UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-K

þ		Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2007

o		Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from           to

Connecticut Water Service, Inc.

(Exact name of registrant as specified in its charter)

Connecticut (State or other jurisdiction of incorporation or organization)		06-0739839 (I.R.S. Employer Identification No.)
93 West Main Street, Clinton, CT (Address of principal executive office)		06413 (Zip Code)

Registrant’s telephone number, including area code (860) 669-8636
Registrant’s website: www.ctwater.com

Securities registered pursuant to Section 12 (b) of the Act:

Title of each Class Common Stock, without par value		Name of each exchange on which registered The Nasdaq Stock Market, Inc.

Securities registered pursuant to Section 12 (g) of the Act:
None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K, (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o       Smaller reporting company o

(Do not check if a smaller reporting company)

          Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ

     As of June 30, 2007, the aggregate market value of the registrant’s voting Common Stock held by non-affiliates of the registrant was $198,764,170 based on the closing sale price on such date as reported on the NASDAQ.

Number of shares of Common Stock, no par value, outstanding as of March 1, 2008 was 8,351,867, excluding 49,679 common stock equivalent shares.

DOCUMENTS INCORPORATED BY REFERENCE

		Part of Form 10-K Into Which
Document		Document is Incorporated
Definitive Proxy Statement, dated		Part III
March 18, 2008, for Annual Meeting of Shareholders to be held on May 15, 2008.

 

 

INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2007

				Page
				Number
Part I
Item 1.		Business			4
Item 1A.		Risk Factors			9
Item 1B.		Unresolved Staff Comments			13
Item 2.		Properties			13
Item 3.		Legal Proceedings			15
Item 4.		Submission of Matters to a Vote of Security Holders			15
Part II
Item 5.		Market for the Company’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities			16
Item 6.		Selected Financial Data			18
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 7A.		Quantitative and Qualitative Disclosure About Market Risk			33
Item 8.		Financial Statements and Supplementary Data			34
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			34
Item 9A.		Controls and Procedures			34
Item 9B.		Other Information			35
Part III
Item 10.		Directors, Executive Officers and Corporate Governance			36
Item 11.		Executive Compensation			36
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			36
Item 13.		Certain Relationships and Related Transactions, and Director Independence			37
Item 14.		Principal Accountant Fees and Services			37
Part IV
Item 15.		Exhibits and Financial Statement Schedules			38
		Signatures			40
EX-4.33: BOND PURCHASE AGREEMENT
EX-4.34: LOAN AGREEMENT
EX-4.35: INDENTURE OF TRUST
EX-10.5.h: 8TH AMENDMENT TO A/R EMPLOYEES' RETIREMENT PLAN
EX-10.5.i: 9TH AMENDMENT TO A/R EMPLOYEES' RETIREMENT PLAN
EX-21: SUBSIDIARIES
EX-23.1: CONSENT OF PRICEWATERHOUSECOOPERS, LLP
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

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This Form 10-K contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements should be read in conjunction with the risk factors described in Item 1A below and the cautionary statements included in this Form 10-K in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Forward Looking Information”.

PART I

ITEM 1. BUSINESS

The Company

The Registrant, Connecticut Water Service, Inc. (referred to as “the Company”, “we” or “our”) was incorporated in 1974, with The Connecticut Water Company (Connecticut Water) as its largest subsidiary which was organized in 1956. Connecticut Water Service, Inc. is a non-operating holding company, whose income is derived from the earnings of its four wholly-owned subsidiary companies. In 2007, approximately 91% of the Company’s earnings from continuing operations were attributable to water activities carried out within its regulated water company, Connecticut Water. As of December 31, 2007, Connecticut Water supplied water to 84,418 customers in 41 towns throughout Connecticut. As a regulated water company Connecticut Water is subject to state regulation regarding financial issues, rates, and operating issues, and to various other state and federal regulatory agencies concerning water quality and environmental standards.

In addition to its regulated utility, the Company owns three unregulated companies, two of which were active and one of which was inactive as of December 31, 2007. In 2007, these unregulated companies, together with real estate transactions within Connecticut Water, contributed the remaining 9% of the Company’s earnings from continuing operations through real estate transactions as well as services and rentals. The two active companies are Chester Realty, Inc., a real estate company in Connecticut; and New England Water Utility Services, Inc. (NEWUS), which provides contract water and sewer operations and other water related services.

The inactive company is The Barnstable Holding Company (Barnstable Holding), a holding company which previously owned BARLACO Inc. (BARLACO) and Barnstable Water Company (Barnstable Water). BARLACO, a real estate company in Massachusetts whose entire inventory of land was sold in 2006; and Barnstable Water, a company that was a public service company until its assets were sold to the Town of Barnstable, Massachusetts in 2005; were each merged with and into Barnstable Holding during 2007. As a result of the sale of the assets of Barnstable Water, results of its operations have been classified as discontinued operations.

Our mission is to provide high quality water service to our customers at a fair return to our stockholders while maintaining a work environment that attracts, retains and motivates our employees to achieve a high level of performance.

Our corporate headquarters are located at 93 West Main Street, Clinton, Connecticut 06413. Our telephone number is 860.669.8636, and our internet address is www.ctwater.com.

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to these documents will be made available free

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of charge through the “INVESTOR INFORMATION” section of the Company’s internet website (http://www.ctwater.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the SEC). The following documents are also available through the “CORPORATE GOVERNANCE” section of our website:

	•		Code of Conduct – Board of Directors
	•		Code of Conduct – Employees
	•		Audit Committee Charter
	•		Compensation Committee Charter
	•		Corporate Governance Committee Charter

Copies of each of the Company’s SEC filings (without exhibits) and corporate governance documents mentioned above will also be mailed to investors, upon request, by contacting the Company’s Corporate Secretary at Connecticut Water, 93 West Main Street, Clinton, CT 06413.

Our Regulated Business

On June 29, 2007, the Company announced that its principal operating subsidiary, Connecticut Water, and its unregulated subsidiary, NEWUS, had entered into definitive purchase agreements to acquire the regulated water utility assets of Eastern Connecticut Regional Water Company, Inc. (Eastern), a wholly-owned subsidiary of Birmingham Utilities, Inc. (Birmingham) and the unregulated assets of Birmingham H2O Services, Inc. (H2O). The agreements called for Connecticut Water and NEWUS to pay a combined $3.5 million for the assets acquired, which had a book value of $9.9 million. On November 16, 2007, the Connecticut Department of Public Utility Control (DPUC) issued a final decision approving the transactions and the accounting treatment described in Note 17 of the Notes to Consolidated Financial Statements. The transaction was completed on January 16, 2008, at which point all of the former customers of Eastern became customers of Connecticut Water. The acquisition of Eastern added more than 2,300 residential customers residing in 14 towns across Connecticut, some only a few miles from existing Connecticut Water systems. The Company is currently integrating Eastern’s customers and employees into Connecticut Water’s operations. The Company expects the integration to be materially complete in the first quarter of 2008. For more information, please refer to Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 17 of the Notes to Consolidated Financial Statements.

In April 2006, the DPUC approved the Company’s application to merge Unionville Water Company (Unionville) and Crystal Water Company (Crystal) into 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, approximately $3.8 million. The Company recognized that increase through recording deferred revenues and a corresponding regulatory asset, as required by the decision. Through December 31, 2007, the Company has recorded approximately $3.8 million in deferred revenues. The second phase of the increase is expected to

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occur on April 1, 2008. 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 $3.8 million, the filing includes 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 was also called for in the Settlement Agreement.

The total increase associated with this second phase is a request of 12.6%, of which approximately 8.2% is 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.

A final decision on this second phase is expected by the end of March 2008.

Our business is subject to seasonal fluctuations and weather variations. The demand for water is generally greater during the warmer months than the cooler months due to customers’ high water consumption related to cooling systems and various outdoor uses such as private and public swimming pools and lawn sprinklers. Demand will vary with rainfall and temperature levels from year to year and season to season, particularly during the warmer months.

In general, the profitability of the water utility industry is largely dependent on the timeliness and adequacy of rates allowed by utility regulatory commissions. In addition, profitability is affected by numerous factors over which we have little or no control, such as costs to comply with security, environmental, and water quality regulations. Inflation and other factors also impact costs for construction, materials and personnel related expenses.

Costs to comply with environmental and water quality regulations are substantial. Since the 1974 enactment of the Safe Drinking Water Act, we have spent approximately $57.6 million in constructing facilities and conducting aquifer mapping necessary to comply with the requirements of the Safe Drinking Water Act, and other federal and state regulations, of which $7.4 million was expended in the last five years. We are presently in compliance with current regulations, but the regulations are subject to change at any time. The costs to comply with future changes in state or federal regulations, which could require us to modify existing filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial.

Connecticut Water derives its rights and franchises to operate from special state acts that are subject to alteration, amendment or repeal and do not grant us exclusive rights to our service areas. Our franchises are free from burdensome restrictions, are unlimited as to time, and authorize us to sell potable water in all the towns we now serve. There is the possibility that the State of Connecticut could attempt to revoke our franchises and allow a governmental entity to take over some or all of our systems. While we would vigorously oppose any such attempts, from time to time such legislation is contemplated.

The rates we charge our water customers are established under the jurisdiction of and are approved by the DPUC. It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return. As noted above, on January 16, 2007, the DPUC approved an increase of revenues of approximately $10,940,000, or 22.3%, for Connecticut Water effective January 1,

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2007. Connecticut Water’s allowed return on equity and return on rate base are 10.125% and 8.07%, respectively.

