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 September 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, Connecticut's consumer advocate, 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 included 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 was 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 was able to complete the interconnection between the systems in the second quarter of 2009, saving ratepayers of both 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.

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. The DPUC approved the transaction on September 9, 2009 and the transaction closed on September 18, 2009. The sale of the conservation easement generated approximately $1.2 million in net income for the Real Estate segment for the period ending September 30, 2009. 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 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 reduction in Depreciation Expense, offset by a temporary rate reduction of 1.84% for the last six months of 2009, and a delay of at least six months in Connecticut Water's next general rate filing. Effective January 1, 2010, the Company's rates will revert to rates in effect during the first half of 2009. The DPUC approved the agreement on July 1, 2009 and the new rates took effect at that time.

The Company anticipates filing for its next general rate increase in January 2010. The Company is currently evaluating the level of increase required to recover its investment in utility plant and increasing operating costs.

On August 25, 2009, the Company completed the acquisition of a small water system serving a condominium complex in the Town of Madison, CT that was found to have uranium levels above recently established standards. By acquiring the system, the Company was able to solve a problem for the condominium residents and to assist the Town of Madison, CT in addressing uranium found in the water of two public schools adjacent to the system. The Company has already installed the treatment system necessary to remove the uranium from the system and was able to connect to the schools prior to the start of the school year. Due to the contamination issues, the Company acquired the system for only a nominal fee. The acquisition added approximately 120 customers to the Company.

On October 29, 2009, the Company filed its second WICA application with the DPUC, requesting a 2.15% surcharge to customers' bills. The surcharges can be placed on customers' bills at the start of a calendar quarter following the receipt of DPUC approval. If approved as filed, the surcharge mechanism will be effective starting January 1, 2010.

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 FASB ASC 980 "Regulated Operations", revenue recognition, and pension plan accounting. Each of these accounting policies and the application of critical accounting policies and estimates were 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 ended September 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, including our next planned rate case in 2010. The Company has experienced greater decline in residential customer usage during the first half of 2009 when compared to prior years. Since weather becomes a significant driver of residential usage in the third quarters of both 2009 and 2008, it is difficult to determine if that trend has continued, improved, or become worse. The Company will continue to monitor this usage trend.

Cool wet weather significantly impacted the sale of water during the nine months ended September 30, 2009. Water production for the nine months ended September 30, 2009 was approximately 4% less than the same period in 2008.

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 September, including the wet and cool weather experienced in the summer months and the completed land sale to the Town of Windsor Locks, CT, the Company expects earnings results in 2009 to be similar to slightly higher than 2008, assuming customer usage stabilizes during the fourth quarter of 2009. 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.

In November 2008, the Company was authorized by its Board of Directors to increase the available lines of credit from $21 million to $40 million. 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 expires on June 25, 2010. On August 12, 2009, the Company replaced an existing line of credit from $3 million to $10 million, which expires on August 11, 2010. Finally, on September 15, 2009, the Company increased a third line of credit from $12 million to $15 million, with an expiration date of June 1, 2011. Interim Bank Loans Payable at September 30, 2009 was approximately $31.6 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.

The Board of Directors 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 is using a combination of its internally generated funds, borrowing under its available lines of credit, and the pending long term debt issuance to fund this construction budget. The Company anticipates utilization of $20 million private activity bonds issued through the Connecticut Development Authority (CDA), for a long term debt issuance in late 2009 or early 2010. In May 2009, the CDA authorized $20 million of volume capacity for the Company's capital projects in 2009; the CDA reaffirmed the authorization in October 2009. On September 8, 2009, the Company filed with the DPUC an application for the issuance of $20 million in CDA backed bonds. If approved by the DPUC, the Company expects to issue these bonds in the fourth quarter of 2009 or the first quarter of 2010. A draft decision approving the bond issuance was issued by the DPUC on October 29, 2009. A final decision is expected on November 12, 2009.

Standard and Poor's, on August 28, 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 nine months ended September, 30 2009 and 2008, shareholders reinvested $731,000 and $728,000 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 nine months ended September 30, 2009, no stock options were exercised. During the nine months ended September 30, 2008, 11,775 stock options were exercised, resulting in approximately $218,000 in proceeds to the Company.

