The following discussion and analysis provides information on AWR's consolidated operations and assets and where necessary, includes specific references to AWR's individual segments and/or other subsidiaries: GSWC, CCWC, ASUS and its subsidiaries.

Overview

Registrant's revenues, operating income and cash flows are earned primarily through delivering potable water to homes and businesses through approximately 2,900 miles of water distribution pipelines and the delivery of electricity in the Big Bear area of San Bernardino county. Rates charged to customers of GSWC and CCWC are determined by the CPUC and ACC, respectively. These rates are intended to allow recovery of operating costs and a reasonable rate of return on capital. Factors affecting financial performance of our regulated utilities include the process and timing of setting rates charged to customers; the ability to recover, and the process for recovering in rates, the costs of distributing water and electricity and our overhead costs; weather; the impact of increased water quality standards and environmental regulations on the cost of operations and capital expenditures; pressures on water supply caused by population growth, more stringent water quality standards, deterioration in water quality and water supply from a variety of causes; capital expenditures needed to upgrade water systems and increased costs; and risks associated with litigation relating to water quality and water supply, including suits initiated by Registrant to protect its water supply.

Operating revenues and income from contracted services at ASUS and its subsidiaries are earned primarily from the operation and maintenance of water and/or wastewater systems for the U.S. government at various military bases. All of the operations and maintenance contracts with the U.S. government are 50-year firm, fixed-price contracts with prospective price redeterminations. ASUS also may generate revenues from the construction of infrastructure improvements at these bases pursuant to the terms of these 50-year contracts or pursuant to supplemental contracts. Revenues generated by contract operations are primarily dependent on these new business activities, including military base operations and the construction of new and/or replacement infrastructure at these military bases. As a result, ASUS is subject to risks that are different than those of Registrant's regulated water and electric utilities. ASUS plans to continue seeking contracts for the operation and maintenance of water and/or wastewater services at military bases. Factors affecting the financial performance of our Military Utility Privatization Subsidiaries include delays in receiving payments from the U.S. government and the redetermination and equitable adjustment of prices under contracts with the U.S. government.

Registrant plans to continue to seek additional rate increases in future years to recover operating and supply costs and receive reasonable returns on invested capital. Capital expenditures in future years are expected to remain at much higher levels than depreciation expense. Cash solely from operations is not expected to be sufficient to fund Registrant's needs for capital expenditures, dividends, investments in Registrant's contract business and other cash requirements. Registrant expects to fund a portion of these needs through a combination of debt and common stock offerings over the next twelve months depending on market conditions. On August 25, 2008, AWR amended its $85 million syndicated credit facility, to increase its aggregate bank commitments by $30 million to $115 million. In addition, a senior note in the amount of $40.0 million has been issued on March 10, 2009, to CoBank, ACB ("CoBank"). Under the terms of this senior note, CoBank purchased a 6.7% Senior Note due March 10, 2019 in the aggregate principal amount of $40.0 million from GSWC. The proceeds will be used to pay down GSWC's intercompany short-term borrowings and to fund capital expenditures.

For 2008, net income was $22.0 million compared to $28.0 million in 2007, a decrease of 21.5%. Diluted earnings per share for 2008 were $1.26 compared to $1.61 in 2007. The decrease in earnings is due primarily to: (i) decreased water consumption and higher operating expenses at GSWC, (ii) a goodwill impairment charge of $7.7 million at CCWC, (iii) and the reduced financial performance of the Military Utility Privatization Subsidiaries. Prior to the implementation of GSWC's water revenue adjustment mechanism in November 2008, GSWC's earnings were affected by decreased consumption. GSWC's water consumption in 2008 decreased by approximately 5% as compared to 2007, or $0.18 per share. Although precipitation was overall lower in most of 2008 (with the exception of the first quarter), compared to the same period in 2007, the 2008 water revenues appear to have been impacted by the effects of state-wide customer conservation efforts. Due to the implementation of GSWC's water revenue adjustment mechanism in late November 2008, earnings were favorably impacted by approximately $0.03 per share in the fourth quarter of 2008 that would have previously been lost due to conservation. Therefore, the net impact due to lower sales in 2008 was $0.15 per share. Higher operating expenses in 2008, as compared to the same period of last year, also negatively impacted GSWC's earnings in 2008. These decreases in GSWC's earnings were partially offset by increases in customer rates approved by the CPUC and effective January 1, 2008 and a lower effective income tax rate.