Our Water Systems

Our water infrastructure consists of 28 noncontiguous water systems in the State of Connecticut. Our system, in total, consists of approximately 1,400 miles of water main and reservoir storage capacity of 7.0 billion gallons. The safe, dependable yield from our 122 active wells and 18 reservoirs is approximately 49 million gallons per day. Water sources vary among the individual systems, but overall approximately 35% of the total dependable yield comes from reservoirs and 65% from wells.

As of December 31, 2007, Connecticut Water’s 84,418 customers consumed approximately 7.3 billion gallons of water generating $59,026,000 in revenue. We supply water, and in most cases, fire protection to all or portions of 41 towns in Connecticut.

The following table breaks down the above total figures by customer class as of December 31, 2007, 2006 and 2005:

		2007				2006				2005
Customers:
Residential			75,579				74,253				72,968
Commercial			5,532				5,485				5,333
Industrial			426				429				428
Public Authority			602				587				580
Fire Protection			1,599				1,562				1,526
Other (including non-metered accounts)			680				931				928
Total			84,418				83,247				81,763
Water Revenues ($000’s)
Residential(1)		$	38,354			$	29,067			$	29,980
Commercial			6,762				5,652				5,619
Industrial			1,764				1,589				1,538
Public Authority			1,924				1,507				1,625
Fire Protection			9,482				8,708				8,267
Other (including non-metered accounts)			740				422				424
Total		$	59,026			$	46,945			$	47,453
Customer Water Consumption
(millions of gallons)
Residential			5,186				4,933				5,260
Commercial			1,259				1,198				1,188
Industrial			423				424				423
Public Authority			389				363				405
Total			7,257				6,918				7,276

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Connecticut Water owns various small, discrete parcels of land that are no longer required for water supply purposes. At December 31, 2007, this land totaled approximately 250 acres. Over the past several years, we have been disposing of these land parcels. For more information, please refer to Segments of Our Business below.

Additional information on land dispositions can be found in Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Commitments and Contingencies.

Competition

Connecticut Water faces competition from a few small privately-owned water systems operating within, or adjacent to, our franchise areas and from municipal and public authority systems whose service areas in some cases overlap portions of our franchise areas.

Employees

As of December 31, 2007, we employed a total of 206 persons. Our employees are not covered by collective bargaining agreements.

Segments of Our Business

For management and financial reporting purposes we divide our business into three segments: Water Activities, Real Estate Transactions, and Services and Rentals.

Water Activities – The Water Activities segment is comprised of our core regulated water activities to supply public drinking water to our customers. This segment encompasses all transactions of our regulated water company with the exception of certain real estate transactions.

Real Estate Transactions – Our Real Estate Transactions segment involves the sale or donation for income tax benefits of our real estate holdings. These transactions can be effected by any of our subsidiary companies. During 2007, the Company engaged in two land transactions totaling 33 acres and increased its valuation allowance, resulting in a net profit of $167,000.

In February 2006, the Company sold 109 acres of land that were owned by BARLACO to the Town of Barnstable, Massachusetts for $1.0 million.

In 2005, the Company sold 74 acres of land in Bristol, Connecticut for $475,000.

In 2005, the Company reduced after-tax profit by $353,000 by recording a reserve for income taxes. This was due to an examination by the Internal Revenue Service (IRS), which was examining the fair market value of the property reflected on the Company’s 2002, 2003 and 2004 tax returns. The IRS completed its examination during 2006 and no adjustment to the Company’s 2002 – 2004 tax liability was needed. As a result, the reserve of $353,000, along with an additional $623,000 in reserves was reversed in 2006.

A breakdown of the net income of this segment between our regulated and unregulated companies for the past three years is as follows:

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		Income (Loss) from Real Estate Transactions from
		Continuing Operations
		Regulated				Unregulated				Total
2005		$	(69,000	)		$	8,000			$	(61,000	)
2006		$	1,083,000			$	980,000			$	2,063,000
2007		$	199,000			$	(32,000	)		$	167,000

Services and Rentals – Our Services and Rentals segment provides contracted services to water and wastewater utilities and other clients and also leases certain of our properties to third parties through our unregulated companies. The types of services provided include contract operations of water and wastewater facilities; Linebacker^®, our service line protection plan for public drinking water customers; and providing bulk deliveries of emergency drinking water to businesses and residences via tanker truck. Our lease and rental income comes primarily from the renting of residential and commercial property.

Some of the services listed above, including the service line protection plan, have little or no competition. But there can be considerable competition for contract operations of large water and wastewater facilities and systems. However, we have sought to develop a niche market by seeking to serve smaller facilities and systems in our service areas where there is less competition. The Services and Rentals segment, while relatively new and a small portion of our overall business, has grown significantly over the past five years and now provides approximately 7% of our overall net income in 2007. Net income generated by this segment of our business was $651,000, $515,000 and $463,000 for the years 2007, 2006 and 2005, respectively.

ITEM 1A. RISK FACTORS

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including, but not limited to, those set forth below, any one of which could cause our actual results to vary materially from recent results or anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, see the discussion in “Forward Looking Information” in Item 7 below – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” at pages F-6 to F-27.

Because we incur significant capital expenditures annually, we depend on the rates we charge our customers.

The water utility business is capital intensive. On an annual basis, we spend significant sums for additions to or replacement of property, plant and equipment. Our ability to maintain and meet our financial objectives is dependent upon the rates we charge our customers. These rates are subject to approval by the DPUC. The Company is entitled to file rate increase requests, from time to time, to recover our investments in utility plant and expenses; however as part of our recent Settlement Agreement with the DPUC, we have agreed not to request rate relief that would become effective prior to January 2010. Once a rate increase petition is filed with the DPUC, the ensuing administrative and hearing process may be lengthy and costly. The timing of

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our future rate increase requests are dependent on the terms of our rate case decision on January 16, 2007 (including the second phase of the rate case filed in January 2008) and also partially dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase to the extent approved. We can provide no assurances that any future rate increase requests will be approved by the DPUC; and, if approved, we cannot guarantee that any such rate increase requests will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase. Additionally, the DPUC may rule that a company must reduce its rates.

Under a 2007 law, the DPUC may authorize regulated water companies to use a rate adjustment mechanism, such as a Water Infrastructure and Conservation Adjustment (WICA), for eligible projects completed and in service for the benefit of the customers. The Company does not expect to be able to take advantage of the WICA mechanism until the first quarter of 2009, at the earliest. For more information related to WICA, please refer to the “Executive Overview” found in Item 7 of this Form 10-K.

Our operating costs could be significantly increased because of state and federal environmental and health and safety laws and regulations.

Our water and wastewater services are governed by various federal and state environmental protection and health and safety laws and regulations, including the federal Safe Drinking Water Act, the Clean Water Act and similar state laws, and federal and state regulations issued under these laws by the U.S. Environmental Protection Agency and state environmental regulatory agencies. These laws and regulations establish, among other things, criteria and standards for drinking water and for discharges into the waters of the United States and/or Connecticut. Pursuant to these laws, we are required to obtain various environmental permits from environmental regulatory agencies for our operations. We cannot assure that we have been or will be at all times in full compliance with these laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators.

Environmental laws and regulations are complex and change frequently. These laws, and the enforcement thereof, have tended to become more stringent over time. While we have budgeted for future capital and operating expenditures to maintain compliance with these laws and our permits, it is possible that new or stricter standards could be imposed that will raise our operating costs. Although these costs may be recovered in the form of higher rates, there can be no assurance that the DPUC would approve rate increases to enable us to recover such costs. In summary, we cannot be assured that our costs of complying with, or discharging liabilities under, current and future environmental and health and safety laws will not adversely affect our business, results of operations or financial condition.

Our business is subject to seasonal fluctuations which could affect demand for our water services and our revenues.

Demand for our water during the warmer months is generally greater than during cooler months due primarily to additional requirements for water in connection with irrigation systems, swimming pools, cooling systems and other outside water use. Throughout the year, and particularly during typically warmer months, demand will vary with temperature and rainfall levels. In the event that temperatures during the typically warmer months are cooler than normal,

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or if there is more rainfall than normal, the demand for our water may decrease and adversely affect our revenues.

Declining per customer residential water usage may reduce our revenues, financial condition and results of operations in future years.

A trend of declining per customer residential water usage in Connecticut has been observed, which we would attribute to the declining household size reported throughout the state, as well as increased water conservation, including the use of more efficient household fixtures and appliances among residential users. Our regulated business is heavily dependent on revenue generated from rates we charge to our residential customers for the volume of water they use. The rate we charge for our water is regulated by the DPUC and we may not unilaterally adjust our rates to reflect changes in demand. Declining volume of residential water usage may, thus, have a negative impact on our operating revenues in the future if regulators do not reflect any usage declines in the rate setting design process.

Potential drought conditions may impact our ability to serve our current and future customers’ demand for water and our financial results.

We depend on an adequate water supply to meet the present and future demands of our customers. Drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in sufficient quantities to our existing and future customers. An interruption in our water supply could have a material adverse effect on our financial condition and results of operations. Moreover, governmental restrictions on water usage during drought conditions may result in a decreased demand for our water, even if our water reserves are sufficient to serve our customers during these drought conditions, which may adversely affect our revenues and earnings.

The failure of, or the requirement to repair, upgrade or dismantle, any of our dams may adversely affect our financial condition and results of operations.