                Connecticut Water Service Inc. and Subsidiaries


Results of Operations

Three Months Ended September 30
Net Income for the three months ended September 30, 2009 increased from that of
the prior year by $2,924,000, which increased earnings per basic and diluted
average common share by $0.33, to $0.67.

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

    Business Segment        September 30, 2009       September 30, 2008       Increase
Water Activities           $          4,115,000     $          2,699,000     $ 1,416,000
Real Estate Transactions              1,389,000                       --       1,389,000
Services and Rentals                    255,000                  136,000         119,000
Total                      $          5,759,000     $          2,835,000     $ 2,924,000

The increase 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 $381,000 or 2.2% to $16,659,000 for the three months ended September 30, 2009 when compared to the same period in 2008. Reasons for this decline in revenue are detailed below:

· On July 1, 2009, the Company's first WICA surcharge and the voluntarily enacted rate decrease, each discussed above in "Regulatory Matters and Inflation", became effective. The net effect of these two new items on customers' bills was a decrease to operating revenue of approximately $152,000, or approximately 40% of the total decrease. WICA charges will continue to appear on customer's bills until the Company's next general rate case while the rate reduction will be eliminated on January 1, 2010.

· The water production for the third quarter declined approximately 4%. The majority of this decline was related to lower residential demand due to the wet and cool weather experienced in the third quarter of 2009, despite similar weather patterns in the same period of 2008.

· Industrial revenues decreased by $92,000, or 18%, to $419,000 when compared to the third quarter of 2008, primarily due to the adverse economic conditions facing companies in the region.

Operation and Maintenance Expense

Operation and Maintenance expense decreased by $974,000 primarily due to the
following components:

                                                      September        September
                Expense Components                     30, 2009         30, 2008        Increase/(Decrease)
Customer                                             $    213,000     $    120,000     $              93,000
Purchased water                                           418,000          390,000                    28,000
Water treatment (including chemical costs)                643,000          665,000                   (22,000 )
Investor relations                                         66,000           89,000                   (23,000 )
Employee benefit costs                                  1,151,000        1,209,000                   (58,000 )
Utility costs                                             879,000          945,000                   (66,000 )
Vehicles                                                  315,000          399,000                   (84,000 )
Outside services                                          255,000          420,000                  (165,000 )
Maintenance                                               250,000          448,000                  (198,000 )
Labor                                                   2,746,000        3,045,000                  (299,000 )
Other                                                     618,000          798,000                  (180,000 )
Total                                                $  7,554,000     $  8,528,000     $            (974,000 )

- Operating costs declined in the third quarter of 2009 largely due to cost containment and the employee focus on capital projects, both administrative and field related. Operations and Maintenance expense declined 11% in the third quarter of 2009. This was attributable to a decrease in labor costs, maintenance expense, and outside services costs. Labor costs charged to Operation and Maintenance expense have decreased compared to the third quarter of 2008 due to a large number of ongoing capital projects, including the implementation of an Enterprise Resource Planning (ERP) system, where approximately 25% of our employees are directly participating in the design and implementation of the new system. For the quarter ended September 30, 2009, approximately $240,000 in Labor costs were charged to the ERP system. Maintenance expense decreased primarily due to reduced costs associated with tank painting and increased infrastructure improvement to replace aging pipe, which is more efficient than repairing main breaks. Outside services decreased primarily due to lower costs associated with audit fees, legal expenses and decreased consulting expenses, after management authorized the use of external services in only unique circumstances. Utility costs decreased due to decreases in power costs in the third quarter of 2009. Employee benefit costs decreased over 2008 levels, primarily due to a decrease in costs associated with post-retirement medical costs. These decreases in benefit costs are offset by increases in medical costs due to increased claims and higher pension costs in 2009. Investor relations costs have decreased as the Company completes many SEC filings in-house as opposed to using outside vendors to assist in filings. Purchased water costs increased in the quarter primarily due to an increase in water purchased in our Unionville system. Customer costs increased in the current quarter due to an increase in uncollectible accounts due in part to the general economic downturn.

