SJW CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2010

(in thousands, except share and per share data)

Stock Options

No options were granted during the three months ended June 30, 20092010 and 2008.2009.

For the six months ended June 30, 2009, after taking into consideration the relevant facts and circumstances, SJW Corp. does not project any foreseeable terminations which could lead to forfeiture of unvested options. As of June 30, 2009, total2010, there are no unrecognized compensation costs related to stock options amounted to $2. Theseas all costs are expected to be recognized over a weighted average period of 0.08 year.

SFAS 123R requires the cash flows resulting from the tax benefits for deductions in excess of the compensation expense recorded for those options (excess tax benefits) to be classified as cash from financing activities. For the three and six months ended June 30, 2009, total cash received on exercise of options amounted to $35, and the excess tax benefits realized from stock options exercised amounted to $3. For the three and six months ended June 30, 2008, total cash received on exercise of options amounted to $71 and the excess tax benefits realized from stock options exercised amounted to $19.have been recognized.

Restricted Stock and Deferred Restricted Stock and Deferral Election Programs and Restricted Stock AwardsPlans

Under SJW Corp.’s Amended and Restated Deferred Restricted Stock Program (the “Deferred Restricted Stock Program”), SJW Corp. granted deferredOn January 4, 2010, restricted stock units to non-employee Board members. This program was amended effective January 1, 2008. As a resultcovering an aggregate of that amendment, no new awards of deferred restricted stock units will be made under the Deferred Restricted Stock Program with respect to Board service after December 31, 2007. In addition, SJW Corp.’s Deferral Election Program (as amended, the “Deferral Program”) includes retainer fees and meeting fees earned for the calendar year 2007 to be deferred into deferred restricted stock units. Prior to 2007, only retainer fees were allowed to be converted under the Deferral Program. The retainer fees and meeting fees are collectively referred to as the “Annual Service Fees.” For any post-2007 calendar year, the Annual Service Fees that are deferred will be credited as a dollar amount to a deferred liability account, and will no longer be deferred into deferred restricted stock units.

On April 27, 2009, a total of 7,56214,389 shares of common stock of SJW Corp. were distributedgranted to several executives of SJW Corp. and its subsidiaries. These units will vest in four equal successive installments upon completion of each year of service with no dividend equivalent rights. Share-based compensation expense is being recognized at grant date fair value of $20.64 per unit over the vesting period beginning in 2010.

On January 26, 2010, market performance-vesting restricted stock units granted to a retired memberkey executive of SJW Corp.’s Board of Directors. The excess tax benefits realized from the distribution of such on January 25, 2007 and covering 7,000 shares of common stock toof SJW Corp. were cancelled because the retired Board member amounted to $42.market performance objective was not attained. However, since the requisite service over the three-year service period of the award was rendered even though the market condition was not achieved, compensation cost over the three-year requisite service period was not reversed.

As of June 30, 2009, a total of 21,000 restricted and deferredOn January 26, 2010, restricted stock units covering an aggregate of 49,850 shares of common stock of SJW Corp. were awarded to a key executive of SJW Corp., which includes 7,000 performance-based restricted stock units that will convert into shares of SJW Corp.’s common stock upon vesting at the end of a three year period if specific performance goals are attained. These units do not include dividend equivalent rights. Such units include market performance-vesting restricted units covering 37,850 shares of common stock of SJW Corp. which will be issued if the market performance objective is attained and the executive continues in the Company’s service through the completion of the five-year performance period. Share-based compensation expense is recognized over five years at $8.77 per unit. The remaining 12,000 restricted stock units are recognized over three years at $20.02 per unit. The fair value of the performance-basedmarket performance-vesting restricted awardstock units was estimated using the fair value of SJW Corp.’s common stock with the effect of market conditions and no dividend yield on the date of grant, and assumes the market performance goals will be attained. Share-based

On April 26, 2010, a total of 207 shares of common stock were distributed to a retired member of SJW Corp.’s Board of Directors. There was no excess tax benefit realized from this stock issuance.

As of June 30, 2010, the total unrecognized compensation expense is recognized over three years at $13.57 per unit for performance-based stock units and $25.24 per unit for the remaining 14,000costs related to restricted and deferred restricted stock units. If such goals are not met and requisite serviceplans amounted to $1,445. This cost is not rendered, no compensation cost will be recognized and any recognized compensation cost will be reversed.

Additionally, as of June 30, 2009, 13,569 restricted stock units were awarded to several executives of SJW Corp. and its subsidiaries, which includes 11,730 units that will vest in four equal successive installments upon completion of each year of service and 1,839 restricted stock units that will vest in three equal successive installments upon completion of each year of service. These units do include dividend equivalent rights. Share-based compensation expense is being recognized at grant date fair values of $26.83 and $25.24 per unit, respectively, over the vesting periods beginning in 2009.

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As of June 30, 2009, the total unrecognized compensation costs were $1,365. These costs are expected to be recognized over a weighted averageweighted-average period of 1.681.98 years.