We own 32 dams throughout the state of Connecticut. While the Company maintains robust dam maintenance and inspection programs, a failure of any of those dams could result in injuries and damage to residential and/or commercial property downstream for which we may be responsible, in whole or in part. The failure of a dam could also adversely affect our ability to supply water in sufficient quantities to our customers and could adversely affect our financial condition and results of operations. Any losses or liabilities incurred due to the failure of one of our dams might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

Any failure of our reservoirs, storage tanks, mains or distribution networks could result in losses and damages that may affect our financial condition and reputation.

Connecticut Water distributes water through an extensive network of mains and stores water in reservoirs and storage tanks located across Connecticut. A failure of major mains, reservoirs, or tanks could result in injuries and damage to residential and/or commercial property for which we may be responsible, in whole or in part. The failure of major mains, reservoirs or tanks may also result in the need to shut down some facilities or parts of our water distribution network in order to conduct repairs. Such failures and shutdowns may limit our ability to supply water in

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sufficient quantities to our customers and to meet the water delivery requirements prescribed by governmental regulators, including the DPUC, and adversely affect our financial condition, results of operations, cash flow, liquidity and reputation. Any business interruption or other losses might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

Any future acquisitions we may undertake may involve risks and uncertainties.

An important element of our growth strategy is the acquisition and integration of water systems in order to move into new service areas and to broaden our current service areas. Connecticut Water has completed three acquisitions since the beginning of 2007 through the filing of this report on Form 10-K on March 17, 2008. The acquisitions of Avery Heights, Hilldale Park Homeowner’s Association, and Birmingham’s Eastern Division water systems have increased the Company’s customer base by approximately 2,300 customers. Following these acquisitions, The Connecticut Water Company now serves more than 86,000 customers, or a population of nearly 300,000 people, in more than 50 Connecticut towns. We will not be able to acquire other businesses if we cannot identify suitable acquisition opportunities or reach mutually agreeable terms with acquisition candidates. It is our intent, when practical, to integrate any businesses we acquire with our existing operations. The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and cause diversion of our management’s time and resources. Future acquisitions by us could result in:

	•		dilutive issuances of our equity securities;
	•		incurrence of debt and contingent liabilities;
	•		failure to have effective internal control over financial reporting;
	•		fluctuations in quarterly results; and
	•		other acquisition-related expenses.

Some or all of these items could have a material adverse effect on our business as well as our ability to finance our business and comply with regulatory requirements. The businesses we acquire in the future may not achieve sales and profitability that would justify our investment and any difficulties we encounter in the integration process, including in the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. In addition, as consolidation becomes more prevalent in the water and wastewater industries, the prices for suitable acquisition candidates may increase to unacceptable levels and limit our ability to grow through acquisitions.

Water supply contamination may adversely affect our business.

Our water supplies are subject to contamination, including contamination from the development of naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-made sources, such as MTBE, and possible terrorist attacks. In the event that our water supply is contaminated, we may have to interrupt the use of that water supply until we are able to substitute the flow of water from an uncontaminated water source or provide additional treatment. We may incur significant costs in order to treat the contaminated source through expansion of our current treatment facilities, or development of new treatment methods. If we are unable to substitute water supply from an uncontaminated water source, or to adequately treat the

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contaminated water source in a cost-effective manner, there may be an adverse effect on our revenues, operating results and financial condition. The costs we incur to decontaminate a water source or an underground water system could be significant and could adversely affect our business, operating results and financial condition and may not be recoverable in rates. We could also be held liable for consequences arising out of human exposure to hazardous substances in our water supplies or other environmental damage. For example, private plaintiffs have the right to bring personal injury or other toxic tort claims arising from the presence of hazardous substances in our drinking water supplies. Our insurance policies may not be sufficient to cover the costs of these claims.

The need to increase security may continue to increase our operating costs.

In addition to the potential pollution of our water supply as described above, in the wake of the September 11, 2001 terrorist attacks and the ongoing threats to the nation’s health and security, we have taken steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply. We have also tightened our security measures regarding the delivery and handling of certain chemicals used in our business. We have and will continue to bear increased costs for security precautions to protect our facilities, operations and supplies. These costs may be significant. We are currently not aware of any specific threats to our facilities, operations or supplies; however, it is possible that we would not be in a position to control the outcome of terrorist events should they occur.

Key employee turnover may adversely affect our operating results.

Our success depends significantly on the continued individual and collective contributions of our management team. The loss of the services of any member of our senior management team or the inability to hire and retain experienced management personnel could harm our operating results.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

The properties of our regulated water company consist of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, treatment plants, pumping plants, transmission and distribution mains and conduits, mains and other facilities and equipment used for the collection, purification, storage and distribution of water. In certain cases, our water company may be a party to limited contractual arrangements for the provision of water supply from neighboring utilities. We believe that our properties are in good operating condition. Water mains are located, for the most part, in public streets and, in a few instances, are located on land that we own in fee simple and/or land utilized pursuant to easement right, most of which are perpetual and adequate for the purpose for which they are held.

The net utility plant of the Company at December 31, 2007 was solely owned by Connecticut Water. Connecticut Water’s net utility plant balance as of December 31, 2007 was $277,662,000, nearly $15 million more than the balance of net utility plant as of December 31, 2006, due primarily to normal plant additions.

14

Sources of water supply owned, maintained, and operated by Connecticut Water include eighteen reservoirs and fifty-two well fields. In addition, Connecticut Water has an agreement with the Metropolitan District Commission (MDC) (a public water and sewer authority presently serving the City of Hartford and portions of surrounding towns), which provides, among other things, for the operation and maintenance by MDC of a filtration plant to supply up to 650,000 gallons of treated water per day for Connecticut Water’s Collinsville System. Collectively, these sources have the capacity to deliver approximately forty-seven million gallons of potable water daily to the fourteen major operating systems in the following table. In addition to the principal systems identified, Connecticut Water owns, maintains, and operates fourteen small, non-interconnected satellite and consecutive water systems that, combined have the ability to deliver about one million gallons of additional water per day to their respective systems. For some small consecutive water systems, purchased water may comprise substantially all of the total available supply of the system. During 2006, the Company entered into, and the DPUC approved, a purchased water agreement with the South Central Connecticut Regional Water Authority (RWA) to purchase up to one million gallons per day billed at the RWA’s wholesale rate. Activation of the interconnection will occur in 2008 on an as needed basis. As part of the DPUC’s decision approving the purchased water agreement, they allowed the Company to capitalize $75,000 per year as the cost to reimburse RWA for capital investments needed to provide for increased water sales. The Company will be allowed to treat these costs as a regulatory asset.

Connecticut Water owns and operates sixteen water filtration facilities, having a combined treatment capacity of approximately 29.33 million gallons per day.

The Company’s estimated available water supply, not including water purchases or non-principal systems, is as follows:

		ESTIMATED
		AVAILABLE SUPPLY
		(MILLION GALLONS PER DAY)
Chester System			1.69
Collinsville System			0.65
Danielson System			3.76
Gallup System			0.60
Guilford System			9.31
Naugatuck System			6.91
Northern Western System			16.16
Plainfield System			1.01
Somers System			0.28
Stafford System			1.00
Terryville System			0.94
Thomaston System			0.73
Thompson System			0.29
Unionville System			3.88
Total			47.21

As of December 31, 2007, the transmission and distribution systems of Connecticut Water consisted of approximately 1,400 miles of main. On that date, approximately 76 percent of our mains were eight-inch diameter or larger. Substantially all new main installations are cement-lined ductile iron pipe of eight-inch diameter or larger.

We believe that our properties are maintained in good condition and in accordance with current regulations and standards of good waterworks industry practice.

15

ITEM 3. LEGAL PROCEEDINGS

We are involved in various legal proceedings from time to time. Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we, or any of our subsidiaries are a party, or to which any of our properties is subject, that presents a reasonable likelihood of a material adverse impact on the Company’s financial condition, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

16

PART II

ITEM 5. MARKET FOR THE COMPANY’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is traded on the NASDAQ Global Select Market under the symbol “CTWS”. Our quarterly high and low stock prices as reported by NASDAQ and the cash dividends we paid during 2007 and 2006 are listed as follows:

		Price								Dividends
Period		High				Low				Paid
2007
First Quarter		$	25.09			$	22.52			$	.2150
Second Quarter			25.00				23.62				.2150
Third Quarter			25.61				23.10				.2175
Fourth Quarter			25.15				22.40				.2175
2006
First Quarter		$	26.43			$	23.81			$	.2125
Second Quarter			27.71				20.29				.2125
Third Quarter			24.39				21.90				.2150
Fourth Quarter			23.18				21.35				.2150

As of March 1, 2008, there were approximately 4,200 holders of record of our common stock.

We presently intend to pay quarterly cash dividends in 2008 on March 17, June 16, September 15 and December 15 subject to our earnings and financial condition, regulatory requirements and other factors our Board of Directors may deem relevant.

Purchases of Equity Securities by the Company – In May 2005, the Company adopted a common stock repurchase program (Share Repurchase Program). The Share Repurchase Program allows the Company to repurchase up to 10% of its outstanding common stock, at a price or prices that are deemed appropriate. As of December 31, 2007, no shares have been repurchased. Currently, the Company has no plans to repurchase shares under the Share Repurchase Program.

Performance Graph – Set forth below is a line graph comparing the cumulative total shareholder return for each of the years 2002 – 2007 on the Company’s Common Stock, based on the market price of the Common Stock and assuming reinvestment of dividends, with the cumulative total shareholder return of companies in the Standard & Poor’s 500 Index and the Standard and Poor’s 500 Utility Index.

