**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**


**FORM
      10-K**




(Mark
                One)
              þ
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934
              **For
                the fiscal year ended December 31,
                2006**




OR




 ̈
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
                For
                  the transition period from _________________
                  to______________________


Commission
      File Number     0-422




**MIDDLESEX
      WATER COMPANY**


(Exact
      name of registrant as specified in its charter)




**New
                Jersey**
            **22-1114430**(State
                of Incorporation)
            (IRS
                employer identification no.)




**1500
      Ronson Road, Iselin NJ 08830**


(Address
      of principal executive offices, including zip code)




**(732)
      634-1500**


(Registrant's
      telephone number, including area code)




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


Title
                  of Each Class:
              Name
                  of each exchange on which
                  registered:


None
            None




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


Common
      Stock, No par Value


(Title
      of
      Class)




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




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





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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large
                accelerated filer ̈
            Accelerated
                filerþ
            Non-accelerated
                filer ̈




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




The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant at June 30, 2006 was $210,829,136 based on the closing market price
      of $18.92 per share.




The
      number of shares outstanding for each of the registrant's classes of common
      stock, as of March 1, 2007:




Common
      Stock, No par Value 13,184,376 shares outstanding




Documents
      Incorporated by Reference


Proxy
      Statement to be filed in connection with the Registrant’s Annual Meeting of
      Shareholders to be held on May 23, 2007, which will be filed with the Securities
      and Exchange Commission within 120 days, is incorporated as to Part
      III.














**MIDDLESEX
      WATER COMPANY**


**FORM
      10-K**





INDEX


PAGEForward-Looking
                      Statements
                  1**PART
                      I**Item
                      1.
                  Business:Overview
                  2Financial
                      Information
                  4Water
                      Supplies and Contracts
                  4Employees
                  5Competition
                  6Regulation
                  6Management
                  7Item
                      1A.
                  Risk
                      Factors
                  10Item
                      1B.
                  Unresolved
                      Staff Comments
                  15Item
                      2.
                  Properties
                  15Item
                      3.
                  Legal
                      Proceedings
                  16Item
                      4.
                  Submission
                      of Matters to a Vote of Security
                      Holders
                  17**PART
                      II**Item
                      5.
                  Market
                      for the Registrant's Common Equity and Related
                      Stockholder Matters
                  17Item
                      6.
                  Selected
                      Financial Data
                  19Item
                      7.
                  Management's
                      Discussion and Analysis of Financial Condition
                      and Results of Operations
                  20Item
                      7A.
                  Qualitative
                      and Quantitative Disclosure About Market
                      Risk
                  29Item
                      8.
                  Financial
                      Statements and Supplementary Data
                  29Item
                      9.
                  Changes
                      in and Disagreements with Accountants on Accounting
                      and Financial Disclosure
                  54Item
                      9A.
                  Controls
                      and Procedures
                  55Item
                      9B.
                  Other
                      Information
                  58**PART
                      III**Item
                      10.
                  Directors,
                      Executive Officers and Corporate
                      Governance
                  59Item
                      11.
                  Executive
                      Compensation
                  59Item
                      12.
                  Security
                      Ownership of Certain Beneficial Owners and Management
                      and Related Stockholder Matters
                  59Item
                      13.
                  Certain
                      Relationships and Related Transactions, and Director
                      Independence
                  59Item
                      14.
                  Principal
                      Accountant Fees and Services
                  59**PART
                      IV**Item
                      15.
                  Exhibits
                      and Financial Statement Schedules
                  60Signatures
                  
                  61Exhibit
                      Index
                  62




*Index*


**Forward-LookingStatements**




Certain
      statements contained in this annual report and in the documents incorporated
      by
      reference constitute “forward-looking statements” within the meaning of Section
      21E of the Securities Exchange Act of 1934 and Section 27A of the Securities
      Act
      of 1933. The Company intends that these statements be covered by the safe
      harbors created under those laws. These statements include, but are not limited
      to:




-
            statements
                as to expected financial condition, performance, prospects and earnings
                of
                the Company;


-
            statements
                regarding strategic plans for
                growth;


-
            statements
                regarding the amount and timing of rate increases and other regulatory
                matters;


-
            statements
                as to the Company’s expected liquidity needs during fiscal 2007 and beyond
                and statements as to the sources and availability of funds to meet
                its
                liquidity needs;


-
            statements
                as to expected rates, consumption volumes, service fees, revenues,
                margins, expenses and operating
                results;


-
            statements
                as to the Company’s compliance with environmental laws and regulations and
                estimations of the materiality of any related
                costs;


-
            statements
                as to the safety and reliability of the Company’s equipment, facilities
                and operations;


-
            statements
                as to financial projections;


-
            statements
                as to the ability of the Company to pay
                dividends;


-
            statements
                as to the Company’s plans to renew municipal franchises and consents in
                the territories it serves;


-
            expectations
                as to the amount of cash contributions to fund the Company’s retirement
                benefit plans, including statements as to anticipated discount rates
                and
                rates of return on plan assets;


-
            statements
                as to trends; and


-
            statements
                regarding the availability and quality of our water
                supply.




These
      forward-looking statements are subject to risks, uncertainties and other factors
      that could cause actual results to differ materially from future results
      expressed or implied by the forward-looking statements. Important factors that
      could cause actual results to differ materially from anticipated results and
      outcomes include, but are not limited to:




-
            the
                effects of general economic
                conditions;


-
            increases
                in competition in the markets served by the
                Company;


-
            the
                ability of the Company to control operating expenses and to achieve
                efficiencies in its operations;


-
            the
                availability of adequate supplies of
                water;


-
            actions
                taken by government regulators, including decisions on base rate
                increase
                requests;


-
            new
                or additional water quality
                standards;


-
            weather
                variations and other natural
                phenomena;


-
            the
                existence of attractive acquisition candidates and the risks involved
                in
                pursuing those acquisitions;


-
            acts
                of war or terrorism;


-
            significant
                changes in the housing starts in
                Delaware;


-
            the
                availability and cost of capital resources;
                and


-
            other
                factors discussed elsewhere in this
                prospectus.




Many
      of
      these factors are beyond the Company’s ability to control or predict. Given
      these uncertainties, readers are cautioned not to place undue reliance on any
      forward-looking statements, which only speak to the Company’s understanding as
      of the date of this report. The Company does not undertake any obligation to
      release publicly any revisions to these forward-looking statements to reflect
      events or circumstances after the date of this prospectus or to reflect the
      occurrence of unanticipated events, except as may be required under applicable
      securities laws.




For
      an
      additional discussion of factors that may affect the Company’s business and
      results of operations, see Item 1A - Risk Factors.




1
 *Index*


**PART
      I**




**Item
      1.** **Business.**




**Overview**





Middlesex
      Water Company (“Middlesex”) was incorporated as a water utility company in 1897
      and owns and operates regulated water utility and wastewater systems in New
      Jersey and Delaware. The Company also operates water and wastewater systems
      under contract on behalf of municipal and private clients in New Jersey and
      Delaware.





The
      terms
“the Company,” “we,” “our,” and “us” refer to Middlesex Water Company and its
      subsidiaries, including Tidewater Utilities, Inc. (Tidewater) and Tidewater’s
      wholly-owned subsidiaries, Southern Shores Water Company, LLC (Southern Shores)
      and White Marsh Environmental Systems, Inc. (White Marsh). The Company’s other
      subsidiaries are Pinelands Water Company (Pinelands Water) and Pinelands
      Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), Utility
      Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy) Inc.,
      (USA-PA) and Tidewater Environmental Services, Inc. (TESI).





Middlesex
      principal executive offices are located at 1500 Ronson Road, Iselin, New Jersey
      08830. Our telephone number is (732) 634-1500. Our internet website address
      is
      http://www.middlesexwater.com. We make available, free of charge through our
      internet website, reports and amendments filed or furnished pursuant to Section
      13(a) or 15(d) of the Securities Exchange Act of 1934, after such material
      is
      electronically filed with or furnished to the Securities and Exchange Commission
      (SEC).




*Middlesex
      System*




The
      Middlesex System in New Jersey provides water services to approximately 59,200
      retail customers, primarily in eastern Middlesex County, New Jersey and provides
      water under wholesale contracts to the City of Rahway, Township of Edison,
      the
      Boroughs of Highland Park and Sayreville and both the Old Bridge and the
      Marlboro Township Municipal Utilities Authorities. The Middlesex System treats,
      stores and distributes water for residential, commercial, industrial and fire
      prevention purposes. The Middlesex System also provides water treatment and
      pumping services to the Township of East Brunswick under contract. The Middlesex
      System, through its retail and contract sales, produced approximately 67% of
      2006 revenue.





The
      Middlesex System’s retail customers are located in an area of approximately 55
      square miles in Woodbridge Township, the City of South Amboy, the Boroughs
      of
      Metuchen and Carteret, portions of the Township of Edison and the Borough of
      South Plainfield in Middlesex County and, to a minor extent, a portion of the
      Township of Clark in Union County. Retail customers include a mix of residential
      customers, large industrial concerns and commercial and light industrial
      facilities. These customers are located in generally well-developed areas of
      central New Jersey. The contract customers of the Middlesex System comprise
      an
      area of approximately 146
      square miles with a population of approximately 303, 000.
      Contract sales to Edison, Sayreville, Old Bridge, Marlboro and Rahway are
      supplemental to the existing water systems of these customers. The State of
      New
      Jersey in the mid-1980’s approved plans to increase available surface water
      supply to the South River Basin area of the state to facilitate a reduction
      in
      groundwater use in this area. The Middlesex System provides treated surface
      water under long-term agreements to East Brunswick, Marlboro, Old Bridge and
      Sayreville consistent with the state-approved plan.





Middlesex
      provides water service to approximately 300 customers in Cumberland County,
      New
      Jersey. This system is referred to as Bayview and is not physically
      interconnected with the Middlesex system. Bayview produced less than 1% of
      our
      total revenue in 2006. Bayview was legally merged into Middlesex effective
      January 1, 2006.


2
 *Index*


*Tidewater
      System*




Tidewater,
      together with its wholly-owned subsidiary, Southern Shores, provides water
      services to approximately 30,100 retail customers for domestic, commercial
      and
      fire protection purposes in over 271 separate community water systems in New
      Castle, Kent and Sussex Counties, Delaware. An additional wholly-owned
      subsidiary, White Marsh, operates water and wastewater systems under contract
      for approximately 5,000 residential customers and also owns the office building
      that Tidewater uses as its business office. White Marsh’s rates for water and
      wastewater operations are not regulated by the Delaware Public Service
      Commission (PSC). The Tidewater System produced approximately 21% of total
      revenue in 2006.




*Utility
      Service Affiliates-Perth Amboy*




USA-PA
      operates the City of Perth Amboy, New Jersey’s water and wastewater systems
      under a 20-year agreement, which expires in 2018. USA-PA serves approximately
      9,600 customers, most of whom are served by both systems. The agreement was
      effected under New Jersey’s Water Supply Public-Private Contracting Act and the
      New Jersey Wastewater Public/Private Contracting Act and requires USA-PA to
      lease from Perth Amboy all of its employees who currently work on the Perth
      Amboy water and wastewater systems. Under the agreement, USA-PA receives both
      fixed and variable fees. The variable position is based on customer billing.
      Fixed fee revenues were $7.6 million in 2006 and are to increase over the term
      of the 20-year contract to $10.2 million based upon a schedule of rates. USA-PA
      produced approximately 10% of total revenue in 2006.




In
      connection with the agreement, Middlesex guaranteed a series of Perth Amboy’s
      municipal bonds in the principal amount of approximately $26.3 million, of
      which
      approximately $23.4 million remains outstanding. In connection with the
      agreement with Perth Amboy, USA-PA entered into a 20-year subcontract with
      a
      wastewater operating company for the operation and maintenance of the Perth
      Amboy wastewater system. The subcontract provides for the sharing of certain
      fixed and variable fees and operating expenses.




*Pinelands
      System*




Pinelands
      Water provides water services to approximately 2,500 residential customers
      in
      Burlington County, New Jersey. Pinelands Water produced less than 1% of total
      revenue in 2006. Pinelands Water is not physically interconnected with the
      Middlesex System. **




Pinelands
      Wastewater provides wastewater services to approximately 2,500 primarily
      residential retail customers. Under contract, it also services one municipal
      wastewater system in Burlington County, New Jersey with about 200 residential
      customers. Pinelands Wastewater produced approximately 1% of total revenue
      in
      2006.




*Utility
      Service Affiliates, Inc.*





USA
      provides residential customers a service line maintenance program called
      LineCare SM .
      LineCare SM is an
      affordable maintenance program that covers all parts, material and labor
      required to repair or replace specific elements of the customer’s water service
      line and customer shut-off valve in the event of a failure. USA produced less
      than 1% of total revenue in 2006.




*TESI
      System*





TESI,
      which was formed in 2005, provides wastewater services to approximately 115
      residential retail customers in Delaware. TESI produced less than 1% of our
      total revenue in 2006.


3
 *Index*


Financial
      Information





Consolidated
      operating revenues and operating income are as follows:




(Thousands
                  of Dollars)
                Years
                  Ended December 31,2006
              
              2005
              
              2004Operating
                  Revenues
              
              $
              81,061
              
              $
              74,613
              
              $
              70,991Operating
                  Income
              
              $
              21,318
              
              $
              17,218
              
              $
              16,933


Operating
      revenues were earned from the following sources:




Years
                  Ended December 31,2006
              
              2005
              
              2004Residential
              
              
              42.6
              %
              
              41.9
              %
              
              39.9
              %Commercial
              
              
              10.0
              
              
              9.8
              
              
              9.5Industrial
              
              
              10.7
              
              
              11.0
              
              
              10.9Fire
                  Protection
              
              
              10.7
              
              
              10.4
              
              
              10.2Contract
                  Sales
              
              
              12.3
              
              
              13.4
              
              
              12.8Contract
                  Operations
              
              
              11.0
              
              
              10.8
              
              
              11.2Other
              
              
              2.7
              
              
              2.7
              
              
              5.5TOTAL
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %




**Water
      Supplies and Contracts**




Our
      New
      Jersey and Delaware water supply systems are physically separate and are not
      interconnected. In New Jersey, the Pinelands System and Bayview System are
      not
      interconnected with the Middlesex System or each other. We believe that we
      have
      adequate sources of water supply to meet the current service requirements of
      our
      present customers in New Jersey and Delaware.





*Middlesex
      System*




Our
      Middlesex System, which produced approximately 17 billion gallons in 2006,
      obtains water from surface sources and wells, or groundwater sources. In 2006,
      surface sources of water provided approximately 71% of the Middlesex System’s
      water supply, groundwater sources provided approximately 23% from 31 wells
      and
      the balance was purchased from a non-affiliated water utility. Middlesex
      System’s distribution storage facilities are used to supply water to customers
      at times of peak demand, outages and emergencies.





The
      principal source of surface water for the Middlesex System is the Delaware
&
Raritan Canal, which is owned by the State of New Jersey and operated as a
      water
      resource by the New Jersey Water Supply Authority. Middlesex is under contract
      with the New Jersey Water Supply Authority, which expires November 30, 2023.
      The
      contract provides for average purchases of 27 million gallons per day (mgd)
      of
      untreated water from the Delaware & Raritan Canal, augmented by the Round
      Valley/Spruce Run Reservoir System. Surface water is pumped to, and treated,
      at
      the Middlesex Carl J. Olsen (CJO) Plant. Middlesex also has an agreement with
      a
      non-affiliated regulated water utility for the purchase of treated water. This
      long-term agreement, which expires February 27, 2011, provides for minimum
      purchase of 3 mgd of treated water with provisions for additional purchases.


4
 *Index*


*Tidewater
      System*




Our
      Tidewater System, which produced approximately two billion gallons in 2006,
      obtains 100% of its supply from groundwater sources from 184 wells. In 2006,
      19
      new wells were placed into service. We deactivated, sealed and abandoned 10
      wells for either water quality reasons or for the purpose of consolidating
      production facilities for more cost-efficient operation. Tidewater continues
      to
      submit applications to Delaware regulatory authorities for the approval of
      additional wells as growth, demand and water quality warrants. The Tidewater
      System does not have a central treatment facility but has several regional
      treatment plants. Several of its water systems in New Castle, Kent and Sussex
      Counties, Delaware have interconnected transmission systems.





*Pinelands
      System*




Water
      supply to our Pinelands System is derived from groundwater sources from four
      wells which provided overall system delivery of 197 million gallons in 2006.
      The
      pumping capacity of the four wells is 2.2 million gallons per day.




*Bayview
      System*




Water
      supply to Bayview customers is derived from groundwater water sources from
      two
      wells, which delivered 7.7 million
      gallons in 2006.





*Pinelands
      Wastewater System*




The
      Pinelands Wastewater System discharges into the South Branch of the Rancocas
      Creek through a tertiary treatment plant that provides clarification,
      sedimentation, filtration and disinfection. The total capacity of the plant
      is
      0.5 mgd, and the system provided overall treatment to 114 million gallons in
      2006.





*TESI
      System*




The
      TESI
      System owns and operates five wastewater treatment systems in Southern Delaware.
      The treatment plants provide clarification, sedimentation, and disinfection.
      The
      combined total treatment capacity of the plants is 218,000 gallons per day.
      The
      treated effluent is disposed of through land application. Current average flow
      is approximately 12,000 gallons per day.





**Employees**




As
      of
      December 31, 2006, we had a total of 243 employees. In addition, we lease 19 full-time employees under the USA-PA contract with the City of Perth Amboy,
      New
      Jersey. No employees are represented by a union except the leased employees
      who
      are subject to a collective bargaining agreement with the City of Perth Amboy.
      We believe our employee relations are good. Wages and benefits, other than
      for
      leased employees, are reviewed annually and are considered competitive within
      both the industry and the regions where we operate.




5
 *Index*


**Competition**




Our
      business in our franchised service area is substantially free from direct
      competition with other public utilities, municipalities and other entities.
      However, our ability to provide contract water supply and wastewater services
      and operations and maintenance services is subject to competition from other
      public utilities, municipalities and other entities. Although Tidewater has
      been
      granted an exclusive franchise for each of its existing community water systems,
      its ability to expand service areas can be affected by the PSC awarding
      franchises to other regulated water utilities with whom we compete for such
      franchises and for projects.





**Regulation**




We
      are
      regulated as to rates charged to customers for water and wastewater services
      in
      New Jersey and Delaware, as to the quality of the services we provide and as
      to
      certain other matters. Our USA, USA-PA and White Marsh subsidiaries are not
      regulated utilities. We are subject to environmental and water quality
      regulation by the United States Environmental Protection Agency (EPA), and
      the
      New Jersey Department of Environmental Protection (DEP) with respect to
      operations in New Jersey and by Department of Natural Resources and
      Environmental Control (DNREC), the Delaware Department of Health and Social
      Services-Division of Public Health (DPH), and the Delaware River Basin
      Commission (DRBC) with respect to operations in Delaware. In addition, our
      issuances of securities are subject to the prior approval of the SEC and the
      New
      Jersey Board of Public Utilities (BPU) or the PSC.




*Regulation
      of Rates and Services*




New
      Jersey water and wastewater service operations (excluding the operations of
      USA
      and USA-PA) are subject to regulation by the BPU. Similarly, our Delaware water
      and wastewater operations (excluding the operations of White Marsh) are subject
      to regulation by the PSC. These regulatory authorities have jurisdiction with
      respect to rates, service, the issuance of securities and other matters of
      utility companies operating within the States of New Jersey and Delaware,
      respectively. For ratemaking purposes, we account separately for operations
      in
      New Jersey and Delaware to facilitate independent ratemaking by the BPU for
      New
      Jersey operations and the PSC for Delaware operations.




In
      determining our rates, the BPU and the PSC consider the income, expenses, rate
      base of property used and useful in providing service to the public and a fair
      rate of return on investments within their separate jurisdictions. Rate
      determinations by the BPU do not guarantee particular rates of return to us
      for
      our New Jersey operations nor do rate determinations by the PSC guarantee
      particular rates of return for our Delaware operations. Thus, we may not achieve
      the rates of return permitted by the BPU or the PSC.





On
      April
      28, 2006, Tidewater filed for a $5.5 million, or 38.6%, base rate increase
      with
      the Delaware Public Service Commission (PSC). The request was intended to
      recover increased costs of operations, maintenance and taxes, as well as capital
      investment of approximately $23.8 million since rates were last established
      in
      March 2005. Since June 27, 2006, Tidewater has been billing and recognizing
      additional revenues through a 15% interim rate increase subject to refund as
      allowed under PSC regulations. A settlement was reached amongst the parties
      which concluded that a 26.9% overall increase in base rates would be
      implemented. The PSC approved the settlement and the remaining 11.9% increase
      was put into effect on February 28, 2007. The combined effect of the interim
      and
      final rate increases was $3.9 million in additional annual operating
      revenues.





Effective
      April 13, 2006, Pinelands Water and Pinelands Wastewater received approval
      from
      the New Jersey Board of Public Utilities (BPU) for base rate increases of 7.02%
      and 0.98%, respectively. These increases


6
 *Index*


represent
      a total base rate increase of approximately $0.1 million for Pinelands to offset
      increased costs associated with capital improvements and the operation and
      maintenance of their systems.





In
      accordance with the tariff established for Southern Shores, an annual rate
      increase of 3% was implemented on January 1, 2007. Under the terms of a contract
      with Southern Shores Homeowners Association, the increase cannot exceed the
      lesser of the regional Consumer Price Index or 3%.





There
      can
      be no assurance that any future rate increases will be granted or, if granted,
      that they will be in the amounts requested.





*Water
      Quality and Environmental Regulations*




Both
      the
      EPA and the DEP regulate our operations in New Jersey with respect to water
      supply, treatment and distribution systems and the quality of the water, as
      do
      the EPA, DNREC, DPH and DRBC with respect to operations in Delaware.




Federal,
      New Jersey and Delaware regulations adopted relating to water quality require
      us
      to perform expanded types of testing to ensure that our water meets state and
      federal water quality requirements. In addition, environmental regulatory
      agencies are reviewing current regulations governing the limits of certain
      organic compounds found in the water as byproducts of treatment. We participate
      in industry-related research to identify the various types of technology that
      might reduce the level of organic, inorganic and synthetic compounds found
      in
      the water. The cost to water companies of complying with the proposed water
      quality standards depends in part on the limits set in the regulations and
      on
      the method selected to implement such reduction. We believe the CJO Plant
      capabilities put us in a strong position to meet any such future standards
      with
      regard to our Middlesex System. We regularly test our water to determine
      compliance with existing federal, New Jersey and Delaware primary water quality
      standards.




Well
      water treatment in our Tidewater System is by chlorination for disinfection
      purposes and, in some cases, pH correction and filtration for nitrate and iron
      removal.





Well
      water treatment in the Pinelands and Bayview Systems (disinfection only) is
      done
      at individual well sites.





The
      DEP
      and the DPH monitor our activities and review the results of water quality
      tests
      that are performed for adherence to applicable regulations. Other regulations
      applicable to us include the Lead and Copper Rule, the maximum contaminant
      levels established for various volatile organic compounds, the Federal Surface
      Water Treatment Rule and the Total Coliform Rule.