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SJW CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2010

(in thousands, except share and per share data)

Dividend Equivalent Rights

Under the Incentive Plan, certain holders of options, restricted stock, and deferred restricted stock awards may have the right to receive dividend equivalent rights (“DERs”) each time a dividend is paid on common sharesstock after the grant date. Stock compensation on DERs is recognized as a liability and recorded against retained earnings on the date dividends are issued. For the three and six months ended June 30, 2009, $302010, $31 and $62, respectively, related to DERs were recorded against retained earnings and were accrued as a liability. For the three and six months ended June 30, 2008, $412009, $30 and $88,$62, respectively, related to DERs were recorded against retained earnings and were accrued as a liability.

SJW Corp.’s Deferred Restricted Stock and Deferral Election Programs for non-employee Board members were amended effective January 1, 2008, to allow the DERs with respect to the deferred shares to remain in effect only through December 31, 2017. Accordingly, the last DERs conversion into deferred restricted stock units will occur on the first business day in January 2018. Previously, no such time limitation was placed in the Deferred Restricted Stock and Deferral Election Programs.

Employee Stock Purchase Plan

The ESPP allows eligible employees to purchase shares of SJW Corp.’s common stock at 85% of the fair market value of shares on the purchase date. Under the ESPP, employees can designate up to a maximum of 10% of their base compensation for the purchase of shares of common stock, subject to certain restrictions. A total of 270,400 shares of common stock have been reserved for issuance under the ESPP.

After considering the estimated employee terminations or withdrawals from the plan before the purchase date, SJW Corp.’s ESPPrecorded expenses were $24 and $39 for the three and six months ended June 30, 2010, respectively, and $22 and $36 for the three and six months ended June 30, 2009, respectively, and $15 and $33 for the three and six months ended June 30, 2008, respectively, related to the ESPP.

The total unrecognized compensation costs related to the semi-annual offering period that ends July 31, 20092010 for the ESPP is approximately $7.$8. This cost is expected to be recognized during the third quarter of 2009.2010.

Note 3. Real Estate Investments

The major components of real estate investments as of June 30, 20092010 and December 31, 20082009 are as follows:

Depreciation and amortization is computed using the straight-line method over the estimated service lives of the assets, ranging from 5 to 39 years.

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SJW CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2010

(in thousands, except share and per share data)

Note 4. Employee Benefit Plans

The components of net periodic benefit costs for San Jose Water Company’s pension plan, its Executive Supplemental Retirement Plan and other postretirement benefit plan for the three and six months ended June 30, 20092010 and 20082009 are as follows:

The following table summarizes the fair values of plan assets by major categories as required by FASB ASC Topic 715, as of June 30, 2010:

8The Plan has a target allocation of 60% invested in a diversified array of equity securities to provide long-term capital appreciation and 40% invested in a diversified array of fixed income securities to provide preservation of capital plus generation of income.

In 2009,2010, San Jose Water Company has made a contributionis required by the Internal Revenue Service to make minimum contributions of $1,100$2,870 and $499 to the pension plan and expectsother postretirement benefit plan, respectively. For the three and six months ended June 30, 2010, $642 and $1,159, respectively, has been contributed to make a contribution of approximately $470 to the pension plan and other postretirement benefit plan. San Jose Water Company is evaluating the impact of changes to the Pension Protection Act of 2006 that governs San Jose Water Company’s cash contribution requirement.

The accounting for pensions

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SJW CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2010

(in thousands, except share and other postretirement benefits requires the extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the employees, mortality, turnover, and medical costs to determine the present value of the benefit obligation and the fair value of plan assets at the end of the year. With the current market conditions, the funded status of the pension plans and the contributions could change due to fluctuations on the expected return on plan assets as well as the present value of the benefit obligation. Further, required plan contributions by San Jose Water Company may increase and payout restrictions on benefit payments from the pension plan could result from declining asset values and a decreased expectation of return on assets. SJW Corp. will review the assumptions on the measurement date of December 31, 2009 to determine any change in the present value of the benefit obligation and the fair value of plan assets.per share data)

Note 5. Segment and Nonregulated Business Reporting

SJW Corp. is a holding company with four subsidiaries: (i) San Jose Water Company, a water utility operation with both regulated and nonregulated businesses, (ii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operates commercial building rentals (“Real Estate Services”), (iii) SJWTX, Inc. which is doing business as Canyon Lake Water Service Company, a regulated water utility located in Canyon Lake, Texas and (iv) Texas Water Alliance Limited, a nonregulated water utility operation which is seekingundertaking activities that are necessary to develop wholesalea water suppliessupply project in Texas. In accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,FASB ASC Topic 280 – “Segment Reporting,” SJW Corp. has determined that it has two reportable business segments. The first segment is that of providing water utility and utility-related services to its customers through SJW Corp.’s subsidiaries, San Jose Water Company, and Canyon Lake Water Service Company, and Texas Water Alliance Limited, together referred to as the “Water Utility Services.” The second segment is property management and investment activity conducted by SJW Land Company, thereferred to as “Real Estate Services.”

SJW Corp.’s reportable segments have been determined based on information used by the chief operating decision maker. SJW Corp.’s chief operating decision maker is its President and Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis that is accompanied by disaggregated information about operating revenue, net income and total assets, by subsidiaries.

