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 2008 Annual Report on Form 10-K.

Regulatory Matters and Inflation

During the three months ended June 30, 2009, 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, 2008.

In July 2006, the Company filed a rate application with the Department of Public Utility Control (DPUC) for 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 in revenues of approximately $10,940,000, or 22.3%. The Settlement Agreement allowed Connecticut Water to defer a portion of the approved rate increase, approximately $3.8 million through December 31, 2007 and $4.8 million through March 31, 2008. The Company recognized that increase through recording deferred revenues and a corresponding regulatory asset, as required by the decision. 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 includes requested recovery and a return on $15.5 million of additional capital investments made in 2007. On March 28, 2008, an 11.95% rate increase was approved. The approved rates became effective on April 1, 2008.

On July 23, 2008, the Company announced that it had reached a definitive agreement with Ellington Acres Company (Ellington Acres) to purchase all of Ellington Acres' outstanding stock for approximately $1.5 million. Ellington Acres is a regulated water company serving approximately 750 customers in Ellington and Somers, Connecticut, situated between two systems in the Company's Northern Region that the Company had planned to interconnect. The Company will be able to interconnect the two systems with Ellington Acres, saving the ratepayers of Connecticut Water and Ellington Acres significant capital expenditures. The DPUC approved the acquisition in December 2008 and the Company completed the transaction on January 16, 2009. The $1.5 million purchase price has been preliminarily allocated to amortizable intangible plant, on the Utility Plant line on the Balance Sheet, at June 30, 2009.

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 an expedited review and approval by the DPUC, to reflect the costs of replacement of certain types of aging utility plant. The purpose of the IAR is to clearly define the criteria for determining the priority of future replacement projects. The Company received approval of its IAR from the DPUC on March 26, 2009. The Company filed for a 1% surcharge under the WICA mechanism on April 24, 2009. On July 1, 2009, the Company was approved to add a 0.95% WICA surcharge on customers' bills issued on and after July 2, 2009.

In 2008, the Company entered into negotiations with the Town of Windsor Locks, Connecticut and ultimately agreed to sell a conservation easement on a well field property no longer needed as a source of supply for $2.0 million. Windsor Locks was awarded a grant from the Connecticut Department of Environmental Protection to assist in purchasing the conservation easement in order to permanently protect the approximate 200-acre property from development and guarantee public access to the land for passive recreation. The Company filed an application with the DPUC and submitted the draft agreement and the form of Conservation Easement to the DPUC on April 3, 2009. DPUC approval is expected in the second half of 2009. The Purchase and Sale Agreement between the Company and the Town was executed on May 7, 2009. Subject to successful receipt of DPUC approval, and of final authorization for the Town to proceed with the transaction, the Company expects the transaction to be completed in 2009. If the transaction closes, the Company estimates that it will generate approximately $1 million in net income in the Real Estate segment. The Company currently has no other specific plans for land transactions in 2009 and beyond.

On April 30, 2009, the Company filed with the DPUC an agreement negotiated by and between the Company and the Office of Consumer Counsel, Connecticut's consumer advocate, to accomplish three goals: First, a request to equalize depreciation rates across divisions, which would lower depreciation expense, resulting in a temporary 1.84% reduction of rates for all Connecticut Water customers, effective July 1 through December 31, 2009; Secondly, an increase in allowed Operation and Maintenance expense equal to the 1.84% of the Company's previously allowed revenue requirements, effective January 1, 2010; Finally, an extension of the "stay out" period such that Connecticut Water will not file a new general rate adjustment seeking new rates to take effect any sooner than July 1, 2010. The net effect of these three items is a temporary rate reduction of 1.84%, offset by a reduction in Depreciation Expense, for the last six months of 2009, at which time the Company's rates will revert to rates in effect during the first half of 2009, and a delay of at least six months in Connecticut Water's next general rate filing. The DPUC approved the agreement on July 1, 2009 and the new rates took effect at that time.

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, 2008. There were no significant changes in the application of critical accounting policies or estimates during the three months ending June 30, 2009. 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 2008 Annual Report on Form 10-K filed on March 13, 2009.

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. 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 experienced greater decline in residential customer usage in the second quarter of 2009 when compared to prior periods. The approximate 5.6% decline in year over year consumption was greater than the trend that the Company has noted over the past five years of approximately 2% per year. The Company will continue to monitor this usage trend.

Cool wet weather significantly impacted the sale of water in second quarter of 2009. Water production during the three months ended June 30, 2009 was approximately 7% less than the five-year average production for the same three month period.

The Company believes that these factors and those described in detail in Item 1A
- Risk Factors and 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 2009 and beyond. Please also review carefully the risks and uncertainties described below under the heading "Forward-Looking Information."

Based on the financial results through June and the continued wet and cool weather experienced in July the Company expects earnings results in 2009 to be similar to 2008, assuming a return to normal weather patterns during the remainder of the year, and the completion of the Windsor Locks land sale. During 2009 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 sections entitled Item 1A - Risk Factors, "Commitments and Contingencies" in Item 7 of the Company's Annual Report on Form 10-K and the risks and uncertainties described in the "Forward-Looking Information" section 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.

