**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

(MarkOne)

**x**                              Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 

**for the quarterly period ended March 31, 2007**

**or**

**o**                                 Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 

**for the transition period from                     to                   **

**Commissionfile number   001-14431**

**American States Water Company**

(Exact Nameof Registrant as Specified in Its Charter)

| **California**                                                                      |   | **95-4676679**                     |
|-------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization)                      |   | (IRS Employer  Identification No.) |
| ** **                                                                          |   | ** **                         |
| **630 E.  Foothill Blvd, San Dimas, CA**                                            |   | **91773-1212**                     |
| (Address of  Principal Executive Offices)                                           |   | (Zip Code)                         |
| ** **                                                                          |
| **(909)  394-3600**                                                                 |
| (Registrant’s  Telephone Number, Including Area Code)                          |
| ** **                                                                          |
| **Not  Applicable**                                                                 |
| (Former Name,  Former Address and Former Fiscal Year, if Changed Since Last Report) |

**Commissionfile number   001-12008**

**Golden State Water Company**

(Exact Nameof Registrant as Specified in Its Charter)
| **California**                                                                      |   | **95-1243678**                     |
|-------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or  Other Jurisdiction of Incorporation or Organization)                     |   | (IRS  Employer Identification No.) |
| ** **                                                                          |   | ** **                         |
| **630 E. Foothill  Blvd, San Dimas, CA**                                            |   | **91773-1212**                     |
| (Address of  Principal Executive Offices)                                           |   | (Zip Code)                         |
| ** **                                                                          |
| **(909) 394-3600**                                                                  |
| (Registrant’s  Telephone Number, Including Area Code)                          |
| ** **                                                                          |
| **Not Applicable**                                                                  |
| (Former  Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |

Indicate by check mark whether Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that Registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

| American States Water  Company |   | Yes  x   No  o |
|--------------------------------|--------|------------------------------------|
| Golden State  Water Company    |   | Yes  x   No  o |

Indicate by check mark whether the Registrant isa large accelerated filer, an accelerated filer, or a nonaccelerated file. Seedefinition of “accelerated filer and large accelerated file” in Rule 12b-2 ofthe Exchange Act. (Check one):

| American States Water Company |   | Large  accelerated filero |   | Accelerated  filerx |   | Nonaccelerated  filero |
|-------------------------------|--------|---------------------------|--------|---------------------|--------|------------------------|
| Golden State  Water Company   |   | Large  accelerated filero |   | Accelerated  filero |   | Nonaccelerated  filerx |

 

Indicate by check mark whether the Registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act)

| American States Water  Company |   | Yes  ̈  Nox |
|--------------------------------|--------|-----------------|
| Golden State  Water Company    |   | Yes  ̈  Nox |

As of May 9, 2007,the number of Common Shares outstanding, of American States Water Company was17,061,007 shares.

As of May 9, 2007, all of the 122 outstanding Common Shares of GoldenState Water Company were owned by American States Water Company.

 

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**AMERICAN STATES WATER COMPANY**

**and**

**GOLDEN STATE WATER COMPANY**

**FORM 10-Q**

### **INDEX**

| **Part I**  | **Financial Information**                                                                                                      | ** ** |
|------------------|--------------------------------------------------------------------------------------------------------------------------------|------------|
|             | ** **                                                                                                                     | ** ** |
| Item  1:         | Financial  Statements                                                                                                          |       |
|             |                                                                                                                           |       |
|             | Consolidated Balance Sheets of American States Water  Company as of March 31, 2007 and December 31, 2006             |       |
|             |                                                                                                                           |       |
|             | Consolidated Statements of Income of American States  Water Company for the Three Months Ended March 31, 2007 and 2006    |       |
|             |                                                                                                                           |       |
|             | Consolidated Statements of Cash Flow of American  States Water Company for the Three Months Ended March 31, 2007 and 2006 |       |
|             |                                                                                                                           |       |
|             | Balance Sheets of Golden State Water Company as of  March 31, 2007 and December 31, 2006                             |       |
|             |                                                                                                                           |       |
|             | Statements of Income of Golden State Water Company for  the Three Months Ended March 31, 2007 and 2006                    |       |
|             |                                                                                                                           |       |
|             | Statements of Cash Flow of Golden State Water Company  for the Three Months Ended March 31, 2007 and 2006                 |       |
|             |                                                                                                                           |       |
|             | Notes to Consolidated Financial Statements                                                                                     |       |
|             |                                                                                                                           |       |
| Item 2:          | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                    |       |
|             |                                                                                                                           |       |
| Item 3:          | Quantitative and Qualitative Disclosures About Market  Risk                                                                    |       |
|             |                                                                                                                           |       |
| Item 4:          | Controls and Procedures                                                                                                        |       |
|             |                                                                                                                           |       |
| **Part II** | **Other Information**                                                                                                          | ** ** |
|             | ** **                                                                                                                     | ** ** |
| Item  1:         | Legal  Proceedings                                                                                                             |       |
|             |                                                                                                                           |       |
| Item 1A:         | Risk Factors                                                                                                                   |       |
|             |                                                                                                                           |       |
| Item 2:          | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                   |       |
|             |                                                                                                                           |       |
| Item 3:          | Defaults Upon Senior Securities                                                                                                |       |
|             |                                                                                                                           |       |
| Item 4:          | Submission of Matters to a Vote of Security Holders                                                                            |       |
|             |                                                                                                                           |       |
| Item  5:         | Other  Information                                                                                                             |       |
|             |                                                                                                                           |       |
| Item 6:          | Exhibits                                                                                                                       |       |
|             |                                                                                                                           |       |
|             | Signatures                                                                                                                     |       |

 

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#### **PART I**

**Item 1. Financial Statements**

General

Thebasic financial statements included herein have been prepared by Registrant,without audit, pursuant to the rules and regulations of the Securities andExchange Commission.

Certain information and footnote disclosures normallyincluded in financial statements, prepared in accordance with accountingprinciples generally accepted in the United States of America, have beencondensed or omitted pursuant to such rules and regulations. In theopinion of management, all adjustments consisting of normal recurring items andestimates necessary for a fair statement of results for the interim period havebeen made.

It is suggested that these financial statements beread in conjunction with the financial statements and notes thereto in thelatest Annual Report on Form 10-K of American States Water Company and itswholly-owned subsidiary, Golden State Water Company.

Filing Format

This quarterly report on Form 10-Q is a combinedreport being filed by two separate Registrants: American States Water Company(hereinafter “AWR”) and Golden State Water Company (hereinafter “GSWC”). Formore information, please see Note 1 to the Notes to Consolidated FinancialStatements and the heading entitled General in Item 2 - Management’s Discussionand Analysis of Financial Condition and Results of Operations. References inthis report to “Registrant” are to AWR and GSWC collectively, unless otherwisespecified. GSWC makes no representations as to the information contained inthis report relating to AWR and its subsidiaries, other than GSWC.

**Forward-Looking Information**

Certain matters discussed in this report (includingthe documents incorporated herein by reference) are forward-looking statementsintended to qualify for the “safe harbor” from liability established by thePrivate Securities Litigation Reform Act of 1995. These forward-lookingstatements can generally be identified as such because the context of thestatement will include words such as Registrant “believes,” “anticipates,” “expects”or words of similar import. Similarly, statements that describe Registrant’sfuture plans, objectives, estimates or goals are also forward-lookingstatements. Such statements address future events and conditions concerningcapital expenditures, earnings, litigation, rates, water quality and otherregulatory matters, adequacy of water supplies, the ability to recover supply costs from ratepayers, contractoperations, liquidity and capital resources, and accounting matters. Actualresults in each case could differ materially from those currently anticipatedin such statements, by reason of factors such as changes in utility regulation,including ongoing local, state and federal activities; recovery of regulatoryassets not yet included in rates; future economic conditions, including changesin customer demand and changes in water and energy supply costs; futureclimatic conditions; and legislative, legal proceedings, regulatory and othercircumstances affecting anticipated revenues and costs.

1

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**AMERICANSTATES WATER COMPANY****CONSOLIDATED BALANCE SHEETS****ASSETS****(Unaudited)**
| **(in thousands)**                                                                                 | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Utility Plant, at cost**                                                                              | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Water                                                                                                   |       | $                        | 940,928    |                        | $          | 936,810 |   |
| Electric                                                                                                |       | 64,424                   |       | 64,103                      |       |
|                                                                                                    |       | 1,005,352                |       | 1,000,913                   |       |
| Less -  Accumulated depreciation                                                                        |       | (294,511                 | )          | (286,951                    | )          |
|                                                                                                    |       | 710,841                  |       | 713,962                     |       |
| Construction  work in progress                                                                          |       | 42,672                   |       | 36,639                      |       |
| Net utility  plant                                                                                      |       | 753,513                  |       | 750,601                     |       |
|                                                                                                    |       |                     |       |                        |       |
| **Other Property and Investments**                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Goodwill                                                                                                |       | 11,606                   |       | 11,614                      |       |
| Other property  and investments                                                                         |       | 9,986                    |       | 9,977                       |       |
| Total other  property and investments                                                                   |       | 21,592                   |       | 21,591                      |       |
|                                                                                                    |       |                     |       |                        |       |
| **Current Assets**                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                              |       | 9,052                    |       | 3,223                       |       |
| Accounts  receivable-customers (less allowance for doubtful accounts of $671 in 2007  and $796 in 2006) |       | 12,555                   |       | 14,816                      |       |
| Unbilled revenue                                                                                        |       | 16,054                   |       | 15,696                      |       |
| Receivable from  the U.S. government                                                                    |       | 10,252                   |       | 6,388                       |       |
| Other accounts  receivable (less allowance for doubtful accounts of $300 in 2007 and 2006)              |       | 6,164                    |       | 5,368                       |       |
| Income taxes  receivable                                                                                |       | 475                      |       | 1,100                       |       |
| Materials and  supplies, at average cost                                                                |       | 1,667                    |       | 1,565                       |       |
| Regulatory  assets - current                                                                            |       | 4,486                    |       | 3,905                       |       |
| Prepayments and  other current assets                                                                   |       | 3,002                    |       | 2,787                       |       |
| Costs and  estimated earnings in excess of billings on uncompleted contracts                            |       | 4,489                    |       | 4,495                       |       |
| Deferred income  taxes - current                                                                        |       | 3,516                    |       | 5,093                       |       |
| Total current  assets                                                                                   |       | 71,712                   |       | 64,436                      |       |
|                                                                                                    |       |                     |       |                        |       |
| **Regulatory and Other Assets**                                                                         | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Regulatory  assets                                                                                      |       | 84,735                   |       | 84,686                      |       |
| Other accounts  receivable                                                                              |       | 9,449                    |       | 9,335                       |       |
| Deferred income  taxes                                                                                  |       | 11                       |       | 16                          |       |
| Other                                                                                                   |       | 8,767                    |       | 6,290                       |       |
| Total regulatory  and other assets                                                                      |       | 102,962                  |       | 100,327                     |       |
|                                                                                                    |       |                     |       |                        |       |
| **Total Assets**                                                                                        |       | $                        | 949,779    |                        | $          | 936,955 |   |

*The accompanying notes are an integral part ofthese consolidated financial statements*

2

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**AMERICANSTATES WATER COMPANY****CONSOLIDATED BALANCE SHEETS****CAPITALIZATION AND LIABILITIES****(Unaudited)**
| **(in thousands)**                                                      | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Capitalization**                                                           | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Common shares, no par value, no stated value                                 |       | $                        | 175,603    |                        | $          | 175,135 |   |
| Earnings reinvested in the business                                          |       | 111,716                  |       | 108,599                     |       |
| Total common shareholders’ equity                                       |       | 287,319                  |       | 283,734                     |       |
| Long-term debt                                                               |       | 267,776                  |       | 267,833                     |       |
| Total capitalization                                                         |       | 555,095                  |       | 551,567                     |       |
|                                                                         |       |                     |       |                        |       |
| **Current  Liabilities**                                                     | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Notes payable to banks                                                       |       | 36,000                   |       | 32,000                      |       |
| Long-term debt - current                                                     |       | 593                      |       | 603                         |       |
| Accounts payable                                                             |       | 23,003                   |       | 23,984                      |       |
| Income taxes payable                                                         |       | 115                      |       | 103                         |       |
| Accrued employee expenses                                                    |       | 5,191                    |       | 5,320                       |       |
| Accrued interest                                                             |       | 5,270                    |       | 2,583                       |       |
| Unrealized loss on purchased power contracts                                 |       | 944                      |       | 3,654                       |       |
| Regulatory liabilities - current                                             |       | 3,682                    |       | 3,546                       |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 1,790                    |       | 2,038                       |       |
| Other                                                                        |       | 11,800                   |       | 12,072                      |       |
| Total current liabilities                                                    |       | 88,388                   |       | 85,903                      |       |
|                                                                         |       |                     |       |                        |       |
| **Other  Credits**                                                           | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Advances for construction                                                    |       | 84,266                   |       | 83,203                      |       |
| Contributions in aid of construction - net                                   |       | 92,153                   |       | 91,702                      |       |
| Deferred income taxes                                                        |       | 83,994                   |       | 80,727                      |       |
| Unamortized investment tax credits                                           |       | 2,405                    |       | 2,427                       |       |
| Accrued pension and other postretirement benefits                            |       | 32,846                   |       | 31,042                      |       |
| Regulatory liabilities                                                       |       | 605                      |       | 588                         |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 2,156                    |       | 2,005                       |       |
| Other                                                                        |       | 7,871                    |       | 7,791                       |       |
| Total other credits                                                          |       | 306,296                  |       | 299,485                     |       |
|                                                                         |       |                     |       |                        |       |
| **Commitments  and Contingencies (Note 7)**                                  |       | —                   |       | —                      |       |
|                                                                         |       |                     |       |                        |       |
| **Total  Capitalization and Liabilities**                                    |       | $                        | 949,779    |                        | $          | 936,955 |   |

*The accompanying notes are an integral part ofthese consolidated financial statements*

3

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**AMERICANSTATES WATER COMPANY****CONSOLIDATED STATEMENTS OF INCOME****FOR THE THREE MONTHS****ENDED MARCH 31, 2007 AND 2006****(Unaudited)**
| ** **                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Operating Revenues**                                                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Water                                                                 |       | $                                                | 50,327     |   | $ | 50,749 |   |
| Electric                                                              |       | 8,869                                            |       | 8,346 |   |
| Contracted  services                                                  |       | 13,074                                           |       | 5,220 |   |
| Total operating  revenues                                             |       | 72,270                                           |       | 64,315 |   |
|                                                                  |       |                                             |       |   |   |
| **Operating Expenses**                                                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Water purchased                                                       |       | 8,873                                            |       | 8,344 |   |
| Power purchased  for pumping                                          |       | 2,118                                            |       | 1,604 |   |
| Groundwater  production assessment                                    |       | 2,279                                            |       | 2,083 |   |
| Power purchased  for resale                                           |       | 4,281                                            |       | 4,563 |   |
| Unrealized  (gain) loss on purchased power contracts                  |       | (2,710                                           | )          | 2,155 |   |
| Supply cost  balancing accounts                                       |       | (720                                             | )          | 487 |   |
| Other operating  expenses                                             |       | 6,597                                            |       | 4,700 |   |
| Administrative  and general expenses                                  |       | 13,007                                           |       | 11,114 |   |
| Depreciation and  amortization                                        |       | 7,089                                            |       | 6,483 |   |
| Maintenance                                                           |       | 2,973                                            |       | 2,473 |   |
| Property and  other taxes                                             |       | 2,930                                            |       | 2,547 |   |
| Construction  expenses                                                |       | 9,069                                            |       | 3,702 |   |
| Net gain on sale  of property                                         |       | (367                                             | )          | — |   |
| Total operating  expenses                                             |       | 55,419                                           |       | 50,255 |   |
|                                                                  |       |                                             |       |   |   |
| **Operating Income**                                                  |       | 16,851                                           |       | 14,060 |   |
|                                                                  |       |                                             |       |   |   |
| **Other Income and Expenses**                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Interest expense                                                      |       | (5,496                                           | )          | (5,256 | ) |
| Interest income                                                       |       | 566                                              |       | 899 |   |
| Other                                                                 |       | 69                                               |       | — |   |
| Total other  income and expenses                                      |       | (4,861                                           | )          | (4,357 | ) |
|                                                                  |       |                                             |       |   |   |
| **Income from operations before  income tax expense**                 |       | 11,990                                           |       | 9,703 |   |
|                                                                  |       |                                             |       |   |   |
| Income tax  expense                                                   |       | 5,006                                            |       | 3,804 |   |
|                                                                  |       |                                             |       |   |   |
| **Net Income**                                                        |       | $                                                | 6,984      |   | $ | 5,899 |   |
|                                                                  |       |                                             |       |   |   |
| **Weighted Average Number of  Shares Outstanding**                    |       | 17,055                                           |       | 16,806 |   |
| **Basic Earnings Per Common Share**                                   |       | $                                                | 0.40       |   | $ | 0.35 |   |
|                                                                  |       |                                             |       |   |   |
| **Weighted Average Number of  Diluted Shares**                        |       | 17,114                                           |       | 16,909 |   |
| **Fully Diluted Earnings Per  Share**                                 |       | $                                                | 0.40       |   | $ | 0.35 |   |
|                                                                  |       |                                             |       |   |   |
| **Dividends Declared Per Common Share**                               |       | $                                                | 0.235      |   | $ | 0.225 |   |

*The accompanying notes are an integral part ofthese consolidated financial statements*