		2002				2003				2004				2005				2006				2007
Connecticut Water Service, Inc.			100.00				112.95				111.62				106.76				102.83				110.43
Standard & Poor’s 500 Index			100.00				128.68				142.69				149.70				173.34				182.86
Standard & Poor’s 500 Utilities Index			100.00				126.26				156.91				183.34				221.82				264.87

(Source: Standard & Poor’s Institutional Market Service)

ITEM 6. SELECTED FINANCIAL INFORMATION

SELECTED FINANCIAL DATA

Years Ended December 31, (thousands of dollars except per share
amounts and where otherwise indicated)		2007				2006				2005				2004				2003
CONSOLIDATED STATEMENTS OF INCOME
Continuing Operations
Operating Revenues		$	59,026			$	46,945			$	47,453			$	46,008			$	44,598
Operating Expenses		$	46,324			$	39,962			$	37,486			$	35,487			$	33,380
Other Utility Income, Net of Taxes		$	552			$	542			$	571			$	520			$	465
Total Utility Operating Income		$	13,254			$	7,525			$	10,538			$	11,041			$	11,683
Interest and Debt Expense		$	4,411			$	4,461			$	3,583			$	3,451			$	4,369
Income from Continuing Operations		$	8,781			$	6,708			$	7,166			$	9,163			$	8,890
Cash Common Stock Dividends Paid		$	7,146			$	7,014			$	6,773			$	6,641			$	6,529
Dividend Payout Ratio from Continuing Operations			81	%			105	%			95	%			72	%			73	%
Weighted Average Common Shares Outstanding			8,270,494				8,227,953				8,094,346				7,999,318				7,956,426
Basic Earnings Per Common Share from Continuing Operations		$	1.06			$	0.81			$	0.89			$	1.15			$	1.12
Number of Shares Outstanding at Year End			8,376,842				8,270,394				8,169,627				8,035,199				7,967,379
ROE on Year End Common Equity			8.8	%			7.0	%			7.6	%			10.4	%			10.7	%
Declared Common Dividends Per Share		$	0.865			$	0.855			$	0.845			$	0.835			$	0.825
CONSOLIDATED BALANCE SHEET
Common Stockholders’ Equity		$	100,098			$	95,938			$	94,076			$	87,865			$	83,315
Long-Term Debt (Consolidated, Excluding Current Maturities)			92,285				77,347				77,404				66,399				64,754
Preferred Stock			772				772				847				847				847
Total Capitalization		$	193,155			$	174,057			$	172,327			$	155,111			$	148,916
Stockholders’ Equity (Includes Preferred Stock)			52	%			56	%			55	%			57	%			57	%
Long-Term Debt			48	%			44	%			45	%			43	%			43	%
Net Utility Plant		$	277,662			$	263,187			$	247,703			$	241,776			$	235,098
Total Assets		$	360,813			$	328,140			$	306,035			$	290,940			$	281,345
Book Value — Per Common Share		$	11.95			$	11.60			$	11.52			$	10.94			$	10.46
OPERATING REVENUES BY REVENUE CLASS
Residential		$	38,354			$	29,067			$	29,980			$	28,974			$	27,831
Commercial			6,762				5,652				5,619				5,479				5,327
Industrial			1,764				1,589				1,538				1,635				1,616
Public Authority			1,924				1,507				1,625				1,430				1,302
Fire Protection			9,482				8,708				8,267				8,087				8,026
Other (Including Non-Metered Accounts)			740				422				424				403				496
Total Operating Revenues		$	59,026			$	46,945			$	47,453			$	46,008			$	44,598
Number of Customers (Average)			84,023				82,552				81,211				87,259				86,145
Billed Consumption (Millions of Gallons)			7,257				6,918				7,276				7,801				7,640
Number of Employees			206				200				191				193				195

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

Executive Overview

The Company is a non-operating holding company, whose income is derived from the earnings of its four wholly-owned subsidiary companies: The Connecticut Water Company (Connecticut Water), New England Water Utility Services, Inc. (NEWUS), Chester Realty Company (Chester Realty), and Barnstable Holding Company (Barnstable Holding).

In 2007, approximately 91% of the Company earnings from continuing operations were attributable to the water activities of its largest subsidiary, Connecticut Water, a regulated water utility with 84,418 customers throughout 41 Connecticut towns, as of December 31, 2007. The rates charged for service by Connecticut Water are subject to review and approval by the Connecticut Department of Public Utility Control (DPUC).

After 15 years without filing rate cases, the Company’s 2007 financial results reflect operations under a new rate structure. The Company has spent considerable time and effort over the past 18 months to ensure that our corporate structure is aligned with our new strategy that will see us requesting rate relief on a more consistent basis in the future. This is important because of the Company’s renewed focus on its regulated business as the primary driver of earnings growth and to ensure that we are allowed a fair rate of return on the utility plant that we use to serve our customers.

In an effort to stimulate growth, the Company has stepped up its efforts to acquire water companies near our existing service territories. To that end, the Company announced in June 2007 that Connecticut Water entered into a definitive purchase agreement to acquire the regulated water utility assets of Eastern Connecticut Regional Water Company (Eastern), a regulated subsidiary of Birmingham Utilities, Inc. (Birmingham). The acquisition of Eastern, which closed on January 16, 2008, added more than 2,300 residential customers residing in 14 towns across Connecticut, some only a few miles from existing Connecticut Water systems. See Our Regulated Business, under Item 1 – “Business” and Note 17 to the “Notes to Consolidated Financial Statements” for more information on the acquisition of Eastern. In 2008 and beyond, the Company will continue to look for acquisition candidates that we would easily be able to “tuck-in” to existing service territories, as well as possible acquisitions outside of our service territories, including outside the State of Connecticut. Additionally, the Company plans to continue its efforts to tie in private well owners whose homes are in close proximity to our mains. In 2007, Connecticut Water added 303 customers in our existing service territories. Lastly, the Company will continue to work with developers to encourage public water use for new residential construction within Connecticut Water’s service areas.

Over the next twenty years, the Environmental Protection Agency expects water companies to spend over $275 billion in infrastructure costs nationwide to ensure compliance with existing and future water regulations. Recognizing the importance of timely infrastructure replacement and improvement, the Company, along with other investor-owned regulated water companies in the state, campaigned for the passage of the Water Infrastructure and Conservation Adjustment (WICA) Act in the Connecticut General Assembly 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; principally water mains, meters, service lines and water conservation related investments; without a full rate proceeding. The signing of WICA into law in June 2007 will help to eliminate the regulatory lag from the time the Company invests in replacement, or certain qualified new, plant and when it can begin to recover that investment in the rates charged to customers. The Company, however, does not expect to be able to take advantage of the WICA mechanism until the first quarter of 2009.

While the Company plans to file more frequent rate cases, continue to make acquisitions and, in the future, utilize the WICA adjustment to increase its earnings through its regulated subsidiary, it will also look to NEWUS to increase its earnings in the unregulated business. As part of the Company’s January 2008 acquisition of Eastern, NEWUS acquired the operation and maintenance contracts of Birmingham H2O Services Inc., an unregulated business of Birmingham that has nearly 50 contracts for unregulated water systems in eastern Connecticut, totaling approximately $650,000 in revenues. The Company will continue to seek out maintenance and service contracts with new customers and renew existing contracts that have proven to be beneficial to the Company, as well as to continue the expansion of the Linebacker^® program.

Regulatory Matters and Inflation

The Company, like all other businesses, is affected by inflation, most notably by the continually increasing costs required to maintain, improve, and expand its service capabilities. The cumulative effect of inflation over time results in significantly higher operating costs and facility replacement costs, which must be recovered from future cash flows.

Connecticut Water is also subject to environmental and water quality regulations. Costs to comply with environmental and water quality regulations are substantial. We are currently in compliance with current regulations, but the regulations are subject to change at any time. The costs to comply with future changes in state or federal regulations, which could require us to modify current filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial.

Connecticut Water’s ability to recover its increased expenses and/or investment in utility plant is dependent on the regulatory rates we charge our customers. Changes to these rates must be approved by the DPUC through formal rate proceedings. Due to the subjectivity of certain items involved in the process of establishing rates such as customer usage, future customer growth, inflation, and allowed return on investment, we have no assurance that we will be able to raise our rates to a level we consider appropriate, or to raise rates at all, through any future rate proceeding.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and as directed by the regulatory commissions to which the Company’s subsidiaries are subject. (See Note 1 to the Consolidated Financial Statements for a discussion of our significant accounting policies). The

Company believes the following policies and estimates are critical to the presentation of its consolidated financial statements.

Public Utility Regulation – Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS 71), requires cost based, rate-regulated enterprises such as Connecticut Water to reflect the impact of regulatory decisions in their financial statements. The state regulators, through the rate regulation process, can create regulatory assets that result when costs are allowed for ratemaking purposes in a period after the period in which costs would be charged to expense by an unregulated enterprise. The balance sheet includes regulatory assets and liabilities as appropriate, primarily related to income taxes and post-retirement benefit costs. The Company believes, based on current regulatory circumstances, that the regulatory assets recorded are likely to be recovered and that its use of regulatory accounting is appropriate and in accordance with the provisions of SFAS 71. Material regulatory assets, other than deferred revenue, are earning a return.

Revenue Recognition – The Company’s accounting policies regarding revenue recognition by segment are as follows:

Water Activities – Most of our water customers are billed quarterly, with the exception of larger commercial and industrial customers, as well as public and private fire protection customers who are billed monthly. Most customers, except fire protection customers, are metered. Revenues from metered customers are based on their water usage multiplied by approved, regulated rates and are earned when water is delivered. Public fire protection revenues are based on the length of the water main, and number of hydrants in service and are earned on a monthly basis. Private fire protection charges are based on the diameter of the connection to the water main. Our water companies accrue an estimate for metered customers for the amount of revenues earned relating to water delivered but unbilled at the end of each quarter.