During 2008, a charge of $7.7 million, or $0.27 per share, was recorded to reflect the impairment of goodwill at CCWC in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". During the recent impairment testing, Registrant determined that revenue growth for its Arizona utility, CCWC, was likely to be slower than originally projected due to downturns in overall economic conditions and new housing construction, as well as the current regulatory environment in Arizona resulting in regulatory lags and lower than anticipated rate increases.

Registrant's 2008 results have also been affected by the reduced financial performance of ASUS' contracted service operations at military bases, due to increases in operating expenses primarily incurred at two bases in North Carolina and South Carolina under new operating and maintenance contracts. ASUS incurred higher than anticipated operating costs, losses on certain construction projects under these new contracts and emergency construction activities not anticipated in the contracts to address the age and pre-existing condition of the infrastructure. ASUS is attempting to recover these increased costs through the equitable adjustment provisions of the contracts for these two bases. Moreover, ASUS' results in 2007 included a significant wastewater expansion project at Fort Bliss that added about $0.17 per share. There was no similar significant project during the year ended December 31, 2008. ASUS' overall performance in 2008 decreased by $0.10 per share when compared to 2007.

Unrealized gains and losses on purchased power contracts have been impacting GSWC's earnings since 2002 when GSWC entered into certain purchase power contracts. These contracts qualified as derivative instruments under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The pretax unrealized gain on purchased power contracts was $1.6 million increasing net income by $0.05 per share in 2008 compared to $2.1 million or $0.07 per share for the same period of 2007, a $0.02 per share decrease in earnings between the two periods.

Summary Results by Segment

AWR has three reportable segments: water, electric and contracted services. Within the segments, AWR has three principal business units: water and electric service utility operations conducted through GSWC, a water-service utility operation conducted through CCWC, and a contracted services unit conducted through ASUS and its subsidiaries. The tables below set forth summaries of the results by segment (in thousands) for the years ended December 31, 2008 and 2007:

                                  Operating Revenues                                Pretax Operating Income
                            Year           Year                                 Year           Year
                           Ended          Ended          $          %          Ended          Ended           $         %
                         12/31/2008     12/31/2007     CHANGE    CHANGE      12/31/2008     12/31/2007     CHANGE     CHANGE

Water                   $    247,936   $    237,882   $ 10,054       4.2 %  $     54,609   $     62,622   $  (8,013 )  -12.8 %
Electric                      28,424         28,574       (150 )    -0.5 %         1,334          3,274      (1,940 )  -59.3 %
Contracted services           42,358         34,914      7,444      21.3 %          (988 )        2,045      (3,033 ) -148.3 %
AWR parent                         -              -          -         -            (149 )         (209 )        60     28.7 %
Totals from operation   $    318,718   $    301,370   $ 17,348       5.8 %  $     54,806   $     67,732   $ (12,926 )  -19.1 %

Water - For the year ended December 31, 2008, pretax operating income for water decreased by $8.0 million compared to the year ended December 31, 2007, or 12.8%. The decrease was, due in large part, to the goodwill impairment charge of $7.7 million, or $0.27 per share, recorded at CCWC in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", as more fully described later.

The dollar water margin increased $7.5 million as compared to the same period of 2007 due to higher water rates approved by the CPUC effective January 1, 2008, offset by lower water consumption. An approximately 5% decrease in water consumption during the year of 2008 resulted in a $7.5 million decrease in water revenues, or $0.18 per share. This decrease in consumption occurred even though precipitation was overall lower in most of 2008 (with the exception of the first quarter) as compared to 2007. Differences in temperature and rainfall in Registrant's service areas as well as the effects of conservation, have impacted consumption of water by customers causing fluctuations in Registrant's revenues and earnings between comparable periods.