4

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**AMERICANSTATES WATER COMPANY****CONSOLIDATED STATEMENTS OF CASH FLOW****FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND2006****(Unaudited)**
| ** **                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Cash  Flows From Operating Activities:**                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income                                                        |       | $                                                | 6,984      |   | $ | 5,899 |   |
| Adjustments for  non-cash items:                                  |       |                                             |       |   |   |
| Depreciation and amortization                                     |       | 7,089                                            |       | 6,483 |   |
| Provision for doubtful accounts                                   |       | 5                                                |       | 176 |   |
| Deferred income taxes and investment tax credits                  |       | 2,072                                            |       | 220 |   |
| Unrealized (gain) loss on purchased power contracts               |       | (2,710                                           | )          | 2,155 |   |
| Stock based compensation expense                                  |       | 193                                              |       | 68 |   |
| Net gain on sale of property                                      |       | (367                                             | )          | — |   |
| Other - net                                                       |       | 192                                              |       | 323 |   |
| Changes in  assets and liabilities:                               |       |                                             |       |   |   |
| Accounts receivable - customers                                   |       | 2,256                                            |       | 3,141 |   |
| Unbilled revenue                                                  |       | (358                                             | )          | (527 | ) |
| Other accounts receivable                                         |       | (910                                             | )          | 333 |   |
| Receivable from the U.S. government                               |       | (3,864                                           | )          | 252 |   |
| Materials and supplies                                            |       | (102                                             | )          | 12 |   |
| Prepayments and other current assets                              |       | (215                                             | )          | 604 |   |
| Regulatory assets — supply cost balancing accounts           |       | (720                                             | )          | 487 |   |
| Other assets                                                      |       | 574                                              |       | (5,170 | ) |
| Accounts payable                                                  |       | (981                                             | )          | 343 |   |
| Income taxes receivable/payable                                   |       | 829                                              |       | 1,140 |   |
| Other liabilities                                                 |       | 4,226                                            |       | 833 |   |
| Net cash provided                                                 |       | 14,193                                           |       | 16,772 |   |
|                                                              |       |                                             |       |   |   |
| **Cash  Flows From Investing Activities:**                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Construction expenditures                                         |       | (9,965                                           | )          | (19,399 | ) |
| Proceeds from sale of property                                    |       | 380                                              |       | — |   |
| Net cash used                                                     |       | (9,585                                           | )          | (19,399 | ) |
|                                                              |       |                                             |       |   |   |
| **Cash  Flows From Financing Activities:**                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Proceeds from issuance of common shares                           |       | 272                                              |       | 529 |   |
| Proceeds from stock option exercises                              |       | 12                                               |       | 190 |   |
| Tax benefits from exercise of stock-based awards                  |       | 3                                                |       | 45 |   |
| Receipt of advances for and contributions in aid of  construction |       | 1,501                                            |       | 2,841 |   |
| Refunds on advances for construction                              |       | (427                                             | )          | (357 | ) |
| Repayments of long-term debt                                      |       | (112                                             | )          | (139 | ) |
| Net change in notes payable to banks                              |       | 4,000                                            |       | 4,000 |   |
| Cash received on financing portion of purchased  power contracts  |       | —                                           |       | 667 |   |
| Dividend equivalent rights                                        |       | (36                                              | )          | — |   |
| Tax benefits from payment of dividend equivalent  rights          |       | 16                                               |       | — |   |
| Dividends paid                                                    |       | (4,008                                           | )          | (3,781 | ) |
| Net cash provided                                                 |       | 1,221                                            |       | 3,995 |   |
|                                                              |       |                                             |       |   |   |
| **Net  increase in cash and cash equivalents**                    |       | 5,829                                            |       | 1,368 |   |
| **Cash  and cash equivalents, beginning of period**               |       | 3,223                                            |       | 13,032 |   |
| **Cash and cash equivalents, end  of period**                     |       | $                                                | 9,052      |   | $ | 14,400 |   |

*Theaccompanying notes are an integral part of these consolidated financialstatements*

5

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**GOLDENSTATE WATER COMPANY****BALANCE SHEETS****ASSETS****(Unaudited)**
| **(in thousands)**                                                                                | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Utility  Plant, at cost**                                                                            | ** ** | ** **               | ** ** | ** **                  | ** ** |
|                                                                                                   |       |                     |       |                        |       |
| Water                                                                                                  |       | $                        | 888,011    |                        | $          | 884,719 |   |
| Electric                                                                                               |       | 64,424                   |       | 64,103                      |       |
|                                                                                                   |       | 952,435                  |       | 948,822                     |       |
| Less - Accumulated depreciation                                                                        |       | (278,821                 | )          | (271,716                    | )          |
|                                                                                                   |       | 673,614                  |       | 677,106                     |       |
| Construction work in progress                                                                          |       | 40,376                   |       | 34,438                      |       |
| Net utility plant                                                                                      |       | 713,990                  |       | 711,544                     |       |
|                                                                                                   |       |                     |       |                        |       |
| **Other  Property and Investments**                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Other property and investments                                                                         |       | 7,731                    |       | 7,745                       |       |
| Total other property and investments                                                                   |       | 7,731                    |       | 7,745                       |       |
|                                                                                                   |       |                     |       |                        |       |
| **Current  Assets**                                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                                                                              |       | 4,016                    |       | 1,735                       |       |
| Accounts receivable-customers (less allowance for  doubtful accounts of $636 in 2007 and $771 in 2006) |       | 12,297                   |       | 14,465                      |       |
| Unbilled revenue                                                                                       |       | 15,677                   |       | 15,371                      |       |
| Inter-company receivable                                                                               |       | 747                      |       | 111                         |       |
| Other accounts receivable (less allowance for  doubtful accounts of $283 in 2007 and 2006)             |       | 5,204                    |       | 4,066                       |       |
| Materials and supplies, at average cost                                                                |       | 1,652                    |       | 1,550                       |       |
| Regulatory assets - current                                                                            |       | 4,415                    |       | 3,834                       |       |
| Prepayments and other current assets                                                                   |       | 2,844                    |       | 2,575                       |       |
| Deferred income taxes - current                                                                        |       | 3,409                    |       | 5,024                       |       |
| Total current assets                                                                                   |       | 50,261                   |       | 48,731                      |       |
|                                                                                                   |       |                     |       |                        |       |
| **Regulatory  and Other Assets**                                                                       | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Regulatory assets                                                                                      |       | 84,735                   |       | 84,686                      |       |
| Other accounts receivable                                                                              |       | 9,449                    |       | 9,335                       |       |
| Other                                                                                                  |       | 8,283                    |       | 5,620                       |       |
| Total regulatory and other assets                                                                      |       | 102,467                  |       | 99,641                      |       |
|                                                                                                   |       |                     |       |                        |       |
| **Total  Assets**                                                                                      |       | $                        | 874,449    |                        | $          | 867,661 |   |

*The accompanying notes are an integral part ofthese financial statements*

6

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**GOLDENSTATE WATER COMPANYBALANCE SHEETSCAPITALIZATION AND LIABILITIES(Unaudited)**
| **(in thousands)**                            | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Capitalization**                                 | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Common shares,  no par value, no stated value      |       | $                        | 161,624    |                        | $          | 161,459 |   |
| Earnings  reinvested in the business               |       | 107,255                  |       | 105,506                     |       |
| Total common  shareholder’s equity            |       | 268,879                  |       | 266,965                     |       |
| Long-term debt                                     |       | 261,191                  |       | 261,248                     |       |
| Total  capitalization                              |       | 530,070                  |       | 528,213                     |       |
|                                               |       |                     |       |                        |       |
| **Current Liabilities**                            | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Long-term debt -  current                          |       | 313                      |       | 323                         |       |
| Accounts payable                                   |       | 17,019                   |       | 19,818                      |       |
| Inter-company  payable                             |       | 14,340                   |       | 12,272                      |       |
| Income taxes  payable to Parent                    |       | 1,565                    |       | 1,642                       |       |
| Accrued employee  expenses                         |       | 4,775                    |       | 4,887                       |       |
| Accrued interest                                   |       | 5,098                    |       | 2,445                       |       |
| Unrealized loss  on purchased power contracts      |       | 944                      |       | 3,654                       |       |
| Regulatory  liabilities - current                  |       | 3,682                    |       | 3,546                       |       |
| Other                                              |       | 11,371                   |       | 11,654                      |       |
| Total current  liabilities                         |       | 59,107                   |       | 60,241                      |       |
|                                               |       |                     |       |                        |       |
| **Other Credits**                                  | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Advances for  construction                         |       | 77,179                   |       | 76,646                      |       |
| Contributions in  aid of construction - net        |       | 85,725                   |       | 85,513                      |       |
| Deferred income  taxes                             |       | 80,175                   |       | 76,678                      |       |
| Unamortized  investment tax credits                |       | 2,405                    |       | 2,427                       |       |
| Accrued pension  and other postretirement benefits |       | 32,846                   |       | 31,042                      |       |
| Other                                              |       | 6,942                    |       | 6,901                       |       |
| Total other  credits                               |       | 285,272                  |       | 279,207                     |       |
|                                               |       |                     |       |                        |       |
| **Commitments and Contingencies  (Note 7)**        |       | —                   |       | —                      |       |
|                                               |       |                     |       |                        |       |
| **Total Capitalization and  Liabilities**          |       | $                        | 874,449    |                        | $          | 867,661 |   |

*The accompanying notes are an integral part ofthese financial statements*

7

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**GOLDENSTATE WATER COMPANY****STATEMENTS OF INCOME****FOR THE THREE MONTHS****ENDED MARCH 31, 2007 AND 2006****(Unaudited)**
| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                               | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Operating Revenues**                                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Water                                                 |       | $                                                | 48,688     |   | $ | 48,967 |   |
| Electric                                              |       | 8,869                                            |       | 8,346 |   |
| Total operating  revenues                             |       | 57,557                                           |       | 57,313 |   |
|                                                  |       |                                             |       |   |   |
| **Operating Expenses**                                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Water purchased                                       |       | 8,709                                            |       | 8,174 |   |
| Power purchased  for pumping                          |       | 2,016                                            |       | 1,515 |   |
| Groundwater  production assessment                    |       | 2,279                                            |       | 2,083 |   |
| Power purchased  for resale                           |       | 4,281                                            |       | 4,563 |   |
| Unrealized  (gain) loss on purchased power contracts  |       | (2,710                                           | )          | 2,155 |   |
| Supply cost  balancing accounts                       |       | (720                                             | )          | 487 |   |
| Other operating  expenses                             |       | 5,700                                            |       | 4,527 |   |
| Administrative  and general expenses                  |       | 11,495                                           |       | 10,183 |   |
| Depreciation and  amortization                        |       | 6,644                                            |       | 6,031 |   |
| Maintenance                                           |       | 2,770                                            |       | 2,319 |   |
| Property and  other taxes                             |       | 2,829                                            |       | 2,428 |   |
| Net gain on sale  of property                         |       | (367                                             | )          | — |   |
| Total operating  expenses                             |       | 42,926                                           |       | 44,465 |   |
|                                                  |       |                                             |       |   |   |
| **Operating Income**                                  |       | 14,631                                           |       | 12,848 |   |
|                                                  |       |                                             |       |   |   |
| **Other Income and Expenses**                         |       |                                             |       |   |   |
| Interest expense                                      |       | (5,019                                           | )          | (4,803 | ) |
| Interest income                                       |       | 533                                              |       | 797 |   |
| Other                                                 |       | 52                                               |       | — |   |
|                                                  |       | (4,434                                           | )          | (4,006 | ) |
|                                                  |       |                                             |       |   |   |
| **Income from operations before  income tax expense** |       | 10,197                                           |       | 8,842 |   |
|                                                  |       |                                             |       |   |   |
| Income tax  expense                                   |       | 4,295                                            |       | 3,495 |   |
|                                                  |       |                                             |       |   |   |
| **Net Income**                                        |       | $                                                | 5,902      |   | $ | 5,347 |   |

*The accompanying notes are an integral part ofthese financial statements*

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**GOLDENSTATE WATER COMPANY****STATEMENTS OF CASH FLOW****FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND2006****(Unaudited)**
| ** **                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Cash  Flows From Operating Activities:**                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income                                                        |       | $                                                | 5,902      |   | $ | 5,347 |   |
| Adjustments for  non-cash items:                                  |       |                                             |       |   |   |
| Depreciation and amortization                                     |       | 6,644                                            |       | 6,031 |   |
| Provision for doubtful accounts                                   |       | (5                                               | )          | 163 |   |
| Deferred income taxes and investment tax credits                  |       | 2,167                                            |       | 45 |   |
| Unrealized (gain) loss on purchased power contracts               |       | (2,710                                           | )          | 2,155 |   |
| Stock based compensation expense                                  |       | 177                                              |       | 67 |   |
| Net gain on sale of property                                      |       | (367                                             | )          | — |   |
| Other — net                                                  |       | 139                                              |       | 93 |   |
| Changes in  assets and liabilities:                               |       |                                             |       |   |   |
| Accounts receivable - customers                                   |       | 2,173                                            |       | 3,026 |   |
| Unbilled revenue                                                  |       | (306                                             | )          | (446 | ) |
| Other accounts receivable                                         |       | (1,252                                           | )          | 543 |   |
| Materials and supplies                                            |       | (102                                             | )          | 12 |   |
| Prepayments and other current assets                              |       | (269                                             | )          | 594 |   |
| Regulatory assets - supply cost balancing accounts                |       | (720                                             | )          | 487 |   |
| Other assets                                                      |       | 520                                              |       | (1,332 | ) |
| Accounts payable                                                  |       | (2,799                                           | )          | (43 | ) |
| Inter-company receivable/payable                                  |       | (568                                             | )          | 1,030 |   |
| Income taxes receivable/payable from/to Parent                    |       | 112                                              |       | 1,011 |   |
| Other liabilities                                                 |       | 4,239                                            |       | 531 |   |
| Net cash provided                                                 |       | 12,975                                           |       | 19,314 |   |
|                                                              |       |                                             |       |   |   |
| **Cash  Flows From Investing Activities:**                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Construction expenditures                                         |       | (9,539                                           | )          | (18,808 | ) |
| Proceeds from sale of property                                    |       | 380                                              |       | — |   |
| Net cash used                                                     |       | (9,159                                           | )          | (18,808 | ) |
|                                                              |       |                                             |       |   |   |
| **Cash  Flows From Financing Activities:**                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Proceeds from stock option exercises                              |       | —                                           |       | 190 |   |
| Tax benefits from exercise of stock-based awards                  |       | 3                                                |       | 45 |   |
| Receipt of advances for and contributions in aid of  construction |       | 1,274                                            |       | 2,835 |   |
| Refunds on advances for construction                              |       | (427                                             | )          | (334 | ) |
| Repayments of long-term debt                                      |       | (67                                              | )          | (69 | ) |
| Net change in inter-company borrowings                            |       | 2,000                                            |       | 2,500 |   |
| Cash received on financing portion of purchased  power contracts  |       | —                                           |       | 667 |   |
| Dividend equivalent rights                                        |       | (33                                              | )          | — |   |
| Tax benefits from payment of dividend equivalent  rights          |       | 15                                               |       | — |   |
| Dividends paid                                                    |       | (4,300                                           | )          | (4,300 | ) |
| Net cash (used) provided                                          |       | (1,535                                           | )          | 1,534 |   |
|                                                              |       |                                             |       |   |   |
| **Net  increase in cash and cash equivalents**                    |       | 2,281                                            |       | 2,040 |   |
| **Cash  and cash equivalents, beginning of period**               |       | 1,735                                            |       | 8,788 |   |
| **Cash and cash equivalents, end  of period**                     |       | $                                                | 4,016      |   | $ | 10,828 |   |

*The accompanying notes are an integral part ofthese financial statements*

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**AMERICANSTATES WATER COMPANY****AND****GOLDEN STATE WATER COMPANY****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)**

**Note 1 —Summary of Significant Accounting Policies:**

General / Nature of Operations:American States Water Company (“AWR”) is the parent company of Golden StateWater Company (“GSWC”), Chaparral City Water Company (“CCWC”), and AmericanStates Utility Services, Inc. (“ASUS”) and its subsidiaries.  More than 90% of AWR’s assets consist of thecommon stock of GSWC and its revenues and operations are primarily those ofGSWC. GSWC is a public utility engaged principally in the purchase, production,distribution and sale of water in California serving over 254,000 watercustomers. GSWC also distributes electricity in several California mountain communitiesserving over 23,000 electric customers. The California Public UtilitiesCommission (“CPUC”) regulates GSWC’s water and electric business, includingproperties, rates, services, facilities and other matters. CCWC is a publicutility regulated by the Arizona Corporation Commission (“ACC”) serving over13,000 customers in the town of Fountain Hills, Arizona and a portion of theCity of Scottsdale, Arizona. ASUS performs water related services andoperations on a contract basis. There is no direct regulatory oversight byeither the CPUC or the ACC of the operation or rates of the contracted servicesprovided by ASUS and its wholly-owned subsidiaries or by AWR.

Basis of Presentation: The consolidated financial statements of AWR include the accounts of AWR and its subsidiaries, all of which are wholly owned. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Inter-company transactions and balances have been eliminated in the AWR consolidated financial statements. The consolidated financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America for annual financial statements have been condensed or omitted pursuant to such rules and regulations. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal, recurring items and estimates necessary for a fair statement of the results for the interim periods, have been made. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2006 filed with the SEC. Certain prior-period amounts were reclassified to conform to the March 31, 2007 financial statement presentation.

GSWC’s Related Party Transactions:GSWC and other subsidiaries provide and receive various services to and fromtheir parent, AWR, and among themselves. In addition, AWR has an $85 millionsyndicated credit facility. AWR borrows under this facility and provides fundsto its subsidiaries, including GSWC, in support of their operations. Amounts owedto AWR for borrowings under this facility represent the majority of GSWC’sinter-company payables on GSWC’s balance sheets as of March 31, 2007 andDecember 31, 2006. The interest rate charged to GSWC is sufficient tocover AWR’s interest cost under the credit facility. GSWC also allocatescertain corporate office administrative and general costs to its affiliatesusing agreed upon allocation factors.

New Accounting Pronouncements:  In March 2006, the Financial AccountingStandards Board (“FASB”) Emerging Issues Task Force (“EITF”) issued EITF No.06-03, *“How Sales Taxes Collected From Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement.”*  A consensus wasreached that entities may adopt a policy of presenting sales taxes in theincome statement on either a gross or net basis, based on their accountingpolicy, which should be disclosed.  Ifsuch taxes are significant, and are presented on a gross basis, an entityshould also disclose the amounts of those taxes.  Effective January 1, 2007, Registrant adoptedthe guidance of EITF No. 06-03.  GSWCbills certain sales and use taxes levied by state or local governments to itscustomers. Included in these sales and use taxes are franchise fees, which GSWCpays to various municipalities (based on contracts with these municipalities)in order to operate within the limits of the municipality. GSWC bills thesefranchise fees to its customers based on a CPUC-authorized rate. Thesefranchise fees, which are required to be paid regardless of GSWC’s ability tocollect from the customer, are accounted for on a gross basis. GSWC’s franchisefees billed to customers and recorded as operating revenue were approximately $733,000and $578,000 for the three months ended March 31, 2007 and 2006,respectively. When GSWC acts as an agent, and the tax is not required to beremitted if it is not collected from the customer, the taxes are accounted foron a net basis.