Real Estate Transactions – Revenues are recorded when a sale or other transaction has been completed and title to the real estate has been transferred.

Services and Rentals – Revenues are recorded when the Company has delivered the services called for by contractual obligation.

Benefit Plan Accounting – Management evaluates the appropriateness of the discount rate through the modeling of a bond portfolio which approximates the pension and postretirement plan liabilities. Management further considers rates of high quality corporate bonds of approximate maturities as published by nationally recognized rating agencies consistent with the duration of the Company’s pension and postretirement plans.

The discount rate assumption we use to value our pension and postretirement benefit obligations has a material impact on the amount of expense we record in a given period. Our 2007 and 2006 pension and postretirement expense was calculated using assumed discount rates of 5.75% and 5.50%, respectively. In 2008, our pension and postretirement expense will be calculated using an assumed discount rate of 6.30%. The following table shows how much a one percent change in our assumed discount rate would have changed our reported 2007 pension and postretirement expense:

		Increase				Increase
		(Decrease) in				(Decrease) in
		pension expense				postretirement expense
1% Increase in the discount rate		$	(327,000	)		$	(208,000	)
1% Decrease in the discount rate		$	380,000			$	252,000

Outlook

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 current or lower levels, customer growth in the Company’s core regulated water utility business, 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 the factors described above and those described in detail below under the heading “Commitments and Contingencies” 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 in Item 1A – Risk Factors and those described below under the heading “Forward Looking Information”.

Based on the Company’s current projections, assuming normal weather patterns, the Company believes that its Net Income from Continuing Operations for the year 2009 will increase from the levels reported for 2008, primarily as a result of the second phase of the rate increase which we expect to be approved by the DPUC effective April 1, 2008. During 2009 and subsequent years, the ability of the Company to maintain and increase its Net Income from Continuing Operations 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” and the risks and uncertainties described in “Forward Looking Information”.

FINANCIAL CONDITION

Liquidity and Capital Resources

In recent years, we have relied on both internally generated funds and periodic debt and equity issuances in order to fund our construction budget. Looking forward, we expect construction expenditures will be in excess of cash generated from operations and funds generated from the Company’s dividend reinvestment plan; therefore, we will require additional external debt financings. We expect that this funding will initially come in the form of interim bank loans, with refinancing into long-term debt as the aggregate balance on the interim loans accumulates. The Company considers both market interest rates and the availability of tax-exempt financing opportunities through the Connecticut Development Authority. Although the Company believes it will be able to secure such funding when and as it is needed, we cannot be assured that funding with favorable interest rates will be available to the Company or that any new debt issuances will be tax exempt.

The following table shows the total construction expenditures excluding non-cash contributed utility plant for each of the last three years and what we expect to invest on construction projects in 2008.

						Construction
		Gross				Funded by				Construction
		Construction				Developers &				Funded by
		Expenditures				Others				Company
2005		$	16,957,000			$	2,701,000			$	14,256,000
2006		$	17,792,000			$	1,593,000			$	16,199,000
2007		$	19,841,000			$	1,092,000			$	18,749,000
2008 (Projected)		$	23,400,000			$	5,000,000			$	18,400,000

During 2007, the Company incurred approximately $19.8 million of construction expenditures. The Company financed the expenditures through internally generated funds, long-term debt issuances, proceeds from its dividend reinvestment plan, customers’ advances, contributions in aid of construction and short-term borrowings.

The Board of Directors has approved an $18.4 million construction budget for 2008, net of amounts to be financed by customer advances and contributions in aid of construction. Funds primarily provided by operating activities, short-term borrowings and long-term debt issuances are expected to finance this entire construction program given normal weather patterns and related operating revenue billings.

We currently fund our working capital requirements through our lines of credit with three banks, which provide liquidity to satisfy ongoing cash needs. We consider the current aggregate $21,000,000 lines of credit to be adequate to finance any expected short-term borrowing requirements that may arise in 2008. If additional funding is needed during 2008, the Company does not foresee any obstacles to obtaining new short-term financing arrangements. The lines of credit have lives that range from 12 to 29 months, which expire during 2008 and 2009. We expect to renew the lines as they expire. The interest rates payable are variable and fluctuate over time based on financial conditions. The weighted average interest rate on the $6,459,000 aggregate balance outstanding at December 31, 2007 was 5.47%.

In connection with the 2004 issuance of the $12.5 million variable rate bonds, Connecticut Water entered into an interest rate swap transaction with a counterparty in the notional principal amount of $12,500,000. The interest rate swap agreement provides that, beginning in April 2004 and thereafter on a monthly basis, Connecticut Water will pay the counterparty a fixed interest rate of 3.73% on the notional amount for a period of five years. In exchange, the counterparty began in April 2004 and thereafter on a monthly basis, paying Connecticut Water a floating interest rate (based on 105% of the U.S. Dollar one-month LIBOR rate) on the notional amount for a period of five years. The purpose of the interest rate swap is to manage the Company’s exposure to fluctuations in prevailing interest rates.

In November 2005, Connecticut Water borrowed $10 million through the issuance of Water Facilities Revenue Bonds by the Authority sold in a single series with an interest rate of five percent maturing on October 1, 2040. The proceeds from the sale of the bonds were used to

finance construction and installation of various capital improvements to Connecticut Water’s existing water systems.

In November 2005, Crystal borrowed $5 million through the issuance of Water Facilities Revenue Bonds by the Authority sold in a single series with an interest rate of five percent maturing on October 1, 2040. The proceeds from the sale of the bonds were used to finance the construction of a water treatment plant in the Town of Killingly, CT and to facilitate the interconnection of two systems in the Town of Killingly. As a result of the merger of Crystal into Connecticut Water, this debt issuance became a liability of Connecticut Water.

In December 2007, Connecticut Water borrowed $15 million through the issuance of Water Facilities Revenue Bonds by the Authority sold in a single series with an interest rate of five percent maturing on December 1, 2037. The proceeds from the sale of the bonds are being used to finance construction and installation of various capital improvements to the Company’s existing water system.

Off-Balance Sheet Arrangements and Contractual Obligations

We do not use off-balance sheet arrangements such as securitization of receivables with any unconsolidated entities or other parties. The Company does not engage in trading or risk management activities (other than the interest rate swap agreement discussed above) and does not have material transactions involving related persons.

The following table summarizes the Company’s future contractual cash obligations as of December 31, 2007:

Payments due by Periods
(in thousands of dollars)

						Less												More
						than 1				Years				Years				than 5
Contractual Obligations		Total				year				2 and 3				4 and 5				years
Long-Term Debt (LTD)		$	92,292			$	7			$	16			$	17			$	92,252
Interest on LTD			96,687				4,184				8,366				8,365				75,772
Operating Lease Obligations			996				302				458				236				—
Purchase Obligations (1) (2)			101,572				999				1,881				1,977				96,715
Long-Term Compensation Agreement(3)			48,525				5,341				6,649				6,654				29,881
Total (4) (5)		$	340,072			$	10,833			$	17,370			$	17,249			$	294,620

RESULTS OF OPERATIONS

Overview of 2007 Results from Continuing Operations

Income from Continuing Operations for 2007 was $8,781,000, or $1.06 per basic share, an increase of $2,073,000, or $0.25 per basic share, compared to 2006. The increase in earnings was due to higher net income in our Water Activities segment partially offset by decreases in net income in our Real Estate Transactions segment. Changes in net income for our segments were as follows:

		2007 Net				2006 Net				Increase
Business Segment		Income				Income				(Decrease)
Water Activities		$	7,963,000			$	4,130,000			$	3,833,000
Real Estate			167,000				2,063,000				(1,896,000	)
Services and Rentals Transactions			651,000				515,000				136,000
Total		$	8,781,000			$	6,708,000			$	2,073,000

Water Activities

The increase in net income from Water Activities in 2007, over 2006 results was $3,833,000, or $0.46 per share. A breakdown of the components of this increase was as follows:

										Increase
		2007				2006				(Decrease)
Operating Revenues		$	59,026,000			$	46,945,000			$	12,081,000
Operation and Maintenance			29,864,000				26,451,000				3,413,000
Depreciation			6,525,000				5,881,000				644,000
Income Taxes			4,195,000				2,055,000				2,140,000
Taxes Other than Income Taxes			5,740,000				5,575,000				165,000
Other Utility Income			552,000				542,000				10,000
Other (Deductions) Income			(972,000	)			608,000				(1,580,000	)
Interest and Debt Expense (net of AFUDC)			4,319,000				4,003,000				316,000
Total Income from Water Activities		$	7,963,000			$	4,130,000			$	3,833,000

The 25.7% increase in Operating Revenues was primarily due to the rate increase effective January 1, 2007, specifically:

-

an increase of $9,287,000, or 32.0%, in revenues from residential customers in 2007, including $3,823,000 in deferred revenues;

-

a $1,701,000, or 19.4%, increase in all other metered customers, including commercial, industrial and public authority customers; and

-

a $1,092,000, or 12.0%, increase in non-metered revenues which was primarily due to increased fire protection charges related to the expansion of our water system which increased the number of fire hydrants and revenue generating mains upon which these charges are based.