The tables below set forth information relating to SJW Corp.’s reportable segments and distribution of regulated and nonregulated business activities within the reportable segments. Certain allocated assets, revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Corp. not included in the reportable segments is included in the “All Other” category.

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SJW CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2010

(in thousands, except share and per share data)

Note 6. Long-Term Liabilities

SJW Corp.’s contractual obligations and commitments include senior notes, mortgages and other obligations. San Jose Water Company, a subsidiary of SJW Corp., has received advance deposit payments from its customers on certain construction projects. Refunds of the advance deposit payments constitute an obligation of San Jose Water Company solely.

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On February 2, 2009,May 27, 2010, SJW Corp. and SJW Land Company entered into a credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), which provided an unsecured revolving credit facility in an aggregate amount of $10,000. This credit agreement replaced the then existing credit facility between SJW Corp., SJW Land Company and Wells Fargo. In addition, San Jose Water Company issued $10,000and Wells Fargo entered into a credit agreement which provided an unsecured revolving credit facility in an aggregate amount of unsecured Series J Senior Notes, with an interest rate of 6.54%$75,000. This credit agreement expanded and interest only payments until maturity, which is February 2, 2024. Senior Note Series J has terms and conditions that restrictreplaced the then existing credit facility between San Jose Water Company from issuing additional funded debt ifand Wells Fargo. The outstanding principal balance on both credit agreements shall bear interest either: (a) at a fluctuating rate per annum 1.00% below the prime rate, or (b) at a fixed rate per annum determined by Wells Fargo to be 1.375% above LIBOR. These two credit agreements will expire on June 1, 2012. San Jose Water Company’s unsecured bank line of credit has the following affirmative covenants: (1) the funded debt wouldcannot exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing twelve calendar month12-calendar-month period wouldcannot be less than 175%225% of interest charges. Proceeds fromAs of June 30, 2010, San Jose Water Company’s funded debt was 55% of total capitalization and the salenet income available for interest charges was 328% of Series J Senior Notes were used to repay a portioninterest charges. As of outstanding short-term borrowings.

On MarchJune 30, 2009, SJW Corp. increased its unsecured lines of credit by $20,000 for an aggregate short-term borrowing amount of up to $55,000 with interest rates that approximate the bank’s reference rate plus 1.75%. The line of credit will expire on June 1, 2010.

On May 15, 2009,2010, San Jose Water Company issued $20,000is in compliance with all covenants.

On June 9, 2010, San Jose Water Company entered into a Bond Purchase Contract with Goldman, Sachs & Co., the Treasurer of unsecuredthe State of California and the California Pollution Control Financing Authority (the “Authority”) for the placement of $50,000 aggregate principal amount of 5.10% fixed rate California Pollution Control Financing Authority Revenue Bonds (San Jose Water Company Project) Series K Senior Notes,2010A with an interest rate of 6.75% and interest only payments until maturity, which is May 15, 2039. Senior Note Series K has termsJune 1, 2040 (the “Bonds”).

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SJW CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2010

(in thousands, except share and conditions that restrictper share data)

The Bonds were issued by the Authority on June 16, 2010 pursuant to the provisions of the California Pollution Control Financing Authority Act and an Indenture, dated as of June 1, 2010 (the “Indenture”), between the Authority and Wells Fargo, as trustee. The proceeds from the issuance of the Bonds will be loaned by the Authority to San Jose Water Company from issuing additional funded debt ifpursuant to a Loan Agreement, dated as of June 1, 2010 (the “Loan Agreement”), between the Authority and San Jose Water Company. The loan proceeds will be used by San Jose Water Company to: (1) finance certain costs of (i) improvements to the funded debt would exceed 66-2/3%structures and facilities that are integral to the supply of total capitalization,water throughout the water supply system owned by San Jose Water Company (the “Water System”), (ii) improvements to the water distribution system, and (iii) the acquisition of equipment for the Water System, all in the current service areas of San Jose Water Company and to the extent they will prevent the pollution of drinking water or improve the quality of water or ensure the safe handling, recycling or disposal of materials that might otherwise be improperly disposed of; and (2) net income availablepay certain costs of issuance of the Bonds.

The Loan Agreement contains affirmative and negative covenants customary for a loan agreement relating to revenue bonds, including, among other things, complying with certain disclosure obligations and covenants relating to the tax exempt status of the interest chargeson the Bonds and limitations and prohibitions relating to the transfer of the project funded by the loan proceeds and the assignment of the Loan Agreement. The Loan Agreement and the Indenture contain provisions that provide for the trailing twelve calendar month period would be less than 175% of interest charges. A portionacceleration of the indebtedness upon the occurrence of a loan default event (as defined in the Loan Agreement) and an event of default (as defined in the Indenture).