In July 2006, the FASB issued FASB Interpretation No.48, *“Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109”* (“FIN 48”).  Effective January 1, 2007, Registrant adoptedthe provisions of FIN 48.  See Note 5 forfurther details and impact on the adoption of FIN 48.

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In September 2006,the FASB issued SFAS No. 157, *“Fair Value Measurements”*,which defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. This statement is effectivefor financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. Early adoption isencouraged, provided that Registrant has not yet issued financial statementsfor that fiscal year, including any financial statements for an interim periodwithin that fiscal year. Registrant will implement the new standard effectiveJanuary 1, 2008. Registrant is currently evaluating the impact SFAS No. 157 mayhave on its financial statements and disclosures.

**Note 2 —Regulatory Matters:**

In accordance with accounting principles forrate-regulated enterprises, Registrant records regulatory assets, whichrepresent probable future revenue associated with certain costs that will berecovered from customers through the ratemaking process, and regulatory liabilities,which represent probable future reductions in revenue associated with amountsthat are to be credited to customers through the ratemaking process. At March31, 2007, Registrant had $7.4 million of regulatory assets not accruingcarrying costs. Of this amount, $6.7 million relates to deferred income taxrepresenting accelerated tax benefits flowed-through to ratepayers, which willbe included in rates concurrently with recognition of the associated future taxexpense. In addition, there are other expenses that Registrant recovers inrates over a short period that do not provide for recovery of carrying costs.At March 31, 2007, $673,000 was recorded as other regulatory assets for suchexpenses to be recovered.  Regulatoryassets, less regulatory liabilities, included in the consolidated balancesheets are as follows:
| **(In thousands)**                                       | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **GSWC**                                                      |       |                     |       |                        |       |
| Supply cost balancing accounts                                |       | $                        | 18,741     |                        | $          | 17,321 |   |
| Supply cost memorandum accounts net  under/(over)-collections |       | 6,752                    |       | 7,429                       |       |
| Costs deferred for future recovery on Aerojet case            |       | 21,370                   |       | 21,313                      |       |
| Pensions and other postretirement obligations                 |       | 22,815                   |       | 22,815                      |       |
| Flow-through taxes, net                                       |       | 6,741                    |       | 7,243                       |       |
| Electric transmission line abandonment costs                  |       | 3,265                    |       | 3,288                       |       |
| Asset retirement obligations                                  |       | 3,285                    |       | 3,197                       |       |
| Low income rate assistance balancing accounts                 |       | 4,066                    |       | 3,807                       |       |
| Refund of water right lease revenues                          |       | (3,450                   | )          | (3,565                      | )          |
| Other regulatory assets                                       |       | 1,883                    |       | 2,126                       |       |
| Total GSWC                                                    |       | $                        | 85,468     |                        | $          | 84,974 |   |
| **CCWC**                                                      |       |                     |       |                        |       |
| Asset retirement obligations                                  |       | $                        | 49         |                        | $          | 48 |   |
| Other regulatory liabilities, net                             |       | (583                     | )          | (565                        | )          |
| Total AWR                                                     |       | $                        | 84,934     |                        | $          | 84,457 |   |

 

Regulatory matters are discussed in detail inthe consolidated financial statements and the notes thereto included in theForm 10-K for the year ended December 31, 2006 filed with theSEC.  Discussion below focuses onsignificant matters and changes since December 31, 2006.

***Supply Cost Balancing andMemorandum Accounts******:***

***Electric SupplyCost Balancing Account*** — Electric power costs incurred by GSWC’s Bear ValleyElectric division continue to be charged to its electric supply cost balancingaccount. The under-collection in the electric supply cost balancing account is$19.1 million at March 31, 2007. The balance in the electric supply balancingaccount is primarily impacted by: (i) a surcharge to decrease previouslyunder-collected energy costs, (ii) changes in purchased energy costs, and (iii)changes in power system delivery costs.

The CPUC has authorized GSWC to collect a surchargefrom its customers of 2.2¢ per kilowatt hour through August 2011, to enableGSWC to recover an under-collection of approximately $23.1 million at the endof 2001 which had been incurred during the energy crisis in late 2000 and 2001.GSWC sold 42,683,779 and 42,294,078 kilowatt hours of electricity to its BearValley Electric division customers for the three months ended March 31, 2007and 2006, respectively.  As a result, thesupply cost balancing account was reduced by approximately $918,000 and$880,000 for the three months ended March 31, 2007 and 2006, respectively.  Approximately $15.0 million of theunder-collection incurred during the energy crisis in late 2000 and 2001 hasbeen recovered through this surcharge. GSWC anticipates the surcharge, based onelectricity sales, to be sufficient for it to recover the amount of theunder-collected balance incurred during the energy crisis by August 2011.  However, in 2011, if GSWC has not fullyrecovered the amount of this under collection, GSWC will seek recovery of anyamounts not recovered through this surcharge.

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The purchased energy costs that are recorded in thesupply cost balancing account are subject to a price cap by terms of the 2001settlement with the CPUC. The Bear Valley Electric division of GSWC is allowedto include up to a weighted average annual energy purchase cost of $77 permegawatt-hour (“MWh”) through August 2011 in its electric supply cost balancingaccount for purchased energy costs. To the extent that the actual weightedaverage annual cost for power purchased exceeds the $77 per MWh amount, GSWCwill not be able to include these amounts in its balancing account and suchamounts will be expensed. During the three months ended March 31, 2007 and2006,the amounts expensed were $29,000 and $40,000, respectively, over the $77 perMWh cap.

Charges to GSWC by Southern California Edison (“Edison”),a subsidiary of Edison International, associated with the transportation of energy over Edison’s power systemand the abandonment of a transmission line upgrade have increased under Edison’stariff to levels that exceed the amounts authorized by the CPUC in Bear ValleyElectric’s retail power rates to its customers. The incremental cost increaseto GSWC from the tariff for the abandonment of a transmission line upgrade,which is not included in rates, is $38,137 per month. These increases have beenincluded in the balancing account for subsequent recovery from customers. The incoming power systemdelivery costs are not subject to the $77 per MWh price cap referenced above.  Other components, such as interestaccrued on cumulative under-collected balance and power loss duringtransmission, also affect the balance of the electric supply cost balancingaccount.

In summary, for the three months ended March 31, 2007 and 2006, theunder-collection decreased by approximately $783,000 and $219,000,respectively.

***WaterSupply Cost Memorandum/Balancing Accounts —***All water utilitiesregulated by the CPUC were required to seek review of supply cost under- andover- collections by filing an advice letter annually and to reduce the utility’srecovery of such expenses by the amount exceeding the authorized rate ofreturn. Upon approval by the CPUC, the memorandum accounts are transferred towater supply cost balancing accounts.  OnApril 13, 2006, the CPUC approved a decision eliminating the earnings test thatlimited recovery of expenses recorded in these accounts. The decision alsoeliminated the need to make an annual filing. Pursuant to this order,GSWC recognized a cumulative under-collection of approximately $636,000 to thesupply cost memorandum account provisions in the second quarter of 2006 for theunder-collected balances not recognized at March 31, 2006 and began recordingunder- and over- collections on a monthly basis thereafter commencing with thesecond quarter of 2006.  For the three months endedMarch 31, 2007 and 2006, approximately, $1.5 million of under-collections and$237,000 of over-collections, respectively, were recorded in the water supplycost memorandum/balancing accounts, including amortization of approximately$320,000 under-collection and $237,000 over-collection, respectively.

GSWC filed advice letters with the CPUC in October2006 for review of $2.0 million net under-collections of Region I’s  2005 and 2006 water supply cost memorandumaccount balance as of August 31, 2006 and its net balance after amortization ofthe 2001-2003 balancing account.  OnJanuary 3, 2007, the CPUC approved the advice letters as filed.  As a result, the total $2.0 million net under-collectionwas transferred to the water supply cost balancing account in January2007.  There was no impact to earnings in2007 as this net under-collection was recorded as a regulatory asset in 2006.

***Costs Deferred for Future Recovery:***

In 1999, GSWC suedAerojet-General Corporation (“Aerojet”) for contaminating the Sacramento CountyGroundwater Basin, which affected certain GSWC wells. On a related matter, GSWCalso filed a lawsuit against the State of California (the “State”). The CPUCauthorized memorandum accounts to allow for recovery, from customers, of costsincurred by GSWC in prosecuting the cases against Aerojet and the State, lessany recovery from the defendants or others. On July 21, 2005, the CPUCauthorized GSWC to collect approximately $21.3 million of the Aerojetlitigation memorandum account, through a rate surcharge, which will continuefor no longer than 20 years. Beginning in October 2005, new rates went intoeffect to begin amortizing the memorandum account over a 20-year period.

A rate surchargegenerating approximately $220,000 and $210,000 was billed to customers duringthe three months ended March 31, 2007 and 2006, respectively. GSWC will keepthe Aerojet memorandum account open until the earlier of full amortization ofthe balance or 20 years.  However, nocosts will be added to the memorandum account, other than on-going interestcharges approved by the decision. Pursuant to the decision, additional interest of approximately $276,000was added to the Aerojet litigation memorandum account during the three monthsended March 31, 2007.  It is management’sintention to offset any settlement proceeds from Aerojet that may occurpursuant to the settlement agreement against the balance in the memorandumaccount, with the exception of an $8.0 million payment guaranteed by Aerojet(for capital investments), with interest due GSWC, to be paid in full over 5years, beginning in 2009. Pursuant to such settlement agreement, Aerojet hasagreed to reimburse GSWC an additional $17.5 million, plus interest accruingfrom January 1, 2004, for GSWC’s past legal and expert costs. The recovery of the $17.5 million iscontingent upon the issuance of land use approvals for development in a definedarea within Aerojet property in Eastern Sacramento County and the receiptof certain fees in connection with such development.

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On April 7, 2006, GSWC filed an advice letter with theCPUC to incorporate the Westborough development, which represents a portion ofthe defined property, into the Arden Cordova service area and to provide waterservice to that new development. The City of Folsom filed a protest of GSWC’sadvice letter on April 27, 2006. GSWC and the City of Folsom continue tonegotiate a settlement of issues presented in their protest.  On January 30, 2007, the CPUC rejected theadvice letter without prejudice, and invited GSWC to re-file the advice letteronce the City of Folsom protest is resolved, or file an application for CPUCapproval of the service territory expansion. GSWC cannot predict the outcome ofthe City’s protest nor the future development within Aerojet’s property.

***Other Regulatory Matters:***

On February 15, 2007, the CPUC issued a subpoena toGSWC in connection with an investigation of certain work orders and chargespaid to a specific contractor used by GSWC for numerous construction projects. The CPUC’s investigation focuses on whether these charges were approvedin customer rates and whether they were just and reasonable. Management cannotpredict the outcome of the investigation at this time.

On April 16, 2007, GSWC filed an industry-widecompliance report regarding its historical purchases of energy from renewablegeneration sources at its Bear Valley Electric operations.  The filing indicates that GSWC has notachieved interim target purchase levels established by the CPUC and could besubject to possible fines.  Based on thecalculation of possible fines included in the filing, the fines can range ashigh as approximately $592,000.  GSWC hascontested the possible fines and management does not believe it is probablethat GSWC will ultimately be assessed these fines, and accordingly, noprovision for loss has been recorded in the financial statements.

**Note 3 —Earnings per Share/Capital Stock:**

Registrant computes earnings per share (“EPS”) inaccordance with EITF No. 03-06, *“Participating Securitiesand the Two-Class Method under FASB Statement No. 128”. *EITF No. 03-06 provides theaccounting guidance for the effect of participating securities on EPScalculations and the use of the “two-class” method. The guidance requires theuse of the “two-class” method of computing EPS for companies with participatingsecurities. The “two-class” method is an earnings allocations formula thatdetermines EPS for each class of common stock and participating security.AWR has participating securities related to stock option and restricted stockunits that earn dividend equivalents on an equal basis with Common Shares thathave been issued under AWR’s 2000 Stock Incentive Plan and 2003 Non-EmployeeDirectors Stock Plan. In applying the “two-class” method, undistributedearnings are allocated to both Common Shares and participating securities. Thefollowing is a reconciliation of Registrant’s net income and weighted averageCommon Shares outstanding for calculating basic net income per share:
| **Basic**                                                                                                                                    | ** ** | **For The Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in thousands, except per share amounts)**                                                                        | ** ** | **2007**                                                               | ** ** | **2006** | ** ** |
| Net income                                                                                                                                   |       | $                                                                      | 6,984      |   | $ | 5,899 |   |
| Less: (a)  Distributed earnings to common shareholders                                                                                  |       | 4,008                                                                  |       | 3,781 |   |
|                 Distributed earnings to participating  securities |       | 86                                                                     |       | — |   |
| Undistributed  earnings                                                                                                                      |       | 2,890                                                                  |       | 2,118 |   |
|                                                                                                                                         |       |                                                                   |       |   |   |
| (b)  Undistributed earnings allocated to common  shareholders                                                                           |       | 2,830                                                                  |       | 2,075 |   |
|        Undistributed earnings allocated to  participating securities                                           |       | 60                                                                     |       | 43 |   |
|                                                                                                                                         |       |                                                                   |       |   |   |
| Total income  available to common shareholders, basic (a)+(b)                                                                                |       | $                                                                      | 6,838      |   | $ | 5,856 |   |
|                                                                                                                                         |       |                                                                   |       |   |   |
| Weighted average  Common Shares outstanding, basic                                                                                           |       | 17,055                                                                 |       | 16,806 |   |
| **Basic earnings per Common Share**                                                                                                          |       | $                                                                      | 0.40       |   | $ | 0.35 |   |

DilutedEPS is based upon the weighted average number of Common Shares including bothoutstanding shares and shares potentially issuable in connection with stockoptions and restricted stock units granted under Registrant’s 2000 StockIncentive Plan and 2003 Non-Employee Directors Stock Plan, and net income. AtMarch 31, 2007 and 2006 there were 704,591 and 770,977 optionsoutstanding, respectively, under these Plans. At March 31, 2007 and 2006,there were also approximately 60,352 and 46,279 restricted stock unitsoutstanding, respectively.

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The following is a reconciliation of Registrant’s netincome and weighted average Common Shares outstanding for calculating dilutednet income per share:
| **Diluted**                                                           | ** ** | **For The Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2007**                                                               | ** ** | **2006** | ** ** |
| Common  shareholders earnings, basic                                  |       | $                                                                      | 6,838      |   | $ | 5,856 |   |
| Undistributed  earnings for dilutive stock options (1)                |       | —                                                                 |       | — |   |
| Total common  shareholders earnings, diluted                          |       | $                                                                      | 6,838      |   | $ | 5,856 |   |
|                                                                  |       |                                                                   |       |   |   |
| Weighted average  common shares outstanding, basic                    |       | 17,055                                                                 |       | 16,806 |   |
| Stock-based  compensation (2)                                         |       | 59                                                                     |       | 103 |   |
| Weighted average  common shares outstanding, diluted                  |       | 17,114                                                                 |       | 16,909 |   |
| **Diluted earnings per Common  Share**                                |       | $                                                                      | 0.40       |   | $ | 0.35 |   |

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(1)          Undistributed earningsallocated to participating securities were not included due to theirantidilutive effect on diluted earnings per share.

(2)          In applying the treasurystock method of reflecting the dilutive effect of outstanding stock-basedcompensation in the calculation of diluted EPS, 297,991 and 366,610 stockoptions at March 31, 2007 and 2006, respectively, were deemed to beoutstanding in accordance with SFAS No. 128, *“EarningsPer Share”*.

Stock options of 101,090 and 94,917 were outstandingat March 31, 2007 and 2006, respectively, but not included in the computationof diluted EPS because the related option exercise price was greater than theaverage market price of AWR’s Common Shares for the three months ended March 31, 2007 and 2006.  Stock options of 305,510 and 309,450, andrestricted stock units of 60,352 and 46,279 were outstanding at March 31, 2007and 2006, respectively, but not included in the computation of diluted EPSbecause they were antidilutive.

Registrant has a Shareholder Rights Plan designed toprotect the Company’s shareholders in the event of an unsolicited unfair offerto acquire the Company. The rights for Junior Participating Preferred Shares(the “Rights”) are exercisable based solely on “a non-market-based contingency”,and are not contingent upon the market price of the AWR’s stock. Therefore, theshares that would be issued if the Rights are exercised are not included in thecalculation of diluted earnings per share.

During the three months ended March 31, 2007 and2006, Registrant issued 10,532 and 24,101 Common Shares, for approximately$284,000 and $719,000, respectively, under the Registrant’s Common SharePurchase and Dividend Reinvestment Plan, the 401(k) Plan, and the stockincentive plans. In addition, during the three months ended March 31, 2007and 2006, Registrant purchased 282 and 14,084, respectively, Common Shares onthe open market under the Registrant’s Common Share Purchase and DividendReinvestment Plan and 401(k) Plan, which were used to satisfy the requirementsof these plans.

During the three months ended March 31, 2007 and2006, AWR paid quarterly dividends to the shareholders of approximately $4.0million, or $0.235 per share, and $3.8 million, or $0.225 per share,respectively.

**Note4 — Derivative Instruments:**

Registranthas certain block-forward purchase power contracts that are subject to SFASNo. 133, *“Accounting for Derivative Instruments andHedging Activities”*, as amended by SFAS Nos. 138 and 149. Aderivative financial instrument or other contract derives its value fromanother investment or designated benchmark. SFAS No. 133 requirescompanies to record derivatives on the balance sheet as assets and liabilities,and to measure those instruments at their fair value. Certain of thesecontracts qualify as an exception provided under SFAS No. 133 foractivities that are considered normal purchases and normal sales. Thesecontracts are reflected in the statements of income at the time of contractsettlement.

During2002, GSWC became a party to block-forward purchase power contracts thatqualified as derivative instruments under SFAS No. 133. Contracts withPinnacle West Capital Corporation which became effective in November 2002have not been designated as normal purchases and normal sales. As a result, ona monthly basis, the related asset or liability is adjusted to reflect the fairmarket value at the end of the month. For the three months ended March 31,2007 and 2006, GSWC recognized a pretax unrealized gain of $2.7 million and apretax unrealized loss of $2.2 million, respectively.  As this contract is settled, the realizedgains or losses are recorded in power purchased for resale, and the previouslyrecorded unrealized gains or losses are reversed. These contracts have beenrecognized at fair market value on the balance sheets resulting in a cumulativeunrealized loss of $944,000 as of March 31, 2007.