In August 2008, the CPUC issued a final decision regarding conservation rate design that allows for the establishment and implementation of a Water Revenue Adjustment Mechanism ("WRAM") to decouple sales from revenues and a Modified Cost Balancing Account ("MCBA") to remove the impact to earnings due to supply mix changes. GSWC prospectively implemented the new WRAM and MCBA in late November 2008 for Regions II and III. This should help mitigate fluctuations in Registrant's future water margin due to changes in water consumption and supply
mix. In addition, the CPUC also approved an advice letter filed by GSWC to allow GSWC to create and implement a Water Conservation Memorandum Account ("WCMA") to track the extraordinary expenses and revenue shortfall associated with conservation measures in conjunction with the declared drought in California. See further discussion on conservation included in the

"Regulatory Matters"section. With the implementation of the WRAM and MCBA in late November 2008, earnings were favorably impacted by approximately $0.03 per share in the fourth quarter of 2008 that would have previously been lost due to conservation. Therefore, the net impact due to lower sales in 2008 was $0.15 per share. Higher operating expenses, as more fully described later, decreased pretax operating income by $7.8 million.

Electric - For the year ended December 31, 2008, pretax operating income from electric operations decreased by $1.9 million due in part to a decrease of $546,000 in the pretax unrealized gain on purchased power contracts for the year ended December 31, 2008 as compared to the same period in 2007. The unrealized gain on purchased power contracts increased operating income by approximately $1.6 million for the year of 2008, or $0.05 per share, as compared to $2.1 million, or $0.07 per share, for the same period in 2007. The remainder of the decrease was due primarily to an increase of $802,000 in allocation of costs from corporate headquarters' to BVES and a lower electric margin resulting from lower electric usage and reconnection fees.

Contracted Services - For the year ended December 31, 2008, the pretax operating income for contracted services decreased by $3.0 million to a pretax loss of $988,000. This was primarily due to losses incurred at military bases under two new contracts. ASUS began operating and maintaining the water and wastewater systems under two new contracts in North Carolina and South Carolina during the first quarter of 2008. Pretax operating losses at these two bases were $3.6 million for the year ended December 31, 2008, including $935,000 for emergency construction and maintenance at PSUS to address pre-existing conditions not anticipated in the contract and for which ASUS is pursuing recovery from the U.S. government, and $379,000 in anticipated losses associated with certain initial capital upgrade projects. In September 2008, PSUS submitted a Request for Equitable Adjustment ("REA") for the water and wastewater systems at Fort Jackson, South Carolina requesting a contract modification for these initial capital upgrades and emergency construction costs. The aggregate value of the REA relating to construction work is approximately $1.6 million. The REA has not yet been approved by the U.S. government, and therefore, the anticipated losses on these projects and the emergency costs have been recorded during 2008 in construction expense. In addition, ASUS plans to submit an REA for the water and wastewater systems at Fort Bragg/Pope Air Force Base in North Carolina upon completion of the U.S. government's review of the Joint Inventory Report filed by ASUS in August 2008. The Joint Inventory Report indicates the quantity of the Fort Bragg/Pope Air Force Base infrastructure to be 20-30% greater than what was assumed under the original 50-year contract. Higher than anticipated transition costs, increases in nonincome tax assessments and other operating expenses also contributed to the losses.

Pretax operating income at the other military bases under existing contracts increased by $44,000 for the year ended December 31, 2008 as compared to the same period last year. During 2007, there was a $20.6 million wastewater expansion construction project at Fort Bliss with the U.S. government that generated approximately $4.9 million in pretax operating income during 2007. The project was completed in August 2007. However, ASUS' subsidiaries did undertake similar construction activity in 2008 that were on a smaller scale and helped replace construction revenues and operating income generated from the wastewater expansion project in 2007. Earnings and cash flows from amendments and modifications to the original 50-year contracts with the U.S. government are sporadic and may or may not continue in future periods.

The timely receipt of price redeterminations is critical in order for ASUS to recover increasing costs for operating and maintaining the water and wastewater systems at the military bases. In addition, higher allocations of corporate headquarters' expenses to ASUS and its wholly-owned subsidiaries by the CPUC were not contemplated at the time the contracts with the U.S. government were negotiated and will be addressed in future price redeterminations. Under the terms of these contracts, the contract price is subject to price redetermination two years after commencement of operations and every three years thereafter. Redeterminations have been submitted and are under review by the U.S. government for operations of ODUS and TUS in Virginia and Maryland, respectively. The price redeterminations are expected to be completed in 2009. Pending redetermination of prices, ASUS has received interim inflation adjustments during 2008 to the management fees for operating and maintaining the water and wastewater systems at Fort Eustis, Fort Story and Fort Monroe in Virginia, and the wastewater system at Fort Lee also in Virginia effective on the second anniversary of the date when ASUS began operating these bases (February 23, 2006 for Fort Lee and April 3, 2006 for the other three bases).