The loan proceeds are held by the trustee and classified as restricted cash. When a capital expenditure is incurred by San Jose Water Company which is an approved use of funds as defined in the Loan Agreement, San Jose Water Company will seek the release of restricted cash from the saletrustee. Once the trustee approves the capital expenditure, they will transfer cash from the restricted cash account into San Jose Water Company’s general account. As of Series K Senior NotesJune 30, 2010, the balance recorded in restricted cash was $27,733 and unamortized debt issuance costs were used to repay short-term borrowings.$782. For the three and six months ended June 30, 2010, $21,489 has been released from restricted cash by the trustee.

Note 7. Fair Value Measurement

The following table summarizes the assets and liabilities measured at fair value on a recurring basis as required by SFAS 157,FASB ASC Topic 820 – “Fair Value Measurements and Disclosures,” as of June 30, 2010 and December 31, 2009:

The FASB has also issued FASB Staff Positions (“FSP”) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13 “Accounting for Leases,” and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement. FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Nonfinancial assets and nonfinancial liabilities would include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined in paragraph 6 of SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SJW Corp.’s adoption of SFAS 157 and FSP 157-2 did not have a material impact on SJW Corp.’s financial position, results of operations or cash flows.

Note 8. Bankruptcy of Real Estate Tenant

On January 13, 2009, SJW Land Company was informed that one of its tenants filed a Chapter 11 bankruptcy proceeding and intended to liquidate its operations through the United States bankruptcy court in Delaware. The tenant leased a 148,000 square foot office building and a 346,000 square foot distribution building from SJW Land Company in Knoxville, Tennessee under triple net leases. The tenant vacated the buildings on May 31, 2009. SJW Land Company is incurring all holding costs and is actively seeking to re-lease the property. SJW Corp. has reviewed the Tennessee properties for impairment in accordance with the requirements of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Based upon our review, the carrying amount of the Tennessee properties does not exceed its fair value and as a result, no adjustment has been made to the carrying value.

Note 9. Acquisition

On February 6, 2009, SJWTX, Inc. acquired from the City of Bulverde, Texas (“City”) and the Guadalupe-Blanco River Authority (“GBRA”), the right and obligation to provide water service within the retail water service area of the City, certain areas outside the City and substantially all of the retail water service assets of the GBRA associated with the GBRA’s existing facilities located within such service area. The agreements by which the GBRA had a long-term right to construct and operate a retail water system within such service area were also terminated. The purchase price for the assets was approximately $3,700 with approximately $2,800 and $900 being paid to the GBRA and City, respectively. The GBRA assets acquired are being accounted for under the acquisition method of accounting in accordance with Statement of Financial Accounting Standards No. 141R, “Business Combinations.” Accordingly, the results of the subject GBRA assets are included in the consolidated financial statements of SJW Corp. from the acquisition date. Unaudited pro forma results of operations for this acquisition have not been presented since the impact of the purchase on providing current water services provided by SJWTX, Inc. was not significant.

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ITEM 2. MANAGEMENT’S DISCUSSIONSJW CORP. AND ANALYSIS OFSUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONSSTATEMENTS—(Continued)

June 30, 2010

(in thousands, except share and per share data)

The California Public Utilities Commission (“CPUC”) issued San Jose Water Company’s most recent general rate case decision in November 2009. As part of that decision, the over-collected balance in the Company’s balancing account for expense offsets for the period January 1, 2005 to December 31, 2007 of approximately $1,696 has been reviewed and authorized for inclusion in customer rates as a 12-month customer surcredit.

As of June 30, 2010 and December 31, 2009, the balance in San Jose Water Company’s remaining balancing accounts for expense offsets was an under-collection of $843 and over-collection of $1,062, respectively, including interest. These balancing accounts are expected to be reviewed for inclusion in customer rates by the CPUC as part of San Jose Water Company’s next general rate case.

On June 2, 2010, San Jose Water Company filed an advice letter with the CPUC requesting authorization to increase revenues by $5,740 or approximately 2.61%. This increase is intended to recover the accumulated balance in the Mandatory Conservation Revenue Adjustment Memorandum Account (“MCRAM”), which covered the period from August 3, 2009 to May 1, 2010. The CPUC authorized San Jose Water Company to establish a MCRAM to track the revenue impact of mandatory conservation upon San Jose Water Company’s quantity revenue resulting from mandatory conservation instituted by Santa Clara Valley Water District. As directed by the CPUC’s Water Division, any revenue increase would be recovered via a surcharge on the existing quantity rate for a period of twelve months following final approval by the CPUC. All revenue would be recognized immediately after final approval by the CPUC.

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The information in this Item 2 should be read in conjunction with the financial information and the notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in SJW Corp.’s Annual Report on Form 10-K for the year ended December 31, 2008.2009.

This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Corp. and its subsidiaries that are based on current expectations, estimates, forecasts, and projections about SJW Corp. and its subsidiaries and the industries in which SJW Corp. operates and the beliefs and assumptions of the management of SJW Corp. Such forward-looking statements are identified by words including “expect,” “estimate,” “anticipate,” “intends,” “plans,” “may,” “should,” “will,” and similar expressions. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Important factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”) under the item entitled “Risk Factors,” and in other reports SJW Corp. files with the SEC, specifically the most recent reports on Form 10-Q and Form 8-K, each as it may be amended from time to time. SJW Corp. undertakes no obligation to update the information contained in this report, including the forward-looking statements, to reflect any event or circumstance that may arise after the date of this report.