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The market prices used to determinethe fair value for this derivative instrument were estimated based onindependent sources such as broker quotes and publications. Settlement of thiscontract occurred on a cash or net basis through 2006 and by physical deliverythereafter through 2008. Registrant has no other derivativefinancial instruments.

**Note 5 —Income Taxes:**

As a regulated utility, GSWC treats certaintemporary differences as flow-through adjustments incomputing its income tax provision consistent with the income taxapproach approved by the CPUC for ratemaking purposes.Flow-through adjustments increase or decrease tax expense in oneperiod, with an offsetting increase or decrease occurring in anotherperiod. Giving effect to these temporary differences as flow-throughadjustments typically results in a greater variance between theeffective tax rate (“ETR”) and the statutory federal income tax rate in anygiven period than would otherwise exist if GSWC were not requiredto account for its income taxes as a regulated enterprise.

In July 2006, theFASB issued FIN 48.  FIN 48 clarifies theaccounting for uncertainty in income taxes by prescribing the recognitionthreshold a tax position is required to meet before being recognized in thefinancial statements.  FIN 48 alsoprovides guidance on derecognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition.  Effective January 1, 2007, Registrant adoptedFIN 48. As a result of adoption,Registrant increased retained earnings by $181,000.  As of the adoption date and at March 31,2007, Registrant’s total amount of unrecognized tax benefits was $4.8 million,of which $118,000, if recognized, would affect the effective tax rate.

With the adoption of FIN 48, Registrant continued its policy ofclassifying interest on income tax over/underpayments in interestincome/expense and penalties in “other operating expenses.”  At March 31, 2007, Registrant included$362,000 of net interest receivables from taxing authorities in other assets($92,000 as current), of which $41,000 was included in interest income for thethree months ended March 31, 2007. For the three months ended March 31, 2006, Registrant did not recognizeany income-tax-related interest income or expense.  At March 31, 2007, Registrant had noaccruals for income-tax-related penalties and did not recognize any such penaltyexpense during the three months ended March 31, 2007 and 2006.

Registrant files income tax returns in the U.S. federal and variousstate jurisdictions.  The U.S. federalfilings for the years 1997 through 1999 and 2002 came under examination duringthe three months ended March 31, 2007 as a result of Registrant havingfiled an amended 2002 return during the third quarter of 2006 for whichInternal Revenue Service (“IRS”) and Congressional Joint Committee of Taxation(“JCT”) reviews are required.  The 2002return was amended primarily as a result of the IRS consenting to Registrant’srequest for approval to change a tax accounting method.  In relation to this consent, Registrant’stotal amount of unrecognized tax benefits could significantly increase ordecrease within twelve months of March 31, 2007.  An estimate of the range of the reasonably possiblechange cannot be made at March 31, 2007. Registrant is unable to anticipate when the IRS and JCT reviews will beconcluded.

The California filing for 2001 also came under examination during thethree months ended March 31, 2007 as a result of Registrant having filedan amended 2001 return in the first quarter of 2006.  Registrant anticipates that the Californiareview will be completed by December 31, 2007.

Other than the years currently under examination, as discussed above,Registrant’s 2003 through 2005 tax years remain subject to examination by theIRS and its 2002 through 2005 tax years remain subject to examination by statetaxing authorities.

There was no material difference between AWR and GSWC in regards to theadoption of FIN 48.

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**Note 6 —Employee Benefit Plans:**

The components of net periodic benefit costs, beforeallocation to the overhead pool, for Registrant’s pension plan, postretirementplan, and Supplemental Executive Retirement Plan (“SERP”) for the three monthsended March 31, 2007 and 2006 are as follows:
| ** **                                     | ** ** | **Pension Benefits** | ** ** | **Other  Postretirement  Benefits** | ** ** | **SERP** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|-------------------------------------|------------|----------|------------|
| **(dollars in thousands)**           | ** ** | **2007**                  | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Components of Net Periodic  Benefits Cost:** |       |                      |       |                                |       |     |       |   |   |   |   |   |   |
| Service cost                                   |       | $                         | 980        |                                | $          | 991      |       | $ | 105 |   | $ | 107 |   | $ | 106 |   | $ | 32 |   |
| Interest cost                                  |       | 1,261                     |       | 1,175                               |       | 168      |       | 155 |   | 41 |   | 35 |   |
| Expected return on plan  assets                |       | (1,122                    | )          | (984                                | )          | (57      | )          | (50 | ) | — |   | — |   |
| Amortization of  transition                    |       | —                    |       | —                              |       | 105      |       | 105 |   | — |   | — |   |
| Amortization of prior  service cost            |       | 41                        |       | 41                                  |       | (50      | )          | (50 | ) | 40 |   | 37 |   |
| Amortization of actuarial  (gain) loss         |       | 171                       |       | 292                                 |       | 25       |       | 37 |   | (6 | ) | (3 | ) |
| Net periodic pension  cost                     |       | $                         | 1,331      |                                | $          | 1,515    |       | $ | 296 |   | $ | 304 |   | $ | 181 |   | $ | 101 |   |

Registrant expects to contribute a minimum of approximately$4,215,000 and $800,000 to pension and postretirement medical plans in 2007,respectively.  No contributions were madeduring the three months ended March 31, 2007.

**Note 7 — Contingencies:**

***Water Quality-Related Litigation:***

In 1997, GSWC was namedas a defendant in nineteen lawsuits that alleged that GSWC and other water utilitiesdelivered unsafe water to their customers in the San Gabriel Valley and PomonaValley areas of Los Angeles County. Plaintiffs in these actions sought damages,including general, special, and punitive damages, as well as attorney’s fees oncertain causes of action, costs of suit, and other unspecified relief.  On August 4, 2004, GSWC was dismissed fromall nineteen Los Angeles County cases. The Court found GSWC did not violateestablished water quality standards and dismissed the cases after allowingreasonable time and opportunity for the plaintiffs to prove otherwise. GSWC haslong asserted that it provides water within the standards established by thehealth authorities. On September 21, 2004, GSWC received notice that severalplaintiffs filed an appeal to the trial court’s order to dismiss GSWC. Briefsand reply briefs on the appeal have been filed. On February 7, 2006, the SecondAppellate District in which the briefs were filed moved the California SupremeCourt to transfer the appeal to the First Appellate District, the District inwhich prior appeals regarding these cases had been heard.  The Supreme Court granted the transfer andthe appeal is currently pending before the First Appellate District.  GSWC is unable to predict the outcome of thisappeal.

GSWC is subject to self-insured retention (deductible)provisions in its applicable insurance policies and has either expensed theself-insured amounts or has reserved against payment of these amounts asappropriate. GSWC’s various insurance carriers have, to date, providedreimbursement for much of the costs incurred above the self-insured amounts fordefense against these lawsuits, subject to a reservation of rights. Inaddition, the CPUC has issued certain decisions, which authorize GSWC to establisha memorandum account to accumulate costs for future recovery.

Perchlorate and/or Volatile Organic Compounds (“VOC”)have been detected in five wells servicing GSWC’s San Gabriel System. GSWCfiled suit in federal court, along with two other affected water purveyors andthe San Gabriel Basin Water Quality Authority (“WQA”), against some of thoseallegedly responsible for the contamination of two of these wells. Some of theother potential defendants settled with GSWC, other water purveyors and the WQA(the “Water Entities”) on VOC related issues prior to the filing of thelawsuit. In response to the filing of the Federal lawsuit, the PotentiallyResponsible Party (“PRP”) defendants filed motions to dismiss the suit orstrike certain portions of the suit. The judge issued a ruling on April 1, 2003granting in part and denying in part the potentially responsible party’smotions. A key ruling of the court was that the water purveyors, includingGSWC, by virtue of their ownership of wells contaminated with hazardouschemicals are themselves PRPs under the Comprehensive Environmental Response,Compensation, and Liability Act (“CERCLA”).

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Registrant has, pursuant to permission of the court,amended its suit to claim certain affirmative defenses as an “innocent” partyunder CERCLA. Registrant is presently unable to predict the outcome of thisruling on its ability to fully recover from the PRPs future costs associatedwith the treatment of these wells. In this same suit, the PRPs have filedcross-complaints against the Water Entities, the Metropolitan Water District,the Main San Gabriel Basin Watermaster and others on the theory that theyarranged for and did transport contaminated water into the Main San GabrielBasin for use by Registrant and the other two affected water purveyors and forother related claims.

OnAugust 29, 2003, the US Environmental Protection Agency (“EPA”) issuedUnilateral Administrative Orders (“UAO”) against 41 parties deemed responsiblefor polluting the groundwater in that portion of the San Gabriel Valley fromwhich two of GSWC’s impacted wells draw water. GSWC was not named as a party tothe UAO. The UAO requires that these parties remediate the contamination. Thejudge in the Federal lawsuit has appointed a special master to oversee mandatorysettlement discussions between the PRPs and the Water Entities. EPA is alsoconducting settlement discussions with several PRPs regarding the UAO. TheWater Entities and EPA are working to coordinate their settlement discussionsunder the special master in order to arrive at a complete resolution of allissues affecting the Federal lawsuits and the UAO.  Settlements with a number of the PRPs arebeing finalized; however, Registrant is presently unable to predict theultimate outcome of these settlement discussions.

Registrantis unable to predict an estimate of the loss, if any, resulting from any ofthese suits or administrative proceedings.

***Condemnation of Properties:***

The laws of the State of California and the State ofArizona provide for the acquisition of public utility property by governmentalagencies through their power of eminent domain, also known as condemnation,where doing so is necessary and in the public interest. In addition, however,the laws of the State of California also provide: (i) that the owner of utilityproperty may contest whether the condemnation is actually necessary and in thepublic interest, and (ii) that the owner is entitled to receive the fair marketvalue of its property if the property is ultimately taken.

Although the City of Claremont, California located inGSWC’s Region III, has not initiated the formal condemnation process pursuantto California law, the City has expressed various concerns to GSWC about therates charged by GSWC and the effectiveness of the CPUC’s rate settingprocedures. The City hired a consultant to perform an appraisal of the value ofRegistrant’s water system serving the City. The value was estimated in 2004 bythe consultant at $40 - $45 million. GSWC disagrees with the City’s valuationassessment. As of March 31, 2007, management believes that the fair marketvalue of the system exceeds the $38.5 million recorded net book value and alsoexceeds the consultant’s estimates of the Claremont water system.

The Town of Apple Valley is located in GSWC’s RegionIII and was evaluating the potential takeover of GSWC’s Apple Valley watersystems as well as the water systems of another utility serving the Town.  On March 13, 2007, the Town Council voted toformally abandon its review of the potential acquisition.  GSWC was notified of the Town Council’saction by a letter from the Town Manager dated April 3, 2007.

Except for the City of Claremont and the Town of AppleValley, Registrant has not been, within the last three years, involved inactivities related to the potential condemnation of any of its 38 other watercustomer service areas or in its Bear Valley Electric customer servicearea.  No formal condemnation proceedingshave been filed against any of the Registrant’s properties during the past threeyears.

***Santa Maria Groundwater Basin Adjudication:***

In 1997, the Santa Maria Valley Water ConservationDistrict (“plaintiff”) filed a lawsuit against multiple defendants, includingGSWC, the City of Santa Maria, and several other public water purveyors. Theplaintiff’s lawsuit seeks an adjudication of the Santa MariaGroundwater Basin.  A settlement of thelawsuit has been reached, subject to CPUC approval. The settlement, among otherthings, if approved, would preserve GSWC’s historical pumping rights and securesupplemental water rights for use in case of drought or other reductions in thenatural yield of the Basin. There are also a few nonsettling parties, and thecase is going forward as to these parties. The stipulation, if approved, wouldpreserve GSWC’s position with the settling parties independent of the outcomeof the case as it moves forward with the nonsettling parties.

From 1997 through March 31, 2007, GSWC has incurredcosts of approximately $6.4 million in defending its rights in the SantaMaria Basin, including legal and expert witness fees, which have been recordedin Utility Plant for rate recovery.  InFebruary 2006, GSWC filed an application with the CPUC for recovery of $5.5million of these costs, representing the amount of the costs that had beenincurred as of December 31, 2005.  In February 2007, GSWC reached asettlement with the Division of Ratepayer Advocates authorizing recovery of the$5.5 million requested in GSWC’s application.  The settlement 

17

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deferred review of the remaining legal costs pendingfinal resolution of the lawsuit.  On April 16, 2007 the assignedAdministrative Law Judge issued a proposed decision that approved thesettlement with the Division of Ratepayer Advocates and the Orcutt AdvisoryGroup.  Management believes the proposeddecision will be approved and the recovery of these costs through rates isprobable.

***Air Quality Management District:***

In 1998, the SouthCoast Air Quality Management District (“AQMD”) issued a permit to GSWC for theinstallation and use of air stripping equipment at one of GSWC’s groundwatertreatment systems in its Region II service area.   In 2005, the AQMD conducted an inspection ofthis facility and issued a Notice of Violation (“NOV”) for exceeding the amountof groundwater permitted to be treated by the treatment system during calendaryear 2004.  Since receiving the NOV,changes in GSWC procedures have prevented additional violations at thefacility.  The AQMD could assesspenalties associated with an NOV that can range from $10,000 up to $75,000 perday of violation.  GSWC estimates that itwas in violation approximately 180 days in 2004.  GSWC has met with AQMD to ensure futurecompliance and resolve the NOV.  As partof this process, GSWC also submitted an application to amend the permit,because an amendment may have been necessary for continued operation of thesubject air stripping equipment.

The AQMD hasrecently recommended that GSWC be allowed to pursue a SupplementalEnvironmental Program (“SEP”) as part of the settlement of the NOV. A SEPtypically involves capital expenditures resulting in a change of process,equipment, material, or indirect source reduction for the purposes ofeliminating or reducing air contaminant emissions.  As part of pursuing its permit amendmentapplication, GSWC would include further controls to the facility to reduceemissions.  The anticipated penalties forthe 2004 violations might be reduced or avoided through the settlement of thismatter based on the funding of a SEP.  InOctober 2006, GSWC submitted initial capital cost estimates to the AQMD for theinstallation and operation of granular activated carbon filters at the facilityas a proposed SEP. Installation of the filters would eliminate the use of theair stripping equipment at the facilities involved with the NOV and thusimprove air quality. Initial and follow-up discussions indicated that AQMDstaff has favorably received GSWC’s proposal and if approved, it could resultin the imposition of only a nominal monetary penalty for the 2004 violations.  In April 2007, GSWC submitted the final SEPand is waiting for AQMD approval. However, until further notice from the AQMD on the SEP, GSWC cannotreasonably estimate the outcome of the NOV and any amount of penalties whichmight be assessed.

***OtherLitigation:***

An officer of the Companyhas asserted a potential claim against the Company for retaliation against theofficer and others in connection with alleged discriminatory conduct by theCompany and its Board of Directors. Although management believes that theallegations are without merit and intends to vigorously defend against them,the Company retained an independent investigator to review the allegations andinvestigate the facts. Based upon the results of such investigation, theCompany does not believe that the ultimate resolution of this matter will havea material adverse effect on its financial position, results of operations, orcash flows.

Registrant is alsosubject to other ordinary routine litigation incidental to its business.  Management believes that rate recovery,proper insurance coverage and reserves are in place to insure against property,general liability and workers’ compensation claims incurred in the ordinarycourse of business.

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**Note 8 — Business Segments:**

AWRhas three reportable segments, water, electric and contract operations, whereasGSWC has two segments, water and electric. Within the segments, AWR has threeprincipal business units: water and electric service utility operationsconducted through GSWC, a water-service utility operation conducted throughCCWC, and a contracted services unit conducted through ASUS and itssubsidiaries. All activities of GSWC are geographically located withinCalifornia. All activities of CCWC are located in the state of Arizona.  Activities of ASUS and its subsidiaries areconducted in California, Maryland, Texas and Virginia. Both GSWC and CCWC areregulated utilities. On a stand-alone basis, AWR has no material assets otherthan its investments in its subsidiaries. The tables below set forthinformation relating to GSWC’s operating segments, CCWC, ASUS and itssubsidiaries, and other matters.  Certainassets, revenues and expenses have been allocated in the amounts set forth. Theidentifiable assets are net of respective accumulated provisions fordepreciation. Capital additions reflect capital expenditures paid in cash andexclude property installed by developers and conveyed to GSWC or CCWC.
| ** **                             | ** ** | **As Of And For The Three Months Ended March 31, 2007** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                  | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                                 | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts*** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                         | 48,688     |   | $ | 8,869 |   | $ | 1,639 |   | $ | 13,074 |   | $ | — |   | $ | 72,270 |   |
| Operating income  (loss)               |       | 10,979                                                                                                    |       | 3,652 | (1) | 151 |   | 2,163 |   | (94 | ) | 16,851 |   |
| Interest  expense, net                 |       | 4,138                                                                                                     |       | 348 |   | 118 |   | 285 |   | 41 |   | 4,930 |   |
| Identifiable  assets                   |       | 674,339                                                                                                   |       | 39,651 |   | 38,724 |   | 799 |   | — |   | 753,513 |   |
| Depreciation and  amortization expense |       | 6,111                                                                                                     |       | 533 |   | 397 |   | 48 |   | — |   | 7,089 |   |
| Capital additions                      |       | 8,978                                                                                                     |       | 561 |   | 395 |   | 31 |   | — |   | 9,965 |   |
|                                        |            |                                                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) Includes $2,710,000unrealized gain on purchased power contracts.
| ** **                             | ** ** | **As Of And For The Three Months Ended March 31, 2006** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                  | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                                 | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts*** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                         | 48,967     |   | $ | 8,346 |   | $ | 1,782 |   | $ | 5,220 |   | $ | — |   | $ | 64,315 |   |
| Operating income  (loss)               |       | 13,944                                                                                                    |       | (1,096 | )(2) | 333 |   | 929 |   | (50 | ) | 14,060 |   |
| Interest  expense, net                 |       | 3,660                                                                                                     |       | 346 |   | 121 |   | 115 |   | 115 |   | 4,357 |   |
| Identifiable  assets                   |       | 643,975                                                                                                   |       | 41,309 |   | 37,567 |   | 953 |   | — |   | 723,804 |   |
| Depreciation and  amortization expense |       | 5,496                                                                                                     |       | 535 |   | 416 |   | 36 |   | — |   | 6,483 |   |
| Capital additions                      |       | 17,975                                                                                                    |       | 833 |   | 318 |   | 273 |   | — |   | 19,399 |   |
|                                        |            |                                                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(2) Includes $2,155,000 unrealized loss on purchasedpower contracts.