FBWS has experienced delays in the redetermination of prices at Fort Bliss following completion of the first two years of operation in October 2006. At Fort Bliss, management fees for operation and maintenance of the water and wastewater systems are based on cost levels prevailing in 2003 when the contract with the U.S. government was bid. Further, the contract pricing was also based on assumptions about the size and age of the infrastructure to be operated and maintained over the 50-year contract. The REA had been filed as a claim with the U.S. government to adequately reflect the amount of assets included in the infrastructure at Fort Bliss, which is substantially more than originally estimated by the U.S. government as part of its solicitation for this contract. In December 2008, the U.S. government approved an interim adjustment at Fort Bliss which increased the monthly water and wastewater fees by 50% and 59%, respectively. The increase was retroactive to October 1, 2008 and is expected to generate approximately $1.2 million of additional revenues annually

related to operating and maintaining the Fort Bliss systems. ASUS is continuing negotiations with Fort Bliss to finalize the adjustment necessary due to the increased infrastructure and will also be preparing a price redetermination request for Fort Bliss which it expects to file by mid-2009.

These price redeterminations and equitable adjustments, which include adjustments to reflect changes in operating conditions and infrastructure levels from that assumed at the time of the execution of the contracts, as well as inflation in costs, are expected to provide added revenues prospectively to help offset increased costs and provide Registrant the opportunity to generate positive operating income at its Military Utility Privatization Subsidiaries. As of December 31, 2008, ASUS has $1.1 million of goodwill, which may be at risk for potential impairment if requested price redeterminations and equitable adjustments that have not yet been approved, are not received.

The following discussion and analysis for the years ended December 31, 2008, 2007 and 2006 provides information on AWR's consolidated operations and assets and where necessary, includes specific references to AWR's individual segments and/or other subsidiaries: GSWC, CCWC, ASUS and its subsidiaries.

Consolidated Results of Operations - Years Ended December 31, 2008 and 2007 (amounts in thousands):

                                                       Year           Year
                                                      Ended          Ended          $         %
                                                    12/31/2008     12/31/2007     CHANGE    CHANGE
OPERATING REVENUES
Water                                              $    247,936   $    237,882   $ 10,054      4.2 %
Electric                                                 28,424         28,574       (150 )   -0.5 %
Contracted services                                      42,358         34,914      7,444     21.3 %
Total operating revenues                                318,718        301,370     17,348      5.8 %

OPERATING EXPENSES
Water purchased                                          46,617         45,439      1,178      2.6 %
Power purchased for pumping                              10,428         10,591       (163 )   -1.5 %
Groundwater production assessment                        10,623          9,944        679      6.8 %
Power purchased for resale                               13,616         14,199       (583 )   -4.1 %
Unrealized gain on purchased power contracts             (1,554 )       (2,100 )      546    -26.0 %
Supply cost balancing accounts                             (387 )       (1,962 )    1,575    -80.3 %
Other operating expenses                                 30,076         27,375      2,701      9.9 %
Administrative and general expenses                      62,716         52,637     10,079     19.1 %
Depreciation and amortization                            31,562         28,941      2,621      9.1 %
Maintenance                                              16,331         15,779        552      3.5 %
Property and other taxes                                 12,312         11,254      1,058      9.4 %
ASUS construction expenses                               23,872         22,125      1,747      7.9 %
Goodwill impairment charge                                7,700              -      7,700    100.0 %
Net gain on sale of property                                  -           (584 )      584   -100.0 %
Total operating expenses                                263,912        233,638     30,274     13.0 %

OPERATING INCOME                                         54,806         67,732    (12,926 )  -19.1 %

OTHER INCOME AND EXPENSES
Interest expense                                        (21,330 )      (21,582 )      252     -1.2 %
Interest income                                           1,837          2,371       (534 )  -22.5 %
Other                                                        71            299       (228 )  -76.3 %
                                                        (19,422 )      (18,912 )     (510 )    2.7 %

INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE         35,384         48,820    (13,436 )  -27.5 %

Income tax expense                                       13,379         20,790     (7,411 )  -35.6 %

NET INCOME                                         $     22,005   $     28,030   $ (6,025 )  -21.5 %

Net income for the year ended December 31, 2008 was $22.0 million, equivalent to $1.27 and $1.26 per common share on a basic and fully diluted basis, respectively, compared to $28.0 million or $1.62 and $1.61 per common share on a basic and fully diluted basis, respectively, for the year ended December 31, 2007. Impacting the comparability in the results of the two periods on a fully diluted per share basis are the following significant items:

† A goodwill impairment charge of $7.7 million, or $0.27 per share, during the year ended December 31, 2008 related to CCWC.