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

- Income Tax expense associated with Water Activities decreased due to a lower effective tax rate in 2009. The drivers of the lower effective tax rate are increases to flow through timing difference, including planned pension contributions, and the utilization of state tax credits associated with infrastructure investment made by the Company.

Real Estate

During the third quarter of 2009, the Company completed the previously announced sale of a conservation easement to the Town of Windsor Locks, CT for $2 million. The transaction generated $1.2 million in net income for the Company and contributed $0.14 in earnings per share. The Company also adjusted tax valuation allowances associated with land donations made in previous years generating approximately $147,000 in net income in the Real Estate segment. Additionally, Chester Realty, a wholly-owned, non-regulated subsidiary of the Company, sold a rental property in Killingly, CT during the third quarter of 2009, generating a small profit. There were no Real Estate transactions during the third quarter 2008.

Nine Months Ended September 30
Net Income for the nine months ended September 30, 2009 increased from that of
the prior year by $1,678,000, which increased earnings per basic and diluted
average common share by $0.18, to $1.07.

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

    Business Segment        September 30, 2009       September 30, 2008       Increase
Water Activities           $          7,063,000     $          6,961,000     $   102,000
Real Estate Transactions              1,389,000                       --       1,389,000
Services and Rentals                    717,000                  530,000         187,000
Total                      $          9,169,000     $          7,491,000     $ 1,678,000

The increase 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 $1,442,000 or 3.1% to $45,187,000 for the nine months ended September 30, 2009 when compared to the same period in 2008. Reasons for this decline in revenue are detailed below:

· On July 1, 2009, the Company's first WICA surcharge and the voluntarily enacted rate decrease, each discussed above in "Regulatory Matters and Inflation", became effective. The net effect of these two new items on customers' bills was a decrease to operating revenue of approximately $152,000, or approximately 11% of the total year over year decrease in customer revenues. WICA charges will continue to appear on customer's bills until the Company's next general rate case while the rate reduction will be eliminated on January 1, 2010.

· Water production for the first nine months declined approximately 4%. The majority of this decline was related to lower residential demand due to the extremely wet and cool weather experienced in the second quarter of 2009.

· Industrial revenues decreased by $280,000, or 20%, to $1,106,000 when compared to the first nine months 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.

· 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.

Operation and Maintenance Expense

Operation and Maintenance expense increased by $405,000 primarily due to the
following components:

                                                     September 30,     September 30,
                Expense Components                       2009              2008           Increase/(Decrease)
Purchased water                                      $     928,000     $     693,000     $             235,000
Water treatment (including chemical costs)               1,710,000         1,520,000                   190,000
Outside services                                         1,257,000         1,072,000                   185,000
Customer                                                   723,000           587,000                   136,000
Insurance                                                  841,000           743,000                    98,000
Employee benefit costs                                   3,655,000         3,562,000                    93,000
Investor relations                                         379,000           425,000                   (46,000 )
Maintenance                                              1,094,000         1,195,000                  (101,000 )
Labor                                                    8,742,000         8,858,000                  (116,000 )
Other                                                    4,825,000         5,094,000                  (269,000 )
Total                                                $  24,154,000     $  23,749,000     $             405,000

- Operating costs increased only 2% in the first three months of 2009 largely due to the employee focus on capital projects, both administrative and field related. Purchased water costs increased in the period primarily due to an increase in water purchased in our Unionville system. Additionally, the Company negotiated a reduction of bills related to 2007 purchased water 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. 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. Outside services increased over prior years primarily due to increased legal costs associated with the Perry Street litigation detailed in "Commitments and Contingencies" and the increased use of temporary labor in the early part of the year. Customer costs increased primarily due to an increase in uncollectible accounts. 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. Labor costs have decreased compared to the third quarter of 2008 due to a large number of ongoing capital projects, including the implementation of the ERP system, where approximately 25% of our employees are directly participating in the design and implementation of the new system. For the nine months ended September 30, . . .