****             Includesamounts from ASUS and its wholly-owned subsidiaries’ contracted operations.*

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

# **General**

American States Water Company (“AWR”) is the parentcompany of Golden State Water Company (“GSWC”), American States UtilityServices, Inc. (“ASUS”) and its subsidiaries, and Chaparral City Water Company(“CCWC”). AWR was incorporated as a California corporation in 1998 as a holdingcompany.

GSWC is a California public utility company engagedprincipally in the purchase, production and distribution of water. GSWC alsodistributes electricity in one customer service area. GSWC is regulated by theCalifornia Public Utilities Commission (“CPUC”) and was incorporated as aCalifornia corporation on December 31, 1929. GSWC is organized into oneelectric customer service area and three water service regions consisting of 21customer service areas operating within 75 communities in 10 counties in theState of California. Region I consists of 7 customer service areas in northernand central California; Region II consists of 4 customer service areas locatedin Los Angeles County; and Region III consists of 10 customer service areas ineastern Los Angeles County, and in Orange, San Bernardino and Imperialcounties. GSWC also provides electric service to the City of Big Bear Lake andsurrounding areas in San Bernardino County through its Bear Valley Electricservice division.  GSWC served 254,097water customers and 23,206 electric customers at March 31, 2007, or a total of277,303 customers, compared with 276,362 total customers at March 31, 2006.GSWC’s utility operations exhibit seasonal trends. Although GSWC’s waterutility operations have a diversified customer base, residential and commercialcustomers account for the majority of GSWC’s water sales and revenues. Revenuesderived from commercial and residential water customers accounted forapproximately 90% oftotal water revenues for the three months ended March 31, 2007 and 2006.

CCWC is an Arizona public utility company serving13,395 customers as of March 31, 2007, compared with 13,117 customers at March31, 2006. Located in the town of Fountain Hills, Arizona and a portion of theCity of Scottsdale, Arizona, the majority of CCWC’s customers are residential.The Arizona Corporation Commission (“ACC”) regulates CCWC.

ASUS contracts, either directly or throughwholly-owned subsidiaries, with the U.S. government and various municipalitiesand private entities to provide water and wastewater services, including theoperation and maintenance of water and wastewater systems, billing and meter readingand water marketing. ASUS commenced operation and maintenance of water andwastewater systems through a wholly-owned subsidiary at its first military basein Texas in October 2004.  Since thatdate, ASUS commenced operation and maintenance of water and wastewater systemsat military bases through wholly-owned subsidiaries in Maryland and Virginia inFebruary 2006 and April 2006, respectively. All of these contracts have a 50-year term, subject to termination forconvenience by the U.S. government. The contract price for each of thesecontracts is subject to redetermination two years after commencement ofoperations and every three years thereafter to the extent provided in each ofthe contracts. Prices are also subject to equitable adjustment based uponchanges in circumstances and changes in wages and fringe benefits to the extentprovided in each of the contracts.  Inaddition, a subsidiary of ASUS has executed a contract for the construction ofinfrastructure improvements on a military base in Texas.  This contract is a fixed-price contract.  Prices may be increased by the execution ofchange orders if significant unforeseen issues are encountered duringconstruction that would increase overall costs. Revenues are recognized on the percentage-of-completion method for thiscontract.

ASUS and GSWC have been pursuing an opportunity toprovide contract services for wastewater treatment and retail water servicesrespectively, within the service area of the Natomas Central Mutual WaterCompany (“Natomas”). Natomas is a California mutual water company whichcurrently provides water service to its shareholders, primarily foragricultural irrigation in portions of Sacramento and Sutter counties innorthern California. In August 2004, Natomas and ASUS entered into a contractunder which ASUS acts as the exclusive agent for marketing water that hasbecome “temporarily surplus” to the internal needs of Natomas, and that arisesunder water rights permits and contracts owned or controlled by Natomas, tothird parties outside the Natomas service area. On January 31, 2006, ASUS andNatomas entered into a water purchase and sale agreement under which ASUS willacquire 5,000 acre-feet of permanent Sacramento River water diversion rightsfrom Natomas. Pursuant to the terms of this agreement, Natomas will sell,transfer and convey to ASUS, in perpetuity, water rights and entitlements todivert from the Sacramento River up to 5,000 acre-feet of water per year,subject to certain regulatory approvals. Terms of the acquisition, among otherthings, include a base price of $2,500 per acre-foot of water, with paymentscontingent on achievement of specific milestones and events over a 10-yearperiod. Pursuant to the marketing services agreement described above, Natomaswill pay to ASUS a commission of 16% of the sale price over the same 10-yearperiod for any “temporary surplus” water marketed by ASUS. At the same timethat the water purchase agreement was completed, Natomas and ASUS also enteredinto a settlement agreement that released Natomas from previously establishedreimbursement obligations under prior agreements. ASUS may use the water rightsacquired from Natomas to serve existing customers, to re-sell to otherbeneficial users, or to pursue and serve expanded service territories.

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GSWC and Natomas have also entered into a watertransfer agreement under which GSWC agreed to purchase and Natomas agreed tosell up to 30,000 acre-feet of water to be used exclusively by GSWC to servecustomers in Sutter County, California. Additionally, GSWC filed for aCertificate of Public Convenience and Necessity with the CPUC on May 31, 2006to provide retail water service in a portion of Sutter County, California.  CPUC review of the application has beendeferred pending completion of an environmental assessment for the proposed newwater service. All of the agreements with Natomas are subject to receipt ofvarious regulatory approvals required for their full implementation.

**Overview**

Our revenues, operating income, and cash flows areearned primarily through delivering drinking water to homes and businesses viaover 2,900 miles of water distribution pipelines.  Rates charged to customers of GSWC and CCWCare determined by either the CPUC or ACC. These rates are intended to allowrecovery of operating costs and a reasonable rate of return on capital. Factorsrecently affecting our financial performance include the process and timing ofsetting rates charged to customers; our ability to recover, and the process forrecovering in rates, the costs of distributing water and electricity; weather;the impact of increased water quality standards on the cost of operations andcapital expenditures; pressures on water supply caused by population growth,more stringent water quality standards, deterioration in water quality andwater supply from a variety of causes; capital expenditures needed to upgradewater systems and increased costs and risks associated with litigation relatingto water quality and water supply, including suits initiated by the Company toprotect its water supply.

We plan to continue to seek additional rate increasesin future years to recover our operating and supply costs and receivereasonable returns on invested capital. Capital expenditures in future yearsare expected to remain at much higher levels than depreciation expense. Cashsolely from operations is not expected to be sufficient to fund our needs forcapital expenditures, dividends, investments in our contract business and othercash requirements. We expect to fund these needs through a combination of debtand common stock offerings in the ensuing years.  AWR expects to issue equity in late 2007.

Operating revenues and income from our contracted servicesare earned primarily from the operation and maintenance of water and wastewatersystems for the U.S. government at various military bases.  All of the operations and maintenancecontracts with the U.S. government are 50-year fixed-priceredetermination-prospective contracts. We also may generate revenues from the construction of infrastructureimprovements at these bases pursuant to the terms of these 50-year contracts orpursuant to supplemental contracts. Revenues generated by our contract operations are primarily dependent onthese new business activities, including military base operations and theconstruction of new and/or replacement infrastructures at these militarybases.  As a result, we are subject torisks that are different than those of our regulated water and electric activities.   We plan to continue seeking opportunities tobid on other contracts for the privatization of water and wastewater servicesat military bases.

**Summary Results by Segment**

AWRhas three reportable segments: water, electric and contracts operation. Withinthe segments, AWR has three principal business units: water and electricservice utility operations conducted through GSWC, a water-service utilityoperation conducted through CCWC, and a contracted services unit through ASUSand its subsidiaries.  The tables belowset forth summaries of the results by segment (in thousands):
| ** **             | ** ** | **Operating Revenues**       | ** ** | **Operating Income**         | ** ** |
|------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **             | ** ** | **3 Mos.  Ended  3/31/2007** | ** ** | **3 Mos.  Ended  3/31/2006** | ** ** | **$  CHANGE** | ** ** | **%  CHANGE** | ** ** | **3 Mos.  Ended  3/31/2007** | ** ** | **3 Mos.  Ended  3/31/2006** | ** ** | **$  CHANGE** | ** ** | **%  CHANGE** | ** ** |
| Water                  |       | $                                 | 50,327     |                              | $          | 50,749 |   | $ | (422 | ) | (0.8 | )% | $ | 11,130 |   | $ | 14,277 |   | $ | (3,147 | ) | (22.0 | )% |
| Electric               |       | 8,869                             |       | 8,346                             |       | 523 |   | 6.3 | % | 3,652 |   | (1,096 | ) | 4,748 |   | 433.2 | % |
| Contracted  services   |       | 13,074                            |       | 5,220                             |       | 7,854 |   | 150.5 | % | 2,163 |   | 929 |   | 1,234 |   | 132.8 | % |
| AWR parent             |       | —                            |       | —                            |       | — |   | — |   | (94 | ) | (50 | ) | (44 | ) | 88.0 | % |
| Totals from  operation |       | $                                 | 72,270     |                              | $          | 64,315 |   | $ | 7,955 |   | 12.4 | % | $ | 16,851 |   | $ | 14,060 |   | $ | 2,791 |   | 19.9 | % |

***Water -***For the three months ended March 31,2007, operating income for water decreased by $3.1 million, or 22%, primarilydue to a decision issued by the CPUC on April 13, 2006 regarding GSWC’s waterrights lease revenues received from the City of Folsom.  This decision added about $2.3 million ofadditional revenues in the first quarter of 2006 for amounts that had beenreceived from the City of Folsom in 2004 and 2005.  Prior to the decision, this amount had beenrecorded as a regulatory liability.  Thisdecision allowed GSWC to recognize revenue in the first quarter of 2006 withouta corresponding amount in 2007, except for the on-going annual Folsom leaserevenues of approximately $1.3 million. Higher 

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operatingexpenses as described below also contributed to the decrease in water’soperating income, offset by increased water rates approved by the CPUC thatwere effective January 1, 2007 and an increase in water consumption over thatin the prior period.

***Electric -***Forthe three months ended March 31, 2007, operating income for electricincreased by $4.7 million.  There was anunrealized gain on Bear Valley Electric’s purchased power contracts in thefirst quarter of 2007 due to increasing energy prices versus an unrealized losson purchased power contracts in the same quarter of 2006. The unrealized gainon purchased power contracts increased operating income by approximately $2.7million for the three months ended March 31, 2007, as compared to an unrealizedloss on purchased power contracts that decreased operating income by $2.2million for the same period in 2006.

***Contracted Services -***Forthe three months ended March 31, 2007, operating income for contractedservices increased by $1.2 million.  Thiswas primarily due to a new contract with the U.S. government.  In December 2006, a subsidiary of ASUSfinalized an agreement with the U.S. government for the construction of certainimprovements to the existing wastewater infrastructure located at Fort Bliss inEl Paso, Texas.  The $19.8 millionproject is a firm-fixed price contract, subject to change orders if significantissues are encountered during construction that would increase the overall costof the project.  This constructionproject is an amendment and supplemental to the 50-year contract with the U.S.government to manage the entire water and wastewater systems at FortBliss.  In March 2007, ASUS executed aformal change order to this contract amendment. The change order contained a value of approximately $765,000 thusincreasing total revenues to be recognized on this contract amendment to $20.6million.  Revenues from this agreementare being recognized on the percentage-of-completion method.  As a result of this new project, operatingincome increased by $2.2 million during the first quarter of 2007. The projectis scheduled to be completed by August 15, 2007.  Partially offsetting this increase was the recovery and reimbursementin 2006 of transition period operating expenses of about $672,000 as aresult of operatingand maintaining the water and wastewater systems under new contracts atmilitary bases in Virginia and Maryland pursuant to the contracts with the U.S.government.  We took over theoperation and maintenance of the water and wastewater systems at Andrews AirForce Base in Maryland on February 1, 2006 and commenced operation of thesesystems on that date.  In addition, weassumed the operation and maintenance of the wastewater systems at Fort Lee inVirginia on February 23, 2006 and the water and wastewater systems at FortEustis, Fort Monroe and Fort Story in Virginia on April 3, 2006 and commencedoperation and maintenance of these systems on those dates.  Therefore, we operated these bases partiallyduring the first quarter of 2006 and entirely during same period of 2007.

The following discussion and analysis providesinformation on AWR’s consolidated operations and assets.  For the three months ended March 31,2007 and 2006, there is generally no material difference between theconsolidated operations and assets of AWR and the water and electric operationsand assets of GSWC. However, where necessary, the following discussion andanalysis includes references specifically to AWR’s individual segments and/orother subsidiaries — CCWC and ASUS and its subsidiaries.

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***Consolidated Results of Operations — Three Months Ended March 31,2007 and 2006 (in thousands):***
| ** **                                           | ** ** | **3 Mos.  Ended  3/31/2007** | ** ** | **3 Mos.  Ended  3/31/2006** | ** ** | **$  CHANGE** | ** ** | **%  CHANGE** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|---------------|------------|---------------|------------|
| OPERATING REVENUES                                   |       |                              |       |                              |       |          |       |          |       |
| Water                                                |       | $                                 | 50,327     |                              | $          | 50,749        |       | $             | (422       | ) | (0.8 | )% |
| Electric                                             |       | 8,869                             |       | 8,346                             |       | 523           |       | 6.3           | %          |
| Contracted  services                                 |       | 13,074                            |       | 5,220                             |       | 7,854         |       | 150.5         | %          |
| Total operating  revenues                            |       | 72,270                            |       | 64,315                            |       | 7,955         |       | 12.4          | %          |
|                                                 |       |                              |       |                              |       |          |       |          |       |
| OPERATING EXPENSES                                   |       |                              |       |                              |       |          |       |          |       |
| Water purchased                                      |       | 8,873                             |       | 8,344                             |       | 529           |       | 6.3           | %          |
| Power purchased  for pumping                         |       | 2,118                             |       | 1,604                             |       | 514           |       | 32.0          | %          |
| Groundwater  production assessment                   |       | 2,279                             |       | 2,083                             |       | 196           |       | 9.4           | %          |
| Power purchased  for resale                          |       | 4,281                             |       | 4,563                             |       | (282          | )          | (6.2          | )%         |
| Unrealized  (gain) loss on purchased power contracts |       | (2,710                            | )          | 2,155                             |       | (4,865        | )          | (225.8        | )%         |
| Supply cost  balancing accounts                      |       | (720                              | )          | 487                               |       | (1,207        | )          | (247.8        | )%         |
| Other operating  expenses                            |       | 6,597                             |       | 4,700                             |       | 1,897         |       | 40.4          | %          |
| Administrative  and general expenses                 |       | 13,007                            |       | 11,114                            |       | 1,893         |       | 17.0          | %          |
| Depreciation and  amortization                       |       | 7,089                             |       | 6,483                             |       | 606           |       | 9.3           | %          |
| Maintenance                                          |       | 2,973                             |       | 2,473                             |       | 500           |       | 20.2          | %          |
| Property and  other taxes                            |       | 2,930                             |       | 2,547                             |       | 383           |       | 15.0          | %          |
| Construction  expenses                               |       | 9,069                             |       | 3,702                             |       | 5,367         |       | 145.0         | %          |
| Net gain on sale  of property                        |       | (367                              | )          | —                            |       | (367          | )          | (100.0        | )%         |
| Total operating  expenses                            |       | 55,419                            |       | 50,255                            |       | 5,164         |       | 10.3          | %          |
|                                                 |       |                              |       |                              |       |          |       |          |       |
| OPERATING INCOME                                     |       | 16,851                            |       | 14,060                            |       | 2,791         |       | 19.9          | %          |
|                                                 |       |                              |       |                              |       |          |       |          |       |
| OTHER INCOME AND  EXPENSES                           |       |                              |       |                              |       |          |       |          |       |
| Interest expense                                     |       | (5,496                            | )          | (5,256                            | )          | 240           |       | 4.6           | %          |
| Interest income                                      |       | 566                               |       | 899                               |       | (333          | )          | (37.0         | )%         |
| Other                                                |       | 69                                |       | —                            |       | 69            |       | 100.0         | %          |
|                                                 |       |                              |       |                              |       |          |       |          |       |
| INCOME FROM OPERATIONS  BEFORE INCOME TAX EXPENSE    |       | 11,990                            |       | 9,703                             |       | 2,287         |       | 23.6          | %          |
|                                                 |       |                              |       |                              |       |          |       |          |       |
| Income tax  expense                                  |       | 5,006                             |       | 3,804                             |       | 1,202         |       | 31.6          | %          |
|                                                 |       |                              |       |                              |       |          |       |          |       |
| NET INCOME                                           |       | $                                 | 6,984      |                              | $          | 5,899         |       | $             | 1,085      |   | 18.4 | % |

Netincome for the first quarter ended March 31, 2007 increased by 18.4% to$7.0 million, equivalent to $0.40 per common share on both a basic and fullydiluted basis, compared to $5.9 million or $0.35 per share for the three monthsended March 31, 2006. Impacting the comparability in the results of thetwo periods are the following significant items:

·                  There was anunrealized gain on purchased power contracts in 2007 due to increasing energyprices versus an unrealized loss on purchased power contracts in 2006. Thecumulative unrealized gain on purchased power contracts increased pretax incomeby approximately $2.7 million, or $0.09 per share, for the three months endedMarch 31, 2007, as compared to a cumulative unrealized loss on purchased powercontracts that decreased pretax income by $2.2 million, or $0.08 per share, forthe same period in 2006.

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·                  A decisionissued by the CPUC on April 13, 2006 regarding the treatment of GSWC’swater rights lease revenues increased pre-tax income by about $2.3 million inMarch 2006, or approximately $0.08 per share, over the same period in2007. Pursuant to a March 2004 CPUC order, the apportionment of any Folsomlease revenues that GSWC may collect commencing in January 2004 wasto be determined by a later decision. Pending that later decision and beginningin the first quarter of 2004, all amounts billed to the City of Folsom had beenincluded in a regulatory liability account and no amounts were recognized asrevenue until uncertainties about this matter were resolved with the CPUC. OnApril 13, 2006, the CPUC authorized GSWC to reinvest all lease revenuessince January 2004, inclusive of the balances in the regulatory liabilityaccounts established by GSWC for this matter, in water system infrastructure.These investments will be included in the rate base upon which GSWC earns arate of return. In accordance with California law, GSWC has 8 years in which toreinvest the proceeds, after which any amount remaining would inure to thecustomer’s benefit. As a result, GSWC transferred about $2.3 million of waterrights lease revenues received from the City of Folsom in 2004 and 2005 from theregulatory liability account into revenues.