† An unrealized gain on purchased power contracts which increased pretax income during the year ended December 31, 2008 by $1.6 million, or $0.05 per share, as compared to $2.1 million, or $0.07 per share, for the same period in 2007, a net decrease of $0.02 per share.

† Increased water rates partially offset by higher water supply costs contributed $0.41 per share to earnings while an approximate 5% decrease in water usage during the year ended December 31, 2008 resulted in a $7.5 million decrease in water revenues, or $0.18 per share. The 2008 water revenues appear to have been impacted by the effects of state-wide customer conservation efforts. As previously mentioned, with the implementation of the WRAM and MCBA in late November 2008, earnings were favorably impacted by approximately $0.03 per

share in the fourth quarter of 2008 that would have previously been lost due to conservation. Therefore, the net impact due to lower sales in 2008 was $0.15 per share. As a result of these individual factors, the overall dollar water margin increased by $7.5 million, or $0.26 per share, during the year ended December 31, 2008.

† Pretax operating income for contracted services declined by $3.0 million, or $0.10 per share, during the year ended December 31, 2008 due primarily to losses incurred at new bases. ASUS commenced operation of water and wastewater systems at military bases in North Carolina and South Carolina during the first quarter of 2008 and has incurred higher than anticipated transition, maintenance and emergency construction costs as well as projected losses on certain construction contracts. Current estimates of construction costs compared to contract revenues indicate losses on certain initial capital upgrade projects. Modifications or change orders have not yet been approved by the U.S. government, and therefore, the anticipated losses on these projects and pre-contract costs have been recorded in construction expenses during 2008.

† Registrant recorded a net gain on sale of property of $584,000, or $0.02 per share, during the year ended December 31, 2007. There was no similar gain in the same period of 2008.

† GSWC recorded $480,000 in interest income, or $0.02 per share, during the second quarter of 2008 in connection with the IRS's examination of the 2002 income tax return.

† A significant decrease in the effective income tax rate during the year ended December 31, 2008 as compared to the same period in 2007, due primarily to changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements favorably impacted earnings by $0.10 per share during 2008.

† Higher other expenses at GSWC in 2008 primarily consisting of administrative, general, depreciation and other operating expenses as described below, contributed to an overall decrease of $0.32 per diluted share to the results of operations.

Operating Revenues

Water

For the year ended December 31, 2008, revenues from water operations increased by 4.2% to $247.9 million, compared to $237.9 million for the year ended December 31, 2007. Contributing to this increase were the following: (i) rate increases in all three GSWC water regions approved by the CPUC effective January 1, 2008, which added approximately $13.2 million to water revenues during the year ended December 31, 2008; (ii) an increase in water revenues of $2.1 million due to the surcharge approved by the CPUC effective in May 2008 to recover Region III's under-collection in supply costs; this increase in revenues is offset by a corresponding amount in the supply cost balancing accounts discussed below, resulting in no impact to pretax operating income; (iii) the adoption of the WRAM effective November 25, 2008 at which time GSWC began recording the difference between what is billed to its metered customers in Regions II and III and that which is authorized by the CPUC; and as a result, GSWC recorded $1.3 million of additional revenues caused by the under-collection in the WRAM accounts during the month of December 2008, and (iv) the recording of $541,000 in July 2008 of additional revenues in connection with corrections to the rate calculation for Region III.

These increases in water revenues were partially offset by a decrease of approximately 5% in water consumption due to conservation during 2008, which caused water revenues to be lower by approximately $7.5 million. The implementation of the WRAM should help mitigate fluctuations in Registrant's future revenues due to changes in water consumption. The decline in the number of customers did not result in a significant decrease in water revenues.

Electric

For the year ended December 31, 2008, revenues from electric operations decreased by 0.5% to $28.4 million compared to $28.6 million for the year ended December 31, 2007 due to a decrease of 2.2% in electric usage and lower connections and reconnection fees. The effects of lower electric usage were . . .