General:

SJW Corp. is a holding company with four subsidiaries.

San Jose Water Company, a wholly owned subsidiary of SJW Corp., is a public utility in the business of providing water service to approximately 226,000225,000 connections that serve a population of approximately one million people in an area comprising approximately 138 square miles in the metropolitan San Jose, California area.

The principal business of San Jose Water Company consists of the production, purchase, storage, purification, distribution, wholesale and retail sale of water. San Jose Water Company provides water service to customers in portions of the cities of Cupertino and San Jose and in the cities of Campbell, Monte Sereno, Saratoga and the Town of Los Gatos, and adjacent unincorporated territory, all in the County of Santa Clara in the State of California. San Jose Water Company distributes water to customers in accordance with accepted water utility methods which include pumping from storage and gravity feed from high elevation reservoirs. San Jose Water Company also provides nonregulated water related services under agreements with municipalities. These nonregulated services include full water system operations and billing and cash remittance services.

San Jose Water Company has utility property including land held in fee, impounding reservoirs, diversion facilities, wells, distribution storage, and all water facilities and other property necessary to provide utility service to its customers. Under Section 851 of the California Public Utilities Code, properties currently used and useful in providing utilities services cannot be disposed of unless California Public Utilities Commission (“CPUC”)CPUC approval is obtained.

San Jose Water Company also has approximately 1,500700 acres of nonutility property which has been identified as no longer used and useful in providing utility services. Approximately 15 acres of the nonutility property are developable and located in the vicinity of the San Jose metropolitan area. The remaining properties are located in the hillside area adjacent to San Jose Water Company’s watershed properties.

SJW Land Company, a wholly owned subsidiary of SJW Corp., ownsowned the following properties:real properties as of June 30, 2010:

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The California properties listed above include properties held bya 70% limited partnership interest in 444 West Santa Clara Street, L.P., in which SJW Corp. has a 70% limited partnership interest. The limited partnership has been determined to be a variable interest entity within the scope of FASB Interpretation No. 46R (“FIN46R”), “Consolidation of Variable Interest Entities”ASC Topic 810 – “Consolidation” with SJW Land Company as the primary beneficiary, and as a result, it has been consolidated with SJW Land Company.

SJWTX, Inc., a wholly owned subsidiary of SJW Corp., doing business as Canyon Lake Water Service Company (“CLWSC”), providesis a public utility in the business of providing water utility service to approximately 8,9009,200 connections that serve approximately 36,000 residents in apeople. CLWSC’s service area comprisingcomprises more than 250237 square miles in western Comal County and southern Blanco County in the growing region between San Antonio and Austin, Texas.

Texas Water Alliance Limited (“TWA”), a wholly owned subsidiary of SJW Corp., is seekingundertaking activities that are necessary to develop wholesalea water suppliessupply project in Texas.

In addition, SJW Corp. also owns 1,099,952 shares of common stock of California Water Service Group, which represents approximately 5% of that company’s outstanding shares of common stock as of June 30, 2009.2010.

Business Strategy:

SJW Corp. focuses its business initiatives in four strategic areas:

Regional Regulated Activities

SJW Corp.’s regulated utility operation is conducted through San Jose WaterAs part of its pursuit of the above four strategic areas, the Company a wholly owned water utility subsidiary that provides water service to the greater metropolitan San Jose area, and CLWSC, a wholly owned regulated utility subsidiary in the State of Texas. SJW Corp. plans and applies a diligent and disciplined approach to maintaining and improving its water system infrastructure. It also seeks to acquire regulated water systems adjacent to or near its existing service territory.

Regional Nonregulated Activities

Operating in accordance with guidelines established by the CPUC, San Jose Water Company provides nonregulated water services under agreements with municipalities and other utilities. Nonregulated services include water system operations, billing and cash remittance processing, maintenance services, and telecommunication antenna leasing.

San Jose Water Company also seeks appropriate nonregulated business opportunities that complement its existing operations or that allow it to extend its core competencies beyond existing operations. San Jose Water Company seeks opportunities to fully utilize its capabilities and existing capacity by providing services to other regional water systems, benefiting its existing regional customers through increased efficiencies.

Real Estate Investment

SJW Land Company’s real estate investments diversify SJW Corp.’s asset base and balances SJW Corp.’s concentration in regulated assets. SJW Land Company implements its real estate investment strategy by exchanging selected real estate assets for investments with a capital structure and risk and return profile that is consistent with SJW Corp.’s consolidated capital structure and risk and return profile.

Out-of-Region Opportunities

SJW Corp. alsoconsiders from time to time pursues opportunities to participate in out-of-region wateracquire businesses and utility related services, particularly regulated water businesses, primarily in the Western United States. SJW Corp. evaluates out-of-region and out-of-state opportunities that meet SJW Corp.’s risk and return profile.