·                  An increase inASUS’s pretax operating income of $1.2 million, or $0.04 per share, as comparedto the same period of 2006 for operating, maintaining and improving the water and wastewater systems at militarybases for the U.S. government. The increases include revenue recognized forcertain special projects under the percentage-of-completion method ofaccounting.

·                  Higher operatingexpenses, changes in the effective tax rate, as well as other items describedbelow, contributed to an overall decrease of $0.08 per share to the results ofoperations.

***Operating Revenues***

For thethree months ended March 31, 2007, revenues from water operationsdecreased slightly by 0.8% to $50.3 million, compared to $50.8 million for thethree months ended March 31, 2006.  Contributing to this decrease was a CPUC decision issued on April 13,2006 enabling GSWC to record $2.3 million in the first quarter of 2006 of waterrights lease revenues from the City of Folsom for the period from January 2004to December 2005.  Prior to thisdecision, the apportionment of any lease revenues that GSWC collected in 2004and 2005 had been included in a regulatory liability account and no amountswere recognized as revenues until regulatory uncertainties about this matterwere resolved. There was no such adjustment in the first quarter of 2007.  For the first quarter of 2007 and 2006, GSWCalso recorded water lease revenues from the City of Folsom totaling $311,000and $299,000, respectively.  Thisdecrease was partially offset by rate increases approved by the CPUC andeffective January 1, 2007, which contributed approximately $1.7 million inincreased water revenues.  In addition,an increase of about 1.0% in billed water consumption resulting fromchanges in weather conditions increased revenues by approximately $190,000.Differences in temperature and rainfall in Registrant’s service areas impactsales of water to customers, causing fluctuations in Registrant’s revenues andearnings between comparable periods.

For the three months ended March 31, 2007, revenuesfrom electric operations increased by 6.3% to $8.9 million compared to $8.3million for the three months ended March 31, 2006. The increase reflectshigher kilowatt-hour usage by residential customers due to cooler weatherconditions.  However, this increase waspartially offset by a decrease from our industrial customers resulting fromless usage of snow-making machines.  Lastyear, warm weather until late January allowed industrial customers to continuemaking snow.  Therefore, more energy wasused during February and March of 2006 compared to the same period this year.

Registrant relies upon rate approvals by stateregulatory agencies in California and Arizona in order to recover operatingexpenses and provide for a return on invested and borrowed capital used to fundutility plant. Without such adequate rate relief granted in a timely manner,revenues and earnings can be negatively impacted.

For the three months ended March 31, 2007, revenuesfrom contracted services increased by $7.9 million, or 150.5%, to $13.1 millioncompared to $5.2 million for the three months ended March 31, 2006 due primarily to an increase of approximately $7.3million related to construction revenues earned from the U.S. governmentrecognized on the percentage-of completion method. The revenues earned were forthe construction of certain improvements, renewals and replacements to theexisting water and wastewater infrastructures at Fort Bliss and at othermilitary bases located in Virginia and Maryland pursuant to new operation andmaintenance contracts entered into in early 2006.  Certain of the construction projects arefirm, fixed-price contracts and are supplemental to ASUS’s 50-year contractswith the U.S. government. There were also additional revenues totaling$709,000 in the first quarter of 2007 generated from operating and maintainingthe water and wastewater systems under the new contracts in Virginia andMaryland.

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***Operating Expenses:***

***Supply Costs***

Water supply costs consist ofpurchased water, purchased power for pumping, groundwater production assessmentand water supply cost balancing accounts. Electric supply costs consist of purchased power for resale and electricsupply cost balancing account.  Water andelectric margins are computed by taking total revenues, less total supplycosts.  We use margins and relatedpercentages as an important measure in evaluating our operating results.   We believe this non-GAAP measure to be keyin evaluating our utility business performance within our water andelectric segments.   We review these measurements regularlyand compare them to historical periods and to our operating budget asapproved.  However, this non-GAAP measuremay not be comparable to similarly titled measures used by other entities andshould not be considered as an alternative to operating income, which isdetermined in accordance with GAAP, as an indicator of operating performance.

Total supply costs comprise the largest segment of totaloperating expenses.  Supply costsaccounted for approximately 30% and 34% of total operating expenses for thethree months ended March 31, 2007 and 2006, respectively.  The table below provides the amount ofincreases (decreases), percent changes in supply costs, and margins during thethree months ended March 31, 2007 and 2006 (amounts in thousands):
| ** **                                 | ** ** | **3 Mos.  Ended  3/31/2007** | ** ** | **3 Mos.  Ended  3/31/2006** | ** ** | **$  CHANGE** | ** ** | **%  CHANGE** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|---------------|------------|---------------|------------|
| WATER OPERATING  REVENUES(1)               |       | $                                 | 50,327     |                              | $          | 50,749        |       | $             | (422       | ) | (0.8 | )% |
|                                       |       |                              |       |                              |       |          |       |          |       |
| WATER SUPPLY  COSTS:                       |       |                              |       |                              |       |          |       |          |       |
| Water purchased(1)                         |       | 8,873                             |       | 8,344                             |       | 529           |       | 6.3           | %          |
| Power purchased for pumping(1)             |       | 2,118                             |       | 1,604                             |       | 514           |       | 32.0          | %          |
| Groundwater production assessment(1)       |       | 2,279                             |       | 2,083                             |       | 196           |       | 9.4           | %          |
| Water supply cost balancing accounts(1)    |       | (1,526                            | )          | 237                               |       | (1,763        | )          | (743.9        | )%         |
|                                       |       | $                                 | 11,744     |                              | $          | 12,268        |       | $             | (524       | ) | (4.3 | )% |
| WATER MARGIN(2)                            |       | $                                 | 38,583     |                              | $          | 38,481        |       | $             | 102        |   | 0.3 | % |
|                                       |       |                              |       |                              |       |          |       |          |       |
| PERCENT MARGIN -  WATER                    |       | 76.7                              | %          | 75.8                              | %          |          |       |          |       |
|                                       |       |                              |       |                              |       |          |       |          |       |
| ELECTRIC  OPERATING REVENUES(1)            |       | $                                 | 8,869      |                              | $          | 8,346         |       | $             | 523        |   | 6.3 | % |
|                                       |       |                              |       |                              |       |          |       |          |       |
| ELECTRIC SUPPLY  COSTS:                    |       |                              |       |                              |       |          |       |          |       |
| Power purchased for resale(1)              |       | 4,281                             |       | 4,563                             |       | (282          | )          | (6.2          | )%         |
| Electric supply cost balancing accounts(1) |       | 806                               |       | 250                               |       | 556           |       | 222.4         | %          |
|                                       |       | $                                 | 5,087      |                              | $          | 4,813         |       | $             | 274        |   | 5.7 | % |
| ELECTRIC  MARGIN(2)                        |       | $                                 | 3,782      |                              | $          | 3,533         |       | $             | 249        |   | 7.0 | % |
|                                       |       |                              |       |                              |       |          |       |          |       |
| PERCENT MARGIN -  ELECTRIC                 |       | 42.6                              | %          | 42.3                              | %          |          |       |          |       |

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(1)          As reportedon AWR’s Consolidated Statements of Income, except for supply cost balancingaccounts.  The sum of water and electricsupply cost balancing accounts in the table above are shown on AWR’sConsolidated Statements of Income and totaled ($720,000) and $487,000 for thethree months ended March 31, 2007 and 2006, respectively.

(2)          Water andelectric margins do not include any depreciation and amortization, maintenanceexpense, or other operating expenses.

Two of the principal factors affecting water supplycosts and gross margin are the amount of water produced and the source of thewater.  Generally, water from wells costsless than water purchased from wholesale suppliers.  In addition, GSWC is authorized toestablish water and electric supply cost balancing/memorandum accounts forincreases and/or decreases in costs due to changes in rates charged by itssuppliers providing our purchased water and purchased power, and by agenciesassessing groundwater related pump taxes for our water service areas inCalifornia.   Higher or lower rates inactual costs as compared to rates authorized by the CPUC will either berecovered from or refunded to customers in the future.   However, changes in the water resource mix betweenwater supplied from purchased sources and that supplied from Registrant’s ownwells can increase/decrease actual supply-related costs relative to thatapproved for recovery through rates, thereby impacting 

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earningseither negatively or positively. GSWC has the opportunity to change thesupply-related costs recovered through rates by application to the appropriateregulatory body. GSWC believes that its applications for recovery ofsupply-related costs accurately reflect the water supply situation as it isknown at the time. Without a “full-cost” balancing account authorized by theCPUC, it is impossible to adequately protect earnings from adverse changes insupply costs related to unforeseen contamination or other loss of water supply.

For the three months ended March 31, 2007, 38.9%of the Company’s water supply mix was purchased as compared to 43.2% purchasedfor the three months ended March 31, 2006. This change in mix resulted in improved margins in 2007 compared to sameperiod in 2006.  Water gross margin forthe first quarter of 2006 included the $2.3 million water rights lease revenuesfrom the City of Folsom.

Purchasedwater costs increased by 6.3% to $8.9 million compared to $8.3 million for thethree months ended March 31, 2006. The increase is due primarily to anincrease in water supply demand resulting from higher customer consumption andincreased water rates charged by purchased water suppliers.  In general, the supply cost memorandumaccount as discussed above allows GSWC to track incremental rate changes fromsuppliers, for future recovery in water rates.  In addition, GSWC entered into a one-time lease of pumped water rightswith the City of Pomona in order to allow GSWC to pump more water.  The price of this lease paid by GSWC totaled$226,000 and was for 1,000 acre-feet of stored water in eastern Los AngelesCounty.  There were no water rightsleased by GSWC from others in the same period of 2006.  These increases were offset by a favorablechange in the supply mix discussed above, caused by less purchased water neededto replace groundwater supply not pumped in the prior year.  Certain wells had been removed from servicein 2006 as a result of water quality issues and mechanical problems.

For thethree months ended March 31, 2007, the increases in power purchased forpumping and groundwater production assessments were due to higher water supplydemand and an increase in pumping volume resulting from the favorable supplymix change as discussed. There were also increases in assessment rates leviedagainst groundwater production, effective July 2006. Average pump taxrates increased in Regions II and III by approximately 2% and 4%,respectively.  Again, the supply costmemorandum account tracks the increases in pump tax rates for future recoveryin water rates.

A decrease of $1.8 million during the three monthsended March 31, 2007 in the water supply cost balancing account provisionas compared to the three months ended March 31, 2006 was primarily due tothe recording of $1.2 million in net under-collections to the 2007 memorandumaccount, caused by increased rates in purchased water and purchased power forpumping charged by GSWC’s suppliers and increased pump tax rates. Under-collections in the memorandum account were not recorded in the firstquarter of 2006 due to the CPUC’s earning test requirement, which waseliminated in April 2006 by a CPUC decision.  Under-collections are now recorded on a monthly basis.  There was also a $558,000 decrease in theamortization of the water supply cost balancing accounts due to the expirationin October 2006 of the amortization of Region III’s under-collection.

For the three months ended March 31, 2007, the cost ofpower purchased for resale to customers in GSWC’s Bear Valley Electric divisiondecreased by 6.2% to $4.3 million compared to $4.6 million for the three monthsended March 31, 2006, reflecting an increase in sales to the spot marketat higher energy prices.  GSWC has a 15MWpurchased power agreement with Pinnacle West Capital Corporation (“PWCC”).  Purchased power in excess of demand is soldinto the spot market at the market price.  There was an energyprice increase of about $13/MWh, resulting in higher income from sales in thespot market.  Income from the spot marketsales for the three months ended March 31, 2007 decreased the cost of powerpurchased for resale and increased the electric supply cost balancing accountprovision, respectively, as compared to the same period of 2006.   This decrease of the cost of power purchasedfor resale was offset partially by higher customer demand during the firstquarter of 2007.

***Unrealized(Gain) Loss on Purchased Power Contracts***

Unrealizedgain and loss on purchased power contracts represent gains and losses recordedfor GSWC’s purchased power agreements with PWCC, which qualify asderivative instruments under SFAS No. 133, *“Accountingfor Derivative Instruments and Hedging Activities”*. The $2.7 millionpretax unrealized gain on purchased power contracts for the three months endedMarch 31, 2007 is due to an increase in the current forward market pricessince December 31, 2006. There was a $2.2 million pretax unrealized losson purchased power contracts for the three months ended March 31, 2006.Unrealized gains and losses at Bear Valley Electric will continue to impactearnings during the life of the contract with PWCC, which terminates at the endof 2008.

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***Other Operating Expenses***

The components ofother operating expenses include primarily payroll, material and supplies,chemicals and water treatment, and contract service costs of operating theregulated water systems, including the costs associated with water transmissionand distribution, pumping, water quality, meter reading, billing, andoperations of district offices.  For the three months endedMarch 31, 2007 and 2006, other operating expenses by segment consisted of thefollowing:
| ** **                      | ** ** | **3 Mos.  Ended  3/31/2007** | ** ** | **3 Mos.  Ended  3/31/2006** | ** ** | **$  CHANGE** | ** ** | **%  CHANGE** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|---------------|------------|---------------|------------|
| Water Services                  |       | $                                 | 5,451      |                              | $          | 4,260         |       | $             | 1,191      |   | 28.0 | % |
| Electric  Services              |       | 390                               |       | 429                               |       | (39           | )          | (9.1          | )%         |
| Contracted  Services            |       | 756                               |       | 11                                |       | 745           |       | 6772.7        | %          |
| Total other  operating expenses |       | $                                 | 6,597      |                              | $          | 4,700         |       | $             | 1,897      |   | 40.4 | % |

For the three months endedMarch 31, 2007, other operating expenses for water services increased by$1.2 million due primarily to higher chemicals and water treatment costs,including supplies and materials, of $714,000 in particular at GSWC’s Region IIand III services area.  Region IIincurred an additional $409,000 primarily for arsenic and granular activatedcarbon treatments at three of its well sites, while Region III incurred anadditional $243,000 primarily for two of its treatment plants.  There was also an increase in labor costs of$162,000 due to higher wages, and an increase in outside fees of $324,000 forservices from an outside party to remove nitrate and perclorate at treatmentplants.

There was also an increase in otheroperating expenses of $745,000 for contracted services primarily due to thecommencement of the operation of water and wastewater systems at military basesin Maryland and Virginia that began throughout the first quarter of 2006.  ASUS fully operated these bases during thefirst quarter of 2007, whereas they were only partially operated by ASUS duringthe same period in 2006.

***Administrative and General Expenses***

Administrative and general expensesinclude payroll related to administrative and general functions, all employeebenefits charged to expense accounts, insurance expenses, outside legal andconsulting fees, regulatory utility commissions’ expenses, expenses associatedwith being a public company, and general corporate expenses.  For the three months ended March 31, 2007 and2006, administrative and general expenses by segment consisted of thefollowing:
| ** **                                  | ** ** | **3 Mos.  Ended  3/31/2007** | ** ** | **3 Mos.  Ended  3/31/2006** | ** ** | **$  CHANGE** | ** ** | **%  CHANGE** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|---------------|------------|---------------|------------|
| Water Services                              |       | $                                 | 10,665     |                              | $          | 9,387         |       | $             | 1,278      |   | 13.6 | % |
| Electric  Services                          |       | 1,440                             |       | 1,300                             |       | 140           |       | 10.8          | %          |
| Contracted  Services                        |       | 902                               |       | 427                               |       | 475           |       | 111.2         | %          |
| Total  administratvive and general expenses |       | $                                 | 13,007     |                              | $          | 11,114        |       | $             | 1,893      |   | 17.0 | % |

For the three months endedMarch 31, 2007, administrative and general expenses increased by $1.4million in water and electric services compared to the three months endedMarch 31, 2006 due to: (i) an increase of $954,000 in outsideservices relating primarily to tax and legal services; (ii) an approximate$373,000 increase in labor costs due to higher wages largely related toRegistrant’s annual performance-based salary review program, and (iii) anincrease of $91,000 in miscellaneous expenses.

There was also an increase of$475,000 in contracted services administrative and general expenses dueprimarily to the recovery in 2006 of transition period operating expenses ofabout $672,000 at the various military bases pursuant to the contracts with theU.S. government.   There was no suchrecovery in 2007.  This was offset by adecrease of $246,000 in outside legal and consulting services.

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***Depreciation and Amortization***

Forthe three months ended March 31, 2007, depreciation and amortization expenseincreased by 9.3% to $7.1 million compared to $6.5 million for the three monthsended March 31, 2006 reflecting, among other things, the effects of closingapproximately $73 million of additions to utility plant during 2006,depreciation on which began in January 2007. Registrant anticipates thatdepreciation expense will continue to increase due to Registrant’s on-goingconstruction program at its regulated subsidiaries. Registrant believes thatdepreciation expense related to property additions approved by the appropriateregulatory agency will be recovered through water and electric rates.

***Maintenance***

For the three months endedMarch 31, 2007, maintenance expense increased by 20.2% to $3.0 millioncompared to $2.5 million for the three months ended March 31, 2006 dueprincipally to an increase in required and emergency maintenance on GSWC’swells and water supply sources.

***Property and Other Taxes***

For the three months ended March 31, 2007, propertyand other taxes increased by 15.0% to $2.9 million compared to $2.5 million forthe three months ended March 31, 2006 reflecting additional property taxesresulting from higher assessed values, and increases in payroll taxes based onincreased labor costs.

***Construction Expenses***

For the three months ended March 31, 2007, ASUSconstruction expenses increased to $9.1 million compared to $3.7 million forthe same period in 2006 reflecting the costs incurred for the construction of various improvements, renewals and replacementsto the existing water and wastewater infrastructures at Fort Bliss and at themilitary bases located in Virginia and Maryland pursuant to new contractsentered into in early 2006.  The increasein construction activity resulted from amendments to the original 50-yearcontracts with the U.S. government which required the construction ofadditional improvements at the various military bases.

***Net Gain on Sale of Property***

For the three months ended March 31, 2007, Registrantrecorded a net pre-tax gain of $367,000 on the sale of property primarilyrelated to a settlement of $325,000 reached with the Los Angeles Unified SchoolDistrict (“LAUSD”) for GSWC’s sale of a parcel of land to LAUSD for the purposeof constructing a high school.  There wasno similar gain in the same period of 2006. Earnings and cash flows from these transactions are sporadic and may ormay not continue in future periods.