The $3,413,000, or 12.9%, increase in Operation and Maintenance expense was due to the following changes in expenses:

										Increase
		2007				2006				(Decrease)
Post-retirement medical expense		$	1,759,000			$	473,000			$	1,286,000
Labor			10,842,000				10,240,000				602,000
Outside services			1,480,000				998,000				482,000
Purchased water			1,291,000				866,000				425,000
Utility costs			3,282,000				2,947,000				335,000
Vehicle			1,214,000				942,000				272,000
Rate case cost amortization			270,000				35,000				235,000
Maintenance			1,632,000				1,526,000				106,000
Customer			709,000				606,000				103,000
Other employee benefit costs			2,768,000				3,697,000				(929,000	)
Other			4,617,000				4,121,000				496,000
Total Operation and Maintenance Expense		$	29,864,000			$	26,451,000			$	3,413,000

Post-retirement medical expense increased over the prior year due to the accounting treatment under the January 2007 rate decision. Prior to 2007, the Company was able to recover approximately $473,000 in post-retirement medical expense while deferring any remaining Statement of Financial Accounting Standards No. 106 (SFAS 106) costs on the balance sheet as a regulatory asset. Beginning in 2007, the Company fully expensed the costs determined under SFAS 106. The increase in Labor over 2006 levels was due to normal wage increases and a non-recurring wage adjustment for a majority of hourly employees made early in 2006. Outside services increased over the prior year due to increases in audit, legal and other consulting related costs. Purchased water costs have increased primarily due to increases in the rates charged to the Company by other water utilities. The Company has seen an increase in its Vehicle costs due to rising gas prices, increased insurance rates and higher repair costs. Despite efforts to keep our Utility expense down, such as signing commodity contracts directly with suppliers, Utility costs have increased as our electric providers continue to increase the rates they charge to customers. When filing for a rate increase, the DPUC allows companies to defer costs associated with the filing and then to amortize these expenses through Operation and Maintenance expense. The Company is now seeing an increase in Rate case cost amortization since it has begun to amortize the costs to file the 2006 rate case during 2007. Offsetting these increases was a decrease to Other employee benefit costs due to a reduction in stock based compensation expense and a decrease in pension costs.

The Company saw an increase in Depreciation of $644,000, or 11.0%, due to the Company’s increased capital spending during 2007 in advance of the second phase of the 2006 rate case, filed in January 2008. The Company expects that this line item will continue to increase as the Company looks to replace aging infrastructure in order to take advantage of WICA in future years.

The increase in Income Tax expense associated with the Water Activities segment of $2,140,000 was due primarily to higher pre-tax net income in 2007.

The increase in Taxes Other Than Income Taxes was primarily due to higher property taxes due to towns charging higher property tax rates on our ever increasing property balances.

The increase in Other Utility Operating Income was due to higher income generated from antenna sites on our utility property leased to telecommunication companies.

The decrease in Other Income was primarily due to the regulatory treatment of income taxes related to certain compensation and directors fees (disallowed costs) based on the outcome of the Company’s Settlement Agreement approved by the DPUC in January 2007. This change resulted in a reversal of a regulatory liability of $986,000 in 2006. There was no similar reversal in 2007, and there are none expected in future years.

Interest and Debt Expense remained relatively flat year over year due to the relatively similar capital structure during most of 2007 when compared to 2006. In 2008, the Company expects that Interest and Debt Expense will increase due to the $15 million bond issuance in December 2007.

Real Estate Transactions

The net income generated by the Real Estate Transactions segment decreased $1,896,000, or $0.23 per share, from 2006 due to the sale of land from BARLACO to the Town of Barnstable, Massachusetts and the reversal of reserves during 2006 compared to limited real estate activity during 2007. During 2007, the Company sold 33 acres, in two separate transactions, generating approximately $201,000 in net income. Additionally, upon completion of the 2006 tax return in the third quarter of 2007, the Company received an additional tax benefit relating to the 2006 BARLACO land sale transaction of approximately $20,000. Offsetting these gains, the Company increased its valuation allowance by approximately $54,000 generating an overall net gain in the Real Estate Transactions segment of $167,000.

The agreement the Town of Barnstable entered into with the Company to purchase Barnstable Water’s assets also included a provision whereby the Town of Barnstable would acquire, through a bargain sale purchase, all of the land owned by BARLACO for an additional $1 million. The BARLACO land was sold in February 2006. The Company recorded a gain on the bargain land sale for 2006 of $980,000. This gain is reported on the Gain (Loss) on Property Transactions line of the 2006 Consolidated Statements of Income.

Additionally in 2006, the Company reversed $976,000 of reserves related to an examination by the Internal Revenue Service (IRS) of the Company’s Federal Income Tax Returns for the years 2002 – 2004, which focused primarily on the value of land donated by the Company. The IRS completed its examination in 2006 without adjustment to the previously filed tax returns.

Income from this business segment is largely dependent on the tax deductions received on donations/sales of available land. This typically occurs when utility-owned land is deemed to be not necessary to protect water sources. The Company plans to continue to utilize land donations and sales in 2008 to generate income for this segment of our business.

Services and Rentals

Net income generated from the Services and Rental segment in 2007 increased $136,000, over 2006 levels, with a $0.02 increase to basic earnings per share. The increased net income was

primarily due to increases in the prices we charge our customers and in customer enrollment in our service line maintenance program.

Overview of 2006 Results from Continuing Operations

Income from Continuing Operations for 2006 was $6,708,000, or $0.81 per basic share, a decrease of $458,000, or $0.08 per basic share, compared to 2005. The decrease in earnings was due to lower net income in our Water Activities segment partially offset by increases in net income in our Real Estate segment. Changes in net income for our segments were as follows:

		Increase
		(Decrease)
Business Segment		In Net Income
Water Activities		$	(2,634,000	)
Real Estate			2,124,000
Services and Rentals			52,000
Net (Decrease)		$	(458,000	)

Water Activities

The decrease in net income from Water Activities in 2006 was $2,634,000, or $ 0.34 per share, lower than it was in 2005. A breakdown of the components of this decrease was as follows:

		Increase
		(Decrease)
Operating Revenues		$	(508,000	)
Operation and Maintenance			2,591,000
Depreciation			157,000
Income Taxes			(462,000	)
Taxes Other than Income Taxes			190,000
Other Utility Income			(29,000	)
Other Income			1,320,000
Interest and Debt Expense (net of AFUDC)			941,000
Total (Decrease)		$	(2,634,000	)

The 1.0% decrease in Operating Revenues was primarily due to the following:

-

a $947,000, or 2.4%, decrease in revenues from metered customers in 2006 due to decreased customer water consumption of approximately 4.9%, due to unfavorable weather conditions, despite an increase in the number of customers served of 1.8%;

-

off setting the decrease from metered revenues was a $439,000, or 5.1%, increase in non-metered revenues which was primarily due to increased fire protection charges related to the expansion of our water system which increased the number of fire hydrants and revenue generating mains upon which these charges are based.

The $2,591,000, or 10.9%, increase in Operation and Maintenance expense was primarily due to the following expenses:

		Increase
		(Decrease)
Labor		$	1,464,000
Other employee benefit costs			1,142,000
Utility costs			412,000
Pension expense			254,000
Other outside services			(486,000	)
Legal services			(185,000	)
Maintenance			(112,000	)
Other			102,000
Total Increase		$	2,591,000

The increase in Labor over 2005 levels was due to a non-recurring wage adjustment for a majority of hourly employees made early in 2006. Other employee benefits increased primarily due to increased costs associated with medical benefits offered to employees and retirees of the Company. Utility costs have increased as our power providers continue to increase the rates they charge to customers. Offsetting these increases was a decrease to Other outside services due to a decrease in audit fees and general consulting fees.

The decrease in Income Tax expense associated with the Water Activities segment of $462,000 was due primarily to lower pre-tax net income in 2006, and by flow through accounting related to book/tax timing differences.

The increase in Taxes Other Than Income Taxes was primarily due to increased payroll taxes related to increased salaries.

The decrease in Other Utility Operating Income was due to a reduction of income generated from antenna sites on our utility property leased to telecommunication companies.

The increase in Other Income was primarily due to the regulatory treatment of income taxes related to certain compensation and directors fees (disallowed costs) based on the outcome of the Company’s Settlement Agreement issued by the DPUC in January 2007. This change resulted in a reversal of a regulatory liability of $986,000.

The increase in Interest and Debt Expense was due to the following:

	-		Higher interest expense on long-term debt primarily due to the issuance of $15.0 million in new bonds in November 2005, resulting in a full year’s worth of expense in 2006 compared to a partial year in 2005;
	-		Higher other interest charges on interim bank loans with higher interest rates; and
	-		Amortization of the debt issuance costs of the bonds issued in 2005.

Real Estate Transactions

The net income generated by the Real Estate Transactions segment increased $2,124,000, or $0.26 per share, in 2006 due to the sale of land from BARLACO to the Town of Barnstable, Massachusetts during 2006. The agreement the Town of Barnstable entered into with the Company to purchase Barnstable Water’s assets also included a provision whereby the Town of Barnstable would acquire, through a bargain sale purchase, all of the land owned by BARLACO for an additional $1 million. The BARLACO land was sold in February 2006. The Company recorded a gain on the bargain land sale for 2006 of $980,000. This gain is reported on the Gain (Loss) on Property Transactions line of the Consolidated Statements of Income.

Additionally, the Company reversed $976,000 of reserves related to an examination by the IRS of the Company’s Federal Income Tax Returns for the years 2002 – 2004, which focused primarily on the value of land donated by the Company. The IRS completed its examination in 2006 without adjustment to the previously filed tax returns.

Income from this business segment is largely dependent on the tax deductions received on donations/sales of available land. This typically occurs when utility-owned land is deemed to be not necessary to protect water sources.