**Management**





This
      table lists information concerning our executive management team:





**Name**
            
            **Age**
            
            **Principal
                Position(s)**Dennis
                W. Doll
            
            48
            
            President
                and Chief Executive OfficerA.
                Bruce O’Connor
            
            48
            
            Vice
                President and Chief Financial OfficerRonald
                F. Williams
            
            57
            
            Vice
                President-Operations and Chief Operating OfficerKenneth
                J. Quinn
            
            59
            
            Vice
                President-General Counsel, Secretary and TreasurerJames
                P. Garrett
            
            60
            
            Vice
                President-Human ResourcesRichard
                M. Risoldi
            
            50
            
            Vice
                President-Subsidiary OperationsGerard
                L. Esposito
            
            55
            
            President,
                Tidewater Utilities, Inc.





7
 *Index*


*Dennis
      W. Doll* - Mr.
      Doll, a Certified Public Accountant, joined the Company in November 2004 as
      Executive Vice President. He was elected President and Chief Executive Officer
      and became a Director of Middlesex effective January 1, 2006. Prior to joining
      the Company, Mr. Doll was employed by Elizabethtown Water Company since 1985,
      serving most recently as a member of the senior leadership team of the Northeast
      Region of American Water, which was comprised of Elizabethtown Water Company,
      New Jersey-American Water Company and Long Island Water Corporation and included
      other regulated and non-regulated subsidiaries. In this capacity, Mr. Doll
      most
      recently served as Vice President - Finance & Controller and served
      previously, as Vice President - Merger Integration. Prior to 2001, Mr. Doll
      served as Vice President & Controller of Elizabethtown, Elizabethtown’s
      parent company, E’town Corporation, and various other regulated and
      non-regulated subsidiaries, primarily engaged in the water and wastewater
      fields. Effective January 1, 2006, Mr. Doll became Chairman of the Board and
      Director of all Middlesex subsidiaries. Mr. Doll is a director of the New Jersey
      Utilities Association and the National Association of Water Companies effective
      January 1, 2006.





*A.
      Bruce O’Connor* - Mr.
      O’Connor, a Certified Public Accountant, joined the Company in 1990 as Assistant
      Controller and was elected Controller in 1992 and Vice President in 1995. He
      was
      elected Vice President and Chief Financial Officer in 1996. He is responsible
      for financial reporting, customer service, rate cases, cash management and
      financings. He is Treasurer and a Director of Tidewater Utilities, Inc.,
      Tidewater Environmental Services, Inc., Utility Service Affiliates, Inc., and
      White Marsh Environmental Systems, Inc. He is Vice President, Treasurer and
      a
      Director of Utility Service Affiliates (Perth Amboy) Inc., Pinelands Water
      Company and Pinelands Wastewater Company.




*Ronald
      F. Williams* - Mr.
      Williams joined the Company in 1995 as Assistant Vice President-Operations,
      responsible for the Company’s Engineering and Distribution Departments. He was
      elected Vice President-Operations in October 1995. Mr. Williams was elected
      to
      the additional posts of Assistant Secretary and Assistant Treasurer for
      Middlesex in 2004. He was formerly employed by Garden State Water Company as
      President and Chief Executive Officer. He is a Director and President of Utility
      Service Affiliates (Perth Amboy) Inc., and Director of Utility Service
      Affiliates, Inc., Pinelands Water Company and Pinelands Wastewater Company.




*Kenneth
      J. Quinn* - Mr.
      Quinn joined the Company in 2002 as General Counsel and was elected Assistant
      Secretary in 2003. In 2004, Mr. Quinn was elected Vice President, Secretary
      and
      Treasurer for Middlesex and Secretary and Assistant Treasurer for all
      subsidiaries of Middlesex. Prior to joining the Company he had been employed
      in
      private law practice. Prior to that, Mr. Quinn spent 10 years as in-house
      counsel to two major banking institutions located in New Jersey. In May 2003,
      he
      was elected Assistant Secretary of Tidewater Utilities, Inc., Pinelands Water
      Company, Pinelands Wastewater Company, Utility Service Affiliates (Perth Amboy)
      Inc., and White Marsh Environmental Systems, Inc. He is a member of the New
      Jersey State Bar Association and is also a member of the Public Utility Law
      Section of the Bar.





*James
      P. Garrett* - Mr.
      Garrett joined the Company in 2003 as Assistant Vice President-Human Resources.
      In May 2004, he was elected Vice President- Human Resources. Prior to his hire,
      Mr. Garrett was employed by a national retail chain as Director of
      Organizational Development.





*Richard
      M. Risoldi* - Mr.
      Risoldi joined the Company in 1989 as Director of Production, responsible for
      the operation and maintenance of the Company’s treatment and pumping facilities.
      He was appointed Assistant Vice President of Operations in 2003. He was elected
      Vice President in May 2004, responsible for regulated subsidiary operations
      and
      business development. He is a Director of Tidewater Utilities, Inc., Tidewater
      Environmental Services, Inc., White Marsh Environmental Systems Inc and USA-PA.
      He also serves as Director and President of Pinelands Water Company, Pinelands
      Wastewater Company and Utility Service Affiliates, Inc.


8
 *Index*


*Gerard
      L. Esposito* - Mr.
      Esposito joined Tidewater Utilities, Inc. in 1998 as Executive Vice President.
      He was elected President of Tidewater and White Marsh Environmental Systems,
      Inc. in 2003 and elected President of Tidewater Environmental Services, Inc.
      in
      January 2005. Prior to joining the Company he worked in various executive
      positions for Delaware environmental protection and water quality governmental
      agencies. He is a Director of Tidewater Utilities, Inc., Tidewater Environmental
      Services, Inc., and White Marsh Environmental Systems, Inc.





9
 *Index*


**Item
      1A.** **RiskFactors.**







**Our
      revenue and earnings depend on the rates we charge our customers. We cannot
      raise utility rates in our regulated businesses without filing a petition with
      the appropriate governmental agency. If these agencies modify, delay, or deny
      our petition, our revenues will not increase and our earnings will decline
      unless we are able to reduce costs.**





The
      BPU
      regulates our public utility companies in New Jersey with respect to rates
      and
      charges for service, classification of accounts, awards of new service
      territory, acquisitions, financings and other matters. That means, for example,
      that we cannot raise the utility rates we charge to our customers without first
      filing a petition with the BPU and going through a lengthy administrative
      process. In much the same way, the PSC regulates our public utility companies
      in
      Delaware. We cannot give assurance of when we will request approval for any
      such
      matter, nor can we predict whether the BPU or PSC will approve, deny or reduce
      the amount of such requests.





Certain
      costs of doing business are not completely within our control. The failure
      to
      obtain any rate increase would prevent us from increasing our revenues and,
      unless we are able to reduce costs, would result in reduced earnings.





**We
      are subject to environmental laws and regulations, including water quality
      and
      wastewater effluent quality regulations, as well as other state and local
      regulations. Compliance with those laws and regulations requires us to incur
      costs and we are subject to fines or other sanctions for
      non-compliance.**





The
      EPA
      and DEP regulate our operations in New Jersey with respect to water supply,
      treatment and distribution systems and the quality of the water. Our operations
      in Delaware are regulated by the EPA, DNREC, DPH, and DRBC with respect to
      water
      supply, treatment and distribution systems and the quality of water. Federal,
      New Jersey and Delaware regulations relating to water quality require us to
      perform expanded types of testing to ensure that our water meets state and
      federal water quality requirements. We are subject to EPA regulations under
      the
      Federal Safe Drinking Water Act, which include the Lead and Copper Rule, the
      maximum contaminant levels established for various volatile organic compounds,
      the Federal Surface Water Treatment Rule and the Total Coliform Rule. There
      are
      also similar state regulations by the DEP in New Jersey. The DEP and DPH monitor
      our activities and review the results of water quality tests that we perform
      for
      adherence to applicable regulations. In addition, environmental regulatory
      agencies are continually reviewing regulations governing the limits of certain
      organic compounds found in the water as byproducts of treatment.





We
      are
      also subject to regulations related to fire protection services. In Delaware,
      fire protection is regulated statewide by the Office of State Fire Marshal.
      In
      New Jersey there is no state-wide fire protection regulatory agency. However,
      state regulations exist as to the size of piping required regarding the
      provision of fire protection services.





The
      cost
      of compliance with the water and wastewater effluent quality standards depends
      in part on the limits set in the regulations and on the method selected to
      implement them. If new or more restrictive standards are imposed, the cost
      of
      compliance could be very high and have an adverse impact on our revenues and
      results of operations if we cannot recover those costs through our rates that
      we
      charge our customers. The cost of compliance with fire protection requirements
      could also be high and make us less profitable if we cannot recover those costs
      through our rates charged to our customers.


10
 *Index*


In
      addition, if we fail to comply with environmental or other laws and regulations
      to which our business is subject, we could be fined or subject to other
      sanctions, which could adversely impact our business or results of
      operations.




**We
      are currently appealing a notice of violation and request for corrective action
      issued by the Delaware Fire Marshal regarding the alleged failure of one of
      the
      community water systems operated by Tidewater to meet Delaware fire protection
      requirements. If our appeal is unsuccessful, our operating results could be
      materially affected.**





In
      July
      2005, Tidewater received a notice of violation and request for corrective action
      issued by the Delaware Fire Marshal regarding the alleged failure of one of
      the
      community water systems operated by Tidewater to meet Delaware fire protection
      requirements. Tidewater appealed the Fire Marshal’s decision with the Delaware
      State Fire Prevention Commission (the “SFPC’) and, in November 2005, the SFPC
      denied Tidewater’s appeal. In December 2005, Tidewater filed an appeal of the
      SFPC’s decision with the Sussex County Superior Court in Delaware, which is
      still pending. There are approximately 67 of our other systems that may not
      meet
      the Delaware Fire Marshal’s recent interpretation of the fire protection
      requirements. If the Delaware Fire Marshal’s interpretation of the regulations
      is upheld upon appeal, we may be required to make corrections to the system
      at
      issue with an estimated cost of $1.6 million, and there is a possibility that
      the Delaware Fire Marshal could subsequently issue notices of violation and
      requests for corrective action for some or all of 67 of our other community
      systems. At this time, we cannot predict how many community water systems would
      ultimately require corrective action in that case, the time of the required
      corrective actions, or the costs we would incur to take the actions. We will
      apply to the PSC to increase base rates to recover the costs of any such
      corrective actions. However, if corrective actions need to be taken at several
      community water systems, our costs could be significant, and to the extent
      the
      PSC does not approve rate increases to offset these costs, or if there is a
      significant delay in receiving approval for such rate increases, such costs
      could have a material adverse effect on our operating results.





**We
      depend upon our ability to raise money in the capital markets to finance some
      of
      the costs of complying with laws and regulations, including environmental laws
      and regulations or to pay for some of the costs of improvements to or the
      expansion of our utility system assets. Our regulated utility companies cannot
      issue debt or equity securities without regulatory
      approval.**





We
      require financing to fund the ongoing capital program for the improvement of
      our
      utility system assets and for planned expansion of those systems. We expect
      to
      spend between $122 million and $194 million for capital projects through 2009.
      We must obtain regulatory approval to sell debt or equity securities to raise
      money for these projects. If sufficient capital is not available or the cost
      of
      capital is too high, or if the regulatory authorities deny a petition of ours
      to
      sell debt or equity securities, we may not be able to meet the costs of
      complying with environmental laws and regulations or the costs of improving
      and
      expanding our utility system assets to the level we believe necessary. This
      might result in the imposition of fines or restrictions on our operations and
      may curtail our ability to improve upon and expand our utility system assets.





**Weather
      conditions and overuse of underground aquifers may interfere with our sources
      of
      water, demand for water services and our ability to supply water to
      customers.**





Our
      ability to meet the existing and future water demands of our customers depends
      on an adequate supply of water. Unexpected conditions may interfere with our
      water supply sources. Drought and overuse of underground aquifers may limit
      the
      availability of ground and/or surface water. Freezing weather may also
      contribute to water transmission interruptions caused by pipe and/or main
      breakage. Any interruption in our water supply could cause a reduction in our
      revenue and profitability. These factors might adversely affect our ability
      to supply water in sufficient quantities to our customers. Governmental drought
      restrictions might result in decreased use of water services and can adversely
      affect our revenue and earnings.


11
 *Index*






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





Demand
      for our water during the warmer months is generally greater than during cooler
      months due primarily to additional consumption of water in connection with
      irrigation systems, swimming pools, cooling systems and other outside water
      use.
      Throughout the year, and particularly during typically warmer months, demand
      may
      vary with temperature and rainfall levels. In the event that temperatures during
      the typically warmer months are cooler than normal, or if there is more rainfall
      than normal, the demand for our water may decrease and adversely affect our
      revenues.





**Our
      water sources may become contaminated by naturally-occurring or man-made
      compounds and events. This may cause disruption in services and impose costs
      to
      restore the water to required levels of quality.**





Our
      sources of water may become contaminated by naturally-occurring or man-made
      compounds and events. In the event that our water supply is contaminated, we
      may
      have to interrupt the use of that water supply until we are able to install
      treatment equipment or substitute the flow of water from an uncontaminated
      water
      source through our transmission and distribution systems. We may also incur
      significant costs in treating the contaminated water through the use of our
      current treatment facilities, or development of new treatment methods. Our
      inability to substitute water supply from an uncontaminated water source, or
      to
      adequately treat the contaminated water source in a cost-effective manner may
      reduce our revenues and make us less profitable.





**We
      face competition from other water and wastewater utilities and service providers
      which might hinder our growth and reduce our
      profitability.**





We
      face
      risks of competition from other utilities authorized by federal, state or local
      agencies. Once a state utility regulator grants a franchise to a utility to
      serve a specific territory, that utility has an exclusive right to service
      that
      territory. Although a new franchise offers some protection against competitors,
      the pursuit of franchises is competitive, especially in Delaware where new
      franchises may be awarded to utilities based upon competitive negotiation.
      Competing utilities have challenged, and may in the future challenge, our
      applications for new franchises. Also, third parties entering into long-term
      agreements to operate municipal systems might adversely affect us and our
      long-term agreements to supply water on a contract basis to municipalities,
      which adversely affect our operating results.





**We
      have a long-term contractual obligation for water and wastewater system
      operation and maintenance under which we may incur costs in excess of payments
      received.**





Middlesex
      Water Company and USA-PA operate and maintain the water and wastewater systems
      of the City of Perth Amboy, New Jersey under a 20-year contract expiring in
      2018. This contract does not protect us against incurring costs in excess of
      revenues we earn pursuant to the contract. There can be no absolute assurance
      that we will not experience losses resulting from this contract. Losses under
      this contract or our failure or inability to perform may have a material adverse
      effect on our financial condition and results of operations. Also, in connection
      with the contract, Perth Amboy, through the Middlesex County Improvement
      Authority, issued approximately $68.0 million in three series of bonds.
      Middlesex guaranteed one of those series of bonds, designated the Series C
      Serial Bonds, in the principal amount of approximately $26.3 million. As of
      December 31, 2006, approximately $23.4 million of the Series C Serial Bonds
      remain outstanding. If Perth Amboy defaults on its obligations to pay the bonds
      we have guaranteed, we would have to raise funds to meet our obligations under
      that guarantee.


12
 *Index*





**An
      important element of our growth strategy is the acquisition of water and
      wastewater assets, operations, contracts or companies. Any pending or future
      acquisitions we decide to undertake may involve risks.**





The
      acquisition and/or operation of water and wastewater systems is an important
      element in our growth strategy. This strategy depends on identifying suitable
      opportunities and reaching mutually agreeable terms with acquisition candidates
      or contract partners. These negotiations, as well as the integration of acquired
      businesses, could require us to incur significant costs and cause diversion
      of
      our management’s time and resources. Further, acquisitions may result in
      dilution of our equity securities, incurrence of debt and contingent
      liabilities, fluctuations in quarterly results and other related expenses.
      In
      addition, the assets, operations, contracts or companies we acquire may not
      achieve the sales and profitability expected.








**The
      current concentration of our business in central New Jersey and Delaware makes
      us susceptible to any adverse development in local regulatory, economic,
      demographic, competitive and weather conditions.**





Our
      Middlesex System provides water services to retail customers who are located
      primarily in eastern Middlesex County, New Jersey and provides water under
      wholesale contracts to the Township of Edison, the Boroughs of Highland Park
      and
      Sayreville, and both the Old Bridge and the Marlboro Township Municipal
      Utilities Authorities, and the City of Rahway in Union County, New Jersey.
      Our
      Tidewater System provides water services to retail customers in the State of
      Delaware. Our revenues and operating results are therefore subject to local
      regulatory, economic, demographic, competitive and weather conditions in a
      relatively concentrated geographic area. A change in any of these conditions
      could make it more costly or difficult for us to conduct our business. In
      addition, any such change would have a disproportionate effect on us, compared
      to water utility companies that do not have such a geographic
      concentration.





**The
      necessity for increased security has and may continue to result in increased
      operating costs.**





Since
      the
      September 11, 2001 terrorist attacks and the continuing threats to the health
      and security of the United States of America, we have taken steps to increase
      security measures at our facilities and heighten employee awareness of threats
      to our water supply. We have tightened our security measures regarding the
      delivery and handling of certain chemicals used in our business. We are at
      risk
      for terrorist attacks and have incurred, and will continue to incur increased
      costs for security precautions to protect our facilities, operations and
      supplies from such risks.





**Our
      ability to achieve growth in Delaware is somewhat dependent on the residential
      building market in the territories we serve. If housing starts decline
      significantly, our rate of growth may not meet our
      expectations.**





We
      expect
      our revenues to increase from customer growth in Delaware for our regulated
      water operations and, to a lesser degree, our regulated wastewater operations
      as
      a result of the anticipated construction and sale of new housing units in the
      territories we serve. Although the residential building market in Delaware
      has
      experienced growth in recent years, this growth may not continue in the future.
      If housing starts in the Delaware territories we serve decline significantly
      as
      a result of economic conditions or otherwise, our revenue growth may not meet
      our expectations and our financial results could be negatively
      impacted.







13
 *Index*


**We
      have restrictions on our dividends. There can also be no assurance that we
      will
      continue to pay dividends in the future or, if dividends are paid, that they
      will be in amounts similar to past dividends.**





Our
      Restated Certificate of Incorporation and our Indenture of Mortgage dated as
      of
      April 1, 1927, as supplemented, impose conditions on our ability to pay
      dividends. We have paid dividends on our common stock each year since 1912
      and
      have increased the amount of dividends paid each year since 1973.




Our
      earnings, financial condition, capital requirements, applicable regulations
      and
      other factors, including the timeliness and adequacy of rate increases, will
      determine both our ability to pay dividends on common stock and the amount
      of
      those dividends. There can be no assurance that we will continue to pay
      dividends in the future or, if dividends are paid, that they will be in amounts
      similar to past dividends.




**If
      we are unable to pay the principal and interest on our indebtedness as it comes
      due or we default under certain other provisions of our loan documents, our
      indebtedness could be accelerated and our results of operations and financial
      condition could be adversely affected.**





Our
      ability to pay the principal and interest on our indebtedness as it comes due
      will depend upon our current and future performance. Our performance is affected
      by many factors, some of which are beyond our control. We believe that our
      cash
      generated from operations, and, if necessary, borrowings under our existing
      credit facilities, will be sufficient to enable us to make our debt payments
      as
      they become due. If, however, we do not generate sufficient cash, we may be
      required to refinance our obligations or sell additional equity, which may
      be on
      terms that are not as favorable to us.





No
      assurance can be given that any refinancing or sale of equity will be possible
      when needed or that we will be able to negotiate acceptable terms. In addition,
      our failure to comply with certain provisions contained in our trust indentures
      and loan agreements relating to our outstanding indebtedness could lead to
      a
      default under these documents, which could result in an acceleration of our
      indebtedness.





**We
      depend significantly on the services of the members of our senior management
      team, and the departure of any of those persons could cause our operating
      results to suffer.**





Our
      success depends significantly on the continued individual and collective
      contributions of our senior management team. If we lose the services of any
      member of our senior management or are unable to hire and retain experienced
      management personnel, it could affect our operating results.





**We
      are subject to anti-takeover measures that may be used by existing management
      to
      discourage, delay or prevent changes of control that might benefit
      non-management shareholders.**





Subsection
      10A of the New Jersey Business Corporation Act, known as the Shareholder
      Protection Act, applies to us. The Shareholder Protection Act deters merger
      proposals, tender offers or other attempts to effect changes in our control
      that
      are not negotiated and approved by our Board of Directors. In addition, we
      have
      a classified Board of Directors, which means only one-third of the Directors
      are
      elected each year. A classified Board can make it harder for an acquirer to
      gain
      control by voting its candidates onto the Board of Directors and may also deter
      merger proposals and tender offers. Our Board of Directors also has the ability,
      subject to obtaining BPU approval, to issue one or more series of preferred
      stock having such number of shares, designation, preferences, voting rights,
      limitations and other rights as the Board of Directors may fix. This could
      be
      used by the Board of Directors to discourage, delay or prevent an acquisition
      that might benefit non-management shareholders.










14
 *Index*




**Item
      1B.** **UnresolvedStaff
      Comments.**




None.




**Item
      2.** **Properties.**





Utility
      Plant




The
      water
      utility plant in our systems consist of source of supply, pumping, water
      treatment, transmission and distribution, general facilities and all
      appurtenances, including all connecting pipes.




*Middlesex
      System*




The
      Middlesex System’s principal source of surface supply is the Delaware &
Raritan Canal owned by the State of New Jersey and operated as a water resource
      by the New Jersey Water Supply Authority.




Water
      is
      withdrawn from the Delaware & Raritan Canal at New Brunswick, New Jersey
      through our intake and pumping station, located on state-owned land bordering
      the canal. Water is transported through two raw water pipelines for treatment
      and distribution at our CJO Plant in Edison, New Jersey.





The
      CJO
      Plant includes chemical storage and chemical feed equipment, two dual rapid
      mixing basins, four upflow clarifiers which are also called superpulsators,
      four
      underground reinforced chlorine contact tanks, twelve rapid filters containing
      gravel, sand and anthracite for water treatment and a steel washwater tank.
      The
      CJO Plant also includes a computerized Supervisory Control and Data Acquisitions
      system to monitor and control the CJO Plant and the water supply and
      distribution system in the Middlesex System. There is an on-site State certified
      laboratory capable of performing bacteriological, chemical, process control
      and
      advanced instrumental chemical sampling and analysis. The firm design capacity
      of the CJO Plant is 45 mgd (60 mgd maximum capacity). The main pumping station
      at the CJO Plant has a design capacity of 90 mgd. The four electric
      motor-driven, vertical turbine pumps presently installed have an aggregate
      capacity of 72 mgd.





In
      addition, there is a 15 mgd auxiliary pumping station located at the CJO Plant
      location. It has a dedicated substation and emergency power supply provided
      by a
      diesel-driven generator. It pumps from the 10 million gallon distribution
      storage reservoir directly into the distribution system.





The
      transmission and distribution system is comprised of 732 miles of
      mains and includes 23,200 feet of 48-inch reinforced concrete transmission
      main
      connecting the CJO Plant to our distribution pipe network and related storage
      facilities. Also included is a 58,600 foot transmission main and a 38,800 foot
      transmission main, augmented with a long-term, non-exclusive agreement with
      the
      East Brunswick system to transport water to several of our contract customers.





Middlesex
      System’s storage facilities consist of a 10 million gallon reservoir at the CJO
      Plant, 5 million gallon and 2 million gallon reservoirs in Edison (Grandview),
      a
      5 million gallon reservoir in Carteret (Eborn) and a 2 million gallon reservoir
      at the Park Avenue Well Field.