On June 30, 2009, the Company let expire one line of credit totaling $6 million and entered into a new $15 million line of credit agreement, which increased the Company's total lines of credit to $30 million among three banks. The next largest line of credit, representing $12 million of our total available line of credit, was renewed in the fourth quarter of 2007 and is due upon demand from the bank. The final line of credit, for $3 million, has a term of 12 months, expiring in October 2009. Interim Bank Loans Payable at June 30, 2009 was approximately $17.8 million and represents the outstanding aggregate balance on these lines of credit. Interest expense charged on interim bank loans will fluctuate based on market interest rates. After defining the Company's expected 2009 capital expenditures, described below, the Company determined that additional access to short term capital arrangements may be needed. In November 2008, the Company was authorized by the Board of Directors to increase the available lines of credit to $40 million. The Company expects to finalize a further $10 million increase to its line of credit in the third quarter of 2009.

The Board of Directors has approved a $26.4 million construction budget for 2009, net of amounts to be financed by customer advances and contributions in aid of construction. The Company will use a combination of its internally generated funds, borrowing under its available lines of credit, and, depending on capital market conditions, a long term debt issuance. The Company anticipates utilization of approximately $20 million private activity bonds issued through the Connecticut Development Authority (CDA), for long term debt issuance in 2009 and beyond, as approved by the Board of Directors. In May 2009, the CDA authorized $20 million of volume capacity for the Company's capital projects in 2009.

Standard and Poor's, on March 13, 2009, 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 six months ended June, 30 2009 and 2008, shareholders reinvested $485,000 and $484,000 in additional shares, 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 six months ended June 30, 2009, no stock options were exercised. During the six months ended June 30, 2008, 6,059 stock options were exercised.

Results of Operations

Three Months Ended June 30
Net Income for the three months ended June 30, 2009 decreased from that of the
prior year by $685,000, which decreased earnings per basic and diluted average
common share by $0.08, to $0.27.

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

        Business Segment       June 30, 2009   June 30, 2008   Increase/(Decrease)
    Water Activities              $2,013,000      $2,747,000            $(734,000)
    Real Estate Transactions              --              --                    --
    Services and Rentals             253,000         204,000                49,000
    Total                         $2,266,000      $2,951,000            $(685,000)

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

Revenue

Revenue from our water customers declined by $873,000 or 5.4% to $15,147,000 for the three months ended June 30, 2009 when compared to the same period in 2008. Reasons for this decline in revenue are detailed below:

· The water production for the second quarter declined approximately 6%. The majority of this decline was related to lower residential demand due to the extremely wet and cool second quarter of 2009.

· During the second quarter of 2009, Windsor Locks, CT, part of our largest service area, experienced rain on 63 of 91 days, including 24 of 30 days in June. In the same period of 2008, there was rain on 53 days with 20 days in June. Total rainfall accumulation in the second quarter of 2009 was 13.2 inches, an increase of an inch from 2008. In addition to the rainfall, June 2009 was unusually cool; the average high temperature during the month was 75 degrees, compared to an average high of 81 degrees in 2008. Poor weather conditions primarily impact the outdoor water usage of residential customers.

· Industrial revenues decreased by $205,000, or 37%, to $345,000 when compared to the second quarter of 2008, primarily due to the adverse economic conditions facing companies in the region. A portion of the decrease was due to industrial customers cutting back on shifts and other budget cuts. Additionally, another large industrial customer began using a process to recycle water used during their manufacturing processes, leading to a reduction in consumption.

Operation and Maintenance Expense

Operation and Maintenance expense increased by $377,000 primarily due to the
following components:

                Expense Components                    June 30, 2009       June 30, 2008       Increase/(Decrease)
Employee benefit costs                               $     1,222,000     $     1,043,000     $             179,000
Outside services                                             481,000             327,000                   154,000
Water treatment (including chemical costs)                   533,000             453,000                    80,000
Insurance                                                    296,000             244,000                    52,000
Vehicles                                                     377,000             338,000                    39,000
Customer                                                     279,000             249,000                    30,000
Labor                                                      2,986,000           3,058,000                   (72,000 )
Utility costs                                                797,000             859,000                   (62,000 )
Investor relations                                           181,000             205,000                   (24,000 )
Other                                                      1,248,000           1,247,000                     1,000
Total                                                $     8,400,000     $     8,023,000     $             377,000

- Employee benefit costs increased over 2008 levels, primarily due to an increase in costs associated with medical and pension expenses. Medical costs increased due to additional claims filed in the current year compared to 2008, offset partially by reduced medical administration costs. Pension costs increased primarily due to the impact of return on investments that were below actuarial assumptions in 2008. Outside services increased over prior years primarily due to increased legal costs associated with the Perry Street issued detailed in "Commitments and Contingencies", consulting costs associated with the Company's ERP and the increased use of temporary labor. Water treatment costs increased primarily due to an increase in the cost of key chemicals, despite a decrease in production when compared to the prior year. The increase in the costs of chemicals was partially offset by a reduction in the costs to operate our treatment facilities due to decreases in our testing costs. Insurance costs increased primarily due to increased premiums on the Company's general liability insurance. Labor costs decreased in 2009 by approximately $72,000 due to a large number of ongoing capital projects, including the implementation of an Enterprise Resource Planning (ERP) system, resulting in less labor costs being charged to Operation and Maintenance expense. Utility costs have decreased over the prior year primarily due to a reduction in communication costs. Investor relation costs decreased due to a reduction in proxy mailing and notification related costs.