The factors SJW Corp. considers in evaluating such opportunities include:

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assets. However, SJW Corp. cannot be certain it will be successful in identifying and consummating any transactionsstrategic business acquisitions relating to such opportunities. In addition, any transaction couldwill involve numerous risks. Some of the risks, includeincluding the possibility of payingincurring more costs than the valuebenefits derived from the acquisition, the assumption of certain known and unknown liabilities related to the acquired assets, the riskdiversion of diverting management’s attention from normal dailyday-to-day operations of the business, the potential for a negative impact toon SJW Corp.’s financial position and operating results, the risks of entering markets in which SJW Corp. has no or limited direct prior experience and the potential loss of key employees of any acquired company. SJW Corp. cannot be certain that any transaction will be successful and will not materially harm its operating results or financial condition.

Critical Accounting Policies:

SJW Corp. has identified the accounting policies delineated below as the policies critical to its business operations and the understanding of the results of operations. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. SJW Corp. bases its estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. The impact and any associated risks related to these policies on SJW Corp.’s business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect SJW Corp.’s reported and expected financial results. SJW Corp.’s critical accounting policies are as follows:

Revenue Recognition

SJW Corp. recognizes its regulated and nonregulated revenue when services have been rendered, in accordance with SEC Staff Accounting Bulletin 104,FASB ASC Topic 605 – “Revenue Recognition.”

Metered revenue of San Josethe Water Company and CLWSC (together referred to as the “Water Utility Services”)Services includes billing to customers based on meter readings plus an estimate of water used between the customers’ last meter reading and the end of the accounting period. The Water Utility Services readreads the majority of its customers’ meters on a bi-monthly basis and records its revenue based on its meter reading results. Unbilled revenue from the last meter reading date to the end of the accounting period is estimated based on the most recent usage patterns, production records and the effective tariff rates. Actual results could differ from those estimates, which wouldmay result in adjustingan adjustment to the operating revenue in the period which the revision to the Water Utility Services’ estimates are determined. As of June 30, 20092010 and December 31, 2008,2009, accrued unbilled revenue was $16,630$16,577 and $12,896,$12,435 respectively.

Unaccounted-for water on a 12 month-to-date basis for June 30, 2010 and 2009 approximated 7.62% and 2008 approximated 7.97% and 7.02%, respectively, as a percentage of production. The unaccounted-for water estimate is based on the results of past experience, the trend and efforts in reducing the Water Utility Services’ unaccounted-for water through customer conservation, main replacements and lost water reduction programs.

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Revenues also include a surcharge collected from regulated customers that is paid to the CPUC. This surcharge is recorded both in operating revenues with related expenses charged toand administrative and general expenses. For the six months ended June 30, 20092010 and 2008,2009, the surcharge was $1,393$1,277 and $1,286,$1,393, respectively.

SJW Corp. recognizes its nonregulated revenue based on the nature of the nonregulated business activities. Revenue from San Jose Water Company’s nonregulated utility operations and billing or maintenance agreements are recognized when services have been rendered. Revenue from SJW Land Company properties is generally recognized ratably over the terms of the leases.

Recognition of Regulatory Assets and Liabilities

Generally accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 71, “Accounting for the Effects of Certain Types of Regulation.FASB ASC Topic 980 - ���Regulated Operations.” In accordance with SFAS No. 71,ASC Topic 980, the Water Utility Services, to the extent applicable, record deferred costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the ratemaking process in a period different from when the costs and credits are incurred. Accounting for such costs and credits is based on management’s judgment and prior historical ratemaking practices, and it occurs when management determines that it is probable that these costs and credits will be recognized in the future revenue of the Water Utility Services through the ratemaking process. The regulatory assets and liabilities recorded by the Water Utility Services, in particular, San Jose Water Company, primarily relate to the recognition of deferred income taxes for ratemaking versus tax accounting purposes and the postretirement pension benefits, medical costs, accrued benefits for vacation and asset retirement obligations that have not been passed through rates. The disallowance of any asset in future ratemaking, including deferred regulatory assets, would require San Jose Water Company to immediately recognize the impact of the costs for financial reporting purposes. No disallowance was recognized as of June 30, 20092010 and December 31, 2008, or for any periods presented. The net2009. Net regulatory assets recorded by San Jose Water Company as of June 30, 20092010 and December 31, 2008 was $73,5182009 were $78,274 and $73,778,$78,525, respectively.

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Pension Accounting

San Jose Water Company offers a defined benefit plan, an Executive Supplemental Retirement Plan, and certain postretirement benefits other than pensions to employees retiring with a minimum level of service. Accounting for pensions and other postretirement benefits requires an extensive use of assumptions about the discount rate applied to expected benefit obligations, expected return on plan assets, the rate of future compensation increases expected to be received by the employees, mortality, turnover, and medical costs.