***Interest Expense***

For the three months endedMarch 31, 2007, interest expense increased by 4.6% to $5.5 millioncompared to $5.3 million for the three months ended March 31, 2006primarily reflecting higher interest rates. There was also an increase in short-term cash borrowings. Average bankloan balances outstanding under an AWR credit facility for the first quarter of2007 were approximately $35.0 million, as compared to an average of $28.0million during the same period of 2006.

***Interest Income***

Interestincome decreased by $333,000 for the three months ended March 31, 2007 dueprimarily to the initial recording in the first quarter of 2006 interestaccrued on the uncollected balance of the Aerojet litigation memorandum accountauthorized by the CPUC.  As a result, theinterest income accrued on the memorandum account decreased by $317,000 betweenthe two periods.

***Income Tax Expense***

For the three monthsended March 31, 2007, income tax expense increased by 31.6%to $5.0 million compared to $3.8 million for the three months endedMarch 31, 2006 due, in part, to an increase in pretax incomeof 23.6%. In addition, the effective tax rate (“ETR”)for the three months ended March 31, 2007 was 41.8% as comparedto a 39.2% ETR applicable to the three months ended March 31, 2006. Thevariance between the ETR and the statutory tax rate is primarily the result ofdifferences between book and taxable income that are treated as flow-through adjustmentsin accordance with regulatory requirements. Flow-through adjustmentsincrease or decrease tax expense in one period, with an offsetting increase ordecrease occurring in another period.

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**Critical Accounting Policies and Estimates**

Critical accounting policies and estimates are thosethat are important to the portrayal of AWR’s financial condition, results ofoperations and cash flows, and require the most difficult, subjective orcomplex judgments of AWR’s management. The need to make estimates about theeffect of items that are uncertain is what makes these judgments difficult,subjective and/or complex. Management makes subjective judgments about theaccounting and regulatory treatment of many items. These judgments are based onAWR’s historical experience, terms of existing contracts, and AWR’s observanceof trends in the industry, information provided by customers and informationavailable from other outside sources, as appropriate. Actual resultsmay differ from these estimates under different assumptions or conditions.

The critical accounting policies used in the preparation of the Registrant’s financial statements that we believe affect the more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in *“Management’s Discussion and Analysis of Financial Condition and Results of Operation”* included in our Annual Report on Form 10-K for the year ended December 31, 2006. Except for the adoption of FASB Interpretation No. 48, *“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”* (“FIN 48”), there have been no material changes to the critical accounting policies.  Effective January 1, 2007, Registrant adopted FIN 48. As a result of adoption, Registrant increased retained earnings by approximately $181,000.  As of the adoption date and at March 31, 2007, Registrant’s total amount of unrecognized tax benefits was $4.8 million, of which $118,000, if recognized, would affect the effective tax rate.  See Note 5 (Income Taxes) of *Notes to Consolidated Financial Statements*.

**Liquidity and Capital Resources**

***AWR***

AWR funds its operating expenses and pays dividends onits outstanding Common Shares primarily through dividends from GSWC.  The ability of GSWC to pay dividends to AWRis restricted by California law. Under restrictions of the California tests, atMarch 31, 2007, approximately $107.3 million was available from the retainedearnings of GSWC to pay dividends to AWR. GSWC is also subject to contractual restrictions on its ability to paydividends. GSWC’s maximum ability to pay dividends is restricted by certainNote Agreements to the sum of $21 million plus 100% of consolidated net incomefrom various dates plus the aggregate net cash proceeds received from capitalstock offerings or other instruments convertible into capital stock fromvarious dates. Under the most restrictive of the Note Agreements, $214.6million was available to pay dividends to AWR as of March 31, 2007. GSWC isalso prohibited from paying dividends if, after giving effect to the dividend,its total indebtedness to capitalization ratio (as defined) would be more than..6667 to 1.  Dividends in the amount of$4.3 million were paid to AWR by GSWC in the first quarter of 2007 and 2006,respectively.

Net cash providedby operating activities was $14.2 million for the quarter ended March 31,2007 as compared to $16.8 million for the same period ended March 31,2006. The overall decrease of $2.6 million was primarily attributed to thetiming of cash receipts and disbursements related to working capital itemsaffecting the changes in net cash provided by operating activities.   An approximately $4.1 million increase inamounts due from the U.S. government on projects at Fort Bliss was offset by a$5.0 million change in billings in excess of costs and estimated earnings onuncompleted contracts included in “other assets”.  Increases in 2007 operating revenues mainlydue to an increase in cash collected from GSWC’s customers due to increasedrates were also offset by higher operating costs paid during the period.

Net cash used in investing activities, which consistsprimarily of construction expenditures, decreased to $9.6 million for the threemonths ended March 31, 2007 as compared to $19.4 million for the threemonths ended March 31, 2006.  Thisdecrease was primarily due to several water treatment, well and securityconstruction projects that were completed in 2006 in GSWC’s Los Angeles County,Santa Maria and Barstow areas for which significant capital expenditures wereincurred in the first quarter of 2006. Also, in 2007, the capital expenditureswere offset by $380,000 in proceeds received on the sale of property.

Net cash provided by financing activities was $1.2million for the quarter ended March 31, 2007 as compared to $4.0 millionfor the same period in 2006. The decrease in net cash provided by financingactivities was primarily caused by (i) a decrease of about $1.3 million inadvances for and contributions in aid of construction; (ii) a decrease of$667,000 in the cash received on the financing portion of the purchased powercontracts with PWCC; and (iii) a $435,000 decrease in proceeds from stockoption exercises and the issuance of Common Shares under the Registrant’sCommon Share Purchase and Dividend Reinvestment Plan and 401(k) Plan.

The Company has paid common dividends for 77consecutive years.  During the threemonths ended March 31, 2007 and 2006, AWR paid quarterly dividends toshareholders, totaling approximately $4.0 million and $3.8 million,respectively.  AWR’s ability to pay cashdividends on its Common Shares outstanding depends primarily upon cash flowsfrom GSWC.  AWR presently intends tocontinue paying quarterly cash dividends in future years, on March 1, June 1, 

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September 1 and December1, subject to earnings and financial condition, regulatory requirements andsuch other factors as the Board of Directors may deem relevant.

In June 2005, AWR amended and restated its creditagreement which increased its borrowing limit under this facility to $85million and extended the maturity date to June 2010. Up to $20 million of thisfacility may be used for letters of credit. As of March 31, 2007, an aggregateof $36.0 million in cash borrowings were included in current liabilities andapproximately $11.2 million of letters of credit were outstanding under thisfacility. AWR also has a Registration Statement on file with the Securities andExchange Commission for the sale from time to time of debt and equitysecurities.  As of March 31, 2007, $156.5million was available for issuance under this Registration Statement.

Registrantanticipates that interest costs will increase in future periods due to the needfor additional external capital to fund its construction program, and potentialmarket interest rate increases. Registrant believes that costs associated withcapital used to fund construction at its regulated subsidiaries will continueto be recovered in water and electric rates charged to customers.

In February2007, Standard & Poor’s (“S&P”) revised AWR’s rating outlook fromstable to positive and affirmed the A- rating. S&P debt ratings range from AAA (highest rating possible) toD (obligation is in default). Securities ratings are not recommendations tobuy, sell or hold a security and are subject to change or withdrawal at anytime by the rating agency.

***GSWC***

Net cash providedby operating activities was $13.0 million for the quarter ended March 31,2007 as compared to $19.3 million for the same period in 2006. The decrease of$6.3 million was primarily attributable to the timing of cash receipts anddisbursements related to working capital items. Increases in 2007 water revenues mainly due to an increase in cashcollected from GSWC’s customers resulting from increased rates were offset byhigher operating costs paid during the period.

Net cash used in investing activities decreased to$9.2 million for the quarter ended March 31, 2007 as compared to $18.8million for the same period in 2006. This decrease was primarily due toseveral  water treatment, well andsecurity construction projects that were completed in 2006 in GSWC’s LosAngeles County, Santa Maria and Barstow areas for which significant capitalexpenditures were incurred in the first quarter of 2006.  GSWC anticipates that its capitalexpenditures for calendar 2007 will approximate $60 million.  Also, in 2007, the capital expenditures wereoffset by $380,000 proceeds received on the sale of property.

Net cash used by financing activities was $1.5 millionfor the three months ended March 31, 2007 as compared to net cash providedby financing activities of $1.5 million for the same period in 2006.  The decrease in net cash provided byfinancing activities was primarily caused by (i) a decrease of about $1.6million in advances for and contributions in aid of construction; (ii) adecrease of $667,000 in the cash received on the financing portion of thepurchased power contracts with PWCC; (iii) a $232,000 decrease in proceedsfrom stock option exercises and the related tax benefit, and (iv) a $500,000decrease in the net change in inter-company borrowings.

GSWC funds the majority of its operating expenses,payments on its debt, and dividends on its outstanding Common Shares throughinternal sources. Internal sources of cash flow are provided primarily byretention of a portion of earnings from operating activities. Internal cashgeneration is influenced by factors such as weather patterns, environmentalregulation, litigation, changes in supply costs and regulatory decisionsaffecting GSWC’s ability to recover these supply costs, and the timing of raterelief.

GSWCalso relies on external sources, including equity investments and short-termborrowings from AWR, long-term debt, contributions-in-aid-of-construction,advances for construction and install-and-convey advances to fund the majorityof its construction expenditures. GSWC has a Registration Statement on filewith the SEC for issuance from time to time, of up to $100 million of debtsecurities. As of March 31, 2007, $50 million remained for issuance under thisRegistration Statement.

OnOctober 11, 2005, CoBank purchased a 5.87% Senior Note due December 20,2028 in the aggregate principal amount of $40,000,000 from GSWC. The proceedswere used to pay down GSWC’s inter-company short-term borrowings.

In February 2005, Moody’sInvestor Services (“Moody’s”) changed the rating outlook for $175 million ofsenior unsecured debt at GSWC from A2 negative to A2 stable.  Moody’s debt ratings range from Aaa (bestquality) to C (lowest quality). S&P changed its debt rating for GSWC fromA- stable to A- positive in February 2007. Securities ratings are not recommendations to buy, sell or hold asecurity and are subject to change or withdrawal at any time by the ratingagency.

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***CCWC***

CCWC funds the majority of its operating expenses, paymentson its debt and dividends, if any, through internal operating sources orshort-term borrowings from AWR. CCWC also relies on external sources, includinglong-term debt, contributions-in-aid-of-construction, advances for constructionand install-and-convey advances, to fund the majority of its constructionexpenditures.

***ASUS***

ASUS funds its operatingexpenses primarily through contracted services fees from the U.S. governmentand investments by or loans from AWR. ASUS, in turn, provides funding to its subsidiaries.

**Contractual Obligations and Other Commitments**

Registranthas various contractual obligations which are recorded as liabilities in theconsolidated financial statements. Other items, such as certain purchasecommitments and operating leases are not recognized as liabilities in theconsolidated financial statements, but are required to be disclosed.  During the first quarter of 2007, GSWCentered into a new operating lease for a facility located in San Dimas,California that will house certain departments. The term of the lease is for seven years.  The minimum base rent will totalapproximately $2.0 million over the seven years.

Inaddition to contractual maturities, Registrant has certain debt instrumentsthat contain annual sinking fund or other principal payments. Registrantbelieves that it will be able to refinance debt instruments at their maturitythrough public issuance, or private placement, of debt or equity. Annualprincipal and interest payments are generally made from cash flow fromoperations.

There have been no other material changes to AWR’s contractual obligations and other commitments since December 31, 2006. See *“Managements’ Discussion and Analysis of Financial Condition and Results of Operation—Contractual Obligations, Commitments and Off Balance Sheet Arrangements”*section of the Registrant’s Form 10-K for the year-ended December 31, 2006 for a detailed discussion of contractual obligations and other commitments.

**Regulatory Matters**

GSWC is subject to regulation by the CPUC, which hasbroad powers with respect to service and facilities, rates, classification ofaccounts, valuation of properties, the purchase, disposition and mortgaging ofproperties necessary or useful in rendering public utility service, theissuance of securities, the granting of certificates of public convenience andnecessity as to the extension of services and facilities and various othermatters. CCWC is subject to regulation by the ACC.

Rates that GSWC and CCWC are authorized to charge aredetermined by the CPUC and the ACC, respectively, in general rate cases and arederived using rate base, cost of service and cost of capital, as projected fora future test year in California and using an historical test year, asadjusted, in Arizona. Rates charged to customers vary according to customerclass and rate jurisdiction and are generally set at levels allowing forrecovery of prudently incurred costs, including a fair return on rate base.Rate base generally consists of the original cost of utility plant in service,plus certain other assets, such as working capital and inventory, lessaccumulated depreciation on utility plant in service, deferred income taxliabilities and certain other deductions.

GSWC is required to file a general rate case (“GRC”)application every three years for each of its water rate-making areas accordingto a schedule established by the CPUC. GRC’s typically include an increasein year one and step increases for the second year and attrition increases forthe third year. Rates are based on a forecast of expenses and capital costs.GRC’s have a typical regulatory processing time of one year. In California,rates may be increased by offsets for certain expense increases, includingbut not limited to supply cost offset and balancing account amortization, and adviceletter filings related to certain plant additions and other operating costincreases. Offset rate increases and advice letter filings typically have a twoto four month regulatory lag.

Neither the operations nor rates of AWR and ASUS aredirectly regulated by the CPUC or the ACC. The CPUC and the ACC do howeverregulate certain transactions between GSWC and its affiliates. The amountscharged by the subsidiaries of ASUS for water and wastewater services atmilitary bases are based upon the terms of 50-year contracts with the U.S.government and supplemental fixed price construction contracts. The operationsand maintenance contracts provide that prices will be redetermined at the endof two years after commencement of operations at each military base and everythree years thereafter. In addition, prices may be equitably adjusted forchanges in law, wage and benefit increases and other circumstances.  The construction projects are fixed price.  Prices may be changed through the executionof change orders if significant unforeseen issues arise during the constructionprocess.

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***RecentChanges in Rates***

In February 2006, GSWCfiled an application with the CPUC for rate increases in Region II and to covergeneral office expenses at the Corporate Headquarters. GSWC has settled manyitems with the Division of Ratepayer Advocates (“DRA”) at the CPUC.  If GSWC receives a favorable CPUC decision onthe items that are still contested, we estimate that it will add annualizedrevenues of approximately $5.2 million. If the CPUC’s decision favors DRA, it could result in an estimated $1.5million reduction in annual revenues. Due to delays on this application, the CPUC approved an interim rateincrease, subject to refund, totaling $1.2 million that became effective January1, 2007.  The amount of increase ordecrease ultimately decided by the CPUC will be retroactive to January 1, 2007.A final decision on this application is expected in mid-2007.  Management is unable to predict the outcomeof this rate case.

On January 12, 2006, theCPUC approved GSWC’s Region III rate case. The authorized rate increase for2006 was made effective January 19, 2006 and provided GSWC additional annualrevenue approximating $5.4 million in 2006 based on a return on equity of 9.8%.The CPUC also approved the second year increases for Region III in an estimatedamount of approximately $2.3 million, effective January 1, 2007.  In connection with this GRC, GSWC also filedan Application for Rehearing of the Region III GRC.  GSWC was granted limited re-hearing of thatdecision and was ordered to file a report. GSWC filed that report in January 2007. According to GSWC’s calculations, the adopted revenues in 2006 shouldhave been increased by approximately $326,000, and the rates in 2007 should beapproximately $285,000 higher than adopted. DRA has submitted a response to our report and now the CPUC’s waterdivision will make a final ruling.

InOctober 2006, GSWC filed advice letters with the CPUC for the third yearincreases (the attrition increases) for Region I of approximately $0.6 million,which were approved and became effective on January 1, 2007.

OnNovember 14, 2005, GSWC filed advice letters with the CPUC for step increasesfor Region I in an amount of approximately $0.6 million and an attritionincrease of approximately $5.2 million for Region II, both of which wereapproved and became effective on January 1, 2006.

***Pending Rate Changes in2007***

InJanuary 2007, GSWC filed an application with the CPUC for rate increases inRegion I. In the filing, GSWC requested rate increases which are expected togenerate approximately $10.6 million in annual revenues starting in 2008, withadditional increases of $0.5 million in 2009 and $1.0 million in 2010. Adecision on this application is expected in late 2007.

The application for rate increases to cover generaloffice expenses at the Corporate Headquarters was previously filed in 2005 withthe Region III rate case and was deferred for one year to be combined with theRegion II case as discussed.  GSWC andDRA agreed that when GSWC receives rate increases for general office expenses,still pending, that the increases could be applied immediately to Region IIIsince they are a year late.  If GSWCreceives a favorable CPUC decision on items that are still contested in generaloffice expenses, it would add annualized revenues of approximately $3.8million.  But if the CPUC’s decisionfavors the DRA position, it could result in an estimated $1.3 million reductionin annual revenues.  Region III receivedan interim annual rate increase of $135,000 effective January 1, 2007.  The amount of increase or decrease ultimatelydecided by the CPUC will also be retroactive to January 1, 2007.

CCWC plans to file its next general rate case with theACC during the third quarter of 2007, for its water system in Fountain Hills,Arizona.  The processing of this case isexpected to take approximately 18 months. CCWC filed its last rate case with the ACC in August 2004. In September2005, the ACC approved a rate increase for CCWC. The rate increase waseffective on October 1, 2005 and generated additional annual revenues ofapproximately $1.1 million, an 18% increase over 2004 revenues.   During this GRC, CCWC sought to have itsrates determined using a fair value rate base. The ACC elected not to use fairvalue in setting the rates.  CCWCappealed ACC’s use of only original cost less depreciation rate base todetermine the revenue requirement.  Because CCWC’s fair value rate base was higher, the use of original costexclusively to determine the revenue requirement deprived CCWC of a substantialamount of operating income. Following the approval of this rate case, CCWCfiled an appeal with the Arizona Court of Appeals.  On February 13, 2007, the Arizona Court ofAppeals upheld CCWC’s challenge to the ACC’s failure to use fair value ratebase in the determination of operating income.  The process the ACCutilized resulted in a lower revenue requirement and was found to be inviolation of the Arizona Constitution.  However, the Court also heldthat ACC’s determination of the return on equity, while not well-explained, wasmade based on the evidence, was a matter within the agency’ssubstantial discretion and was lawful.  The ACC sought andreceived an extension of the deadline to seek review by the ArizonaSupreme Court until May 14, 2007.  If the ACC seeks and obtains review, afinal decision will take approximately 9-12 months.  If review is notsought or is denied, the matter will return to the ACC on remand for modificationof the original ACC decision consistent with the decision of the Court ofAppeals.  Remand proceedings would be expected to take at least another 6months.