- The Company saw a modest decrease in its Depreciation expense due to the negotiated reduction in depreciation rates that will result in a temporary reduction in rates for customers, despite an increase in the Company's Utility Plant investment.

- Income Tax expense associated with Water Activities decreased due to lower pre-tax income in 2009.

Six Months Ended June 30
Net Income for the six months ended June 30, 2009 decreased from that of the
prior year by $1,246,000, which decreased earnings per basic and diluted average
common share by $0.15, to $0.40.

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

     Business Segment        June 30, 2009       June 30, 2008       Increase/(Decrease)
 Water Activities           $     2,948,000     $     4,262,000     $          (1,314,000 )
 Real Estate Transactions                --                  --                        --
 Services and Rentals               462,000             394,000                    68,000
 Total                      $     3,410,000     $     4,656,000     $          (1,246,000 )

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

Revenue

Revenue from our water customers declined by $1,061,000 or 3.6% to $28,528,000 for the six months ended June 30, 2009 when compared to the same period in 2008. Reasons for this decline in revenue are detailed below:

· Residential water consumption for the first six months declined approximately 4%. The majority of this decline was related to lower residential demand due to the extremely wet and cool second quarter of 2009.

· Industrial revenues decreased by $188,000, or 22%, to $687,000 when compared to the first half of 2008, primarily due to the economic condition facing companies in the region. A portion of the decrease is due to industrial customers cutting back on shifts and other budget cuts. Additionally, another large industrial customer began using a process to recycle water used during their manufacturing processes, leading to a reduction in consumption.

· Partially offsetting the declining usage described above, was the implementation of the second phase of the Company's 2006 rate increase that was effective April 1, 2008. As a result, the first quarter of 2009 included an increase of rates of approximately 4.5% that was not included in rates in the first quarter of 2008.

The declining usage more than offset the incremental 4.5% increase in customer rates in the first half of 2009 and resulted in a $1,061,000 decline in revenues between years.

Operation and Maintenance Expense

Operation and Maintenance expense increased by $1,379,000 primarily due to the
following components:


                Expense Components                    June 30, 2009       June 30, 2008       Increase/(Decrease)
Outside services                                     $     1,002,000     $       652,000     $             350,000
Water treatment (including chemical costs)                 1,067,000             855,000                   212,000
Purchased water                                              510,000             303,000                   207,000
Labor                                                      5,996,000           5,813,000                   183,000
Employee benefit costs                                     2,504,000           2,353,000                   151,000
Maintenance                                                  844,000             747,000                    97,000
Vehicles                                                     722,000             628,000                    94,000
Insurance                                                    562,000             475,000                    87,000
Other                                                      3,393,000           3,395,000                    (2,000 )
Total                                                $    16,600,000     $    15,221,000     $           1,379,000

- Outside services increased over prior years primarily due to increased legal costs associated with the Perry Street issued detailed in "Commitments and Contingencies", consulting costs associated with the Company's ERP and the increased use of temporary labor. Water treatment costs increased primarily due to an increase in the cost of key chemicals, despite a decrease in production when compared to prior year. Purchased water expense increased primarily due to a negotiated reduction of bills related to 2007 consumption that the Company realized as a reduction of expense in the first quarter of 2008. During 2009, the Company was billed for water as it was purchased from neighboring utilities at the negotiated rates. Labor costs increased in 2009 due to an increase in employees, increased maintenance and repair work in both our Northeast and Southwest Regions, and regular wage increases effective as of April 1, 2009. Employee benefit costs increased primarily due to an increase in costs associated with medical and pension expenses, partially offset by a decrease in post-retirement medical costs. Medical costs increased due to additional claims filed in the current year compared to 2008. Pension costs increased primarily due to a lower return on investments within the pension plan. Maintenance expense increased over the prior year due to increased main break costs in our Northern and Mansfield divisions.

- The Company saw a slight decrease in its Depreciation expense due to the negotiated reduction in depreciation rates that will result in a temporary reduction in rates for customers, despite an increase in the Company's Utility Plant investment.

- Income Tax expense associated with Water Activities decreased due to lower pre-tax income and a lower effective tax rate in 2009 associated with a combination of state tax credits and benefit plan contributions.

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, 2008.

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. The Connecticut Supreme Court has transferred the appeal to itself. This appeal stays the eviction order until the Connecticut Supreme 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. As of February 23, 2009, the lawsuit for back rent has been stayed pending the resolution of the appeal related to the eviction case. 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.

. . .