          5.2             0.6         5.8             4.6             0.5         5.1
 Net income                   $      11.1     $       0.7     $  11.8     $       9.4     $       0.6     $  10.0

Operating revenues for the year rose $5.0 million, or 6.2% over the same period in 2006. Revenues improved by $3.7 million in our Tidewater System, of which $2.4 million was a result of a base rate increase that was granted to Tidewater. The rate increase was implemented in two parts; a 15% interim rate increase in June 2006 and an additional 12% final increase on February 28, 2007. Customer growth and higher consumption contributed $1.9 million of increased revenues. Our Tidewater System experienced record water production and consumption billed due to extended favorable weather during the spring and summer. Fees charged to new customers for initial connection to our Delaware water systems were lower by $0.6 million as new residential and commercial development has slowed in our Delaware service territories. Revenues in our Middlesex system increased by $0.7 million as a result of a 9.1% base rate increase implemented on October 26, 2007. Middlesex revenues also increased by $0.3 million due to increased sales to our contract customers. TESI revenues increased by $0.3 million, as we connected new customers to our existing and new wastewater systems in Delaware.

Operation and maintenance expenses increased $2.8 million, or 6.5%. Labor costs were $1.3 million higher due to wage increases and increased headcount to meet the needs of the growing Delaware customer base, risk management, training and safety. As expected, electric generation costs for our Middlesex system increased due to the renewal in late 2006 of our contract with the power purveyor. That factor accounted for most of the $0.6 million in additional power costs. Pumping and water treatment costs increased a combined $0.2 million due to higher costs for chemicals and disposal of residuals. Costs for water main breaks in our New Jersey system and transportation fuel were $0.2 million higher than the same period in 2006 due to the number and size of the breaks and higher gasoline prices. The cost to operate our TESI regulated wastewater facilities in Delaware increased by $0.2 million as we acquired the Milton, Delaware wastewater system during the year. All other operating costs increased by $0.3 million.

Depreciation expense for 2007 increased by $0.4 million, or 5.6%, due to a higher level of utility plant in service.

Other taxes increased by $0.4 million generally reflecting additional taxes on higher taxable gross revenues, payroll and real estate.

Other income increased $0.7 million, primarily due to a gain of $0.2 million on the sale of non-utility real property in New Jersey and a gain of $0.4 million on the sale of certain water service rights in Delaware.

Interest expense decreased by $0.4 million, or 5.7%, as a result of a lower level of average short-term debt outstanding when compared to 2006.

Income tax expense based on our current year operating results was $0.9 million higher than 2006 and reflects the increased revenues due to higher water rates in New Jersey and Delaware, the record customer usage in Delaware and the sale of non-essential assets. This was partially offset by $0.2 million of solar tax credits recorded during 2007.

Net income increased to $11.8 million from $10.0 million in the prior year, and basic earnings per share increased from $0.83 to $0.88. Diluted earnings per share increased from $0.82 to $0.87.

Outlook

In addition to factors previously discussed under "Results of Operations in 2008 Compared to 2007," our revenues are expected to increase in 2009 from rate increases granted to our Pinelands companies in December 2008. Middlesex has filed a petition with the BPU to implement a purchased water adjustment clause (PWAC) seeking recovery of $1.0 million of additional costs associated with rate increases from two non-affiliated water purveyors for our purchases of treated and untreated water. There can be no assurances that the BPU will grant the PWAC in whole or in part.

Revenues and earnings will also be influenced by weather. Changes in these factors, as well as increases in capital expenditures and operating costs are the primary factors that determine the need for rate increase filings. We continue to implement viable plans to streamline operations and reduce operating costs.

We expect our level of borrowing to increase during 2009 in order to finance a portion of our capital expenditures during the coming year (see Liquidity and Capital Resources). However, current interest rates on short-term borrowings are significantly below the rates at which we borrowed during much of 2008. We believe those lower interest rates will continue during 2009 and will result in lower interest expense.

The actual return on assets held in our retirement benefit plans during 2008 resulted in a decline in the amount available to fund current and future obligations. We expect this will result in higher benefits expenses and increased cash contributions to the plans in 2009.

As a result of ongoing delays in new residential home construction throughout the service territories we serve, there may be an increase in the amount of PS&I that will not be currently recoverable in rates.

Our strategy includes continued revenue growth through acquisitions, internal expansion, contract operations and when necessary, rate relief. We will continue to pursue opportunities in both the regulated and non-regulated sectors that are financially sound, complement existing capabilities and increase shareholder value.

Liquidity and Capital Resources

Cash flows from operations are largely based on three factors: weather, adequate and timely rate increases, and customer growth. The effect of those factors on net income is discussed in results of operations. For 2008, cash

flows from operating activities increased $0.3 million to $19.1 million, as compared to the prior year. This increase was primarily attributable to higher net income and depreciation. The $19.1 million of net cash flow from operations enabled us to fund approximately 67% of our utility plant expenditures for the period internally, with the remainder funded with proceeds from equity issued under our Dividend Reinvestment Plan, long-term borrowings and short-term borrowings.

For 2007, cash flows from operating activities increased $2.7 million to $18.8 million, as compared to the prior year. This increase was primarily attributable to higher net income and depreciation. The $18.8 million of net cash flow from operations enabled us to fund approximately 86% of our utility plant expenditures for the period internally, with the remainder funded with proceeds from equity issued under our Dividend Reinvestment Plan, long-term borrowings and short-term borrowings.