In
      New
      Jersey, we own the properties on which Middlesex System’s 31 wells are located,
      the properties on which our storage tanks are located as well as the property
      where the CJO Plant is located. We also own our headquarters complex located
      at
      1500 Ronson Road, Iselin, New Jersey, consisting of a 27,000 square foot office
      building and an adjacent 16,500 square foot maintenance facility.




15
 *Index*


*Tidewater
      System*




The
      Tidewater System is comprised of 87 production plants that vary in pumping
      capacity from 26,000 gallons per day to 2.0 mgd. Water is transported to our
      customers through 520 miles of transmission and distribution mains. Storage
      facilities include 45 tanks, with an aggregate capacity of 5.8 million gallons.
      Our Delaware operations are managed from Tidewater’s offices in Dover, Delaware
      and Millsboro, Delaware. Tidewater’s Dover, Delaware office property, located on
      property owned by White Marsh, consists of a 6,800 square foot office building
      situated on an eleven-acre lot.




*Pinelands
      System*




Pinelands
      Water owns well site and storage properties in Southampton Township, New Jersey.
      The Pinelands Water storage facility is a 1.2 million gallon standpipe. Water
      is
      transported to our customers through 18 miles of transmission and distribution
      mains.




*Pinelands
      Wastewater System*




Pinelands
      Wastewater owns a 12 acre site on which its 0.5 million gallons per day capacity
      tertiary treatment plant and connecting pipes are located. Its wastewater
      collection system is comprised of approximately 25 miles of main.




*Bayview
      System*




Bayview
      owns two well sites, which are located in Downe Township, Cumberland County,
      New
      Jersey. Water is transported to its customers through our 3.5 mile distribution
      system.





*TESI
      System*




The
      TESI
      System owns and operates five wastewater treatment systems in Southern Delaware.
      The treatment plants provide clarification, sedimentation, and disinfection.
      The
      combined total capacity of the plants is 218,000 gallons per day.





*USA-PA,
      USA and White Marsh*




Our
      non-regulated subsidiaries, namely USA-PA, USA and White Marsh, do not own
      utility plant property.





**Item
      3.**  **LegalProceedings.**





In
      July
      2005, Tidewater received a notice of violation and request for corrective action
      issued by the Delaware Fire Marshal regarding the alleged failure of one of
      the
      community water systems operated by Tidewater to meet Delaware fire protection
      requirements. Tidewater appealed the Fire Marshal’s decision with the Delaware
      State Fire Prevention Commission (the “SFPC”) and, in November 2005, the SFPC
      denied Tidewater’s appeal. In December 2005, Tidewater filed an appeal of the
      SFPC’s decision with the Sussex County Superior Court in Delaware, which is
      still pending. There are approximately 67 of our other systems that may not
      meet
      the Delaware Fire Marshal’s recent interpretation of the fire protection
      requirements. If the Delaware Fire Marshal’s interpretation of the regulations
      is upheld upon appeal, we may be required to make corrections to the system
      at
      issue and the Delaware Fire Marshal could issue notices of violation and
      requests for corrective action for some or all of the approximately 67 other
      community systems. At this time, we cannot predict how many community water
      systems would ultimately require corrective action if our appeal is unsuccessful
      nor can we predict the timing and the cost of any required corrective actions.
      We will apply to the PSC to increase base rates to recover the costs of any
      such
      corrective actions. However, if corrective actions need to be taken at several
      community water systems, our costs could be significant, and to the
      extent


16
 *Index*


the
      PSC
      does not approve rate increases to offset these costs, or if there is a
      significant delay in receiving approval for such rate increases, such costs
      could have a material adverse effect on our operating results.





The
      Court
      action is currently on hold while the parties, with the assistance of a
      mediator, have met in an attempt to resolve as many open issues as possible.
      If
      any significant issues remain open after these discussions, they will be
      referred back to the Court for ultimate decision.





The
      Company is a defendant in lawsuits in the normal course of business. We believe
      the resolution of pending claims and legal proceedings will not have a material
      adverse effect on the Company’s consolidated financial statements.




**Item
      4.**  **Submission
      ofMatters to a Vote of Security
      Holders.**





None.





**PARTII**





**Item
          5.** **Market
          for theRegistrant's Common Equity and Related Stockholder
          Matters.**





The
      Company’s common stock is traded on the NASDAQ Stock Market, under the symbol
      MSEX. The following table shows the range of high and low share prices per
      share
      for the common stock and the dividend paid to shareholders in such quarter.
      As
      of December 31, 2006, there were 2,032 holders of record.





2006
            
            High
            
            Low
            
            DividendFourth
                Quarter
            
            $
            19.50
            
            $
            17.96
            
            $
            0.1725Third
                Quarter
            
            
            20.50
            
            
            17.58
            
            
            0.1700Second
                Quarter
            
            
            19.34
            
            
            16.50
            
            
            0.1700First
                Quarter
            
            
            19.72
            
            
            17.03
            
            
            0.1700





2005
            
            High
            
            Low
            
            DividendFourth
                Quarter
            
            $
            23.34
            
            $
            17.31
            
            $
            0.1700Third
                Quarter
            
            
            23.47
            
            
            19.05
            
            
            0.1675Second
                Quarter
            
            
            20.00
            
            
            17.07
            
            
            0.1675First
                Quarter
            
            
            19.16
            
            
            17.64
            
            
            0.1675





The
      Company has paid dividends on its common stock each year since 1912. Although
      it
      is the present intention of the Board of Directors of the Company to continue
      to
      pay regular quarterly cash dividends on its common stock, the payment of future
      dividends is contingent upon the future earnings of the Company, its financial
      condition and other factors deemed relevant by the Board of Directors at its
      discretion.







17
 *Index*








If
      four
      or more quarterly dividends are in arrears, the preferred shareholders, as
      a
      class, are entitled to elect two members to the Board of Directors in addition
      to Directors elected by holders of the common stock. In the event dividends
      on
      the preferred stock are in arrears, no dividends may be declared or paid on
      the
      common stock of the Company. Substantially all of the Utility Plant of the
      Company is subject to the lien of its mortgage, which also includes certain
      restrictions as to cash dividend payments and other distributions on common
      stock.





The
      Company maintains a shareholder approved Restricted Stock Plan, under which
      63,837 shares of the Company’s common stock are held in escrow by the Company
      for key employees. Such stock is subject to forfeiture by the employee in the
      event of termination of employment within five years of the grant other than
      as
      a result of retirement, death or disability. The maximum number of shares
      authorized for grant under this plan is 240,000 shares.





Set
      forth
      below is a line graph comparing the yearly change in the cumulative total return
      (which includes reinvestment of dividends) of a $100 investment for the
      Company’s common stock, a peer group of investor-owned water utilities, and the
      Dow Jones Wilshire 5000 Stock Index for the period of five years commencing
      December 31, 2001. The current peer group includes American States Water
      Company, Aqua America Inc., Artesian Resources Corp., California Water Service
      Company, Connecticut Water Service, Inc., Pennichuck Corp., SJW Corp., Southwest
      Water Company, York Water Company and the Company. The Dow Jones Wilshire 5000
      Stock Index measures the performance of all U.S. headquartered equity securities
      with readily available price data.











Performance Graph


2001
            2002
            2003
            2004
            2005
            2006Middlesex
                Water Company
            100.00
            96.10
            128.26
            123.82
            117.36
            131.45Dow
                Jones Wilshire 5000
            100.00
            79.14
            104.18
            117.33
            124.75
            144.56Peer
                Group
            100.00
            95.60
            122.38
            141.20
            184.94
            185.41





18
 *Index*


**Item
      6.**  **Selected
      Financial Data.**





**CONSOLIDATED
                    SELECTED FINANCIAL DATA****(In
                    Thousands Except per Share Data)****2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002**Operating
                    Revenues
                
                **$**
                **81,061**
                
                **$**
                **74,613**
                
                $
                70,991
                
                $
                64,111
                
                $
                61,933Operating
                    Expenses:Operations
                    and Maintenance
                
                
                **43,345**
                
                
                **42,156**
                
                
                39,984
                
                
                36,195
                
                
                32,767Depreciation
                
                
                **7,060**
                
                
                **6,460**
                
                
                5,846
                
                
                5,363
                
                
                4,963Other
                    Taxes
                
                
                **9,338**
                
                
                **8,779**
                
                
                8,228
                
                
                7,816
                
                
                7,737Total
                    Operating Expenses
                
                
                **59,743**
                
                
                **57,395**
                
                
                54,058
                
                
                49,374
                
                
                45,467Operating
                    Income
                
                
                **21,318**
                
                
                **17,218**
                
                
                16,933
                
                
                14,737
                
                
                16,466Other
                    Income, Net
                
                
                **774**
                
                
                **740**
                
                
                795
                
                
                358
                
                
                442Interest
                    Charges
                
                
                **7,012**
                
                
                **6,245**
                
                
                5,468
                
                
                5,227
                
                
                5,144Income
                    Taxes
                
                
                **5,041**
                
                
                **3,237**
                
                
                3,814
                
                
                3,237
                
                
                3,999Net
                    Income
                
                
                **10,039**
                
                
                **8,476**
                
                
                8,446
                
                
                6,631
                
                
                7,765Preferred
                    Stock Dividend
                
                
                **248**
                
                
                **251**
                
                
                255
                
                
                255
                
                
                255Earnings
                    Applicable to Common Stock
                
                **$**
                **9,791**
                
                **$**
                **8,225**
                
                $
                8,191
                
                $
                6,376
                
                $
                7,510Earnings
                    per Share:Basic
                
                **$**
                **0.83**
                
                **$**
                **0.72**
                
                $
                0.74
                
                $
                0.61
                
                $
                0.73Diluted
                
                **$**
                **0.82**
                
                **$**
                **0.71**
                
                $
                0.73
                
                $
                0.61
                
                $
                0.73Average
                    Shares Outstanding:Basic
                
                
                **11,844**
                
                
                **11,445**
                
                
                11,080
                
                
                10,475
                
                
                10,280Diluted
                
                
                **12,175**
                
                
                **11,784**
                
                
                11,423
                
                
                10,818
                
                
                10,623Dividends
                    Declared and Paid
                
                **$**
                **0.683**
                
                **$**
                **0.673**
                
                $
                0.663
                
                $
                0.649
                
                $
                0.634Total
                    Assets
                
                **$**
                **370,267**
                
                **$**
                **324,383**
                
                $
                305,634
                
                $
                267,956
                
                $
                251,971Convertible
                    Preferred Stock
                
                **$**
                **2,856**
                
                **$**
                **2,856**
                
                $
                2,961
                
                $
                2,961
                
                $
                2,961Long-term
                    Debt
                
                **$**
                **130,706**
                
                **$**
                **128,175**
                
                $
                115,281
                
                $
                97,377
                
                $
                87,483





19
 *Index*





**Item
                7.**
            **Management's
                Discussion and Analysis of Financial Condition and Results of
                Operation.**





The
      following discussions of the Company’s historical results of operations and
      financial condition should be read in conjunction with the Company’s
      consolidated financial statements and related notes.





**Overview**





Middlesex
      Water Company has operated as a water utility in New Jersey since 1897, and
      in
      Delaware, through our wholly-owned subsidiary, Tidewater, since 1992. We are
      in
      the business of collecting, treating, distributing and selling water for
      domestic, commercial, municipal, industrial and fire protection purposes. We
      also operate a New Jersey municipal water and wastewater system under contract
      and provide wastewater services in New Jersey and Delaware through our
      subsidiaries. We are regulated as to rates charged to customers for water and
      wastewater services, as to the quality of water service we provide and as to
      certain other matters in New Jersey and in Delaware. Only our USA, USA-PA and
      White Marsh subsidiaries are not regulated utilities.





Our
      New
      Jersey water utility system (the Middlesex System) provides water services
      to
      approximately 59,200 retail customers, primarily in central New Jersey. The
      Middlesex System also provides water service under contract to municipalities
      in
      central New Jersey with a total population of approximately 303,000. In
      partnership with our subsidiary, USA-PA, we operate the water supply system
      and
      wastewater system for the City of Perth Amboy, New Jersey. Our other New Jersey
      subsidiaries, Pinelands Water and Pinelands Wastewater, provide water and
      wastewater services to residents in Southampton Township, New Jersey.




Our
      Delaware subsidiaries, Tidewater and Southern Shores, provide water services
      to
      approximately 30,100 retail customers in New Castle, Kent and Sussex Counties,
      Delaware. Our TESI subsidiary provides wastewater services to approximately
      115
      residential retail customers. Our other Delaware subsidiary, White Marsh,
      services an additional 5,000 customers in Kent and Sussex Counties through
      41
      operations and maintenance contracts.




The
      majority of our revenue is generated from retail and contract water services
      to
      customers in our service areas. We record water service revenue as such service
      is rendered and include estimates for amounts unbilled at the end of the period
      for services provided after the last billing cycle. Fixed service charges are
      billed in advance by our subsidiary, Tidewater, and are recognized in revenue
      as
      the service is provided.




We
      expect
      the growth of our regulated wastewater business in Delaware will eventually
      become a more significant component of our operations.





Our
      ability to increase operating income and net income is based significantly
      on
      four factors: weather, adequate and timely rate relief, effective cost
      management, and customer growth. These factors are evident in the discussions
      below which compare our results of operations from prior years.





**Operating
      Results by Segment**





The
      Company has two operating segments, Regulated and Non-Regulated. Our Regulated
      segment contributed 89% and 89% of total revenues, and 94% and 95% of net income
      for the years ended December 31, 2006 and 2005, respectively. The discussion
      of
      the Company’s results of operations is on a consolidated basis, and includes
      significant factors by subsidiary. The segments in the tables included below
      are
      comprised of the following companies: Regulated- Middlesex, Tidewater,
      Pinelands, Southern Shores, and TESI; Non-Regulated- USA, USA-PA, and White
      Marsh.


20
 *Index*


**Results
      of Operations in 2006 Compared to 2005**




(Millions
                  of Dollars)
                Fiscal
                  Years ended December 31,2006
              
              2005Regulated
              
              Non-Regulated
              
              Total
              
              Regulated
              
              Non-Regulated
              
              TotalRevenues
              
              $
              71.9
              
              $
              9.2
              
              $
              81.1
              
              $
              66.3
              
              $
              8.3
              
              $
              74.6Operations
                  and maintenance
              
              
              35.7
              
              
              7.7
              
              
              43.4
              
              
              35.0
              
              
              7.2
              
              
              42.2Depreciation
              
              
              7.0
              
              
              0.1
              
              
              7.1
              
              
              6.3
              
              
              0.1
              
              
              6.4Other
                  taxes
              
              
              9.1
              
              
              0.2
              
              
              9.3
              
              
              8.6
              
              
              0.2
              
              
              8.8**Operating
                  income**
              
              
              20.1
              
              
              1.2
              
              
              21.3
              
              
              16.4
              
              
              0.8
              
              
              17.2Other
                  income (expense)
              
              
              0.9
              
              
              (0.1
              )
              
              0.8
              
              
              0.7
              
              
              0.0
              
              
              0.7Interest
                  expense
              
              
              7.0
              
              
              -
              
              
              7.0
              
              
              6.2
              
              
              -
              
              
              6.2Income
                  taxes
              
              
              4.6
              
              
              0.5
              
              
              5.1
              
              
              2.9
              
              
              0.3
              
              
              3.2**Net
                  income**
              
              $
              9.4
              
              $
              0.6
              
              $
              10.0
              
              $
              8.0
              
              $
              0.5
              
              $
              8.5


Operating
      revenues for the year rose $6.5 million, or 8.7% over the same period in 2005.
      Water sales improved by $2.8 million in our Middlesex System, of which $4.1
      million was a result of a base rate increase that was granted to Middlesex
      on
      December 8, 2005. This increase was somewhat offset by lower consumption
      revenues of $1.3 million due to unfavorable weather from mid-July through the
      late fall of 2006 as compared to the prior year. Customer growth of 7.07% in
      Delaware provided additional water consumption sales, facility charges and
      connection fees of $0.9 million, higher base rates provided $1.0 million, and
      increased consumption for existing customers provided an additional $0.6
      million. New unregulated wastewater contracts in Delaware provided $0.4 million
      in additional revenues. Revenues from our operations and maintenance contract
      with the City of Perth Amboy increased by $0.4 million due to scheduled fixed
      fee adjustments under the agreement. USA had increased revenues for its
      LineCare SM maintenance
      program of $0.1 million. TESI revenues increased by $0.1 million, as we
      connected new customers to our wastewater systems in Delaware. All other
      operations contributed $0.2 million of additional revenues.





While
      we
      anticipate continued organic customer and consumption growth among our Delaware
      systems, such growth and increased consumption cannot be guaranteed. Our water
      systems are highly dependent on the effects of weather, which may adversely
      impact future consumption despite customer growth. Appreciable organic customer
      and consumption growth is less likely in our New Jersey systems due to the
      extent to which our service territory is developed.





Operation
      and maintenance expenses increased $1.2 million or 2.8% as compared to the
      same
      period in 2005. Continued growth of our Delaware water and wastewater operations
      led to higher costs of $1.1 million. Despite lower water production volume
      of
      3.2% for our Middlesex System, costs increased by $0.3 million due to increased
      unit costs for electricity, chemicals and residuals removal. Costs for providing
      services under our contract with the City of Perth Amboy increased by $0.1
      million and costs for providing services under our contracts in Delaware
      increased by $0.2 million. Audit fees declined by $0.3 million as the Company
      changed independent accounting firms beginning with the 2006 audit period.
      Labor
      and benefits expenses fell by $0.3 million due to vacant positions and improved
      performance on investments. All other operating costs increased by $0.1 million.





Electric
      generation costs for our Middlesex System will increase in 2007 due to the
      renewal of a contract for that service in late 2006. Total electric costs
      account for approximately 10% of our annual operations and maintenance expenses.
      Pension and postretirement costs increased $0.4 million during 2006 and we
      expect


21
 *Index*


these
      costs to continue to increase in 2007. In an effort to control the increasing
      cost of providing retirement benefits, we have instituted two changes for
      employees hired after March 31, 2007. Our company funded defined benefit pension
      plan and postretirement health and other benefit plans will not be available
      to
      employees hired after that date. A defined contribution plan is available for
      these future employees. Payroll and related employee benefit costs (excluding
      pension and postretirement expenses previously discussed) are also expected
      to
      be higher in 2007. These increasing costs, in addition to higher business
      insurances will require us to file a request for a rate increase with the
      BPU for Middlesex during 2007. We cannot predict whether the BPU will approve,
      deny or reduce the amount of our request. Our Tidewater system received approval
      by the PSC to increase its rates by an additional 11.9% effective February
      28,
      2007. As part of the same rate matter, the PSC had approved an interim rate
      increase of 15% back in June of 2006. The combined effect of the interim and
      final rate increases was $3.9 million in additional annual operating
      revenues.





Depreciation
      expense for 2006 increased by $0.7 million, or 10.9%, due to a higher level
      of
      utility plant in service. As our investments in utility plant and operating
      expenses increase, we continue to seek timely rate relief through base rate
      filings as discussed above.





Other
      taxes increased by $0.5 million generally reflecting additional taxes on higher
      taxable gross revenues, payroll and real estate.





Other
      income increased $0.1 million, primarily due to higher Allowance for Funds
      Used
      During Construction (AFUDC) as capital spending increased compared to the prior
      year.





Interest
      expense increased by $0.8 million, or 12.9%, as a result of a higher level
      of
      long-term debt, and higher average interest rates and increased weighted average
      short-term borrowings as compared to the prior year period.





Income
      tax expense based on our current year operating results was $5.1
      million.





Net
      income increased to $10.0 million from $8.5 million in the prior year, and
      basic
      earnings per share increased from $0.72 to $0.83. Diluted earnings per share
      increased from $0.71 to $0.82.





**Results
      of Operations in 2005 Compared to 2004**


(Millions
                  of Dollars)
                Fiscal
                  Years ended December 31,2005
              
              2004Regulated
              
              Non-Regulated
              
              Total
              
              Regulated
              
              Non-Regulated
              
              TotalRevenues
              
              $
              66.3
              
              $
              8.3
              
              $
              74.6
              
              $
              60.8
              
              $
              10.2
              
              $
              71.0Operations
                  and maintenance
              
              
              35.0
              
              
              7.2
              
              
              42.2
              
              
              31.0
              
              
              9.0
              
              
              40.0Depreciation
              
              
              6.3
              
              
              0.1
              
              
              6.4
              
              
              5.8
              
              
              0.1
              
              
              5.9Other
                  taxes
              
              
              8.6
              
              
              0.2
              
              
              8.8
              
              
              7.9
              
              
              0.3
              
              
              8.2**Operating
                  income**
              
              
              16.4
              
              
              0.8
              
              
              17.2
              
              
              16.1
              
              
              0.8
              
              
              16.9Other
                  income (expense)
              
              
              0.7
              
              
              0.0
              
              
              0.7
              
              
              0.8
              
              
              0.0
              
              
              0.8Interest
                  expense
              
              
              6.2
              
              
              --
              
              
              6.2
              
              
              5.4
              
              
              0.1
              
              
              5.5Income
                  taxes
              
              
              2.9
              
              
              0.3
              
              
              3.2
              
              
              3.5
              
              
              0.3
              
              
              3.8**Net
                  income**
              
              $
              8.0
              
              $
              0.5
              
              $
              8.5
              
              $
              8.0
              
              $
              0.4
              
              $
              8.4


22
 *Index*


Operating
      revenues for the year rose $3.6 million, or 5.1% over the same period in 2004.
      Water sales improved by $3.6 million in our Middlesex System, of which $1.8
      million was a result of base rate increases that were granted to Middlesex
      on
      May 27, 2004 and December 8, 2005, and $1.8 million was due to increased
      consumption due to drier weather as compared to the prior year. Customer growth
      of 9.2% in Delaware provided additional water consumption sales, facility
      charges and connection fees of $0.9 million, and higher base rates provided
      $1.0
      million. New unregulated wastewater contracts in Delaware provided $0.1 million
      in additional revenues. USA had reduced revenues of $2.2 million as compared
      to
      the prior year period, due to our meter services venture completing its original
      contracts during December 2004. This decrease was partially offset by increased
      revenues for USA’s LineCare SM maintenance
      program of $0.1 million. All other operations contributed $0.1 million of
      additional revenues.





Operation
      and maintenance expenses increased $2.2 million or 5.4% as compared to the
      same
      period in 2004. In New Jersey, payroll and employee benefits costs increased
      by
      $1.9 million. Water production costs for the Middlesex system increased by
      $0.7
      million due to higher demand and increased unit costs for electricity, chemicals
      and residuals removal. Costs to operate the Tidewater system increased $0.2
      million, and increases in our Delaware employee base, general wage increases
      and
      higher costs associated with employee medical and retirement benefits increased
      costs by $1.0 million. Costs for providing services under our contract with
      the
      City of Perth Amboy increased by $0.1 million. All other operating costs
      increased by $0.1 million. The costs of our meter services venture decreased
      $1.8 million due to the completion of the original projects during December
      2004.





Depreciation
      expense for 2005 increased by $0.6 million, or 10.5%, due to a higher level
      of
      utility plant in service.





Other
      taxes increased by $0.6 million generally reflecting additional taxes on higher
      taxable gross revenues, payroll and real estate.





Other
      income decreased $0.1 million, primarily due to reduced AFUDC due to reduced
      capital spending as compared to the prior year.





Interest
      expense increased by $0.8 million, or 14.2%, as a result of a higher level
      of
      long-term debt, and higher average interest rates and increased weighted average
      short-term borrowings as compared to the prior year period.





Income
      tax expense based on our current year operating results was $3.8 million, which
      was partially offset by $0.6 million of tax benefits.