The pension plan is administered by a committee that is composed of an equal number of Companycompany and Unionunion representatives (the “Committee”). The Committee has retained an investment consultant, presently Wells Fargo Advisors, LLC, to assist it with, among other things, asset allocation strategy, investment policy advice, performance monitoring, and manager due diligence. Investment decisions have been delegated by the Committee to an Investment Manager, presently Wachovia Securities, LLC.investment managers. Investment guidelines provided toin the Investment ManagerPolicy Statement require that at least 25% of the plan assets be invested in bonds or cash.fixed income securities. As of December 31, 2008,2009, the plan assets consist of approximately 45%37% bonds, 3%4% cash equivalents, and 52%59% equities. Furthermore, equities are to be diversified by industry groups and selected to achieve a balance of long-term growth and income combined with a goal of long-term preservation of capital coupled with long-term growth through capital appreciation and income. Theycapital. Except as provided for in the prospectus of any co-mingled investments, investment managers may not invest in commodities and futures contracts, private placements, options, letter stock, speculative securities, ornor may they hold more than 5% of assets inof any one private corporation. TheyExcept as provided for in the prospectus of any co-mingled investments, fixed income assets may only investbe invested in bonds, commercial paper, and money market funds with acceptable ratings by Moody’s or Standard & Poor’s.Poor’s as defined by the Investment Policy Statement. The Investment Managerinvestment manager performance is reviewed regularly regarding performance by the Investment Consultantinvestment consultant who provides quarterly reports to the Committee for review.

The market values of the plan assets are marked to market at the measurement date. The investment trust assets incur unrealized market gains or losses from time to time. Both unrealized market gains and losses on pension assets are amortized over 13.2512.93 years for actuarial expense calculation purposes.

Income Taxes

SJW Corp. estimates its federalFederal and state income taxes as part of the process of preparing the financial statements. The process involves estimating the actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes, including the evaluation of the treatment acceptable in the water utility industry and regulatory environment. These differences result in deferred tax assets and liabilities, which are included on the balance sheet. If actual results, due to changes in the regulatory treatment, or significant changes in tax-related estimates or assumptions or changes in law, differ materially from these estimates, the provision for income taxes will be materially impacted.

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Balancing Account

Pursuant to Section 792.5 of the California Public Utilities Code, a balancing account must be maintained for each expense item for which revenue offsets have been authorized. The purpose of a balancing account is to track the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes.

A separate Pursuant to Section 792.5 of the California Public Utilities Code, a balancing account must be maintained for each offset expense item (e.g.,items for which revenue offsets have been authorized.

A balancing account is currently being maintained for the following items: purchased water, purchased power and groundwater extraction charges).charges. The amount in the balancing account balance varies with the seasonality of the water utility business such that, during the summer months when the demand for water is at its peak, the account tends to reflect an under-collection while, during the winter months when demand for water is relatively lower, the account tends to reflect an over-collection.

Since the balances have toamounts in the balancing accounts must be approved by the CPUC before they can be incorporated into rates, San Jose Water Company does not recognize the balancing accountaccounts in its revenue until the CPUC authorizes thea change in customers’ rates. However, hadrates related to any balancing account. It is typical for the CPUC to incorporate any over-collected and/or under-collected balances in balancing accounts into customer rates at the time rate decisions are made as part of the Company’s general rate case proceedings by assessing temporary surcredits and/or surcharges. In such circumstances, the Company recognizes an impact to revenue, either positive or negative, as the surcredits and/or surcharges are billed to customer accounts.

In the case where the Company’s balancing or memorandum-type accounts that have been authorized by the CPUC reach certain thresholds or have termination dates, the Company can request the CPUC to recognize the amounts in such accounts in customer rates prior to the next regular general rate case proceeding by filing an advice letter. If such amounts are authorized for inclusion into customer rates, revenue would be recognized during the period in which authorization was made pursuant to FASB ASC Topic 605 and Sub-Topic 980-605 – “Revenue Recognition.”

If the balancing accountor memorandum-type accounts had been recognized in San Jose Water Company’s financial statements, San Jose Water Company’s retained earnings would be decreased by the amount of surcredits in the accountcase of over-collection or increased by the amountsurcharges in the case of the account under-collection, less applicable taxes.

Recognition of Gain/Loss on Utility, Nonutility Property and Real Estate Investments

In conformity with generally accepted accounting principles for rate-regulated public utilities, the cost of retired utility plant, including retirement costs (less salvage), is charged to accumulated depreciation. Nodepreciation and no gain or loss is recognized for utility plant used and useful in providing water utility services to customers.

Utility property in the Water Utility Services is property that is used and useful in providing water utility services to customers and is included in rate base for rate-setting purposes. In California, real estate type utility property is subject to California Public Utilities Code Section 851, which states any gain recognized will be divided with two-thirds going to the customers (in the form of rate reduction) and one-third to the shareholders. Net gains or losses from the sale of utility property are recorded as a component of other (expense) income in the consolidated statement of income and comprehensive income.

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Nonutility property in the Water Utility Services is property that is neither used nor useful in providing water utility services to customers and is excluded from the rate base for rate-setting purposes. San Jose Water Company recognizes gain/loss on disposition of nonutility property in accordance with California Public Utilities Code Section 790.

SJW Land Company owns real estate investment property, which consists primarily of land and buildings. Net gains and losses from the sale of real estate investments are recorded as a component of other (expense) income in the consolidated statement of income and comprehensive income.