Services and Rentals

Net income generated from the Services and Rental segment in 2006 increased $52,000, over 2005 levels, with no impact on earnings per share. The increased net income was primarily due to increases in the prices we charge our customers and in customer enrollment in our service line maintenance program.

COMMITMENTS AND CONTINGENCIES

Security – The Bioterrorism Response Act of 2001 required every public water system serving over 3,300 people to prepare Vulnerability Assessments (VA) of their critical utility assets. The last of these assessments required to be filed by our companies were submitted to the U.S. Environmental Protection Agency in June 2004 and was followed by updated Emergency Response Plans in December 2004, per statutory requirements. The information within the VA is not subject to release to the public and is protected from Freedom of Information Act inquiries.

Investment in security-related improvements is a continuing process and management believes that the costs associated with any such improvements will be eligible for recovery in future rate proceedings.

Reverse Privatization – Connecticut Water derives its rights and franchises to operate from state laws that are subject to alteration, amendment or repeal, and do not grant permanent exclusive rights to our service areas. Our franchises are free from burdensome restrictions, are unlimited as to time, and authorize us to sell potable water in all towns we now serve. There is the possibility that states could revoke our franchises and allow a governmental entity to take over some or all of our systems. From time to time such legislation is contemplated.

Environmental and Water Quality Regulation – The Company is subject to environmental and water quality regulations. Costs to comply with environmental and water quality regulations

are substantial. We are presently in compliance with current regulations, but the regulations are subject to change at any time. The costs to comply with future changes in state or federal regulations, which could require us to modify current filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial.

Rate Relief – Connecticut Water is a regulated public utility, which provides water services to its customers. The rates that regulated companies charge their water customers are subject to the jurisdiction of the regulatory authority of the DPUC.

In July 2006, the Company filed a rate application with the 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 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, approximately $3.8 million. The Company recognized that increase through recording deferred revenues and a corresponding regulatory asset, as required by the decision. Through December 31, 2007, the Company has recorded approximately $3.8 million in deferred revenues. The second phase of the increase is expected to occur on April 1, 2008. 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 $3.8 million, the filing includes 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 was also called for in the Settlement Agreement.

The total increase associated with this second phase is a request of 12.6%, of which approximately 8.2% is 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.

A final decision on this second phase is expected by the end of March 2008.

In June 2007, the State of Connecticut adopted legislation which permits regulated water companies to recapture money spent on eligible infrastructure improvements without a full rate case proceeding. The DPUC may authorize regulated water companies to use a rate adjustment mechanism, such as a Water Infrastructure and Conservation Adjustment (WICA), for eligible projects completed and in service for the benefit of the customers. Regulated water companies may only charge customers such an adjustment to the extent allowed by the DPUC based on a water company’s infrastructure assessment report, as approved by the DPUC and upon semiannual filings which reflect plant additions consistent with such report. The Company does not expect to be able to take advantage of the WICA mechanism until at least the first quarter of 2009.

In any future rate proceedings, the DPUC may authorize Connecticut Water to charge rates which the DPUC considers to be sufficient to recover the normal operating expenses and to allow Connecticut Water an opportunity to earn what the DPUC considers to be a fair and reasonable return on our invested capital.

Land Dispositions – The Company and its subsidiaries own additional parcels of land in Connecticut, which may be suitable in the future for disposition, either by sale or by donation to municipalities, other local governments or private charitable entities. These additional parcels would include certain Class I and II parcels previously identified for long term conservation by the Connecticut DEP, which have restrictions on development and resale based on provisions of the Connecticut General Statutes.

In previous years, the Company generated a substantial portion of its net income in land donations and sales. However, land donations are not expected to generate income at historical levels in future periods. The Company plans to continue to utilize land donations and sales in 2008 to generate income for this segment of our business.

Capital Expenditures – The Company has received approval from its Board of Directors to spend $18.4 million on capital expenditures in 2008.

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 Connecticut Water, 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, and compliance with environmental and water quality regulations. From time to time, the Company may acquire other regulated and/or unregulated water companies. Profitability is often dependent on identification and consummation of business acquisitions and the profitable integration of these acquired businesses into the Company’s operations. 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 purposes, regulatory approval of land dispositions, the demand for telecommunications antenna site leases and the successful extensions and expansion of our service contract work. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The primary market risk faced by the Company is interest rate risk. As of December 31, 2007, the Company had no exposure to derivative financial instruments or financial instruments with

significant credit risk or off-balance-sheet risks. In addition, the Company is not subject in any material respect to any currency or other commodity risk.

The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company’s exposure to interest fluctuations is managed at the Company and subsidiary operations levels through the use of a combination of fixed rate long-term debt (and variable rate borrowings) under financing arrangements entered into by the Company and its subsidiaries and the use of the interest rate swap agreement discussed below. The Company has $21,000,000 current lines of credit with three banks, under which interim bank loans payable at December 31, 2007 were $6,459,000.

During the first quarter of 2004, Connecticut Water entered into a five-year interest rate swap transaction in connection with the refunding of its First Mortgage Bonds (Series V). The swap agreement provides for Connecticut Water’s exchange of floating rate interest payment obligations for fixed rate interest payment obligations on a notional principal amount of $12,500,000. The purpose of the interest rate swap is to manage the Company’s exposure to fluctuations in prevailing interest rates. See the “Liquidity and Capital Resources” section of Item 7 – “Management’s Discussion and Analysis and Results of Operations” above for further information. The Company does not enter into derivative financial contracts for trading or speculative purposes and does not use leveraged instruments.

Management believes that changes in interest rates will not have a material effect on income or cash flow during 2008, although there can be no assurances that interest rates will not significantly change.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of Connecticut Water Service, Inc., and the Notes to Consolidated Financial Statements together with the report of PricewaterhouseCoopers LLP, independent registered public accounting firm are included herein on pages F-2 through F-27.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures – As of December 31, 2007, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting – Internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of

financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. We have used the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in conducting our evaluation of the effectiveness of the internal control over financial reporting. Based on our evaluation, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2007. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting – There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None

PART III

Pursuant to General Instruction G(3), the information called for by Items 10, (except for information concerning the executive officers of the Company) 11, 12, 13 and 14 is hereby incorporated by reference to the Company’s definitive proxy statement to be filed on EDGAR on or about March 31, 2008. Certain information concerning the executive officers of the Company is included as Item 10 of this report.

36

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following is a list of the executive officers of the Company:

Age in

Period Held or

Term of Office

Name

2008*

Office

Prior Position

Expires

E. W. Thornburg

47

President, Chief

Held position since

2008 Annual Meeting

Executive Officer

March 2006

D. C. Benoit

51

Vice President -

Held current

2008 Annual Meeting

Finance, Chief

position or other

Financial Officer

executive position

and Treasurer

with the Company

since April 1996

T. P. O’Neill

53

Vice President -

Held current

2008 Annual Meeting

Operations &

position or other

Engineering

engineering

position with the

Company since

February 1980

M. P. Westbrook

49

Vice President -

Held current

2008 Annual Meeting

Administration and

position or other

Government Affairs

management position

with the Company

since September

1988

T. R. Marston

55

Vice President -

Held current

2008 Annual Meeting

Business

position or other

Development

position with the

Company since June

1974

D. J. Meaney

47

Corporate Secretary

Held current

2008 Annual Meeting

position or other

communications

position with the

Company since

August 1994

K. A. Johnson

41

Vice President -

Held current

2008 Annual Meeting

Human Resources

position or other

human resources

position with the Company

since May 2007

For further information regarding the executive officers see the Company’s Proxy Statement dated March 31, 2008.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

37

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	1.		Financial Statements:
			The report of independent registered public accounting firm and the Company’s Consolidated Financial Statements listed in the Index to Consolidated Financial Statements on page F-1 hereof are filed as part of this report, commencing on page F-2.

				Page
		Index to Consolidated Financial Statements and Schedule		F-1
		Report of Independent Registered Public Accounting Firm		F-2
		Consolidated Statements of Income for the years Ended December 31, 2007, 2006, and 2005		F-3
		Consolidated Statements of Comprehensive Income for the years ended December 31, 2007, 2006, and 2005		F-3
		Consolidated Balance Sheets at December 31, 2007 and 2006		F-4
		Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005		F-5
		Notes to Consolidated Financial Statements		F-6
2.		Financial Statement Schedule:
		The following schedule of the Company is included on the attached page as indicated:
		Schedule II Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2007, 2006, and 2005		S-1
		All other schedules provided for in the applicable regulations of the Securities and Exchange Commission have been omitted because of the absence of conditions under which they are required or because the required information is set forth in the financial statements or notes thereto.