Net
      income increased to $8.5 million from $8.4 million in the prior year, however
      basic earnings per share decreased from $0.74 to $0.72. Diluted earnings per
      share decreased from $0.73 to $0.71. The earnings per share decrease was due
      to
      an increase in average shares outstanding as compared to the prior year period
      as a result of the sale of 700,000 shares of common stock on May 12, 2004,
      and
      shares issued under the Company’s Dividend Reinvestment Plan during
      2005.





**Outlook**





In
      addition to factors previously discussed under “Results of Operations in 2006
      Compared to 2005,” our revenues are expected to increase in 2007 from
      anticipated customer growth in Delaware for our regulated water operations
      and,
      to a lesser degree, from growth in our regulated wastewater operations in
      Delaware. The recent settlement of our 2006 Tidewater rate case will allow
      rates
      to increase by another 11.9%, or $1.9


23
 *Index*


million
      in annual operating revenues, effective February 28, 2007. Earnings per share
      for 2007 will be fully impacted by the 1,495,000 shares of Common Stock issued
      in November 2006.





We
      expect
      to file for a base rate increase for Middlesex in 2007. Revenues and earnings
      for 2007 will be impacted by the ultimate timing and outcome of the anticipated
      filing. **** Revenues
      and earnings will also be influenced by weather. Changes in these factors,
      as
      well as increases in capital expenditures and operating costs are the primary
      factors that determine the need for rate increase filings.





We
      continue to explore viable plans to streamline operations and reduce costs
      in
      all aspects of our business.





TESI,
      our
      new regulated wastewater operation, commenced operations during fiscal 2005.
      Due
      to the start-up nature of this operation, we expect our expenses with respect
      to
      this subsidiary may marginally exceed its revenues in 2007.





We
      expect
      our interest expense to increase during 2007 as a result of higher expected
      average borrowings and interest rates on short-term credit facilities in order
      to finance a portion of our capital expenditures during the coming year (see
      Liquidity and Capital Resources).





Our
      strategy includes continued revenue growth through acquisitions, internal
      expansion, contract operations and when necessary, rate relief. We will continue
      to pursue opportunities in both the regulated and non-regulated sectors that
      are
      financially sound, complement existing operations and increase shareholder
      value.





**Liquidity
      and Capital Resources**




Cash
      flows from operations are largely based on three factors: weather, adequate
      and
      timely rate increases, and customer growth. The effect of those factors on
      net
      income is discussed in results of operations. For 2006, cash flows from
      operating activities increased $2.4 million to $15.9 million, as compared to
      the
      prior year. This increase was primarily attributable to higher net income,
      depreciation and the timing of collection of customer billings. The $15.9
      million of net cash flow from operations enabled us to fund approximately 53%
      of
      our utility plant expenditures for the period internally, with the remainder
      funded with proceeds from equity issued under our Dividend Reinvestment Plan,
      long-term borrowings and short-term borrowings. In November 2006, we used
      proceeds from a common stock offering to repay all outstanding short-term debt.





For
      2005,
      cash flows from operating activities decreased $2.1 million to $13.5 million,
      as
      compared to the prior year. This decrease was primarily attributable to the
      timing of collection of customer accounts and payments to vendors. These
      decreases in cash flows were partially offset by receipts of advance service
      fees and the timing of payments for interest and employee benefit plans. The
      $13.5 million of net cash flow from operations allowed us to fund approximately
      53% of our utility plant expenditures for the period internally, with the
      remainder funded with proceeds from equity issued under our Dividend
      Reinvestment Plan and both short-term and long-term borrowings.





Increases
      in certain operating costs will impact our liquidity and capital resources.
      As
      described in our results of operations discussion, during 2006 we received
      rate
      relief for Tidewater and Pinelands. We also plan to file for a base rate
      increase for Middlesex in 2007 as a result of continued capital investment
      and
      increases in operating costs in New Jersey. There is no certainty, however,
      that
      the BPU or PSC will approve any or all of this or other future requested
      increases.





***Sources
      of Liquidity***


24
 *Index*


***Short-term
      Debt.*** The
      Company has established revolving lines of credit aggregating $37.0 million.
      There were no outstanding borrowings under these credit lines as of December
      31,
      2006.





The
      weighted average daily amounts of borrowings outstanding under the Company’s
      credit lines and the weighted average interest rates on those amounts were
      $9.5
      million and $9.2 million at 6.13 %
      and
      4.36% for the years ended December 31, 2006 and 2005, respectively.





***Long-term
      Debt.*** Subject
      to regulatory approval, the Company periodically finances capital projects
      under
      State Revolving Fund (SRF) loan programs in New Jersey and Delaware. These
      government programs provide financing at interest rates that are typically
      below
      rates available in the financial markets. A portion of the borrowings under
      the
      New Jersey SRF is interest free. We participated in the Delaware and New Jersey
      SRF loan programs during 2006 and expect to participate in the 2007 New Jersey
      SRF program for up to $3.7 million.





During
      2006, Middlesex closed on $3.7 million of first mortgage bonds through the
      New
      Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey SRF
      loan
      program in order to finance our 2007 RENEW program. The proceeds of these bonds
      and any interest earned are held by a trustee, and are classified as Restricted
      Cash on the Consolidated Balance Sheet.





During
      2006, Tidewater closed on a $1.0 million loan with the Delaware SRF. The
      proceeds were used to fund the ongoing capital program in Delaware.





Substantially
      all of the Utility Plant of the Company is subject to the lien of its mortgage,
      which also includes debt service and capital ratio covenants, certain
      restrictions as to cash dividend payments and other distributions on common
      stock. The Company is in compliance with all of its mortgage covenants and
      restrictions.





***Common
      Stock*** .
      The
      Company periodically issues shares of common stock in connection with its
      Dividend Reinvestment and Common Stock Purchase Plan. Periodically, the Company
      may issue additional equity to reduce short-term indebtedness and for other
      general corporate purposes.  The majority of the net proceeds of
      approximately $26.2 million from the November 2006 common stock offering of
      1,495,000 shares were used to repay all of the Company’s short-term borrowings
      outstanding at that time. The Company also raised $1.3 million through the
      issuance of shares under its Dividend Reinvestment and Common Stock Purchase
      Plan (the Plan) during 2006. The Company issued shares under the Plan at a
      5%
      discount for a six-month period during 2005. This allowed the Company to raise
      $3.7 million through the Plan during 2005.





***Capital
      Expenditures and Commitments***




Under
      our
      capital program for 2007, we plan to expend $19.7 million for additions and
      improvements for our Delaware water systems, which include the construction
      of
      several storage tanks and the creation of new wells and interconnections. We
      expect to spend approximately $20.9 million for system additions and
      acquisitions for our Delaware wastewater systems. We expect to spend $3.9
      million for our RENEW program, which is our program to clean and cement line
      unlined mains in the Middlesex System. There remains a total of approximately
      120 miles of unlined mains in the 732-mile Middlesex System. In 2006, nine
      miles
      of unlined mains were cleaned and cement lined. The capital program also
      includes $10.1 million for scheduled upgrades to our existing systems in New
      Jersey. The scheduled upgrades consist of $1.9 million for improvements to
      existing plant, $5.6 million for mains, $0.7 million for service lines, $0.4
      million for meters, $0.5 million for hydrants, and $1.0 million for other
      infrastructure needs.




25
 *Index*


To
      pay
      for our capital program in 2007, we will utilize internally generated funds
      and
      funds available and held in trust under existing NJEIT loans (currently, $3.7
      million) and Delaware SRF loans (currently, $2.5 million). The SRF programs
      provide low cost financing for projects that meet certain water quality and
      system improvement benchmarks. If necessary, we will also utilize short-term
      borrowings through $37.0 million of available lines of credit with several
      financial institutions. There were no outstanding borrowings under these credit
      lines as of December 31, 2006.




Going
      forward into 2008 through 2009, we currently project that we may be required
      to
      expend between $78.0 million and $140.0 million for capital projects. The exact
      amount is dependent on customer growth, residential housing sales and project
      scheduling. To the extent possible and because of favorable interest rates
      available to regulated water utilities, we expect to finance our capital
      expenditures under the SRF loan programs. We also expect to use internally
      generated funds and proceeds from the sale of common stock through the Dividend
      Reinvestment and Common Stock Purchase Plan. It may also be necessary to sell
      shares of our Common Stock through a public offering.





Tidewater
      is appealing a Notice of Violation regarding a plan of correction to a community
      water system to provide fire protection services. If we are unsuccessful in
      our
      defense, approximately 67 additional community water systems could be subject
      to
      similar corrective plans of action. While we are unable to estimate the
      potential capital investment costs for these additional community water systems
      at this time, Tidewater believes these expenditures would be subject to recovery
      in rates as set by the PSC. See Item 3. - Legal Proceedings for additional
      discussion of this matter.





***Contractual
      Obligations***





In
      the
      course of normal business activities, the Company enters into a variety of
      contractual obligations and commercial commitments. Some of these items result
      in direct obligations on the Company’s balance sheet while others are
      commitments, some firm and some based on uncertainties, which are disclosed
      in
      the Company’s underlying consolidated financial statements.





The
      table
      below presents our known contractual obligations for the periods specified
      as of
      December 31, 2006.




(Millions
                of Dollars)
              Payment
                Due by PeriodTotal
            
            Less
              than
              1
                Year
            
            1-3Years
            
            4-5
              Years
            
            More
              than
              5
                YearsLong-term
                Debt
            
            $
            133.2
            
            $
            2.5
            
            $
            20.4
            
            $
            5.6
            
            $
            104.7Notes
                Payable
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Interest
                on Long-term Debt
            
            
            104.8
            
            
            6.6
            
            
            12.0
            
            
            10.5
            
            
            75.7Purchased
                Water Contracts
            
            
            48.4
            
            
            4.2
            
            
            8.4
            
            
            6.9
            
            
            28.9Wastewater
                Operations
            
            
            55.7
            
            
            4.0
            
            
            8.3
            
            
            8.7
            
            
            34.7Employee
              Retirement Plans (1)
            
            
            3.5
            
            
            3.5
            
            
            ---
            
            
            ---
            
            
            ---Total
            
            $
            345.6
            
            $
            20.8
            
            $
            49.1
            
            $
            31.7
            
            $
            244.0(1)
              Amount not determinable after year one.




**Guarantees**





USA-PA
      operates the City of Perth Amboy’s (Perth Amboy) water and wastewater systems
      under a service contract agreement through June 30, 2018. The agreement was
      effected under New Jersey’s Water Supply Public/Private Contracting Act and the
      New Jersey Wastewater Public/Private Contracting Act. Under the agreement,
      USA-PA receives a fixed fee and a variable fee based on increased system
      billing. Scheduled fixed


26
 *Index*


fee
      payments were $7.6 million in 2006 and will increase over the term of the
      contract to $10.2 million by the end of the contract.




In
      connection with the agreement, Perth Amboy, through the Middlesex County
      Improvement Authority, issued approximately $68.0 million in three series of
      bonds. Middlesex guaranteed one of those series of bonds, designated the Series
      C Serial Bonds, in the principal amount of approximately $26.3 million. Perth
      Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have
      various maturity dates with the final maturity date on September 1, 2015. As
      of
      December 31, 2006, approximately $23.4 million of the Series C Serial Bonds
      remained outstanding.




We
      are
      obligated to perform under the guarantee in the event notice is received from
      the Series C Serial Bonds trustee of an impending debt service deficiency.
      If
      Middlesex funds any debt service obligations as guarantor, there is a provision
      in the agreement that requires Perth Amboy to reimburse us. There are other
      provisions in the agreement that we believe make it unlikely that we will be
      required to perform under the guarantee, such as scheduled annual rate increases
      for the water and wastewater services as well as rate increases due to
      unforeseen circumstances. In the event revenues from customers could not satisfy
      the reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which
      could be used to raise the needed amount.





**Critical
      Accounting Policies and Estimates**




The
      application of accounting policies and standards often requires the use of
      estimates, assumptions and judgments. Changes in these variables may lead to
      significantly different financial statement results. Our critical accounting
      policies are set forth below.




*Regulatory
      Accounting*





We
      maintain our books and records in accordance with accounting principles
      generally accepted in the United States of America. Middlesex and certain of
      its
      subsidiaries, which account for 89% of Operating Revenues and 98% of Total
      Assets, are subject to regulation in the states in which they operate. Those
      companies are required to maintain their accounts in accordance with regulatory
      authorities’ rules and guidelines, which may differ from other authoritative
      accounting pronouncements. In those instances, the Company follows the guidance
      provided in the Financial Accounting Standards Board (FASB), Statement of
      Financial Accounting Standards (SFAS) No. 71, “Accounting For the Effects of
      Certain Types of Regulation” (SFAS 71).




In
      accordance with SFAS No. 71, costs and obligations are deferred if it is
      probable that these items will be recognized for rate-making purposes in future
      rates. Accordingly, we have recorded costs and obligations, which will be
      amortized over various future periods. Any change in the assessment of the
      probability of rate-making treatment will require us to change the accounting
      treatment of the deferred item. We have no reason to believe any of the deferred
      items that are recorded would be treated differently by the regulators in the
      future.





*Revenues*




Revenues
      from metered customers include amounts billed on a cycle basis and unbilled
      amounts estimated from the last meter reading date to the end of the accounting
      period. The estimated unbilled amounts are determined by utilizing factors
      which
      include historical consumption usage and current climate conditions. Differences
      between estimated revenues and actual billings are recorded in a subsequent
      period.




Revenues
      from unmetered customers are billed at a fixed tariff rate in advance at the
      beginning of each service period and are recognized in revenue ratably over
      the
      service period.


27
 *Index*




Revenues
      from the Perth Amboy management contract are comprised of fixed and variable
      fees. Fixed fees, which have been set for the life of the contract, are billed
      monthly and recorded as earned. Variable fees, which are based on billings
      and
      other factors and are not significant, are recorded upon approval of the amount
      by Perth Amboy.




*Pension
      Plan*




We
      maintain a noncontributory defined benefit pension plan which covers
      substantially all employees with more than 1,000 hours of service and who were
      hired prior to March 31, 2007.





The
      discount rate utilized for determining future pension obligations has decreased
      from 5.88% at December 31, 2004 to 5.52% at December 31, 2005 and increased
      to
      5.89% at December 31, 2006. Lowering the discount rate by 0.5% would have
      increased the net periodic pension cost by $0.2 million in 2006. Lowering the
      expected long-term rate of return on the pension plans by 0.5% (from 8.0% to
      7.5%) would have increased the net periodic pension cost in 2006 by
      approximately $0.1 million.




The
      discount rate for determining future pension obligations is determined based
      on
      market rates for long-term, high-quality corporate bonds at our December 31
      measurement date. The expected long-term rate of return for pension assets
      is
      determined based on historical returns and our asset allocation.





Future
      pension expense will depend on future investment performance, changes in future
      discount rates and various other demographic factors related to the population
      participating in the pension plan.




**Recent
      Accounting Standards**




See
      Note
      1(m) of the Notes to Consolidated Financial Statements for a discussion of
      recent accounting pronouncements.





28
 *Index*


**Item
      7A.** **Qualitativeand
      Quantitative Disclosures About Market
      Risk.**





The
      Company is subject to the risk of fluctuating interest rates in the normal
      course of business. Our policy is to manage interest rates through the use
      of
      fixed rate long-term debt and, to a lesser extent, short-term debt. The
      Company’s interest rate risk related to existing fixed rate, long-term debt is
      not material due to the term of the majority of our First Mortgage Bonds, which
      have final maturity dates ranging from 2009 to 2038. Over the next twelve
      months, approximately $2.5 million of the current portion of 16 existing
      long-term debt instruments will mature. Applying a hypothetical change in the
      rate of interest charged by 10% on those borrowings, would not have a material
      effect on our earnings.





**Item
          8.** **Financial
          Statementsand Supplementary
          Data.**





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of Middlesex Water Company:




We
      have
      audited the accompanying consolidated balance sheet and consolidated statement
      of capital stock and long-term debt of Middlesex Water Company and subsidiaries
      (the Company) as of December 31, 2006, and the related consolidated statements
      of income, common stockholders’ equity and comprehensive income, and cash flows
      for the year then ended. These consolidated financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company as of December
      31, 2006, and the results of their operations and their cash flows for the
      year
      then ended in conformity with accounting principles generally accepted in the
      United States of America.




As
      discussed in Note 1 to the consolidated financial statements, the Company
      changed its method of accounting for defined benefit pension and other
      postretirement plans in 2006.




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Middlesex Water Company’s
      internal control over financial reporting as of December 31, 2006, based on
      criteria established in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
      and our report dated March 13, 2007 expressed an unqualified opinion on
      management’s assessment of internal control over financial reporting and an
      unqualified opinion on the effectiveness of internal control over financial
      reporting.




/s/
      Beard
      Miller Company LLP


Beard
      Miller Company LLP


Reading,
      Pennsylvania


March
      13,
      2007


29
 *Index*


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of Middlesex Water Company:




We
      have
      audited the accompanying consolidated balance sheet and consolidated statement
      of capital stock and long-term debt of Middlesex Water Company and subsidiaries
      (the Company) as of December 31, 2005, and the related consolidated statements
      of income, common stockholders’ equity and comprehensive income, and cash flows
      for each of the two years in the period ended December 31, 2005. These
      consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).  Those standards require that
      we plan and perform the audit to obtain reasonable assurance about whether
      the
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.




In
      our
      opinion, such consolidated financial statements present fairly, in all material
      respects, the financial position of the Company as of December 31, 2005, and
      the
      results of its operations and its cash flows for each of the two years in the
      period ended December 31, 2005, in conformity with accounting principles
      generally accepted in the United States of America.








/s/
      DELOITTE & TOUCHE LLP


Parsippany,
      New Jersey


March
      16,
      2006














30
 *Index*


**MIDDLESEX
                        WATER COMPANY****CONSOLIDATED
                        BALANCE SHEETS****December
                        31,**
                    
                    **December
                        31,****ASSETS**
                    
                    
                    
                    **2006**
                    
                    **2005****UTILITY
                        PLANT:**
                    
                    
                    Water
                        Production
                    
                    **$**
                    **95,323,657**
                    
                    $
                    91,403,549Transmission
                        and Distribution
                    
                    
                    **243,958,446**
                    
                    
                    217,098,466General
                    
                    
                    **25,153,277**
                    
                    
                    23,292,087Construction
                        Work in Progress
                    
                    
                    **6,131,037**
                    
                    
                    6,127,634TOTAL
                    
                    
                    **370,566,417**
                    
                    
                    337,921,736Less
                        Accumulated Depreciation
                    
                    
                    **59,693,678**
                    
                    
                    54,960,290UTILITY
                        PLANT - NET
                    
                    
                    **310,872,739**
                    
                    
                    282,961,446**CURRENT
                        ASSETS:**
                    
                    
                    Cash
                        and Cash Equivalents
                    
                    
                    **5,826,012**
                    
                    
                    2,983,762Accounts
                        Receivable, net
                    
                    
                    **8,538,302**
                    
                    
                    8,074,929Unbilled
                        Revenues
                    
                    
                    **4,013,285**
                    
                    
                    3,737,627Materials
                        and Supplies (at average cost)
                    
                    
                    **1,306,196**
                    
                    
                    1,259,935Prepayments
                    
                    
                    **1,228,620**
                    
                    
                    927,254TOTAL
                        CURRENT ASSETS
                    
                    
                    **20,912,415**
                    
                    
                    16,983,507**DEFERRED
                        CHARGES**
                    
                    
                    Unamortized
                        Debt Expense
                    
                    
                    **3,014,005**
                    
                    
                    3,164,043**AND
                        OTHER ASSETS:**
                    
                    
                    Preliminary
                        Survey and Investigation Charges
                    
                    
                    **3,436,124**
                    
                    
                    1,774,817Regulatory
                        Assets
                    
                    
                    **18,341,766**
                    
                    
                    7,469,190Restricted
                        Cash
                    
                    
                    **6,850,418**
                    
                    
                    5,782,705Non-utility
                        Assets - Net
                    
                    
                    **6,254,895**
                    
                    
                    5,727,806Other
                    
                    
                    **584,652**
                    
                    
                    519,610TOTAL
                        DEFERRED CHARGES AND OTHER ASSETS
                    
                    
                    **38,481,860**
                    
                    
                    24,438,171TOTAL
                        ASSETS
                    
                    **$**
                    **370,267,014**
                    
                    $
                    324,383,124**CAPITALIZATION
                        AND LIABILITIES****CAPITALIZATION:**
                    
                    
                    Common
                        Stock, No Par Value
                    
                    **$**
                    **104,248,456**
                    
                    $
                    76,160,949Retained
                        Earnings
                    
                    
                    **25,001,295**
                    
                    
                    23,638,301Accumulated
                        Other Comprehensive Income (Loss), net of tax
                    
                    
                    **94,255**
                    
                    
                    (206,925
                    )TOTAL
                        COMMON EQUITY
                    
                    
                    **129,344,006**
                    
                    
                    99,592,325Preferred
                        Stock
                    
                    
                    **3,958,062**
                    
                    
                    3,958,062Long-term
                        Debt
                    
                    
                    **130,706,358**
                    
                    
                    128,174,944TOTAL
                        CAPITALIZATION
                    
                    
                    **264,008,426**
                    
                    
                    231,725,331**CURRENT**
                    
                    
                    Current
                        Portion of Long-term Debt
                    
                    
                    **2,500,537**
                    
                    
                    1,930,617**LIABILITIES:**
                    
                    
                    Notes
                        Payable
                    
                    
                    **-**
                    
                    
                    4,000,000Accounts
                        Payable
                    
                    
                    **5,490,514**
                    
                    
                    6,038,060Accrued
                        Taxes
                    
                    
                    **6,683,614**
                    
                    
                    6,466,531Accrued
                        Interest
                    
                    
                    **1,879,731**
                    
                    
                    1,868,962Unearned
                        Revenues and Advanced Service Fees
                    
                    
                    **600,626**
                    
                    
                    473,627Other
                    
                    
                    **984,476**
                    
                    
                    707,446TOTAL
                        CURRENT LIABILITIES
                    
                    
                    **18,139,498**
                    
                    
                    21,485,243**COMMITMENTS
                        AND CONTINGENT LIABILITIES (Note 4)****DEFERRED
                        CREDITS**
                    
                    
                    Customer
                        Advances for Construction
                    
                    
                    **19,246,396**
                    
                    
                    17,180,962**AND
                        OTHER LIABILITIES:**
                    
                    
                    Accumulated
                        Deferred Investment Tax Credits
                    
                    
                    **1,812,932**
                    
                    
                    1,617,949Accumulated
                        Deferred Income Taxes
                    
                    
                    **15,779,440**
                    
                    
                    14,296,620Employee
                        Benefit Plans
                    
                    
                    **16,387,754**
                    
                    
                    6,650,724Regulatory
                        Liability - Cost of Utility Plant Removal
                    
                    
                    **6,200,302**
                    
                    
                    5,647,757Other
                    
                    
                    **526,345**
                    
                    
                    793,857TOTAL
                        DEFERRED CREDITS AND OTHER LIABILITIES
                    
                    
                    **59,953,169**
                    
                    
                    46,187,869**CONTRIBUTIONS
                        IN AID OF CONSTRUCTION**
                    
                    
                    
                    **28,165,921**
                    
                    
                    24,984,681TOTAL
                        CAPITALIZATION AND LIABILITIES
                    
                    **$**
                    **370,267,014**
                    
                    $
                    324,383,124See
                        Notes to Consolidated Financial Statements.  31
 *Index*