Recent Accounting Pronouncements:

In June 2009, FASB issued Statement of Financial Accounting Standards No. 168 (“SFAS 168”), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFAS 168 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS replaces SFAS 162 and establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by FASB. SFAS 168 is effective for interim and annual periods ending after September 15, 2009, except for SEC rules and interpretive releases, which are also authoritative generally accepted accounting principles for SEC registrants.

Liquidity and Capital Resources:

Cash Flow from Operations

As ofDuring the six months ended June 30, 2009,2010, SJW Corp. generated cash flow from operations of approximately $22,300,$22,100, compared to $22,800 for the same period$22,300 in 2008.2009. Cash flow from operations is primarily generated by net income from its revenue producing activities, adjusted for non-cash expenses such asfor depreciation and amortization, and deferred income taxes, offset by working capital changes.taxes. The decrease in June 30, 2009 cash flow from operations of approximately $500 resulted from$200 was primarily due to a decrease of approximately $200 in net income adjusted for non-cash items and approximately a $300 decreaseof $1,600 offset by an increase in working capital items. This decrease isand employee benefits of $1,400. The increase in working capital and employee benefit uses were primarily relateddue to an increase in accrued taxes and accrued payroll, offset by a decrease in estimated tax paymentsaccounts receivable, accrued unbilled utility revenue, accounts payable, purchased power and a federal tax refund received in the first quarter of 2008, working capital uses due to changes in various accruals and an increase in pension expense from the second quarter of 2008 to 2009.other current liabilities.

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Cash Flow from Investing Activities

As ofDuring the six months ended June 30, 2009,2010, SJW Corp. used approximately $26,100$38,500 of cash for company funded capital expenditures. In Februaryexpenditures, $1,700 for developer funded capital expenditures, and $2,600 for acquisitions. This represented an increase in additions to utility plant of $14,100 over the same period in 2009 SJWTX, Inc. paid approximately $3,700 for the right and obligationdue to provide water service within the retail water service areasgreater capital expenditures offset by a decrease in acquisitions of the City of Bulverde, Texas.$1,100.

Water Utility Services’ budgeted capital expenditures for 2009,2010, exclusive of capital expenditures financed by customer contributions and advances, are $71,414,$70,016, of which approximately $28,000$33,000 will be spent to replace the Water Utility ServicesServices’ pipes and mains in 2009.2010. Historically, amounts have been carried over from previous years’ budgets. Approximately $21,500 has been carried over from prior years for total forecasted 2010 capital expenditures of $91,500. As of June 30, 2010, $40,202 or 44% of the $91,500 has been spent.

Capital expenditures forThe Water Utility ServicesServices’ capital expenditures are incurred in connection with normal upgrading and expansion of existing facilities and to comply with environmental regulations. Over the next five years, the Water Utility Services expects to incur approximately $386,885$439,000 in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems. Capital expenditures have the effect of increasing utility plant on which the Water Utility Services earns a return. The Water Utility Services actual capital expenditures for Water Utility Services may vary from itstheir projections due to changes in the expected demand for services, weather patterns, actions by governmental agencies, and general economic conditions. Total additions to utility plant normally exceed company-financed additions as a result of new facilities construction funded with advances from developers and contributions in aid of construction.

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A substantial portion of San Jose Water Company’s distribution system was constructed during the period from 1945 to 1980. Expenditure levels for renewal and modernization of this part of the system will grow at an increasing rate as these components reach the end of their useful lives. In most cases, replacement cost will significantly exceed the original installation cost of the retired assets due to increases in the costs of goods and services.services and increased regulation. San Jose Water Company also expects to realize an increase in net salvage cost.

Historically,As of June 30, 2010, the Water Utility Services’ write-offs for uncollectible accounts represent less than 1% of its total revenue.revenue, unchanged from June 30, 2009. Management believes it can continue to collect its accounts receivable balances at its historical collection rate. However, continued recessionary factors in the economy could increase the probability that more of our customers would default on their accounts.

Cash Flow from Financing Activities

As ofNet cash provided by financing activities for the six months ended June 30, 2009,2010 increased by approximately $13,900 from the same period in the prior year. As the company has increased its needs for capital expenditures, funding for these has been made possible from a net increase in the line of credit this year and additional long-term borrowings, where in the prior year we made a net repayment on the line of credit were lower and repayments onissued long-term debt. Long-term borrowings during the linesix months ended June 30, 2010 consists of credit were higher than$50,000 in California Pollution Control Financing Authority Revenue Bonds, of which $22,267 was released for general use with the activity experienced duringremaining held as restricted cash pursuant to the terms of the loan agreement with the California Pollution Control Financing Authority. During the same period in 2008. In February 2009,the prior year, San Jose Water Company issued $10,000a total of $30,000 in unsecured Senior Notes, $10,000 in Series J with an interest rate of 6.54% and interest only payments until maturity, which is February 2024. In May 2009, San Jose Water Company issued $20,000 of unsecured Senior Notesin Series K, with an interest rate of 6.75% and interest only payments until maturity, which is May 2039. In addition, receipts of advances and contributions in aid of construction were lower by approximately $3,700 as of June 30, 2009, compared to the same period in 2008.K.