Increases in certain operating costs will impact our liquidity and capital resources. As described in our results of operations and outlook discussions, during 2008 we received rate relief for Tidewater and Pinelands and have filed for rate increases for Middlesex and Tidewater. We continually monitor the need for timely rate filing to minimize the lag between the time we experience increased operating and capital costs and the time we receive appropriate rate relief. There is no certainty, however, that the BPU or PSC will approve any or all future requested increases.

Sources of Liquidity

Short-term Debt. The Company had established lines of credit aggregating $36.0 million as of December 31, 2008, and increased the established amount to $50.0 million in February 2009. At December 31, 2008, the outstanding borrowings under these credit lines was $25.9 million at a weighted average interest rate of 2.30%.

The weighted average daily amounts of borrowings outstanding under the Company's credit lines and the weighted average interest rates on those amounts were $16.4 million and $2.6 million at 3.69% and 6.36% for the years ended December 31, 2008 and 2007, respectively.

Long-term Debt. Subject to regulatory approval, the Company periodically finances capital projects under State Revolving Fund (SRF) loan programs in New Jersey and Delaware. These government programs provide financing at interest rates that are typically below rates available in the broader financial markets. A portion of the borrowings under the New Jersey SRF is interest-free. We participated in the Delaware and New Jersey SRF loan programs during 2008 and expect to participate in the 2009 New Jersey SRF program for up to $4.0 million.

During 2008, Middlesex closed on $3.5 million of first mortgage bonds through the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey SRF loan program in order to finance our 2009 RENEW program. The proceeds of these bonds, and any interest earned, are held by a trustee, and are classified as Restricted Cash on the Consolidated Balance Sheet.

Substantially all of the Utility Plant of the Company is subject to the lien of its mortgage, which includes debt service and capital ratio covenants. The Company is in compliance with all of its mortgage covenants and restrictions.

Common Stock. The Company periodically issues shares of common stock in connection with its Dividend Reinvestment and Common Stock Purchase Plan (the Plan). The Company raised $1.2 million through the issuance of shares under the Plan during 2008. Periodically, the Company may issue additional equity to reduce short-term indebtedness and for other general corporate purposes. The last public offering of our common stock closed in November 2006. The majority of the net proceeds of approximately $26.2 million from that common

stock offering of 1.5 million shares were used to repay all of the Company's short-term borrowings outstanding at that time.

Capital Expenditures and Commitments

Under our capital program for 2009, we plan to expend $10.0 million for additions and improvements for our Delaware water systems, which include the construction of several storage tanks and the creation of new wells and interconnections. We expect to spend approximately $1.0 million for construction of wastewater systems in Delaware. We expect to spend $5.2 million to complete the implementation of a Company-wide information system and $0.9 million for other information systems equipment and software. We expect to spend $3.5 million for our RENEW program, which is our program to clean and cement line unlined mains in the Middlesex System. There remains a total of approximately 109 miles of unlined mains in the 730-mile Middlesex System. In 2008, three miles of unlined mains were cleaned and cement lined. The capital program also includes $12.4 million for scheduled upgrades to our existing systems in New Jersey. The scheduled upgrades consist of $4.0 million for improvements to existing plant, $5.8 million for mains, $0.9 million for service lines, $0.7 million for meters, $0.3 million for hydrants, and $0.8 million for other infrastructure needs.

To pay for our capital program in 2009, we will utilize internally generated funds and funds available and held in trust under existing NJEIT loans (currently, $4.5 million) and Delaware SRF loans (currently, $1.9 million). The SRF programs provide low cost financing for projects that meet certain water quality and system improvement benchmarks. If necessary, we will also utilize short-term borrowings through $50.0 million of available lines of credit with several financial institutions. As of December 31, 2008, we had $25.9 million outstanding against the lines of credit.

Going forward into 2010 through 2011, we currently project that we may be required to expend between $65.0 million and $91.2 million for capital projects. The exact amount is dependent on customer growth, residential housing sales and project scheduling. In particular, Middlesex had filed a prudence review application with the BPU for a proposed major transmission pipeline designed to strengthen its existing transmission network and provide further system reliability. Initial estimates to construct the pipeline are $26.2 million. A settlement amongst the parties in the prudence review was approved by the BPU on October 23, 2008. As part of the settlement, it was agreed the pipeline is needed but will not be constructed at this time. The parties further agreed that it would be effective utility management and proper long-term planning for the Company to proceed with the procurement of easements along the agreed-upon pipeline route in anticipation of a need for the project as customer demand for water increases in the South River Basin portion of our customer base.

To the extent possible and because of favorable interest rates available to regulated water utilities, we expect to finance portions of our capital expenditures under the SRF loan programs. We also expect to use internally generated funds and proceeds from the sale of common stock through the Dividend Reinvestment and Common Stock Purchase Plan. It may also be necessary to sell shares of our Common Stock through a public offering.

Contractual Obligations

In the course of normal business activities, the Company enters into a variety of contractual obligations and commercial commitments. Some of these items result in direct obligations on the Company's balance sheet while others are commitments, some firm and some based on uncertainties, which are disclosed in the Company's other underlying consolidated financial statements.

The table below presents our known contractual obligations for the periods specified as of December 31, 2008.

                                                                         Payment Due by Period
                                                                          (Millions of Dollars)
                                                                    Less than                        4-5         More than
                                                   Total             1 Year         1-3 Years       Years         5 Years
Long-term Debt                               $           136.0     $      18.0     $       6.8     $    7.0     $     104.2
Notes Payable                                             25.9            25.9             ---          ---             ---
Interest on Long-term Debt                                93.4             5.8            10.9         10.3            66.4
Purchased Water Contracts                                 41.9             4.9             7.8          4.9            24.3
. . .