**MIDDLESEX
                  WATER COMPANY****CONSOLIDATED
                  STATEMENTS OF INCOME****Years
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**Operating
                  Revenues
              
              **$**
              **81,061,457**
              
              **$**
              **74,613,305**
              
              $
              70,991,146Operating
                  Expenses:Operations
              
              
              **39,797,755**
              
              
              **38,635,382**
              
              
              36,519,355Maintenance
              
              
              **3,546,677**
              
              
              **3,519,914**
              
              
              3,464,036Depreciation
              
              
              **7,060,360**
              
              
              **6,460,241**
              
              
              5,846,191Other
                  Taxes
              
              
              **9,338,404**
              
              
              **8,779,325**
              
              
              8,228,354Total
                  Operating Expenses
              
              
              **59,743,196**
              
              
              **57,394,862**
              
              
              54,057,936Operating
                  Income
              
              
              **21,318,261**
              
              
              **17,218,443**
              
              
              16,933,210Other
                  Income (Expense):Allowance
                  for Funds Used During Construction
              
              
              **632,366**
              
              
              **547,714**
              
              
              606,019Other
                  Income
              
              
              **159,288**
              
              
              **219,572**
              
              
              221,950Other
                  Expense
              
              
              **(17,977**
              **)**
              
              **(27,593**
              **)**
              
              (32,676
              )Total
                  Other Income, net
              
              
              **773,677**
              
              
              **739,693**
              
              
              795,293Interest
                  Charges
              
              
              **7,012,452**
              
              
              **6,244,671**
              
              
              5,468,576Income
                  before Income Taxes
              
              
              **15,079,486**
              
              
              **11,713,465**
              
              
              12,259,927Income
                  Taxes
              
              
              **5,040,591**
              
              
              **3,237,324**
              
              
              3,814,418Net
                  Income
              
              
              **10,038,895**
              
              
              **8,476,141**
              
              
              8,445,509Preferred
                  Stock Dividend Requirements
              
              
              **247,786**
              
              
              **251,286**
              
              
              254,786Earnings
                  Applicable to Common Stock
              
              **$**
              **9,791,109**
              
              **$**
              **8,224,855**
              
              $
              8,190,723Earnings
                  per share of Common Stock:Basic
              
              **$**
              **0.83**
              
              **$**
              **0.72**
              
              $
              0.74Diluted
              
              **$**
              **0.82**
              
              **$**
              **0.71**
              
              $
              0.73Average
                  Number ofCommon
                  Shares Outstanding :Basic
              
              
              **11,843,580**
              
              
              **11,444,785**
              
              
              11,079,835Diluted
              
              
              **12,174,720**
              
              
              **11,783,925**
              
              
              11,422,975Cash
                  Dividends Paid per Common Share
              
              **$**
              **0.683**
              
              **$**
              **0.673**
              
              $
              0.663See
                  Notes to Consolidated Financial Statements


32
 *Index*


**MIDDLESEX
                  WATER COMPANY****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**Twelve
                  Months Ended December 31,2006
              
              2005
              
              2004CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  Income
              
              $
              10,038,895
              
              $
              8,476,141
              
              $
              8,445,509Adjustments
                  to Reconcile Net Income toNet
                  Cash Provided by Operating Activities:Depreciation
                  and Amortization
              
              
              7,761,243
              
              
              7,159,670
              
              
              6,387,808Provision
                  for Deferred Income Taxes and ITC
              
              
              896,993
              
              
              164,873
              
              
              603,275Allowance
                  for Funds Used During Construction
              
              
              (632,366
              )
              
              (547,714
              )
              
              (606,019
              )Changes
                  in Assets and Liabilities:Accounts
                  Receivable
              
              
              (463,373
              )
              
              (1,758,076
              )
              
              (634,245
              )Unbilled
                  Revenues
              
              
              (275,658
              )
              
              (164,914
              )
              
              (337,925
              )Materials
                  & Supplies
              
              
              (46,261
              )
              
              (56,029
              )
              
              215,236Prepayments
              
              
              (301,366
              )
              
              (103,278
              )
              
              185,328Other
                  Assets
              
              
              (563,300
              )
              
              (151,166
              )
              
              (578,048
              )Operations
                  Contracts Receivable
              
              
              78,161
              
              
              -
              
              
              14,207Accounts
                  Payable
              
              
              (538,220
              )
              
              (17,933
              )
              
              1,224,406Accrued
                  Taxes
              
              
              197,004
              
              
              (323,227
              )
              
              528,715Accrued
                  Interest
              
              
              10,768
              
              
              165,831
              
              
              (107,508
              )Employee
                  Benefit Plans
              
              
              (83,679
              )
              
              709,988
              
              
              377,068Unearned
                  Revenue & Advanced Service Fees
              
              
              126,999
              
              
              86,471
              
              
              (215,698
              )Other
                  Liabilities
              
              
              (298,779
              )
              
              (143,704
              )
              
              56,913NET
                  CASH PROVIDED BY OPERATING ACTIVITIES
              
              
              15,907,061
              
              
              13,496,933
              
              
              15,559,022CASH
                  FLOWS FROM INVESTING ACTIVITIES:Utility
                  Plant Expenditures*
              
              
              (30,360,491
              )
              
              (25,287,735
              )
              
              (28,878,576
              )Cash
                  Surrender Value & Other Investments
              
              
              (154,527
              )
              
              (294,372
              )
              
              (273,837
              )Restricted
                  Cash
              
              
              (1,035,943
              )
              
              7,637,175
              
              
              (9,431,686
              )Preliminary
                  Survey & Investigation Charges
              
              
              (1,661,307
              )
              
              (742,635
              )
              
              348,589NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (33,212,268
              )
              
              (18,687,567
              )
              
              (38,235,510
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Redemption
                  of Long-term Debt
              
              
              (1,914,900
              )
              
              (1,214,521
              )
              
              (1,067,258
              )Proceeds
                  from Issuance of Long-term Debt
              
              
              5,016,234
              
              
              14,948,082
              
              
              18,995,153Net
                  Short-term Bank Borrowings (Repayments)
              
              
              (4,000,000
              )
              
              (7,000,000
              )
              
              (1,500,000
              )Deferred
                  Debt Issuance Expenses
              
              
              (27,858
              )
              
              (166,477
              )
              
              (65,219
              )Common
                  Stock Issuance Expense
              
              
              (238,405
              )
              
              -
              
              
              (379,534
              )Restricted
                  Cash
              
              
              (31,770
              )
              
              (162,774
              )
              
              -Proceeds
                  from Issuance of Common Stock
              
              
              28,087,507
              
              
              4,076,047
              
              
              15,055,874Payment
                  of Common Dividends
              
              
              (8,189,710
              )
              
              (7,690,462
              )
              
              (7,375,629
              )Payment
                  of Preferred Dividends
              
              
              (247,786
              )
              
              (251,286
              )
              
              (254,786
              )Construction
                  Advances and Contributions-Net
              
              
              1,694,145
              
              
              1,601,019
              
              
              297,045NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              20,147,457
              
              
              4,139,628
              
              
              23,705,646NET
                  CHANGES IN CASH AND CASH EQUIVALENTS
              
              
              2,842,250
              
              
              (1,051,006
              )
              
              1,029,158CASH
                  AND CASH EQUIVALENTS AT BEGINNING OF YEAR
              
              
              2,983,762
              
              
              4,034,768
              
              
              3,005,610CASH
                  AND CASH EQUIVALENTS AT END OF YEAR
              
              $
              5,826,012
              
              $
              2,983,762
              
              $
              4,034,768*Excludes
                  Allowance for Funds Used During Construction.SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH ACTIVITY:Utility
                  Plant received as Construction Advances and
                  Contributions
              
              $
              3,543,203
              
              $
              5,149,990
              
              $
              2,722,121SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOWS INFORMATION:Cash
                  Paid During the Year for:Interest
              
              $
              6,937,230
              
              $
              5,990,089
              
              $
              5,409,803Interest
                  Capitalized
              
              $
              (632,366
              )
              $
              (547,714
              )
              $
              (606,019
              )Income
                  Taxes
              
              $
              4,351,550
              
              $
              3,792,000
              
              $
              3,074,513See
                  Notes to Consolidated Financial Statements.


33
 *Index*


**MIDDLESEX
                  WATER COMPANY****CONSOLIDATED
                  STATEMENTS OF CAPITAL STOCK****AND
                  LONG-TERM DEBT****December
                  31,**
              
              **December
                  31,****2006**
              
              **2005**Common
                  Stock, No Par ValueShares
                  Authorized -  20,000,000Shares
                  Outstanding -  2006 - 13,168,081
              
              **$**
              **104,248,456**
              
              **$**
              **76,160,949**2005
                  - 11,584,499Retained
                  Earnings
              
              
              **25,001,295**
              
              
              **23,638,301**Accumulated
                  Other Comprehensive Income (Loss), net of tax
              
              
              **94,255**
              
              
              **(206,925**
              **)**TOTAL
                  COMMON EQUITY
              
              **$**
              **129,344,006**
              
              **$**
              **99,592,325**Cumulative
                  Preference Stock, No Par Value:Shares
                  Authorized - 100,000Shares
                  Outstanding - NoneCumulative
                  Preferred Stock, No Par ValueShares
                  Authorized - 139,497Convertible:Shares
                  Outstanding, $7.00 Series - 13,881
              
              **$**
              **1,457,505**
              
              **$**
              **1,457,505**Shares
                  Outstanding, $8.00 Series - 12,000
              
              
              **1,398,857**
              
              
              **1,398,857**Nonredeemable:Shares
                  Outstanding, $7.00 Series - 1,017
              
              
              **101,700**
              
              
              **101,700**Shares
                  Outstanding, $4.75 Series - 10,000
              
              
              **1,000,000**
              
              
              **1,000,000**TOTAL
                  PREFERRED STOCK
              
              **$**
              **3,958,062**
              
              **$**
              **3,958,062**Long-term
                  Debt8.05%,
                  Amortizing Secured Note, due December 20, 2021
              
              **$**
              **2,895,875**
              
              **$**
              **2,983,384**6.25%,
                  Amortizing Secured Note, due May 22, 2028
              
              
              **8,995,000**
              
              
              **9,415,000**6.44%,
                  Amortizing Secured Note, due August 25, 2030
              
              
              **6,626,667**
              
              
              **6,906,667**6.46%,
                  Amortizing Secured Note, due September 19, 2031
              
              
              **6,906,667**
              
              
              **7,000,000**4.22%,
                  State Revolving Trust Note, due December 31, 2022
              
              
              **738,773**
              
              
              **754,164**3.30%
                  to 3.60%, State Revolving Trust Note, due May 1, 2025
              
              
              **3,099,950**
              
              
              **3,018,254**3.49%,
                  State Revolving Trust Note, due January 25, 2027
              
              
              **598,144**
              
              
              **278,144**4.03%,
                  State Revolving Trust Note, due December 1, 2026
              
              
              **914,537**
              
              
              **-**4.00%
                  to 5.00%, State Revolving Trust Bond, due September 1,
                  2021
              
              
              **730,000**
              
              
              **760,000**0.00%,
                  State Revolving Fund Bond, due September 1, 2021
              
              
              **577,222**
              
              
              **614,436**First
                  Mortgage Bonds:5.20%,
                  Series S, due October 1, 2022
              
              
              **12,000,000**
              
              
              **12,000,000**5.25%,
                  Series T, due October 1, 2023
              
              
              **6,500,000**
              
              
              **6,500,000**6.40%,
                  Series U, due February 1, 2009
              
              
              **15,000,000**
              
              
              **15,000,000**5.25%,
                  Series V, due February 1, 2029
              
              
              **10,000,000**
              
              
              **10,000,000**5.35%,
                  Series W, due February 1, 2038
              
              
              **23,000,000**
              
              
              **23,000,000**0.00%,
                  Series X, due September 1, 2018
              
              
              **646,897**
              
              
              **700,280**4.25%
                  to 4.63%, Series Y, due September 1, 2018
              
              
              **820,000**
              
              
              **870,000**0.00%,
                  Series Z, due September 1, 2019
              
              
              **1,454,749**
              
              
              **1,567,367**5.25%
                  to 5.75%, Series AA, due September 1, 2019
              
              
              **1,890,000**
              
              
              **1,990,000**0.00%,
                  Series BB, due September 1, 2021
              
              
              **1,804,982**
              
              
              **1,926,956**4.00%
                  to 5.00%, Series CC, due September 1, 2021
              
              
              **2,090,000**
              
              
              **2,185,000**5.10%,
                  Series DD, due January 1, 2032
              
              
              **6,000,000**
              
              
              **6,000,000**0.00%,
                  Series EE, due September 1, 2024
              
              
              **7,482,432**
              
              
              **7,715,909**3.00%
                  to 5.50%, Series FF, due September 1, 2024
              
              
              **8,735,000**
              
              
              **8,920,000**0.00%,
                  Series GG, due August 1, 2026
              
              
              **1,750,000**
              
              
              **-**4.00%
                  to 5.00%, Series HH, due August 1, 2026
              
              
              **1,950,000**
              
              
              **-**SUBTOTAL
                  LONG-TERM DEBT
              
              
              **133,206,895**
              
              
              **130,105,561**Less:
                  Current Portion of Long-term Debt
              
              
              **(2,500,537**
              **)**
              
              **(1,930,617**
              **)**TOTAL
                  LONG-TERM DEBT
              
              **$**
              **130,706,358**
              
              **$**
              **128,174,944**See
                  Notes to Consolidated Financial Statements.


34
 *Index*


****MIDDLESEX
                        WATER COMPANY****
                      **CONSOLIDATED
                        STATEMENTS OF COMMON STOCKHOLDERS' EQUITY AND COMPREHENSIVE**
                      **INCOME**AccumulatedCommon
                    
                    Common
                    
                    
                    
                    OtherStock
                    
                    Stock
                    
                    Retained
                    
                    ComprehensiveShares
                    
                    Amount
                    
                    Earnings
                    
                    Income
                        (Loss)
                    
                    TotalBalance
                        at January 1, 2004
                    
                    
                    10,566,937
                    
                    $
                    56,924,028
                    
                    $
                    22,668,348
                    
                    $
                    50,808
                    
                    $
                    79,643,184Net
                        Income
                    
                    
                    
                    
                    
                    
                    
                    
                    8,445,509
                    
                    
                    
                    
                    
                    8,445,509Change
                        in Value of Equity Investments, Net of $3,000 Income
                        Tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (5,967
                    )
                    
                    (5,967
                    )Comprehensive
                        Income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,439,542Dividend
                        Reinvestment & Common Stock Purchase Plan
                    
                    
                    76,935
                    
                    
                    1,533,507
                    
                    
                    
                    
                    
                    
                    
                    
                    1,533,507Issuance
                        of Common Stock
                    
                    
                    700,000
                    
                    
                    13,257,000
                    
                    
                    
                    
                    
                    
                    
                    
                    13,257,000Restricted
                        Stock Award - Net
                    
                    
                    14,900
                    
                    
                    265,367
                    
                    
                    
                    
                    
                    
                    
                    
                    265,367Cash
                        Dividends on Common Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    (7,375,629
                    )
                    
                    
                    
                    
                    (7,375,629
                    )Cash
                        Dividends on Preferred Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    (254,786
                    )
                    
                    
                    
                    
                    (254,786
                    )Common
                        Stock Expenses
                    
                    
                    
                    
                    
                    
                    
                    
                    (379,534
                    )
                    
                    
                    
                    
                    (379,534
                    )Balance
                        at December 31, 2004
                    
                    
                    11,358,772
                    
                    $
                    71,979,902
                    
                    $
                    23,103,908
                    
                    $
                    44,841
                    
                    $
                    95,128,651Net
                        Income
                    
                    
                    
                    
                    
                    
                    
                    
                    8,476,141
                    
                    
                    
                    
                    
                    8,476,141Minimum
                        Pension Liability, Net of $135,000 Income Tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (262,205
                    )
                    
                    (262,205
                    )Change
                        in Value of Equity Investments, Net of $5,000 Income
                        Tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10,439
                    
                    
                    10,439Comprehensive
                        Income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,224,375Dividend
                        Reinvestment & Common Stock Purchase Plan
                    
                    
                    194,777
                    
                    
                    3,640,334
                    
                    
                    
                    
                    
                    
                    
                    
                    3,640,334Restricted
                        Stock Award - Net
                    
                    
                    18,950
                    
                    
                    435,713
                    
                    
                    
                    
                    
                    
                    
                    
                    435,713Preferred
                        Stock Conversion
                    
                    
                    12,000
                    
                    
                    105,000
                    
                    
                    
                    
                    
                    
                    
                    
                    105,000Cash
                        Dividends on Common Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    (7,690,462
                    )
                    
                    
                    
                    
                    (7,690,462
                    )Cash
                        Dividends on Preferred Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    (251,286
                    )
                    
                    
                    
                    
                    (251,286
                    )Balance
                        at December 31, 2005
                    
                    
                    11,584,499
                    
                    
                    76,160,949
                    
                    
                    23,638,301
                    
                    
                    (206,925
                    )
                    $
                    99,592,325Net
                        Income
                    
                    
                    
                    
                    
                    
                    
                    
                    10,038,895
                    
                    
                    
                    
                    
                    10,038,895Minimum
                        Pension Liability, Net of $135,000 Income Tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    262,205
                    
                    
                    262,205Change
                        in Value of Equity Investments, Net of $20,000 Income
                        Tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    38,975
                    
                    
                    38,975Comprehensive
                        Income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10,340,075Dividend
                        Reinvestment & Common Stock Purchase Plan
                    
                    
                    69,803
                    
                    
                    1,321,424
                    
                    
                    
                    
                    
                    
                    
                    
                    1,321,424Restricted
                        Stock Award - Net
                    
                    
                    18,779
                    
                    
                    275,383
                    
                    
                    
                    
                    
                    
                    
                    
                    275,383Issuance
                        of Common Stock
                    
                    
                    1,495,000
                    
                    
                    26,490,700
                    
                    
                    
                    
                    
                    
                    
                    
                    26,490,700Cash
                        Dividends on Common Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    (8,189,710
                    )
                    
                    
                    
                    
                    (8,189,710
                    )Cash
                        Dividends on Preferred Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    (247,786
                    )
                    
                    
                    
                    
                    (247,786
                    )Common
                        Stock Expenses
                    
                    
                    
                    
                    
                    
                    
                    
                    (238,405
                    )
                    
                    
                    
                    
                    (238,405
                    )Balance
                        at December 31, 2006
                    
                    
                    13,168,081
                    
                    $
                    104,248,456
                    
                    $
                    25,001,295
                    
                    $
                    94,255
                    
                    $
                    129,344,006See
                        Notes to Consolidated Financial Statements.





35
 *Index*




**Middlesex
      Water Company**


**Notes
      to Consolidated Financial Statements**





**Note
      1 - Summary of Significant Accounting Policies**





**(a)** Organization - Middlesex Water Company (Middlesex) is the parent company and
      sole shareholder of Tidewater Utilities, Inc. (Tidewater), Tidewater
      Environmental Services, Inc. (TESI), Pinelands Water Company (Pinelands Water)
      and Pinelands Wastewater Company (Pinelands Wastewater) (collectively,
      Pinelands), Utility Service Affiliates, Inc. (USA) and Utility Service
      Affiliates (Perth Amboy) Inc. (USA-PA). Southern Shores Water Company, LLC
      (Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh),
      are
      wholly-owned subsidiaries of Tidewater. The financial statements for Middlesex
      and its wholly-owned subsidiaries (the Company) are reported on a consolidated
      basis. All significant intercompany accounts and transactions have been
      eliminated.





Middlesex
      Water Company has operated as a water utility in New Jersey since 1897, and
      in
      Delaware, through our wholly-owned subsidiary, Tidewater, since 1992. We are
      in
      the business of collecting, treating, distributing and selling water for
      domestic, commercial, municipal, industrial and fire protection purposes. We
      also operate a New Jersey municipal water and wastewater system under contract
      and provide wastewater services in New Jersey and Delaware through our
      subsidiaries. We are regulated as to rates charged to customers for water and
      wastewater services in New Jersey and Delaware, as to the quality of services
      we
      provide and as to certain other matters. Only our USA, USA-PA and White Marsh
      subsidiaries are not regulated utilities.





**(b)** System
      of Accounts - Middlesex, Pinelands Water and Pinelands Wastewater maintain
      their
      accounts in accordance with the Uniform System of Accounts prescribed by the
      Board of Public Utilities of the State of New Jersey (BPU). Tidewater, TESI
      and
      Southern Shores maintain their accounts in accordance with the Public Service
      Commission of Delaware (PSC) requirements.





**(c)** Utility
      Plant is stated at original cost as defined for regulatory purposes. Property
      accounts are charged with the cost of betterments and major replacements of
      property. Cost includes direct material, labor and indirect charges for pension
      benefits and payroll taxes. The cost of labor, materials, supervision and other
      expenses incurred in making repairs and minor replacements and in maintaining
      the properties is charged to the appropriate expense accounts. At December
      31,
      2006, there was no event or change in circumstance that would indicate that
      the
      carrying amount of any long-lived asset was not recoverable.





**(d)** Depreciation is computed by each regulated member of the Company utilizing
      a
      rate approved by the applicable regulatory authority. The Accumulated Provision
      for Depreciation is charged with the cost of property retired, less salvage.
      The
      following table sets forth the range of depreciation rates for the major utility
      plant categories used to calculate depreciation for the years ended December
      31,
      2006, 2005 and 2004. These rates have been approved by either the BPU or
      PSC:





Source
                of Supply
            1.15%
                - 3.44%
            Transmission
                and Distribution (T&D):Pumping
            2.87%
                - 5.04%
            T&D
                - Mains
            1.10%
                - 3.13%Water
                Treatment
            2.71%
                - 7.64%
            T&D
                - Services
            2.12%
                - 2.81%General
                Plant
            2.08%
                - 17.84%
            T&D
                - Other
            1.61%
                - 4.63%





Non-regulated
      fixed assets consist primarily of an office building, furniture and fixtures,
      and transportation equipment. These assets are recorded at original cost and
      depreciation is calculated based on the estimated useful lives, ranging from
      3
      to 40 years.


36
 *Index*





**(e)** ** Customers’
      Advances for Construction *-* Water
      utility plant and/or cash advances are contributed to the Company by customers,
      real estate developers and builders in order to extend water service to their
      properties. These contributions are recorded as Customers’ Advances for
      Construction. Refunds on these advances are made by the Company in accordance
      with agreements with the contributing party and are based on either additional
      operating revenues related to the utility plant or as new customers are
      connected to and take service from the utility plant. After all refunds are
      made, any remaining balance is transferred to Contributions in Aid of
      Construction.





Contributions
      in Aid of Construction - Contributions in Aid of Construction include direct
      non-refundable contributions of water utility plant and/or cash and the portion
      of Customers’ Advances for Construction that become non-refundable.





Advances
      and Contributions are not depreciated in accordance with BPU and PSC
      requirements. In addition, these amounts reduce the investment base for purposes
      of setting rates.





**(f)** Allowance for Funds Used During Construction (AFUDC) - Middlesex and its
      regulated subsidiaries capitalize AFUDC, which represents the cost of financing
      projects during construction. AFUDC is added to the construction costs of
      individual projects exceeding specific cost and construction period thresholds
      established for each company and then depreciated along with the rest of the
      utility plant’s costs over its estimated useful life. For the years ended
      December 31, 2006, 2005 and 2004 approximately $0.6 million, $0.5 million and
      $0.6 million, respectively of AFUDC was added to the cost of construction
      projects. AFUDC is calculated using each company’s weighted cost of debt and
      equity as approved in their most recent respective regulatory rate order. The
      average AFUDC rate for the years ended December 31, 2006, 2005 and 2004 for
      Middlesex and Tidewater were 7.37% and 8.15%, respectively.