(b)

Exhibits:

		Exhibits for Connecticut Water Service, Inc. are in the Index to Exhibits		E-1
		Exhibits heretofore filed with the Securities and Exchange Commission as indicated below are incorporated herein by reference and made a part hereof as if filed herewith. Exhibits marked by asterisk (*) are being filed herewith.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

		Page
Index to Consolidated Financial Statements and Schedule			F-1
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Statements of Income for the years ended December 31, 2007, 2006, and 2005			F-3
Consolidated Statements of Comprehensive Income for the years ended December 31, 2007, 2006, and 2005			F-3
Consolidated Balance Sheets at December 31, 2007 and 2006			F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005			F-5
Notes to Consolidated Financial Statements			F-6
Schedule II — Valuation and Qualifying Accounts			S-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Connecticut Water Service, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of comprehensive income present fairly, in all material respects, the financial position of Connecticut Water Service, Inc. and its subsidiaries (the “Company”) at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Stamford, Connecticut
March 17, 2008

Connecticut Water Service, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, (in thousands, except per share data)		2007				2006				2005
Operating Revenues		$	59,026			$	46,945			$	47,453
Operating Expenses
Operation and Maintenance			29,864				26,451				23,860
Depreciation			6,525				5,881				5,724
Income Taxes			4,195				2,055				2,517
Taxes Other Than Income Taxes			5,740				5,575				5,385
Total Operating Expenses			46,324				39,962				37,486
Net Operating Revenues			12,702				6,983				9,967
Other Utility Income, Net of Taxes			552				542				571
Total Utility Operating Income			13,254				7,525				10,538
Other Income (Deductions), Net of Taxes
Gain (Loss) on Real Estate Transactions			167				2,063				(61	)
Non-Water Sales Earnings			651				515				463
Allowance for Funds Used During Construction			92				458				521
Other			(972	)			608				(712	)
Total Other (Deductions) Income, Net of Taxes			(62	)			3,644				211
Interest and Debt Expenses
Interest on Long-Term Debt			3,500				3,526				2,929
Other Interest Charges			537				514				294
Amortization of Debt Expense			374				421				360
Total Interest and Debt Expenses			4,411				4,461				3,583
Income from Continuing Operations			8,781				6,708				7,166
Discontinued Operations, Net of Tax of $(244) and $1,720 in 2006 and 2005, respectively			—				243				3,158
Net Income			8,781				6,951				10,324
Preferred Stock Dividend Requirement			38				38				38
Total Net Income Applicable to Common Stock		$	8,743			$	6,913			$	10,286
Weighted Average Common Shares Outstanding:
Basic			8,270				8,188				8,094
Diluted			8,333				8,237				8,143
Earnings Per Common Share:
Basic — Continuing Operations		$	1.06			$	0.81			$	0.89
Basic — Discontinued Operations			—				0.03				0.38
Basic — Net Income Applicable to Common Stock		$	1.06			$	0.84			$	1.27
Diluted — Continuing Operations		$	1.05			$	0.81			$	0.88
Diluted — Discontinued Operations			—				0.03				0.38
Diluted — Net Income Applicable to Common Stock		$	1.05			$	0.84			$	1.26

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, (in thousands)		2007				2006				2005
Net Income Applicable to Common Stock		$	8,743			$	6,913			$	10,286
Other Comprehensive Income, net of tax
Qualified cash flow hedging instrument net of tax of $(148), $(22), and $129 in 2007, 2006, and 2005, respectively			(222	)			(45	)			207
Adjustment to pension and post-retirement benefits other than pension, net of tax of $56 in 2007			143				—				—
Comprehensive Income		$	8,664			$	6,868			$	10,493

The accompanying notes are an integral part of these consolidated financial statements.

Connecticut Water Service, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31, (in thousands, except share amounts)		2007				2006
ASSETS
Utility Plant		$	384,421			$	362,837
Construction Work in Progress			1,407				2,755
			385,828				365,592
Accumulated Provision for Depreciation			(108,166	)			(102,405	)
Net Utility Plant			277,662				263,187
Other Property and Investments			6,652				4,905
Cash and Cash Equivalents			337				1,377
Restricted Cash			8,220				—
Accounts Receivable (Less Allowance, 2007 - $352; 2006 - $285)			6,507				5,305
Accrued Unbilled Revenues			4,545				4,233
Materials and Supplies, at Average Cost			987				900
Prepayments and Other Current Assets			2,375				2,335
Total Current Assets			22,971				14,150
Unamortized Debt Issuance Expense			7,685				7,398
Unrecovered Income Taxes			30,278				24,372
Post-Retirement Benefits Other Than Pension			6,410				6,023
Goodwill			3,608				3,608
Deferred Charges and Other Costs			5,547				4,497
Total Regulatory and Other Long-Term Assets			53,528				45,898
Total Assets		$	360,813			$	328,140
CAPITALIZATION AND LIABILITIES
Common Stockholders’ Equity:
Common Stock Without Par Value:
Authorized - 25,000,000 Shares — Issued and Outstanding: 2007 — 8,376,842; 2006 — 8,270,394		$	62,808			$	60,165
Retained Earnings			37,272				35,676
Accumulated Other Comprehensive Income			18				97
Common Stockholders’ Equity			100,098				95,938
Preferred Stock			772				772
Long-Term Debt			92,285				77,347
Total Capitalization			193,155				174,057
Interim Bank Loans Payable			6,459				5,250
Current Portion of Long-Term Debt			7				7
Accounts Payable and Accrued Expenses			5,984				6,048
Accrued Taxes			1,316				464
Accrued Interest			810				887
Other Current Liabilities			337				314
Total Current Liabilities			14,913				12,970
Advances for Construction			34,583				32,183
Contributions in Aid of Construction			47,865				47,217
Deferred Federal and State Income Taxes			28,616				26,002
Unfunded Future Income Taxes			25,404				20,155
Long-Term Compensation Arrangements			14,717				13,933
Unamortized Investment Tax Credits			1,560				1,623
Commitments and Contingencies
Total Capitalization and Liabilities		$	360,813			$	328,140

The accompanying notes are an integral part of these consolidated financial statements.

Connecticut Water Service, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, (in thousands)		2007				2006				2005
Operating Activities:
Net Income		$	8,781			$	6,951			$	10,324
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Deferred Revenues			(3,823	)			—				—
Gain on Sale of BARLACO Assets Sold			—				(980	)			—
Earnings from Discontinued Operations			—				(243	)			(3,158	)
Allowance for Funds Used During Construction			(131	)			(491	)			(575	)
Depreciation (including $338 in 2007, $396 in 2006, and $188 in 2005 charged to other accounts)			7,173				6,277				5,912
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable and Accrued Unbilled Revenues			(1,513	)			268				(342	)
(Increase) Decrease in Other Current Assets			(129	)			(805	)			2,600
Decrease (Increase) in Other Non-Current Items			2,072				(549	)			(556	)
Increase (Decrease) in Accounts Payable, Accrued Expenses and Other Current Liabilities			1,258				690				(3,603	)
Increase (Decrease) in Deferred Income Taxes and Investment Tax Credits, Net			1,893				(1,492	)			2,332
Total Adjustments			6,800				2,675				2,610
Net Cash and Cash Equivalents Provided by Continuing Operations			15,581				9,626				12,934
Net Cash and Cash Equivalents Provided by (Used In) Discontinued Operations			—				243				(185	)
Net Cash and Cash Equivalents Provided by Operating Activities			15,581				9,869				12,749
Investing Activities:
Company Financed Additions to Utility Plant			(18,749	)			(16,199	)			(14,256	)
Advances from Others for Construction			(961	)			(1,102	)			(1,955	)
Net Additions to Utility Plant Used in Continuing Operations			(19,710	)			(17,301	)			(16,211	)
Release of Restricted Cash			—				2,686				—
Proceeds from Sale of BARLACO Assets Sold (Net of $35 in Transaction Costs)			—				965				—
Proceeds from Sale of Barnstable Water Company Assets (Net of $114 in Transaction Costs)			—				—				9,885
Sale (Purchase) of Short Term Investments			—				6,922				(6,713	)
Net Cash and Cash Equivalents Used in Investing Activities in Continuing Operations			(19,710	)			(6,728	)			(13,039	)
Net Cash and Cash Equivalents Used in Investing Activities in Discontinued Operations			—				—				(171	)
Net Cash Used in Investing Activities			(19,710	)			(6,728	)			(13,210	)
Financing Activities:
Net Proceeds from Interim Bank Loans			6,459				5,250				4,750
Net Repayment of Interim Bank Loans			(5,250	)			(4,750	)			(5,650	)
Repayment of Long-Term Debt Including Current Portion			(62	)			(2,381	)			(665	)
Proceeds from Issuance of Long-Term Debt			6,482				—				12,282
Proceeds from Issuance of Common Stock			1,238				1,401				2,038
Proceeds from Exercise of Stock Options			809				284				455
Redemption of Preferred Stock			—				(75	)			—
Costs Incurred to Issue Long-Term Debt and Common Stock			(367	)			(4	)			(934	)
Advances from Others for Construction			961				1,102				1,955
Cash Dividends Paid			(7,181	)			(7,030	)			(6,838	)
Net Cash and Cash Equivalents Provided by (Used in) Financing Activities in Continuing Operations			3,089				(6,203	)			7,393
Net Cash and Cash Equivalents Used in Financing Activities in Discontinued Operations			—				—				(3,200	)
Net Cash and Cash Equivalents Provided by (Used in) Financing Activites			3,089				(6,203	)			4,193
Net (Decrease) Increase in Cash and Cash Equivalents			(1,040	)			(3,062	)			3,732
Cash and Cash Equivalents at Beginning of Year			1,377				4,439				707
Cash and Cash Equivalents at End of Year		$	337			$	1,377			$	4,439
Non-Cash Investing and Financing Activities:
Non-Cash Contributed Utility Plant (see Note 1 for details)		$	2,116			$	3,295			$	1,231
Short-term Investment of Bond Proceeds Held in Trust		$	8,220			$	—			$	2,628
Supplemental Disclosures of Cash Flow Information:
Cash Paid for Continuing Operations During the Year for:
Interest		$	4,398			$	4,159			$	3,511
State and Federal Income Taxes		$	2,096			$	1,176			$	3,515
Cash Paid for Discontinued Operations During the Year for:
Interest		$	—			$	—			$	106
State and Federal Income Taxes		$	—			$	73			$	410