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***Other Regulatory Matters***

On April 16, 2007, GSWC filed an industry-widecompliance report regarding its historical purchases of energy from renewablegeneration sources at its Bear Valley Electric operations.  The filing indicates that GSWC’s has notachieved interim target purchase levels established by the CPUC and could besubject to possible fines.  Based on thecalculation of possible fines included in the filing, the fines can range ashigh as approximately $592,000.  GSWC hascontested the fines and management does not believe it is probable that GSWCwill ultimately be assessed these possible fines, and accordingly, no provisionfor loss has been recorded in the financial statements.

There have been no othermaterial changes to AWR’s other regulatory matters since December 31,2006. See *“Managements’ Discussion and Analysis of FinancialCondition and Results of Operation—Regulatory Matters”*section ofthe Registrant’s Form 10-K for the year-ended December 31, 2006 for adetailed discussion of other regulatory matters.  Other regulatory matters included: NewService Territory Application, Finance Application, State-Wide RateApplication, Memorandum Supply Cost Accounts, Low Income Balancing Accounts,Santa Maria Groundwater Basin Adjudication, Refund of Water Rights LeaseRevenues, Recovery of Cost of Tree Removal and Mitigation for Bark BeetleInfestation, and Outside Services Memorandum Account.

**Environmental Matters**

AWR’s subsidiaries are subject to increasinglystringent environmental regulations including the 1996 amendments to theFederal Safe Drinking Water Act; enhanced surface water treatmentrules; regulation of disinfectant/disinfection by-products; and the long-term enhanced surface watertreatment rules; ground water treatmentrule; contaminant regulation of radon and arsenic; and unregulatedcontaminants monitoring rule.

Additional information on these requirements and othersignificant environmental matters is described in *“Management’sDiscussion and Analysis of**Financial Condition andResults of Operation”* included in Registrant’s 2006 Annual Report onForm 10-K for the year ended December 31, 2006. There have been nomaterial changes in any of the environmental matters discussed in theForm 10-K since December 31, 2006.

**Water Supply**

Water supply andrevenues are significantly affected, both in the short-run and long-run, by changesin weather conditions.  Both Californiaand Arizona have been experiencing lower-than-normal precipitation.  According to the National Weather Service,downtown Los Angeles is in the driest rainfall season (from July 2006 to June2007) on record with only 2.47” of rain, or 18% of normal, through March2007.  California snowpack as of April2007 was only at 40% of the normal level and Southwest Arizona snowpack is below50% of normal with the Verde River basin being the lowest at below 25% level.

Due to significantstorms during the winter of 2005-2006, California reservoirs are at 110% ofaverage and Arizona reservoir storage is at 68% of average.  Snowpack above Lake Powell is 65% of averageand the April-June 2007 inflow is forecast to be 4.0 million acre-feet, whichis 50% of normal.  Currently Lake Powellstorage is at 64% of average or 11,637 million acre-feet which is 933 millionacre-feet more than last year at this time.

According to theNational Weather Service (NWS) Climate Prediction Center, the prospects forsignificant drought relief across California and Southwest Arizona are remote asthe snow season comes to a close and the snow pack remains well belownormal.  Southern California andSouthwest Arizona are now in an extreme drought and expectations are for it tocontinue at least through July of 2007. However, the NWS expects the onset of the thunderstorm season in Julyshould bring some short-term relief to Arizona.

Registrant serves its customers’ demands for water in naturally aridparts of the country.  Recognizing thenatural aridity of the region it serves, Registrant consistently emphasizesconservation of water and energy resources. While emphasizing consistent improvements in conservation, however,Registrant also manages its portfolio of water resources to reliably andaffordably meet its customers’ demand for high quality water service.

The productivity of the water supplies managed by Registrant variesfrom year to year depending upon a variety of factors, including the amount andlocation of rainfall, the availability of imported water from the ColoradoRiver and from northern California, the amount of water stored in reservoirsand groundwater basins accessible by the company, the amount of water used byour customers and others, evolving challenges to water quality, and a varietyof legal limitations on use.

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GSWC and CCWC own facilities and water rights thatallow us to produce locally available groundwater to serve nearly half of ourcustomers’ demand in an average year. Population growth in the regions we serve and increases in the amount ofgroundwater used have resulted in both cooperative and judicially-enforcedregimes for managing groundwater basins for long-term sustainability.  Registrant actively participates in effortsto protect groundwater basins from over-use and from contamination and toprotect its water rights.  In someperiods, such efforts require reductions in groundwater pumping and increasedreliance on alternative water resources. However, because sustainable groundwater only meets a portion ofcustomer demand, Registrant also manages a portfolio of water supplyarrangements including purchasing water from water supply wholesalers to insurethe reliability, quality and affordability of water.

***StateWater Project***

To augment local groundwater, Registrant relies onsupplemental supplies imported from distant watersheds either naturally throughriver systems or artificially through integrated systems of reservoirs andconveyance facilities. GSWC contracts, either directly or through intermediatewholesalers, for imported supplemental water supplies with a variety ofgovernmental agencies which manage water projects, including the CaliforniaDepartment of Water Resources (State Water Project).  GSWC contracts for supplemental watersupplies from the State Water Project (“SWP”) through several member agenciesof the Metropolitan Water District of Southern California (“MWD”) which act assub-wholesalers.  To receive suchsupplies, Registrant maintains physical connections to the MWD imported waterdistribution system throughout the six-county area encompassing most ofmetropolitan southern California.  Inaddition to the more generalized challenges facing all Western water projects,the SWP faces particular challenges to the operation of its pumping plantlocated at the southern end of the San Joaquin/Sacramento River Delta whichnaturally drains to the Pacific Ocean through San Francisco Bay.  Because of its diversion of water for exportto central, coastal and southern California through the pumping plant, the SWPis subject to a variety of operating limitations and permitting processesdesigned, collectively, to balance the need for water exports with the need torestore and protect the Bay/Delta environment. In the first quarter of 2007, the SWP received a court order to complywith certain endangered species permitting requirements or cease pumpingoperations.  The SWP is currentlyattempting to comply with the court order and may appeal the decision to ahigher court.  Significant additionalrestrictions on SWP operations, however, would pose a substantial challenge tothe water use patterns throughout California. Because of the potential risk to the SWP water supply, Registrant isboth monitoring developments and working with MWD and its member agencies tosafeguard the supply and evaluate potential emergency responses to any suddenreduction in SWP deliveries.

***Conservation***

In light of supplyvariability and the general scarcity and value of water supplies available inthe Western U.S., Registrant makes continuous efforts to promote activeconservation by all customer classes. However, customer conservation can result in lower water sales thanwould otherwise occur, and lower volumes of water sold can have a negativeimpact on Registrant’s earnings.  Inorder to remedy the financial disincentive associated with water conservation,Registrant has worked collaboratively with the CPUC and the  ACC to address ratestructure issues.  Currently, Registrantis actively participating in the CPUC’s Conservation Order InitiatingInvestigation (“OII”).  Through theConservation OII, the CPUC proposes to eliminate disincentives to promoteconservation.  Among other potential solutionsbeing considered by the CPUC are revisions to tariff structures to createincreasing rate blocks, so that greater consumption will be tempered by higherunit pricing to consumers, and sales adjustment mechanisms, to essentiallyde-couple volume of sales from Registrant’s revenue.

Additionalinformation on water supply issues are described in *“Management’sDiscussion and Analysis of**Financial Condition andResults of Operation”* included in our 2006 Annual Report onForm 10-K for the year ended December 31, 2006.

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**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

Registrantis exposed to certain market risks, including fluctuations in interest rates,and commodity price risk primarily relating to changes in the market price ofelectricity. Market risk is the potential loss arising from adverse changes inprevailing market rates and prices. Therehave been no material changes regarding Registrant’s market risk position fromthe information provided in its Annual Report on Form 10-K for the yearended December 31, 2006. The quantitative and qualitative disclosuresabout market risk are discussed in *Item 7A-Quantitative andQualitative Disclosures About Market Risk*, contained in Registrant’sAnnual Report on Form 10-K.

**Item 4. Controls and Procedures**

**(a) Evaluationof Disclosure Controls and Procedures**

As required by Rule 13a-15(b) under theSecurities and Exchange Act of 1934 (the “Exchange Act”), we have carried outan evaluation, under the supervision and with the participation of our management,including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”),of the effectiveness, as of the end of the fiscal quarter covered by thisreport, of the design and operation of our “disclosure controls and procedures”as defined in Rule 13a-15(e) and 15d-15(e) promulgated by theSecurities and Exchange Commission (SEC) under the Exchange Act. Based uponthat evaluation, the CEO and the CFO concluded that disclosure controls andprocedures, as of the end of such fiscal quarter, were adequate and effectiveto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and formsand that such information is accumulated and communicated to our management,including our CEO and CFO, as appropriate to allow timely decisions regardingrequired disclosure.

**(b) Changesin Internal Controls over Financial Reporting**

There has been no change in our internal control overfinancial reporting during the quarter ended March 31, 2007, that hasmaterially affected or is reasonably likely to materially affect our internalcontrol over financial reporting.

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**PART II**

**Item 1. Legal Proceedings**

There havebeen no material developments in any of the legal proceedings described in our2006 Annual Report onForm 10-K.

Registrantis subject to ordinary routine litigation incidental to its business. Otherthan those disclosed in Registrant’s Form 10-K for the year endedDecember 31, 2006, no other legal proceedings are pending, which arebelieved to be material. Management believes that rate recovery, properinsurance coverage and reserves are in place to insure against property,general liability and workers’ compensation claims incurred in the ordinarycourse of business.

**Item 1A. Risk Factors**

We commenced the operation and maintenance of our water andwastewater systems for the U.S. government at our first military base inOctober 2004.  We began the operation andmaintenance of additional water and wastewater systems at military bases inVirginia and Maryland in 2006.  All ofthese contracts are fixed price contracts. We also commenced the construction of infrastructure improvements atthese bases in 2006 pursuant to fixed price contracts.  Revenues generated by our contract operationsare primarily dependent on these new business activities.  As a result, we are subject to risks that aredifferent than those we previously faced.

***Our operations and maintenance contracts onmilitary bases create certain risks that are different from that of ourregulated utility operations.***

We have entered into contracts to provide water andwastewater services at military bases pursuant to 50-year fixed pricecontracts, subject to termination, in whole or in part, for the convenience ofthe U.S. government.  In addition, theU.S. government may stop work under the terms of the contracts, delay performanceof our obligations under the contracts or modify the contracts at itsconvenience.

Our contract pricing was based on a number of assumptions,including assumptions about prices and availability of labor, equipment andmaterials.  We may be unable to recoverall of our costs if any of these assumptions are inaccurate or we failed toconsider all costs that we may incur in connection with performing thework.  We are also subject to priceadjustments at the time of price redetermination or in connection with requestsfor equitable adjustments or other changes permitted by terms of the contracts.

We are subject to audits, cost review and investigations bycontracting oversight agencies.  Duringthe course of an audit, the oversight agency may disallow costs.  Such cost disallowances may result inadjustments to previously reported revenues.

Payment under these contracts is subject to appropriationsby Congress.  We may experience delays inreceiving payment or delays in redetermination of prices or other priceadjustments due to cancelled or delayed appropriations specific to our projectsor reductions in government spending for the military or generally.  Appropriations and the timing of payment, maybe influenced by, among other things, the state of the economy, competingpolitical priorities, budget constraints, the timing and amount of tax receiptsand the overall level of government expenditures for the military.

In addition, we must maintain the proper management ofwater and wastewater facilities and find state-certified and other qualifiedemployees to support the operation of these facilities.  Failure to do so could put us at risk of,among other things, operations errors at the military bases and for improperbilling and collection procedures as well as loss of contracts, assessment ofpenalties for operational failures and loss of revenues.

***Our contracts for the construction ofinfrastructure improvements on military bases create risks that are different,in some respects, from that of our operations and maintenance contracts.***

We have entered into contracts for the construction ofinfrastructure improvements to water and wastewater systems at militarybases.  Many of these contracts arefixed-price contracts.  Under fixed-pricecontracts, we benefit from cost savings and earnings from approved contractchange orders, but are generally unable to recover any cost overruns to theapproved contract price.

Revenues from these types of contracts are recognized usingthe percentage-of-completion method of accounting.  This accounting practice that we use resultsin our recognizing contract revenues and earnings ratably over the contractterm in proportion to our incurrence of contract costs.  The earnings or losses recognized onindividual contracts are based on estimates of contract revenues, costs andprofitability.

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We establish prices for these types of  fixed-pricecontracts, in part, on cost estimates that are subject to a number ofassumptions, including assumptions regarding future economic conditions.  If these estimates prove inaccurate orcircumstances change, cost overruns could have a material adverse effect on ourcontract business operations and results of operations for contracted services.

***We may be adversely affected by disputeswith the U.S. government regarding our performance of contract services onmilitary bases or by failure to properly perform the contract services.***

If there is a dispute with the U.S. government regardingperformance under these contracts or the amounts owed to us, the U.S.government may delay, reject or withhold payment to us.  If we are ultimately unable to collect thesepayments on a timely basis, our profits and cash flows will be adverselyaffected.

If we fail to comply with the terms of one or more of ourU.S. government contracts, other agreements with the U.S. government or U.S.government regulations and statutes, we could be suspended or barred fromfuture U.S. government contracts for a period of time and be subject topossible civil or criminal fines and penalties and damage to our reputation inthe water and wastewater industry.

***We are dependent upon subcontractors for theperformance of contracted services on military bases.***

We primarily rely on a single subcontractor for theoperation and maintenance of wastewater systems at military bases pursuant toour existing contracts with the U.S. government.  The failure of this subcontractor to performservices for us in accordance with the terms of our contracts with the U.S.government could result in the termination of contracts to provide wastewaterservices at these bases, a loss of revenues and increases in costs to correctthe subcontractor’s performance failures.

We also rely on third-party manufacturers as well asthird-party subcontractors to complete our projects.  To the extent that we cannot engagesubcontractors or acquire equipment or materials, our ability to complete aproject in a timely fashion or at a profit may be impaired.  If the amount we are required to pay forthese goods and services exceeds the amount we have estimated in bidding forfixed-price work, we could experience losses in the performance of thesecontracts.  In addition, if asubcontractor or manufacturer is unable to deliver its services, equipment ormaterials according to the negotiated terms for any reason, including thedeterioration of its financial condition, we may be required to purchase theservices, equipment of materials from another source at a higher price.  This may reduce the profit to be realized orresult in a loss on a project for which the services, equipment or materialswere needed.

If these subcontractors fail to perform services to beprovided to us or fail to provide us with the proper equipment or materials, wemay be penalized for their failure to perform.

***We continue to incur costs associated withthe expansion of our contract activities.***

We continue to incur additional costs in connection withthe expansion of our contract operations associated with the preparation ofbids and the negotiation of the terms of new contracts.  Our ability to recover these costs and toearn a profit on our contract operations will depend upon the extent to whichwe are successful in obtaining new contracts and our ability to recover thosecosts and other costs from revenues from new contracts.

There have been no other significant changes in the riskfactors disclosed in our 2006 Annual Report on Form 10-K.

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**Item 2. Unregistered Sales of Equity Securitiesand Use of Proceeds**

The shareholders of AWR have approved the material featuresof all equity compensation plans under which AWR directly issues equitysecurities. AWR did not directly issue any unregistered equity securitiesduring the first quarter of 2007.  Thefollowing table provides information about repurchases of Common Shares by AWRduring the first quarter of 2007:
| **Period**                  | ** ** | **Total Number of  Shares  Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs(1)** | ** ** | **Maximum Number  of Shares That May  Yet Be Purchased  under the Plans or  Programs** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1  - 31, 2007  |       | 147                                              | (2)        | $                                                | 37.28      |                                                                                                                                | —     |                                                                                                                                | NA         | (3) |
| February 1  - 28, 2007 |       | 12                                               | (2)        | $                                                | 40.83      |                                                                                                                                | —     |                                                                                                                                | NA         | (3) |
| March 1  - 31, 2007    |       | 123                                              | (2)        | $                                                | 37.18      |                                                                                                                                | —     |                                                                                                                                | NA         | (3) |
| Total                       |       | 282                                              |       | $                                                | 37.39      |                                                                                                                                | —     |                                                                                                                                | NA         | (3) |

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(1)          None of the Common Shares were purchased pursuant toany publicly announced stock repurchase program.

(2)          All of these CommonShares were acquired on the open market for participants in the Company’sCommon Share Purchase and Dividend Reinvestment Plan.

(3)          None of these planscontain a maximum number of Common Shares that may be purchased in theopen market under the plans.

**Item 3. Defaults Upon Senior Securities**

None

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

No items were submitted during the first quarter ofthe fiscal year covered by this report to a vote of security holders throughthe solicitation of proxies or otherwise.

**Item 5. Other Information**

(a)          On April 27, 2007, the Board of Directors of AWR declared aregular quarterly dividend of $0.235 per Common Share. The dividend will bepaid June 1, 2007 to shareholders of record as of the close of business onMay 7, 2007.

(b)         There have been no material changes during the firstquarter of 2007 to the procedures by which shareholders may nominatepersons to the Board of Directors of AWR.

## **Item 6. Exhibits**

(a)          The following documentsare filed as Exhibits to this report:
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                  |
| 31.1.1 |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1) |
|   |   |                                                                                                                  |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)  |
|   |   |                                                                                                                  |
| 31.2.1 |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1) |
|   |   |                                                                                                                  |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (2)          |
|   |   |                                                                                                                  |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (2)          |

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(1)          Filed concurrentlyherewith

(2)          Furnished concurrentlyherewith

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#### **SIGNATURE**

Pursuant to the requirements of Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized and as its principalfinancial officer.

 
|        |   |   | AMERICAN STATES WATER COMPANY |
|--------|--------|--------|-------------------------------|
|   |   |   | and its subsidiary            |
|   |   |   | GOLDEN STATE WATER COMPANY    |
|   |   |   |                          |
|   |   |   |                          |
|   |   |   | By:                           | /s/ Robert J. Sprowls |
|   |   |   |                          | Robert J. Sprowls |
|   |   |   |                          | Senior Vice President-Finance, Chief Financial |
|   |   |   |                          | Officer, |
|   |   |   |                          | Treasurer and Corporate Secretary |

 

Dated:May 10, 2007

 

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