**(g)** Accounts
      Receivable - We record bad debt expense based on historical write-offs. The
      allowance for doubtful accounts was $0.3 million at December 31, 2006, and
      $0.2
      million at December 31, 2005 and 2004. The corresponding expense for the year
      ended December 31, 2006, 2005 and 2004 was $0.3 million, $0.2 million and $0.1
      million, respectively.





**(h)** Revenues
      - General metered customer’s bills for regulated water service are typically
      comprised of two components; a fixed service charge and a volumetric or
      consumption charge. Revenues from general metered service water customers,
      except Tidewater, include amounts billed in arrears on a cycle basis and
      unbilled amounts estimated from the last meter reading date to the end of the
      accounting period. The estimated unbilled amounts are determined by utilizing
      factors which include historical consumption usage and current climate
      conditions. Actual billings may differ from our estimates. Revenues are adjusted
      in the period that the difference is identified. Tidewater customers are billed
      in advance for their fixed service charge and these revenues are recognized
      as
      the service is provided to the customer.





Southern
      Shores is an unmetered system. Customers are billed a fixed service charge
      in
      advance at the beginning of each month and revenues are recognized as earned.
      Revenues from the City of Perth Amboy management contract are comprised of
      fixed
      and variable fees. Fixed fees, which have been set for the life of the contract,
      are billed monthly and recorded as earned. Variable fees, which are not
      significant, are recorded upon approval of the amount by the City of Perth
      Amboy.





USA
      bills
      customers on a quarterly or annual basis for its LineCare SM service
      line maintenance program. Quarterly amounts billed are recognized as earned.
      Amounts that are billed on an annual basis are deferred and recognized as
      revenue ratably over the year.


37
 *Index*


**(i)** Deferred
      Charges and Other Assets - Unamortized Debt Expense is amortized over the lives
      of the related issues. Restricted Cash represents proceeds from loans entered
      into through state financing programs and is held in trusts. The proceeds are
      restricted for specific capital expenditures and debt service
      requirements.





**(j)** Income
      Taxes - Middlesex files a consolidated federal income tax return for the Company
      and income taxes are allocated based on the separate return method. Investment
      tax credits have been deferred and are amortized over the estimated useful
      life
      of the related property.





**(k)** Statements of Cash Flows - For purposes of reporting cash flows, the Company
      considers all highly liquid investments with original maturity dates of three
      months or less to be cash equivalents. Cash and cash equivalents represent
      bank
      balances and money market funds with investments maturing in less than 90
      days.





**(l)** Use of
      Estimates - Conformity with accounting principles generally accepted in the
      United States of America requires management to make estimates and assumptions
      that affect the reported amounts in the financial statements. Actual results
      could differ from those estimates.





**(m)** Recent
      Accounting Pronouncements - In July 2006, the Financial Accounting Standards
      Board (FASB) issued FASB Interpretation No. 48 (FIN 48) “Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,”
to clarify certain aspects of accounting for uncertain tax positions, including
      recognition and measurement of those tax positions. This interpretation is
      effective for fiscal years beginning after December 15, 2006. The Company
      does not expect the adoption of this interpretation to materially impact the
      Company’s results of operations and financial condition.





In
      September 2006, the FASB issued Statement of Financial Accounting Standard
      (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
      Postretirement Plans,” (SFAS 158), which the Company has adopted for the year
      ended December 31, 2006. SFAS 158 requires recognition of the overfunded or
      underfunded status of defined benefit pension and other postretirement plans
      as
      an asset or liability on the balance sheet and recognition of changes in that
      funded status in the year in which the changes occur generally through
      comprehensive income. For an underfunded plan, the incremental liability to
      be
      recorded is the difference between the projected benefit obligation and the
      fair
      value of plan assets. SFAS No. 87, “Employers' Accounting for Pensions”
(SFAS 87) and SFAS No. 106, “Employers' Accounting for Postretirement
      Benefits Other Than Pensions” (SFAS 106) allowed for deferred recognition
      of this liability through amortization of this difference over time. Under
      SFAS
      158, actuarial gains and losses and prior service costs and credits that arise
      during the period but, pursuant to SFAS 87 and SFAS 106 were not yet
      recognized as components of net periodic benefit cost, will be recognized as
      a
      component of Other Comprehensive Income (net of tax). SFAS 158 also recognizes
      an adjustment to the beginning balance of retained earnings (net of tax) for
      any
      transition obligation remaining from the initial application of SFAS 87
      and SFAS 106. Such amounts subsequently will be amortized as a component of
      net periodic benefit cost. See Note 7 - Employee Benefits for additional
      disclosures.




In
      December 2004, the FASB issued SFAS No.123(R), “Share-Based
      Payment” (SFAS 123(R)), which replaces SFAS No. 123, “Accounting for Stock-Based
      Compensation” (SFAS 123), and supersedes APB Opinion No. 25, “Accounting
      for Stock Issued to Employees”. The Statement requires that the cost resulting
      from all share-based payment transactions be recognized in the financial
      statements. The Statement also establishes fair value as the measurement
      objective in accounting for share-based payment arrangements and requires all
      entities to apply a fair-value-based measurement method in accounting for
      share-based payment transactions with employees, except for equity instruments
      held by employee share ownership plans. This statement was originally effective
      for quarters beginning after June 15, 2005, however on April 14, 2005, the
      Securities and Exchange Commission adopted a rule which makes the provisions
      of
      SFAS 123(R) effective for the first annual reporting period beginning after
      June
      15, 2005 (January 1, 2006 for the Company). The




38
 *Index*




Company previously
      recognized compensation expense at fair value for stock-based payment awards
      in
      accordance with SFAS No. 123 “Accounting for Stock-Based Compensation,” and the
      adoption of this standard did not have a material impact on its financial
      position, results of operations, or cash flows.




**(n)** Other
      Comprehensive Income - Total comprehensive income includes changes in equity
      that are excluded from the consolidated statements of income and are recorded
      into a separate section of capitalization on the consolidated balance sheets.
      The Company’s accumulated other comprehensive income shown on the consolidated
      balance sheets consists of unrealized gains on investment holdings.





**(o)** Regulatory Accounting - We maintain our books and records in accordance with
      accounting principles generally accepted in the United States of America.
      Middlesex and certain of its subsidiaries, which account for 89% of Operating
      Revenues and 98% of Total Assets, are subject to regulation in the state in
      which they operate. Those companies are required to maintain their accounts
      in
      accordance with regulatory authorities’ rules and guidelines, which may differ
      from other authoritative accounting pronouncements. In those instances, the
      Company follows the guidance provided in SFAS No. 71, “Accounting for the
      Effects of Certain Types of Regulation.”





**(p)** Pension
      Plan - We maintain a noncontributory defined benefit pension plan which covers
      substantially all employees with more than 1,000 hours of service, and who
      were
      hired as of March 31, 2007. The discount rate utilized for determining pension
      costs decreased from 6.00% for the year ended December 31, 2004 to 5.88% for
      the
      year ended December 31, 2005 to 5.52% for the year ended December 31, 2006.
      Future actual pension expense will depend on future investment performance,
      changes in future discount rates and various other factors related to the
      population participating in the pension plans.





**Note
      2 - Rate and Regulatory Matters**





On
      April
      28, 2006, Tidewater filed for a $5.5 million, or 38.6%, base rate increase
      with
      the Delaware Public Service Commission (PSC). The request is intended to recover
      increased costs of operations, maintenance and taxes, as well as capital
      investment of approximately $23.8 million since rates were last established
      in
      March 2005. Since June 27, 2006, Tidewater has been billing and recognizing
      additional revenues through a 15% interim rate increase subject to refund as
      allowed under PSC regulations. A settlement was reached amongst the parties
      which concluded that a 26.9% overall increase in base rates would be
      implemented. The PSC approved the settlement and the remaining 11.9% increase
      was put into effect on February 28, 2007.





Effective
      April 13, 2006, Pinelands Water and Pinelands Wastewater received approval
      from
      the New Jersey Board of Public Utilities (BPU) for base rate increases of 7.02%
      and 0.98%, respectively. These increases represent a total base rate increase
      of
      approximately $0.1 million for Pinelands to offset increased costs associated
      with capital improvements, and the operation and maintenance of their systems.





In
      accordance with the tariff established for Southern Shores, an annual rate
      increase of 3% was implemented on January 1, 2007. Under the terms of a contract
      with Southern Shores Homeowners Association, the increase cannot exceed the
      lesser of the regional Consumer Price Index or 3%.




We
      have
      recorded certain costs as regulatory assets because we expect full recovery
      of,
      or are currently recovering, these costs in the rates we charge customers.
      These
      deferred costs have been excluded from rate base and, therefore, we are not
      earning a return on the unamortized balances. These items are detailed as
      follows:








39
 *Index*




(Thousands
                ofDollars)
              Years
                Ended December 31,Regulatory
                Assets
            
            2006
            
            2005
            
            Remaining
              RecoveryPeriodsPostretirement
                Benefits
            
            $
            11,130
            
            $
            610
            
            VariousIncome
                Taxes
            
            
            6,813
            
            
            6,167
            
            VariousTank
                Painting
            
            
            275
            
            
            352
            
            3-9
                yearsRate
                Cases and Other
            
            
            124
            
            
            340
            
            Up
                to 3 yearsTotal
            
            $
            18,342
            
            $
            7,469





Postretirement
      benefits include pension and other postretirement benefits that have been
      recorded on the Consolidated Balance Sheet upon adoption of SFAS 158 as of
      December 31, 2006. These amounts represent obligations in excess of current
      funding, which the Company believes will be fully recovered in rates set by
      the
      regulatory authorities.





The
      recovery period for income taxes is dependent upon when the temporary
      differences between the tax and book treatment of various items
      reverse.





The
      Company uses composite depreciation rates for its regulated utility assets,
      which is currently an acceptable method under generally accepted accounting
      principles and is widely used in the utility industry. Historically, under
      the
      composite depreciation method, the anticipated costs of removing assets upon
      retirement are provided for over the life of those assets as a component of
      depreciation expense. The Company recovers certain asset retirement costs
      through rates charged to customers as an approved component of deprecation
      expense. As of December 31, 2006 and 2005, the Company has approximately $6.2
      million and $5.6 million, respectively, of expected costs of removal recovered
      currently in rates in excess of actual costs incurred. These amounts are
      recorded as regulatory liabilities.





The
      Company is recovering in current rates acquisition premiums totaling $0.8
      million over the remaining lives of the underlying Utility Plant. These deferred
      costs have been included in rate base as utility plant and a return is being
      earned on the unamortized balances during the recovery periods.









40
 *Index*




**Note
      3 - Income Taxes**







Income
      tax expense differs from the amount computed by applying the statutory rate
      on
      book income subject to tax for the following reasons:







Years
                Ended December 31,
              (Thousands
                of Dollars)2006
            
            2005
            
            2004Income
                Tax at Statutory Rate
            
            $
            5,155
            
            $
            3,982
            
            $
            4,168Tax
                Effect of:Utility
                Plant Related
            
            
            (338
            )
            
            (899
            )
            
            (500
            )State
                Income Taxes - Net
            
            
            257
            
            
            176
            
            
            167Employee
                Benefits
            
            
            (48
            )
            
            (25
            )
            
            (25
            )Other
            
            
            15
            
            
            3
            
            
            4Total
                Income Tax Expense
            
            $
            5,041
            
            $
            3,237
            
            $
            3,814





Income
      tax expense is comprised of the following:





Current:Federal
            
            $
            3,846
            
            $
            2,889
            
            $
            3,128State
            
            
            298
            
            
            183
            
            
            83Deferred:Federal
            
            
            884
            
            
            160
            
            
            512State
            
            
            92
            
            
            84
            
            
            170Investment
                Tax Credits
            
            
            (79
            )
            
            (79
            )
            
            (79
            )Total
                Income Tax Expense
            
            $
            5,041
            
            $
            3,237
            
            $
            3,814





The
      statutory review period for income tax returns for the years prior to 2003
      has
      been closed.





Deferred
      income taxes reflect the net tax effect of temporary differences between the
      carrying amounts of assets and liabilities for financial purposes and the
      amounts used for income tax purposes. The components of the net deferred tax
      liability are as follows:




Years
                Ended December 31,
              (Thousands
                of Dollars)2006
            
            2005Utility
                Plant Related
            
            $
            23,656
            
            $
            21,827Customer
                Advances
            
            
            (4,189
            )
            
            (4,250
            )Employee
                Benefits
            
            
            (3,515
            )
            
            (3,210
            )Other
            
            
            (173
            )
            
            (70
            )Total
                Deferred Tax Liability
            
            $
            15,779
            
            $
            14,297







41
 *Index*


**Note
      4 - Commitments and Contingent Liabilities**





*Guarantees
      -* USA-PA
      operates the City of Perth Amboy’s (Perth Amboy) water and wastewater systems
      under a service contract agreement through June 30, 2018. The agreement was
      effected under New Jersey’s Water Supply Public/Private Contracting Act and the
      New Jersey Wastewater Public/Private Contracting Act. Under the agreement,
      USA-PA receives a fixed fee and a variable fee based on increased system
      billing. Scheduled fixed fee payments for 2006, 2005 and 2004 were $7.6 million,
      $7.4 million and $7.4 million, respectively. The fixed fees will increase over
      the term of the contract to $10.2 million.





In
      connection with the agreement, Perth Amboy, through the Middlesex County
      Improvement Authority, issued approximately $68.0 million in three series of
      bonds. Middlesex guaranteed one of those series of bonds, designated the Series
      C Serial Bonds, in the principal amount of approximately $26.3 million. Perth
      Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have
      various maturity dates with the final maturity date on September 1, 2015. As
      of
      December 31, 2006, approximately $23.4 million of the Series C Serial Bonds
      remained outstanding.





We
      are
      obligated to perform under the guarantee in the event notice is received from
      the Series C Serial Bonds trustee of an impending debt service deficiency.
      If
      Middlesex funds any debt service obligations as guarantor, there is a provision
      in the agreement that requires Perth Amboy to reimburse us. There are other
      provisions in the agreement that we believe make it unlikely that we will be
      required to perform under the guarantee, such as scheduled annual rate increases
      for water and wastewater services as well as rate increases due to unforeseen
      circumstances. In the event revenues from customers could not satisfy the
      reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which
      could be used to raise the needed amount.





*Water
      Supply* -
      Middlesex has an agreement with the New Jersey Water Supply Authority (NJWSA)
      for the purchase of untreated water through November 30, 2023, which provides
      for an average purchase of 27 million gallons a day (mgd). Pricing is set
      annually by the NJWSA through a public rate making process. The agreement has
      provisions for additional pricing in the event Middlesex overdrafts or exceeds
      certain monthly and annual thresholds.





Middlesex
      also has an agreement with a non-affiliated regulated water utility for the
      purchase of treated water. This agreement, which expires February 27, 2011,
      provides for the minimum purchase of 3 mgd of treated water with provisions
      for
      additional purchases.





Purchased
      water costs are shown below:




(Millions
                of Dollars)
              Years
                Ended December 31,Purchased
                Water
            
            2006
            
            2005
            
            2004Untreated
            
            $
            2.3
            
            $
            2.3
            
            $
            2.2Treated
            
            
            1.9
            
            
            1.9
            
            
            2.1Total
                Costs
            
            $
            4.2
            
            $
            4.2
            
            $
            4.3





*Construction* -The
      Company may spend up to $54.6 million in 2007, $81.6 million in 2008 and $58.0
      million in 2009 on its construction program. ** The
      development of these estimates is based in part upon projected housing
      development and sales in Delaware.





*Litigation
      -* In July
      2005, Tidewater received a notice of violation and request for corrective action
      issued by the Delaware Fire Marshal regarding the alleged failure of one of
      the
      community water systems operated by Tidewater to meet Delaware fire protection
      requirements. Tidewater appealed the Fire Marshal’s decision with the Delaware
      State Fire Prevention Commission (the “SFPC”) and, in November 2005, the SFPC
      denied


42
 *Index*


Tidewater’s
      appeal. In December 2005, Tidewater filed an appeal of the SFPC’s decision with
      the Sussex County Superior Court in Delaware, which is still pending. There
      are
      approximately 67 of our other systems that may not meet the Delaware Fire
      Marshal’s recent interpretation of the fire protection requirements. If the
      Delaware Fire Marshal’s interpretation of the regulations is upheld upon appeal,
      we may be required to make corrections to the system at issue and the Delaware
      Fire Marshal could issue notices of violation and requests for corrective action
      for some or all of the approximately 67 other community systems. At this time,
      we cannot predict how many community water systems would ultimately require
      corrective action if our appeal is unsuccessful nor can we predict the timing
      and the cost of any required corrective actions. We will apply to the PSC to
      increase base rates to recover the costs of any such corrective actions.
      However, if corrective actions need to be taken at several community water
      systems, our costs could be significant, and to the extent the PSC does not
      approve rate increases to offset these costs, or if there is a significant
      delay
      in receiving approval for such rate increases, such costs could have a material
      adverse effect on our operating results.





The
      Court
      action is currently on hold while the parties, with the assistance of a
      mediator, have met in an attempt to resolve as many open issues as possible.
      If
      any significant issues remain open after these discussions, they will be
      referred back to the Court for ultimate decision.





The
      Company is a defendant in lawsuits in the normal course of business. We believe
      the resolution of pending claims and legal proceedings will not have a material
      adverse effect on the Company’s consolidated financial statements.





*Change
      in Control Agreements* - The
      Company has Change in Control Agreements with certain of its officers that
      provide compensation and benefits in the event of termination of employment
      in
      connection with a change in control of the Company.





**Note
      5 - Short-term Borrowings**





Information
      regarding the Company’s short-term borrowings for the years ended December 31,
      2006 and 2005 is summarized below:




(Millions
                of Dollars)2006
            
            2005Established
                Lines at Year-End
            
            $
            37.0
            
            $
            40.0Maximum
                Amount Outstanding
            
            
            18.2
            
            
            16.0Average
                Outstanding
            
            
            9.5
            
            
            9.2Notes
                Payable at Year-End
            
            
            None
            
            
            4.0Weighted
                Average Interest Rate
            
            
            6.13
            %
            
            4.36
            %Weighted
                Average Interest Rate at Year-End
            
            
            None
            
            
            5.09
            %





Middlesex
      had no outstanding short-term borrowings as of December 31, 2006.





Interest
      rates for short-term borrowings are below the prime rate with no requirement
      for
      compensating balances.




**Note
      6 - Capitalization**




All
      the
      transactions discussed below related to the issuance of securities were approved
      by either the BPU or PSC, except where otherwise noted.


43
 *Index*


*Common
      Stock*


In
      November 2006, the Company sold and issued 1,495,000 shares of its common stock
      in a public offering that was priced at $18.46. The majority of the net proceeds
      of approximately $26.2 million were used to repay all of the Company’s
      short-term borrowings outstanding at that time. Remaining proceeds from the
      public offering will be used to fund a portion of the 2007 capital
      program.





The
      number of shares authorized under the Dividend Reinvestment and Common Stock
      Purchase Plan (DRP) is 1,700,000 shares. The cumulative number of shares issued
      under the DRP at December 31, 2006, is 1,581,646. The Company also has shares
      authorized and outstanding under a restricted stock plan, which is described
      in
      Note 7 - Employee Benefit Plans.





In
      the
      event dividends on the preferred stock are in arrears, no dividends may be
      declared or paid on the common stock of the Company. At December 31, 2006,
      no
      preferred stock dividends were in arrears.





*Preferred
      Stock*


If
      four
      or more quarterly dividends are in arrears, the preferred shareholders, as
      a
      class, are entitled to elect two members to the Board of Directors in addition
      to Directors elected by holders of the common stock. At December 31, 2006 and
      2005, 36,898 shares of preferred stock presently authorized were outstanding
      and
      there were no dividends in arrears.





The
      conversion feature of the no par $7.00 Series Cumulative and Convertible
      Preferred Stock allows the security holders to exchange one convertible
      preferred share for twelve shares of the Company's common stock. In addition,
      the Company may redeem up to 10% of the outstanding convertible stock in any
      calendar year at a price equal to the fair market value of twelve shares of
      the
      Company's common stock for each share of convertible stock redeemed. During
      September 2005, 1,000 shares of the no par $7.00 Series Cumulative and
      Convertible Preferred Stock was converted into 12,000 of common
      stock.





The
      conversion feature of the no par $8.00 Series Cumulative and Convertible
      Preferred Stock allows the security holders to exchange one convertible
      preferred share for 13.714 shares of the Company's common stock. The preferred
      shares are convertible into common stock at the election of the security holder
      or Middlesex.





*Long-term
      Debt*


In
      November 2006, Middlesex issued $3.7 million of first mortgage bonds through
      the
      New Jersey Environmental Infrastructure Trust under the New Jersey SRF program.
      The Company closed on the first mortgage bonds designated as Series GG and
      HH on
      November 4, 2006.





In
      May
      2006, Tidewater closed on a $1.0 million loan with the Delaware State Revolving
      Fund (SRF). The proceeds were used to fund capital improvements for one specific
      community water system in Delaware. The interest rate on the loan is 4.03%
      and
      will have a final maturity on December 1, 2026.





In
      July
      2005 Tidewater closed on a $2.0 million loan with the Delaware SRF. This loan
      allows, but does not obligate, Tidewater to draw down against a General
      Obligation Note for two specific projects over a two-year period ending in
      April
      2007. The interest rate on any draw-down will be set at 3.49%. In August 2005,
      Tidewater converted $7.0 million of short-term borrowings to a $7.0 million
      mortgage-type loan to be repaid over a term of 25 years. This loan bears
      interest at 6.44%. In September 2005, Tidewater closed on another $7.0 million
      mortgage-type loan. This loan bears interest at 6.46% and is to be repaid over
      a
      term of 26 years.





First
      Mortgage Bonds Series S through W and Series DD are term bonds with single
      maturity dates. With the exception of $15.0 million for repayment for the First
      Mortgage Bond Series U due in 2009, principal


44
 *Index*


repayments
      for the First Mortgage Bonds extend beyond 2011. The aggregate annual principal
      repayment obligations for all other long-term debt are shown below:




(Millions
                of Dollars)Year
            
            Annual
                Maturities2007
            
            $2.52008
            
            $2.72009
            
            $2.72010
            
            $2.82011
            
            $2.8




The
      weighted average interest rate on all long-term debt at December 31, 2006 and
      2005 was 5.28% and 5.36%, respectively. Except for the Amortizing Secured Notes
      and Series U First Mortgage Bonds, all of the Company’s outstanding debt has
      been issued through the New Jersey Economic Development Authority ($57.5
      million), the New Jersey Environmental Infrastructure Trust program ($29.9
      million) and the SRF program ($5.4 million).




Restricted
      cash includes proceeds from the Series Y, AA, BB, CC, EE, FF, GG, and HH First
      Mortgage Bonds and State Revolving Trust Bonds issuances. These funds are held
      in trusts and restricted for specific capital expenditures and debt service
      requirements. Series GG and HH proceeds can only be used for the 2007 main
      cleaning and cement lining program. All other bond issuance balances in
      restricted cash are for debt service requirements.




Substantially
      all of the Utility Plant of the Company is subject to the lien of its mortgage,
      which also includes debt service and capital ratio covenants, certain
      restrictions as to cash dividend payments and other distributions on common
      stock. The Company is in compliance with all of its mortgage covenants and
      restrictions.




*Earnings
      Per Share*


The
      following table presents the calculation of basic and diluted earnings per
      share
      (EPS) for the three years ended December 31, 2006. Basic EPS is computed on
      the
      basis of the weighted average number of shares outstanding. Diluted EPS assumes
      the conversion of both the Convertible Preferred Stock $7.00 Series and $8.00
      Series.




(In
                Thousands, Except per Share Amounts)2006
            
            2005
            
            2004Basic:
            Income
            
            Shares
            
            Income
            
            Shares
            
            Income
            
            SharesNet
                Income
            
            $
            10,039
            
            
            11,844
            
            $
            8,476
            
            
            11,445
            
            $
            8,446
            
            
            11,080Preferred
                Dividend
            
            
            (248
            )
            
            (251
            )
            
            
            (255
            )Earnings
                Applicable to Common Stock
            
            $
            9,791
            
            
            11,844
            
            $
            8,225
            
            
            11,445
            
            $
            8,191
            
            
            11,080Basic
                EPS
            
            $
            0.83
            
            
            
            
            $
            0.72
            
            
            
            
            $
            0.74Diluted:Earnings
                Applicable to Common Stock
            
            $
            9,791
            
            
            11,844
            
            $
            8,225
            
            
            11,445
            
            $
            8,191
            
            
            11,080$7.00
                Series Dividend
            
            
            97
            
            
            167
            
            
            101
            
            
            175
            
            
            104
            
            
            179$8.00
                Series Dividend
            
            
            96
            
            
            164
            
            
            96
            
            
            164
            
            
            96
            
            
            164Adjusted
                Earnings Applicable to Common Stock
            
            $
            9,984
            
            
            12,175
            
            $
            8,422
            
            
            11,784
            
            $
            8,391
            
            
            11,423Diluted
                EPS
            
            $
            0.82
            
            
            
            
            $
            0.71
            
            
            
            
            $
            0.73





45
 *Index*


*Fair
      Value of Financial Instruments*


The
      following methods and assumptions were used by the Company in estimating its
      fair value disclosure for financial instruments for which it is practicable
      to
      estimate that value. The carrying amounts reflected in the consolidated balance
      sheets for cash and cash equivalents, marketable securities, and trade
      receivables and payables approximate their respective fair values due to the
      short-term maturities of these instruments. The fair value of the Company’s
      long-term debt relating to first mortgage bonds is based on quoted market prices
      for similar issues. The carrying amount and fair market value of the Company’s
      bonds were as follows:




(Thousands
                of Dollars)
              At
                December 31,2006
            
            2005Carrying
            
            Fair
            
            Carrying
            
            FairAmount
            
            Value
            
            Amount
            
            ValueFirst
                Mortgage Bonds
            
            $
            101,124
            
            $
            103,083
            
            $
            98,376
            
            $
            101,080State
                Revolving Bonds
            
            $
            1,307
            
            $
            1,340
            
            $
            1,374
            
            $
            1,402





For
      other
      long-term debt for which there was no quoted market price, it was not
      practicable to estimate their fair value. The carrying amount of these
      instruments at December 31, 2006 and 2005 was $30.8 million and $30.3 million,
      respectively. Customer advances for construction have a carrying amount of
      $19.2
      million and $17.2 million at December 31, 2006 and 2005, respectively. Their
      relative fair values cannot be accurately estimated since future refund payments
      depend on several variables, including new customer connections, customer
      consumption levels and future rate increases.




**Note
      7 - Employee Benefit Plans**




*Pension*


The
      Company has a noncontributory defined benefit pension plan, which covers
      substantially all employees with more than 1,000 hours of service. Employees
      hired after March 31, 2007 are not eligible to participate in this plan,
      but will be able to participate in a defined contribution plan that provides
      an
      annual contribution at the discretion of the Company based upon a percentage
      of
      the participants’ compensation. Eligibility requirements for the defined
      contribution plan are the same as the defined benefit plan. In addition, the
      Company maintains an unfunded supplemental pension plan for its executive
      officers. The Accumulated Benefit Obligation for all pension plans at December
      31, 2006 was $22.1 million.





*Postretirement
      Benefits Other Than Pensions*


The
      Company has a postretirement benefit plan other than pensions for substantially
      all of its retired employees. Employees hired after March 31, 2007 are not
      eligible to participate in this plan. Coverage includes healthcare and life
      insurance. Retiree contributions are dependent on credited years of service.
      Accrued retirement benefit costs are recorded each year.





The
      Company has recognized a deferred regulatory asset relating to the difference
      between the accrued retirement benefit costs and actual cash paid for plan
      premiums in years prior to 1998. Included in the regulatory asset is a
      transition obligation from adopting SFAS No.106, “Employers’ Accounting for
      Postretirement Benefits Other than Pensions,” on January 1, 1993. In addition to
      the recognition of annual accrued retirement benefit costs in rates, Middlesex
      is also recovering the transition obligation over 15 years. The regulatory
      assets at December 31, 2006 and 2005 were $0.5 million and $0.6 million,
      respectively.





The
      Company adopted SFAS 158 on December 31, 2006. Because the Company is subject
      to
      regulation in the states in which it operates, it is required to maintain its
      accounts in accordance with the regulatory authority’s


46
 *Index*


rules
      and
      guidelines, which may differ from other authoritative accounting pronouncements.
      In those instances, the Company follows the guidance of SFAS No. 71, “Accounting
      for the Effects of Certain Types of Regulation,” (SFAS 71). Based on prior
      regulatory practice, and in accordance with the guidance provided by SFAS 71,
      the Company recorded underfunded pension and postretirement obligations, which
      otherwise would be recognized as Other Comprehensive Income as of December
      31,
      2006 under SFAS 158, as a Regulatory Asset, and expects to recover those costs
      in rates charged to customers. The adoption of this standard had no impact
      on
      results of operations or cash flows.





The
      following table summarizes the effect of adopting SFAS 158 on the Company’s
      Consolidated Balance Sheet as of December 31, 2006.





Assets:
            
            Pre-
              Adoption
            
            SFAS
                158
              Adoption
            
            Post-
              AdoptionRegulatory
                Assets - Employee Benefits
            
            $
            524
            
            $
            10,606
            
            $
            11,130Deferred
                Charges and Other Assets- Employee Benefits
            
            
            214
            
            
            (214
            )
            
            -Liabilities
                and Equity:Employee
                Benefit Plans
            
            
            6,567
            
            
            10,129
            
            
            16,696





The
      Company uses a December 31 measurement date for all of its employee benefit
      plans. The table below sets forth information relating to the Company’s pension
      plans and other postretirement benefits for 2006 following the disclosure
      requirements of SFAS 158 and for 2005 following the disclosure requirements
      prior to the adoption of SFAS 158.





47
 *Index*




(Thousands
                of Dollars)
              Years
                Ended December 31,Pension
                Benefits
            
            Other
                Benefits2006
            
            2005
            
            2006
            
            2005Reconciliation
                of Projected Benefit ObligationBeginning
                Balance
            
            $
            29,666
            
            $
            26,099
            
            $
            15,247
            
            $
            11,133Service
                Cost
            
            
            1,311
            
            
            1,126
            
            
            756
            
            
            621Interest
                Cost
            
            
            1,703
            
            
            1,559
            
            
            804
            
            
            771Actuarial
                (Gain)/Loss
            
            
            544
            
            
            2,141
            
            
            (1,655
            )
            
            3,130Benefits
                Paid
            
            
            (1,496
            )
            
            (1,259
            )
            
            (454
            )
            
            (408
            )Ending
                Balance
            
            $
            31,728
            
            $
            29,666
            
            $
            14,698
            
            $
            15,247Reconciliation
                of Plan Assets at Fair ValueBeginning
                Balance
            
            $
            20,338
            
            $
            19,510
            
            $
            4,666
            
            $
            3,430Actual
                Return on Plan Assets
            
            
            2,578
            
            
            885
            
            
            1,045
            
            
            225Employer
                Contributions
            
            
            1,608
            
            
            1,202
            
            
            1,444
            
            
            1,419Benefits
                Paid
            
            
            (1,496
            )
            
            (1,259
            )
            
            (454
            )
            
            (408
            )Ending
                Balance
            
            $
            23,028
            
            $
            20,338
            
            $
            6,701
            
            $
            4,666Funded
                Status
            
            $
            (8,700
            )
            $
            (9,328
            )
            $
            (7,997
            )
            $
            (10,581
            )Amounts
                Not Recognized in the Consolidated Balance SheetsUnrecognized
                Net Transition Obligation
            
            
            -
            
            
            -
            
            
            -
            
            
            947Unrecognized
                Net Actuarial (Gain)/Loss
            
            
            -
            
            
            5,163
            
            
            -
            
            
            7,533Unrecognized
                Prior Service Cost
            
            
            -
            
            
            81
            
            
            -
            
            
            (3
            )Net
                Amount Recognized
            
            $
            (8,700
            )
            $
            (4,084
            )
            $
            (7,997
            )
            $
            (2,104
            )Amounts
                Recognized in the Consolidated Balance Sheets consist of:Accrued
                Benefit Cost
            
            $
            -
            
            $
            (4,084
            )
            $
            -
            
            $
            (2,104
            )Additional
                Minimum Liability
            
            
            -
            
            
            (476
            )
            
            -
            
            
            -Intangible
                Asset
            
            
            -
            
            
            79
            
            
            -
            
            
            -Accumulated
                Other Comprehensive Income (pre-tax)
            
            
            -
            
            
            397
            
            
            -
            
            
            -Current
                Liability
            
            
            (308
            )
            
            -
            
            
            -
            
            
            -Noncurrent
                Liability
            
            
            (8,392
            )
            
            -
            
            
            (7,997
            )
            
            -Net
                Liability Recognized
            
            $
            (8,700
            )
            $
            (4,084
            )
            $
            (7,997
            )
            $
            (2,104
            )Separate
                Disclosure for Plans with Accumulated Benefit Obligation in Excess
                of Plan
                Assets:Projected
                Benefit Obligation
            
            $
            -
            
            $
            25,822Accumulated
                Benefit Obligation
            
            
            -
            
            
            21,500Fair
                Value of Plan Assets
            
            
            -
            
            
            20,338


48
 *Index*




(Thousands
                of Dollars)
              Years
                Ended December 31,Pension
                Benefits
            
            Other
                Benefits2006
            
            2005
            
            2004
            
            2006
            
            2005
            
            2004Components
                of Net Periodic Benefit CostService
                Cost
            
            $
            1,311
            
            $
            1,126
            
            $
            746
            
            $
            756
            
            $
            622
            
            $
            426Interest
                Cost
            
            
            1,703
            
            
            1,559
            
            
            1,387
            
            
            804
            
            
            771
            
            
            580Expected
                Return on Plan Assets
            
            
            (1,608
            )
            
            (1,547
            )
            
            (1,492
            )
            
            (330
            )
            
            (275
            )
            
            (213
            )Amortization
                of Net Transition Obligation
            
            
            -
            
            
            -
            
            
            -
            
            
            135
            
            
            135
            
            
            135Amortization
                of Net Actuarial (Gain)/Loss
            
            
            258
            
            
            49
            
            
            -
            
            
            443
            
            
            482
            
            
            292Amortization
                of Prior Service Cost
            
            
            11
            
            
            92
            
            
            92
            
            
            -
            
            
            -
            
            
            -Net
                Periodic Benefit Cost
            
            $
            1,675
            
            $
            1,279
            
            $
            733
            
            $
            1,808
            
            $
            1,735
            
            $
            1,220





2006
            
            2005
            
            2004
            
            2006
            
            2005
            
            2004Weighted
                Average Assumptions:Expected
                Return on Plan Assets
            
            
            8.00
            %
            
            8.00
            %
            
            8.00
            %
            
            7.50
            %
            
            7.50
            %
            
            7.50
            %Discount
                Rate for:Benefit
                Obligation
            
            
            5.89
            %
            
            5.52
            %
            
            5.88
            %
            
            5.89
            %
            
            5.52
            %
            
            5.88
            %Benefit
                Cost
            
            
            5.52
            %
            
            5.88
            %
            
            6.00
            %
            
            5.52
            %
            
            5.88
            %
            
            6.00
            %Compensation
                Increase for:Benefit
                Obligation
            
            
            3.50
            %
            
            3.50
            %
            
            3.50
            %
            
            3.50
            %
            
            3.50
            %
            
            3.50
            %Benefit
                Cost
            
            
            3.50
            %
            
            3.50
            %
            
            3.50
            %
            
            3.50
            %
            
            3.50
            %
            
            3.50
            %





The
      compensation increase assumption for Other Benefits is attributable to life
      insurance provided to qualifying employees upon their retirement. The insurance
      coverage will be determined based on the employee’s base compensation as of
      their retirement date.





A
      9.0%
      annual rate of increase in the per capita cost of covered healthcare benefits
      was assumed for 2006 and assumed to decline by 1.0% per year through 2008 and
      by
      0.5% per year to 5% by year 2011. A one-percentage point change in assumed
      healthcare cost trend rates would have the following effects:





(Thousands
                of Dollars)
              1
                Percentage PointIncrease
            
            DecreaseEffect
                on Current Year’s Service and Benefit Cost
            
            $
            377
            
            $
            (282
            )Effect
                on Benefit Obligation
            
            
            2,719
            
            
            (2,113
            )





The
      following benefit payments, which reflect expected future service, are expected
      to be paid:





Year
            Pension
                Benefits
            
            Other
                Benefits2007
            
            $
            1,500
            
            $
            5022008
            
            
            1,568
            
            
            5242009
            
            
            1,539
            
            
            5642010
            
            
            1,547
            
            
            5832011
            
            
            1,612
            
            
            5992012-2016
            
            
            9,004
            
            
            3,536Totals
            
            $
            16,770
            
            $
            6,308





49
 *Index*


*Benefit
      Plans Assets*





The
      allocation of plan assets at December 31, 2006 and 2005, by asset category
      is as
      follows:


Pension
                Plan
            
            Other
                BenefitsAsset
                Category
            
            2006
            
            2005
            
            2006
            
            2005
            
            Target
            
            RangeEquity
                Securities
            
            
            60.0
            %
            
            63.7
            %
            
            48.5
            %
            
            56.3
            %
            
            60
            %
            
            30-65
            %Debt
                Securities
            
            
            36.9
            
            
            33.4
            
            
            33.0
            
            
            41.0
            
            
            38
            %
            
            25-70
            %Cash
            
            
            3.1
            
            
            2.9
            
            
            18.5
            
            
            2.7
            
            
            2
            %
            
            0-10
            %Total
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %





Two
      outside investment firms each manage a portion of the pension plan asset
      portfolio. One of those investment firms also manages the other postretirement
      benefits assets. Quarterly meetings are held between the Company’s Pension
      Committee of the Board of Directors and the investment managers to review their
      performance and asset allocation. If the actual asset allocation is outside
      the
      targeted range, the Pension Committee reviews current market conditions and
      advice provided by the investment managers to determine the appropriateness
      of
      rebalancing the portfolio.





The
      objective of the Company is to maximize the long-term return on benefit plan
      assets, relative to a reasonable level of risk, maintain a diversified
      investment portfolio and maintain compliance with the Employee Retirement Income
      Security Act of 1974. The expected long-term rate of return is based on the
      various asset categories in which plan assets are invested and the current
      expectations and historical performance for these categories.





Equity
      securities include Middlesex common stock in the amounts of $0.7 million (3.2%
      of total plan assets) and $0.7 million (3.3% of total plan assets) at December
      31, 2006 and 2005, respectively.





For
      the
      pension plan, Middlesex made total cash contributions of $1.6 million in 2006
      and expects to make cash contributions of approximately $1.8 million in
      2007.





For
      the
      postretirement health benefit plan, Middlesex made cash contributions of $1.4
      million in 2006 and expects to make contributions of approximately $1.6 million
      in 2007.





*401(k)
      Plan*


The
      Company has a 401(k) defined contribution plan, which covers substantially
      all
      employees with more than 1,000 hours of service. Under the terms of the Plan,
      the Company matches 100% of a participant’s contributions, which do not exceed
      1% of a participant’s compensation, plus 50% of a participant’s contributions
      exceeding 1%, but not more than 6%. The Company’s matching contributions were
      $0.3 million for each of the years ended December 31, 2006, 2005 and 2004.
      As
      described above, employees hired after March 31, 2007 may be eligible to
      participate in a defined contribution plan that intends to provide an annual
      cash contribution to each participant’s account based upon a percentage of the
      eligible participants’ compensation. The timing and extent of any contributions
      are at the discretion of the Company.





*Stock-Based
      Compensation*


The
      Company maintains a Restricted Stock Plan, under which 63,837 shares of the
      Company's common stock were held in escrow by the Company as of December
      31, 2006 for key employees. Such stock is subject to an agreement requiring
      forfeiture by the employee in the event of termination of employment within
      five
      years of the award other than as a result of retirement, death, disability
      or
      change in control. The maximum number of shares authorized for grant under
      this
      plan is 240,000 shares.


50
 *Index*


The
      Company recognizes compensation expense at fair value for the restricted stock
      awards in accordance with SFAS No.123(R), “Share-Based Payment.”
Compensation expense is determined by the market value of the stock on the
      date
      of the award and is being amortized over a five-year period.





The
      following table presents information on the Restricted Stock Plan:





Shares
            
            Unearned
              Compensation
            
            Weighted
              Average
              Grant
                PriceBalance,
                January 1, 2004
            
            
            69,400
            
            $
            612,172Granted
            
            
            14,900
            
            
            265,367
            
            $
            17.81Vested
            
            
            (19,067
            )Amortization
                of Compensation Expense
            
            
            
            
            
            (271,298
            )Balance,
                December 31, 2004
            
            
            65,233
            
            
            606,241Granted
            
            
            19,000
            
            
            435,713
            
            $
            22.95Vested
            
            
            (28,166
            )Amortization
                of Compensation Expense
            
            
            
            
            
            (342,122
            )Balance,
                December 31, 2005
            
            
            56,067
            
            
            699,832Granted
            
            
            21,027
            
            
            404,520
            
            $
            19.24Vested
            
            
            (11,009
            )Forfeited
            
            
            (2,248
            )
            
            (38,339
            )Amortization
                of Compensation Expense
            (271,159
            )Balance,
                December 31, 2006
            
            
            63,837
            
            $
            794,854







**Note
      8 - Business Segment Data**







The
      Company has identified two reportable segments. One is the regulated business
      of
      collecting, treating and distributing water on a retail and wholesale basis
      to
      residential, commercial, industrial and fire protection customers in parts
      of
      New Jersey and Delaware. This segment also includes regulated wastewater systems
      in New Jersey and Delaware. The Company is subject to regulations as to its
      rates, services and other matters by the states of New Jersey and Delaware
      with
      respect to utility service within these states. The other segment is primarily
      comprised of non-regulated contract services for the operation and maintenance
      of municipal and private water and wastewater systems in New Jersey and
      Delaware. Inter-segment transactions relating to operational costs are treated
      as pass-through expenses. Finance charges on inter-segment loan activities
      are
      based on interest rates that are below what would normally be charged by a
      third
      party lender.




51
 *Index*




(Thousands
                of Dollars)
              Twelve
                Months Ended December 31,Operations
                by Segments:
            
            2006
            
            2005
            
            2004Revenues:Regulated
            
            $
            71,948
            
            $
            66,317
            
            $
            60,745Non
                - Regulated
            
            
            9,317
            
            
            8,416
            
            
            10,366Inter-segment
                Elimination
            
            
            (204
            )
            
            (120
            )
            
            (120
            )Consolidated
                Revenues
            
            $
            81,061
            
            $
            74,613
            
            $
            70,991Operating
                Income:Regulated
            
            $
            20,062
            
            $
            16,390
            
            $
            16,075Non
                - Regulated
            
            
            1,256
            
            
            828
            
            
            858Consolidated
                Operating Income
            
            $
            21,318
            
            $
            17,218
            
            $
            16,933Depreciation:Regulated
            
            $
            6,936
            
            $
            6,357
            
            $
            5,762Non
                - Regulated
            
            
            124
            
            
            103
            
            
            84Consolidated
                Depreciation
            
            $
            7,060
            
            $
            6,460
            
            $
            5,846Other
                Income, Net:Regulated
            
            $
            951
            
            $
            836
            
            $
            892Non
                - Regulated
            
            
            (78
            )
            
            ---
            
            
            (1
            )Inter-segment
                Elimination
            
            
            (99
            )
            
            (96
            )
            
            (96
            )Consolidated
                Other Income, Net
            
            $
            774
            
            $
            740
            
            $
            795Interest
                Expense:Regulated
            
            $
            7,012
            
            $
            6,245
            
            $
            5,469Non
                - Regulated
            
            
            99
            
            
            96
            
            
            96Inter-segment
                Elimination
            
            
            (99
            )
            
            (96
            )
            
            (96
            )Consolidated
                Interest Charges
            
            $
            7,012
            
            $
            6,245
            
            $
            5,469Net
                Income:Regulated
            
            $
            9,417
            
            $
            8,037
            
            $
            7,993Non
                - Regulated
            
            
            622
            
            
            439
            
            
            453Consolidated
                Net Income
            
            $
            10,039
            
            $
            8,476
            
            $
            8,446


Capital
                Expenditures:Regulated
            
            $
            30,122
            
            $
            25,016
            
            $
            28,669Non
                - Regulated
            
            
            238
            
            
            272
            
            
            210Total
                Capital Expenditures
            
            $
            30,360
            
            $
            25,288
            
            $
            28,879




52
 *Index*


As
                  of
                December
                  31,
            
            As
                of
              December
                31,2006
            
            2005Assets:Regulated
            
            $
            366,149
            
            $
            320,889Non
                - Regulated
            
            
            6,808
            
            
            5,912Inter-segment
                Elimination
            
            
            (2,690
            )
            
            (2,418
            )Consolidated
                Assets
            
            $
            370,267
            
            $
            324,383


53
 *Index*


**Note
      9 - Quarterly Operating Results - Unaudited**





Operating
      results for each quarter of 2006 and 2005 are as follows:




(Thousands
                of Dollars, Except per Share Data)1st
            
            2nd
            
            3rd
            
            4th
            
            Total2006Operating
                Revenues
            
            $
            18,230
            
            $
            21,037
            
            $
            22,632
            
            $
            19,162
            
            $
            81,061Operating
                Income
            
            
            3,973
            
            
            6,149
            
            
            6,858
            
            
            4,338
            
            
            21,318Net
                Income
            
            
            1,812
            
            
            2,968
            
            
            3,377
            
            
            1,882
            
            
            10,039Basic
                Earnings per Share
            
            $
            0.15
            
            $
            0.25
            
            $
            0.29
            
            $
            0.14
            
            $
            0.83Diluted
                Earnings per Share
            
            $
            0.15
            
            $
            0.25
            
            $
            0.28
            
            $
            0.14
            
            $
            0.822005Operating
                Revenues
            
            $
            16,743
            
            $
            18,431
            
            $
            20,832
            
            $
            18,607
            
            $
            74,613Operating
                Income
            
            
            3,171
            
            
            4,259
            
            
            6,013
            
            
            3,775
            
            
            17,218Net
                Income
            
            
            1,380
            
            
            1,946
            
            
            3,024
            
            
            2,126
            
            
            8,476Basic
                Earnings per Share
            
            $
            0.12
            
            $
            0.17
            
            $
            0.26
            
            $
            0.17
            
            $
            0.72Diluted
                Earnings per Share
            
            $
            0.12
            
            $
            0.16
            
            $
            0.26
            
            $
            0.17
            
            $
            0.71





The
      information above, in the opinion of the Company, includes all adjustments
      consisting only of normal recurring accruals necessary for a fair presentation
      of such amounts. The business of the Company is subject to seasonal fluctuation
      with the peak period usually occurring during the summer months.





**Item
      9.**  **Changes
      in and Disagreementswith Accountants on Accounting and
      Financial Disclosure.**





Deloitte
      & Touche LLP (D&T) was previously the independent registered public
      accounting firm for Middlesex Water Company (the Company). On March 31, 2006,
      the Audit Committee of the Registrant’s Board of Directors agreed to engage
      Beard Miller Company LLP (BMC) as its independent registered public accounting
      firm to replace D&T, effective for fiscal year 2006, including the Company’s
      audit for the year ended December 31, 2006. The change was made after the Audit
      Committee reviewed proposals from three independent accounting firms, including
      D&T.





D&T’s
      audit reports on the Company's consolidated financial statements for each of
      the
      past two fiscal years ended December 31, 2005 and December 31, 2004 did not
      contain any adverse opinions or disclaimers of opinion, nor were such reports
      qualified or modified as to uncertainty, audit scope or accounting principles.
      The audit report of D&T on management's assessment of internal control over
      financial reporting and the effectiveness of internal control over financial
      reporting as of December 31, 2005 did not contain an adverse opinion or
      disclaimer of opinion, and was not qualified or modified as to uncertainty,
      audit scope or accounting principles.





During
      the two most recent fiscal years ended December 31, 2005 and 2004, and through
      April 5, 2006, there were no disagreements with D&T on any matter of
      accounting principles or practices, financial statement disclosure, or auditing
      scope or procedures, which disagreements, if not resolved to D&T’s
      satisfaction would have caused them to make reference to the subject matter
      of
      the disagreement in connection with the audit reports of the financial
      statements for such years. During the two most recent fiscal years ended
      December 31, 2005 and 2004, and through April 5, 2006, there was one reportable
      event. On November 9, 2005, the Company informed D&T of an identified
      material weakness in internal controls related to recording and reporting
      construction advances and contributions for utility plant. Subsequent to the
      notification, the


54
 *Index*


Company
      filed an amended Form 10-K for the year ended December 31, 2004 and Form 10-Q’s
      for the quarters ended March 31, 2005 and June 30, 2005. The material weakness
      identified is discussed in Item 9A of the Company’s Form 10-K/A for the year
      ended December 31, 2004.





We
      have
      provided D&T with a copy of the foregoing disclosures and requested from
      them a letter indicating whether they agree with these disclosures. A copy
      of
      their letter dated April 5, 2006 is attached as Exhibit 16 hereto.





During
      the Company’s two most recent fiscal years and through March 31, 2006, the
      Company did not consult with BMC regarding either (1) the application of
      accounting principles to a specified transaction, either completed or proposed,
      or the type of audit opinion that might be rendered on the Company’s financial
      statements, or (2) any matter that was either the subject of disagreement or
      reportable events .





**Item
      9A.**  **Controls
      andProcedures**





(1)
      Disclosure controls and procedures are controls and other procedures that are
      designed to ensure that information required to be disclosed in Company reports
      filed or submitted under the Exchange Act is recorded, processed, summarized
      and
      reported, within the time periods specified in the Securities and Exchange
      Commission’s rules and forms. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed in Company reports filed under the Exchange Act is
      accumulated and communicated to management, including the Company’s Chief
      Executive Officer and Chief Financial Officer as appropriate, to allow timely
      decisions regarding disclosure.





As
      required by Rule 13a-15 under the Exchange Act, an evaluation of the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures was conducted by the Company’s Chief Executive Officer along with
      the Company’s Chief Financial Officer for the quarter ended December 31, 2006.
      Based upon that evaluation the Company’s Chief Executive Officer and the
      Company’s Chief Financial Officer concluded that the Company’s disclosure
      controls and procedures were effective as of the end of the period covered
      by
      this report. Accordingly, management believes the consolidated financial
      statements included in this report fairly present in all material respects
      our
      financial condition, results of operations and cash flows for the periods
      presented.





55
 *Index*


(2) **Management’s Report on Internal Control Over Financial
      Reporting**





The
      management of Middlesex Water Company (Middlesex or the Company) is responsible
      for establishing and maintaining adequate internal control over financial
      reporting as defined in Exchange Act Rule 13A-15(f) and 15d-15(f). Middlesex’s
      internal control system was designed to provide reasonable assurance to the
      Company’s management and Board of Directors of adequate preparation and fair
      presentation of the published financial statements.





All
      internal control systems, no matter how well designed, have inherent
      limitations. Therefore, even those systems determined to be effective can
      provide only reasonable assurance with respect to the adequacy of financial
      statement preparation and presentation. Middlesex’s management assessed the
      effectiveness of the Company’s internal control over financial reporting as of
      December 31, 2006. In making this assessment, management used the criteria
      set
      forth by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO) in *Internal
      Control- Integrated Framework* .
      Based
      on our assessment, we believe that as of December 31, 2006, the Company’s
      internal control over financial reporting is operating as designed and is
      effective based on those criteria.





Middlesex’s
      independent registered public accounting firm has issued their report on our
      assessment of the Company’s internal control over financial reporting. This
      report appears on pages 57 and 58.








/s/
                Dennis W. Doll
            
            /s/
                A. Bruce O’ConnorDennis
                W. Doll
            
            A.
                Bruce O’ConnorPresident
                and Chief
            
            Vice
                President and ChiefExecutive
                Officer
            
            Financial
                Officer





Iselin,
      New Jersey


March
      13,
      2007








56
 *Index*


(3) **Report
      of Independent Registered Public Accounting Firm**





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of Middlesex Water Company:




We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control over Financial Reporting, that Middlesex Water
      Company (the Company) maintained effective internal control over financial
      reporting as of December 31, 2006, based on criteria established in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      The Company’s management is responsible for maintaining effective internal
      control over financial reporting and for its assessment of the effectiveness
      of
      internal control over financial reporting. Our responsibility is to express
      an
      opinion on management’s assessment and an opinion on the effectiveness of the
      Company’s internal control over financial reporting based on our
      audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.




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




In
      our
      opinion, management’s assessment that the Company maintained effective internal
      control over financial reporting as of December 31, 2006, is fairly stated,
      in
      all material respects, based on criteria established in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Also in our opinion, the Company maintained, in all material respects, effective
      internal control over financial reporting as of December 31, 2006, based on
      criteria established in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO).





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet and the
      consolidated statement of capital stock and long-term debt of the Company as
      of
      December 31, 2006, and the related consolidated statements of income, common
      stockholders’ equity and comprehensive income, and cash flows for the year ended
      December 31,




57
 *Index*


2006,
      and
      our report dated March 13, 2007 expressed an unqualified opinion on these
      consolidated financial statements.









/s/
      Beard
      Miller Company LLP


Beard
      Miller Company LLP


Reading,
      Pennsylvania


March
      13,
      2007




**Item
      9B.**  **OtherInformation.**





None.





58
 *Index*


**PART
      III**





**Item
                10.**
            **Directors,
                Executive Officers and Corporate
                Governance.**





Information
      with respect to Directors of Middlesex Water Company is included in Middlesex
      Water Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders and
      is incorporated herein by reference.





Information
      regarding the Executive Officers of Middlesex Water Company is included under
      Item 1. in Part I of this Annual Report.





**Item
                11.**
            **Executive
                Compensation.**





This
      Information for Middlesex Water Company is included in Middlesex Water Company’s
      Proxy Statement for the 2007 Annual Meeting of Stockholders and is incorporated
      herein by reference.





**Item
                12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters.**





This
      information for Middlesex Water Company is included in Middlesex Water Company’s
      Proxy Statement for the 2007 Annual Meeting of Stockholders and is incorporated
      herein by reference.





**Item
                13.**
            **Certain
                Relationships and Related Transactions, and Director
                Independence.**





This
      information for Middlesex Water Company is included in Middlesex Water Company’s
      Proxy Statement for the 2007 Annual Meeting of Stockholders and is incorporated
      herein by reference.




**Item
                  14.**
              **Principal
                  Accounting Fees and
                  Services.**





This
      information for Middlesex Water Company is included in Middlesex Water Company’s
      Proxy Statement for the 2007 Annual Meeting of Stockholders and is incorporated
      herein by reference.





59
 *Index*


**PARTIV**


**Item
                    15.**
                **Exhibits
                    and Financial Statement Schedules**





1.
            The
                following Financial Statements and Supplementary Data are included
                in Part
                II- Item 8. of this annual report:





Consolidated
      Balance Sheets at December 31, 2006 and 2005.





Consolidated
      Statements of Income for each of the three years in the period ended December
      31, 2006, 2005 and 2004.





Consolidated
      Statements of Cash Flows for each of the three years in the period ended December
      31, 2006, 2005 and 2004.





Consolidated
      Statements of Capital Stock and Long-term Debt at December 31, 2006 and
      2005.





Consolidated
      Statements of Common Stockholders Equity and Comprehensive Income for each
      of
      the three years in the period ended December 31, 2006, 2005 and
      2004.





Notes
      to
      Consolidated Financial Statements.





2.
            Financial
                Statement Schedules





All
      Schedules are omitted because of the absence of the conditions under which
      they
      are required or because the required information is shown in the financial
      statements or notes thereto.





3.
            Exhibits





See
      Exhibit listing immediately following the signature page.





60
 *Index*




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities and Exchange Act
      of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





MIDDLESEX
      WATER COMPANY





By:
            /s/
                Dennis W. DollDennis
                W. DollPresident,
                Chief Executive Officer and DirectorDate:
            March
                13, 2007




Pursuant
      to the requirements of the Securities and Exchange Act of 1934, this report
      has
      been signed below by the following persons, on behalf of the registrant and
      in
      the capacities on March 13, 2007.




By:
            /s/
                A. Bruce O’ConnorA.
                Bruce O’ConnorVice
                President and Chief Financial OfficerBy:
            /s/
                Dennis W. DollDennis
                W. DollPresident,
                Chief Executive Officer and DirectorBy:
            /s/
                J. Richard TompkinsJ.
                Richard TompkinsChairman
                of the Board and DirectorBy:
            /s/
                Annette CatinoAnnette
                CatinoDirectorBy:
            /s/
                John C. CuttingJohn
                C. CuttingDirectorBy:
            /s/
                John R. MiddletonJohn
                R. MiddletonDirectorBy:
            /s/
                John P. MulkerinJohn
                P. MulkerinDirectorBy:
            /s/
                Walter G. ReinhardWalter
                G. ReinhardDirectorBy:
            /s/
                Jeffries SheinJeffries
                SheinDirector





61
 *Index*





EXHIBIT
      INDEX





Exhibits
      designated with an asterisk (*) are filed herewith. The exhibits not so
      designated have heretofore been filed with the Commission and are incorporated
      herein by reference to the documents indicated in the previous filing columns
      following the description of such exhibits. Exhibits designated with a dagger
      (t) are management contracts or compensatory plans.


Exhibit
                No.
            Document
                Description
            Previous
              Registration
              No.
            Filing’s
              Exhibit
              No.3.1
            Certificate
                of Incorporation of the Company, as amended, filed as Exhibit 3.1
                of 1998
                Form 10-K.3.2
            Bylaws
                of the Company, as amended, filed as Exhibit 3.2 of 2005 Form
                10-K.3.3
            Certificate
                of Correction of Middlesex Water Company filed with the State of
                New
                Jersey on April 30, 1999, filed as Exhibit 3.3 of 2003 Form
                10-K/A-2.3.4
            Certificate
                of Amendment to the Restated Certificate of Incorporation Middlesex
                Water
                Company, filed with the State of New Jersey on February 17, 2000,
                filed as
                Exhibit 3.4 of 2003 Form 10-K/A-2.3.5
            Certificate
                of Amendment to the Restated Certificate of Incorporation Middlesex
                Water
                Company, filed with the State of New Jersey on June 5, 2002, filed
                as
                Exhibit 3.5 of 2003 Form 10-K/A-2.4.1
            Form
                of Common Stock Certificate.
            2-55058
            2(a)4.2
            Registration
                Statement, Form S-3, under Securities Act of 1933 filed February
                3, 1987,
                relating to the Dividend Reinvestment and Common Stock Purchase
                Plan.
            33-117174.3
            Revised
                Prospectus relating to the Dividend Reinvestment and Common Stock
                Purchase
                Plan, Submitted to the Securities and Exchange Commission, January
                20,
                2000.
            33-117174.4
            Post
                Effective Amendments No. 7, Form S-3, under Securities Act of 1933
                filed
                February 1, 2002, relating to the Dividend Reinvestment and Common
                Stock
                Purchase Plan.
            33-1171710.1
            Copy
                of Purchased Water Agreement between the Company and Elizabethtown
                Water
                Company, filed as Exhibit 10 of 2006 First Quarter Form
                10-Q.10.2
            Copy
                of Mortgage, dated April 1, 1927, between the Company and Union County
                Trust Company, as Trustee, as supplemented by Supplemental Indentures,
                dated as of October 1, 1939 and April 1, 1949.
            2-15795
            4(a)-4(f)10.3
            Copy
                of Supplemental Indenture, dated as of July 1, 1964 and June 15,
                1991,
                between the Company and Union County Trust Company, as
                Trustee.
            33-54922
            10.4-10.910.4
            Copy
                of Supply Agreement, dated as of November 17, 1986, between the Company
                and the Old Bridge Municipal Utilities Authority.
            33-31476
            10.1210.5
            Copy
                of Supply Agreement, dated as of July 14, 1987, between the Company
                and
                the Marlboro Township Municipal Utilities Authority, as
                amended.
            33-31476
            10.13







62
 *Index*


EXHIBIT
      INDEX




Exhibit
                No.
            Document
                Description
            Previous
              Registration
              No.
            Filing’s
              Exhibit
              No.10.6
            Copy
                of Supply Agreement, dated as of February 11, 1988, with modifications
                dated February 25, 1992, and April 20, 1994, between the Company
                and the
                Borough of Sayreville filed as Exhibit No. 10.11 of 1994 First Quarter
                Form 10-Q.10.7
            Copy
                of Water Purchase Contract, dated as of
              September
                25, 2003, between the Company and the New Jersey Water Supply Authority,
                filed as Exhibit No. 10.7 of 2003 Form 10-K.10.8
            Copy
                of Treating and Pumping Agreement, dated April 9, 1984, between the
                Company and the Township of East Brunswick.
            33-31476
            10.1710.9
            Copy
                of Supply Agreement, dated June 4, 1990, between the Company and
                Edison
                Township.
            33-54922
            10.2410.10
            Copy
                of amended Supply Agreement, between the Company and the Borough
                of
                Highland Park, filed as Exhibit No. 10.1 of 2006 First Quarter Form
                10-Q.(t)10.11
            Copy
                of Supplemental Executive Retirement Plan, filed as Exhibit 10.13
                of 1999
                Third Quarter Form 10-Q.(t)10.12
            Copy
                of 1989 Restricted Stock Plan, filed as Appendix B to the Company’s
                Definitive Proxy Statement, dated and filedApril
                25, 1997.
            33-31476
            10.22(t)10.13(a)
            Employment
                Agreement between Middlesex Water Company and Dennis W. Doll, filed
                as
                Exhibit 10.13(i) of 2004 Form 10-K.(t)10.13(b)
            Employment
                Agreement between Middlesex Water Company and A. Bruce O’Connor, filed as
                Exhibit 10.15(c) of 1999 Third Quarter Form 10-Q.(t)10.13(c)
            Employment
                Agreement between Middlesex Water Company and Ronald F. Williams,
                as filed
                as Exhibit 10.15(g) of 1999 Third Quarter Form 10-Q.(t)10.13(d)
            Employment
                Agreement between Middlesex Water Company and Richard M. Risoldi,
                filed as
                Exhibit 10.13(d) of 2003 Form 10-K.(t)10.13(e)
            Employment
                Agreement between Middlesex Water Company and Kenneth J. Quinn, filed
                as
                Exhibit 10.13(e) of 2003 Form 10-K.(t)10.13(f)
            Employment
                Agreement between Middlesex Water Company and James P. Garrett, filed
                as
                Exhibit 10.13(f) of 2003 Form 10-K.(t)10.13(g)
            Employment
                Agreement between Tidewater Utilities, Inc. and Gerard L. Esposito,
                filed
                as Exhibit 10.13(g) of 2003 Form 10-K.(t)10.13(h)
            Consulting
                Agreement between Middlesex Water Company and J. Richard Tompkins,
                filed
                as Exhibit 10.13(h) of 2005 Form 10-K.


63
 *Index*


EXHIBIT
      INDEX





Exhibit
                No.
            Document
                Description
            Previous
              Registration
              No.
            Filing’s
              Exhibit
              No.10.14
            Copy
                of Transmission Agreement, dated October 16, 1992, between the Company
                and
                the Township of East Brunswick.
            33-54922
            10.2310.15
            Copy
                of Supplemental Indentures, dated September 1, 1993, (Series S & T)
                and January 1, 1994, (Series U & V), between the Company and United
                Counties Trust Company, as Trustee, filed as Exhibit No. 10.22 of
                1993
                Form 10-K.10.16
            Copy
                of Trust Indentures, dated September 1, 1993, (Series S & T) and
                January 1, 1994, (Series V), between the New Jersey Economic Development
                Authority and First Fidelity Bank (Series S & T), as Trustee, and
                Midlantic National Bank (Series V), as Trustee, filed as Exhibit
                No. 10.23
                of 1993 Form 10-K.10.17
            Copy
                of Supplemental Indenture dated October 15, 1998 between Middlesex
                Water
                Company and First Union National Bank, as Trustee. Copy of Loan Agreement
                dated November 1, 1998 between the New Jersey and Middlesex Water
                Company
                (Series X), filed as Exhibit No. 10.22 of the 1998 Third Quarter
                Form
                10-Q.10.18
            Copy
                of Supplemental Indenture dated October 15, 1998 between Middlesex
                Water
                Company and First Union National Bank, as Trustee. Copy of Loan Agreement
                dated November 1, 1998 between the State of New Jersey Environmental
                Infrastructure Trust and Middlesex Water Company (Series Y), filed
                as
                Exhibit No. 10.23 of the 1998 Third Quarter Form 10-Q.10.19
            Copy
                of Operation, Maintenance and Management Services Agreement dated
                January
                1, 1999 between the Company City of Perth Amboy, Middlesex County
                Improvement Authority and Utility Service Affiliates, Inc.
            333-66727
            10.2410.20
            Copy
                of Supplemental Indenture dated October 15, 1999 between Middlesex
                Water
                Company and First Union National Bank, as Trustee and copy of Loan
                Agreement dated November 1, 1999 between the State of New Jersey
                and
                Middlesex Water Company (Series Z), filed as Exhibit No. 10.25 of
                the 1999
                Form 10-K.10.21
            Copy
                of Supplemental Indenture dated October 15, 1999 between Middlesex
                Water
                Company and First Union National Bank, as Trustee and copy of Loan
                Agreement dated November 1, 1999 between the New Jersey Environmental
                Infrastructure Trust and Middlesex Water Company (Series AA), filed
                as
                Exhibit No. 10.26 of the 1999 Form 10-K.


64
 *Index*


EXHIBIT
      INDEX





Exhibit
                No.
            Document
                Description
            Previous
              Registration
              No.
            Filing’s
              Exhibit
              No.10.22
            Copy
                of Supplemental Indenture dated October 15, 2001 between Middlesex
                Water
                Company and First Union National Bank, as Trustee and copy of Loan
                Agreement dated November 1, 2001 between the State of New Jersey
                and
                Middlesex Water Company (Series BB). Filed as Exhibit No. 10.22 of
                the
                2001 Form 10-K.10.23
            Copy
                of Supplemental Indenture dated October 15, 2001 between Middlesex
                Water
                Company and First Union National Bank, as Trustee and copy of Loan
                Agreement dated November 1, 2001 between the New Jersey Environmental
                Infrastructure Trust and Middlesex Water Company (Series CC). Filed
                as
                Exhibit No. 10.22 of the 2001 Form 10-K.10.24
            Copy
                of Supplemental Indenture dated January 15, 2002 between Middlesex
                Water
                Company and First Union National Bank, as Trustee and copy of Loan
                Agreement dated January 1, 2002 between the New Jersey Economic
                Development Authority and Middlesex Water Company (Series DD), filed
                as
                Exhibit No. 10.24 of the 2001 Form 10-K.10.25
            Copy
                of Supplemental Indenture dated March 1, 1998 between Middlesex Water
                Company and First Union National Bank, as Trustee. Copy of Trust
                Indenture
                dated March 1, 1998 between the New Jersey Economic Development Authority
                and PNC Bank, National Association, as Trustee (Series W), filed
                as
                Exhibit No. 10.21 of the 1998 Third Quarter Form 10-Q.10.26
            Copy
                of Supplemental Indenture dated October 15, 2004 between Middlesex
                Water
                Company and Wachovia Bank, as Trustee and copy of Loan Agreement
                dated
                November 1, 2004 between the State of New Jersey and Middlesex Water
                Company (Series EE), filed as Exhibit No. 10.26 of the 2004 Form
                10-K.10.27
            Copy
                of Supplemental Indenture dated October 15, 2004 between Middlesex
                Water
                Company and Wachovia Bank, as Trustee and copy of Loan Agreement
                dated
                November 1, 2004 between the New Jersey Environmental Infrastructure
                Trust
                and Middlesex Water Company (Series FF), filed as Exhibit No. 10.27
                of the
                2004 Form 10-K.10.29
            Copy
                of Supply Agreement, between the Company and the City of Rahway,
                filed as
                Exhibit No. 10.2 of 2006 First Quarter Form 10-Q.








65
 *Index*








EXHIBIT
      INDEX





Exhibit
                No.
            Document
                Description
            Previous
              Registration
              No.
            Filing’s
              Exhibit
              No.*10.30
            Copy
                of Supplemental Indenture dated October 15, 2006 between Middlesex
                Water
                Company and U.S. Bank National Association, as Trustee and copy of
                Loan
                Agreement dated November 1, 2006 between the State of New Jersey
                and
                Middlesex Water Company (Series GG).*10.31
            Copy
                of Supplemental Indenture dated October 15, 2006 between Middlesex
                Water
                Company and U.S. Bank National Association, as Trustee and copy of
                Loan
                Agreement dated November 1, 2006 between the New Jersey Environmental
                Infrastructure Trust and Middlesex Water Company (Series HH).*21
            Middlesex
                Water Company Subsidiaries.*23.1
            Consent
                of Independent Registered Public Accounting Firm, Beard Miller Company
                LLP.*23.2
            Consent
                of Independent Registered Public Accounting Firm, Deloitte & Touche,
                LLP.*31
            Section
                302 Certification by Dennis W. Doll pursuant to Rules 13a-14 and
                15d-14 of
                the Securities Exchange Act of 1934.*31.1
            Section
                302 Certification by A. Bruce O’Connor pursuant to Rules 13a-14 and 15d-14
                of the Securities Exchange Act of 1934.*32
            Section
                906 Certification by Dennis W. Doll pursuant to 18
                U.S.C.§1350.*32.1
            Section
                906 Certification by A. Bruce O’Connor pursuant to 18
                U.S.C.§1350.






66